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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 2000
REGISTRATION NO. 333-48866
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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WILLIAMS ENERGY PARTNERS L.P.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4610 73-1599053
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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WILLIAMS GP LLC
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(918) 573-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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CRAIG R. RICH
WILLIAMS GP LLC
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(918) 573-2000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
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DAN A. FLECKMAN ROBERT V. JEWELL
VINSON & ELKINS L.L.P. ANDREWS & KURTH L.L.P.
1001 FANNIN, SUITE 2300 600 TRAVIS, SUITE 4200
HOUSTON, TEXAS 77002-6760 HOUSTON, TEXAS 77002
(713) 758-2222 (713) 220-4200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to Completion, dated December 22, 2000
PROSPECTUS
[WILLIAMS ENERGY PARTNERS]
3,750,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
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Williams Energy Partners L.P. is a partnership recently formed by The Williams
Companies, Inc. This is the initial public offering of our common units. We
expect the initial public offering price to be between $19.00 and $21.00 per
unit. We intend to distribute a minimum quarterly distribution of $0.525 per
unit, or $2.10 per unit each year, to the extent we have sufficient cash from
our operations after payment of fees and expenses, including reimbursements to
our general partner. We have applied to list the common units on the New York
Stock Exchange under the symbol "WEG."
INVESTING IN THE COMMON UNITS INVOLVES RISK. RISK FACTORS BEGIN ON PAGE 11.
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PER COMMON UNIT TOTAL
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Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Williams Energy Partners...... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 562,500
common units on the same terms and conditions as set forth above to cover
over-allotments of common units, if any. To the extent that the underwriters do
not exercise this option, affiliates of The Williams Companies, Inc. will
purchase these common units at the initial public offering price. As a result,
we will issue a total of 4,312,500 common units in connection with this offering
regardless of whether the over-allotment option is exercised.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the common
units on or about , 2001.
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LEHMAN BROTHERS BANC OF AMERICA SECURITIES LLC
DAIN RAUSCHER WESSELS
A.G. EDWARDS & SONS, INC.
UBS WARBURG LLC
, 2001
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[MAP REPRESENTING THE LOCATION OF THE PARTNERSHIP'S ASSETS]
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY.......................................... 1
Partnership Structure and Management...................... 4
The Offering.............................................. 6
Summary Historical and Pro Forma Financial and Operating
Data................................................... 8
Summary of Conflicts of Interest and Fiduciary
Responsibilities....................................... 10
RISK FACTORS................................................ 11
Risks Inherent in Our Business............................ 11
Risks Inherent in an Investment in Williams Energy
Partners............................................... 13
Tax Risks to Common Unitholders........................... 15
USE OF PROCEEDS............................................. 18
CAPITALIZATION.............................................. 19
DILUTION.................................................... 20
CASH DISTRIBUTION POLICY.................................... 21
Distributions of Available Cash........................... 21
Operating Surplus and Capital Surplus..................... 21
Subordination Period...................................... 22
Distributions of Available Cash from Operating Surplus
During the Subordination Period........................ 23
Distributions of Available Cash from Operating Surplus
After the Subordination Period......................... 23
Incentive Distribution Rights -- Hypothetical Annualized
Yield.................................................. 23
Distributions from Capital Surplus........................ 25
Adjustment to the Minimum Quarterly Distribution and
Target Distribution Levels............................. 25
Distributions of Cash Upon Liquidation.................... 25
CASH AVAILABLE FOR DISTRIBUTION............................. 28
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING
DATA...................................................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 33
Introduction.............................................. 33
Overview.................................................. 33
Acquisition History....................................... 34
Results of Operations -- Williams Energy Partners
Predecessor............................................ 35
Results of Operations -- Marine Terminals Predecessor..... 40
Liquidity and Capital Resources........................... 42
Environmental............................................. 44
Impact of Inflation....................................... 44
New Accounting Pronouncements............................. 44
Quantitative and Qualitative Disclosures about Market
Risk................................................... 45
BUSINESS.................................................... 46
Introduction.............................................. 46
Our Relationship with Williams............................ 46
Business Strategy......................................... 46
Competitive Strengths..................................... 47
Petroleum Product Terminals............................... 49
Ammonia Pipeline and Terminals System..................... 59
Tariff Regulation......................................... 62
Safety and Maintenance.................................... 63
Environmental and Safety.................................. 63
Employee Safety........................................... 67
Title to Properties....................................... 67
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Employees................................................. 68
Legal Proceedings......................................... 68
MANAGEMENT.................................................. 69
Our General Partner Manages Williams Energy Partners...... 69
Directors and Executive Officers of Williams GP LLC....... 69
Reimbursement of Expenses of the General Partner.......... 70
Executive Compensation.................................... 70
Compensation of Directors................................. 70
Long-Term Incentive Plan.................................. 71
Management Incentive Plan................................. 72
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 73
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 74
Distributions and Payments to the General Partner and its
Affiliates............................................. 74
Formation Stage........................................... 74
Operational Stage......................................... 74
Liquidation Stage......................................... 75
Rights of our General Partner............................. 75
Agreements Governing the Transactions..................... 75
Omnibus Agreement......................................... 75
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 77
Conflicts of Interest..................................... 77
Fiduciary Duties Owed to Unitholders by our General
Partner are Prescribed by Law and the Partnership
Agreement.............................................. 80
DESCRIPTION OF THE COMMON UNITS............................. 82
The Units................................................. 82
Transfer Agent and Registrar.............................. 82
Transfer of Common Units.................................. 82
DESCRIPTION OF THE SUBORDINATED UNITS....................... 84
Conversion of Subordinated Units.......................... 84
Limited Voting Rights..................................... 85
Distributions upon Liquidation............................ 85
THE PARTNERSHIP AGREEMENT................................... 86
Organization.............................................. 86
Purpose................................................... 86
Power of Attorney......................................... 86
Capital Contributions..................................... 86
Limited Liability......................................... 86
Issuance of Additional Securities......................... 87
Amendment of the Partnership Agreement.................... 88
Merger, Sale or Other Disposition of Assets............... 90
Termination and Dissolution............................... 91
Liquidation and Distribution of Proceeds.................. 91
Withdrawal or Removal of the General Partner.............. 91
Transfer of General Partner Interests and Incentive
Distribution Rights.................................... 93
Change of Management Provisions........................... 93
Limited Call Right........................................ 94
Meetings; Voting.......................................... 94
Status as Limited Partner or Assignee..................... 95
Non-citizen Assignees; Redemption......................... 95
Indemnification........................................... 95
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Books and Reports......................................... 96
Right to Inspect Our Books and Records.................... 96
Registration Rights....................................... 96
UNITS ELIGIBLE FOR FUTURE SALE.............................. 97
TAX CONSIDERATIONS.......................................... 99
Partnership Status........................................ 99
Limited Partner Status.................................... 101
Tax Consequences of Unit Ownership........................ 101
Tax Treatment of Operations............................... 106
Disposition of Common Units............................... 106
Uniformity of Units....................................... 108
Tax-Exempt Organizations and Other Investors.............. 109
Administrative Matters.................................... 110
State, Local and Other Tax Considerations................. 112
INVESTMENT IN WILLIAMS ENERGY PARTNERS BY EMPLOYEE BENEFIT
PLANS..................................................... 113
UNDERWRITING................................................ 114
VALIDITY OF THE COMMON UNITS................................ 117
EXPERTS..................................................... 117
WHERE YOU CAN FIND MORE INFORMATION......................... 118
FORWARD-LOOKING STATEMENTS.................................. 118
INDEX TO FINANCIAL STATEMENTS............................... F-1
Appendix A -- Form of Amended and Restated Agreement of
Limited Partnership.................................... A-1
Appendix B -- Form of Application for Transfer of Common
Units.................................................. B-1
Appendix C -- Glossary of Terms........................... C-1
Appendix D -- Pro Forma Available Cash from Operating
Surplus................................................ D-1
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including the historical and
pro forma financial statements and the notes to those financial statements. The
information presented in this prospectus assumes that the underwriters'
over-allotment option is not exercised and that all of the 562,500 common units
subject to the over-allotment option are purchased by affiliates of The Williams
Companies, Inc. You should read "Summary of Risk Factors" beginning on page 3
and "Risk Factors" beginning on page 11 for more information about important
factors that you should consider before buying common units. We include a
glossary of some of the terms used in this prospectus as Appendix C.
WILLIAMS ENERGY PARTNERS L.P.
We were recently formed by The Williams Companies, Inc. to own, operate and
acquire a diversified portfolio of complementary energy assets. We are
principally engaged in the storage, transportation and distribution of refined
petroleum products and ammonia. We intend to acquire additional assets in the
future and have a management team dedicated to a growth strategy. Our initial
asset portfolio consists of:
- Four petroleum product terminal facilities located along the Gulf Coast
and near the New York harbor. We refer to these facilities as our "marine
terminals."
- 24 petroleum product terminals located principally in the southeastern
United States. We refer to these terminals as our "inland terminals."
- An ammonia pipeline and terminals system.
Our marine and inland terminals store and distribute gasoline and other
refined petroleum products throughout 12 states. Our ammonia pipeline and
terminals system transports and distributes ammonia from production facilities
in Texas and Oklahoma to various distribution points in the Midwest for use as
an agricultural fertilizer. We have little direct exposure to commodity price
fluctuations because we do not take title to the products we store, transport
and distribute. However, commodity prices may affect demand for our services.
For the year ended December 31, 1999, on a pro forma basis, we had revenues of
$76.5 million, EBITDA of $35.7 million and net income of $20.0 million. For the
nine months ended September 30, 2000, on a pro forma basis, we had revenues of
$58.7 million, EBITDA of $28.0 million and net income of $16.1 million.
Our marine terminal facilities are large storage terminals that have an
aggregate storage capacity in excess of 17.6 million barrels. These facilities
primarily generate revenues by providing storage for our customers and
principally serve refiners, marketers and large end-users of petroleum products.
Our marine terminal facilities are strategically located near major refining
hubs along the Gulf Coast and near the New York harbor.
Our inland terminals form a distribution network for gasoline and other
refined petroleum products throughout the southeastern United States. Most of
these terminals are connected to the Colonial or Plantation pipelines, which are
two of the principal refined petroleum product pipelines that serve the
southeastern United States. Our inland terminals provide a means for our
customers to receive refined petroleum products from these pipelines and to
transfer these products to trucks, rail cars or barges for delivery to their
final destination. We collect a fee based on the volume of refined petroleum
products, or "throughput," that we distribute from our inland terminals. Our
customers include retail suppliers, wholesalers and marketers of petroleum
products. For the nine months ended September 30, 2000, on a pro forma basis,
our marine and inland terminals generated 85.9% of our total revenues and 85.3%
of our total EBITDA.
Our ammonia pipeline and terminals system extends for approximately 1,100
miles from Texas and Oklahoma to Minnesota. Ammonia is produced from natural gas
and is primarily used either directly as a nitrogen fertilizer or as a component
of more complex nitrogen-based fertilizer products. Our customers pay tariffs to
transport ammonia through our system from their production facilities in Texas
and Oklahoma to various distribution points in the Midwest. For the nine months
ended September 30, 2000, on a pro forma basis, our ammonia pipeline and
terminals system generated 14.1% of our total revenues and 14.7% of our total
EBITDA.
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OUR RELATIONSHIP WITH WILLIAMS
One of our principal attributes is our relationship with Williams. Williams
is an integrated energy and communications company with 1999 revenues in excess
of $8.5 billion. Williams is engaged in numerous aspects of the energy industry,
including exploration and production of oil and natural gas, transportation,
processing and storage of natural gas and natural gas liquids, refining and
marketing of petroleum products and energy marketing and trading. Williams has
been in the business of storing, transporting and distributing refined petroleum
products since it acquired its first pipeline in 1966.
Williams has a long history of successfully pursuing and consummating
energy acquisitions and intends to use our partnership as a primary growth
vehicle for its storage, transportation and distribution businesses. We expect
to pursue strategic acquisitions independently and to have the opportunity to
participate jointly with Williams in reviewing potential acquisitions, including
transactions that we would be unable to pursue on our own. Additionally, we may
have the opportunity to make acquisitions directly from Williams in the future,
although we have not yet identified any of these acquisition opportunities.
Through our relationship with Williams, we will have access to a significant
pool of management talent and strong relationships throughout the energy
industry. We expect that potential sellers will be more inclined to contact us
and to solicit bids from our company as a result of our affiliation with
Williams.
Williams has a significant interest in our partnership through its
ownership of a 65.6% limited partner interest and all of our combined 2% general
partner interest. Additionally, Williams Energy Marketing and Trading, a
subsidiary of Williams, utilizes our facilities to support its commodity trading
business and is our single largest customer. Williams Energy Marketing and
Trading represented approximately 25.6% of our revenues for the nine months
ended September 30, 2000, and we plan to continue to market our services to
Williams Energy Marketing and Trading.
BUSINESS STRATEGY
Our primary business strategies are:
- to grow through strategic acquisitions to increase per unit cash flow;
- to maximize the benefits of our relationship with Williams; and
- to generate stable cash flows to make quarterly cash distributions.
COMPETITIVE STRENGTHS
We believe that we are well-positioned to execute our business strategies
successfully because of the following competitive strengths:
- Our ability to grow through acquisitions is enhanced by our affiliation
with Williams, and we expect this relationship to provide us access to
attractive acquisition opportunities.
- Our senior management team and the board of directors of our general
partner have extensive industry experience and include some of the most
senior officers of Williams.
- Our assets are strategically located in areas with high demand for our
services.
- As an independent terminal operator, unlike many integrated oil companies
that provide storage and distribution services, we do not have refining
or retail operations that compete with our customers.
- We provide distribution services to our customers through our "virtual
supply network" which provides same-day delivery of refined petroleum
products at several points along our terminal network, regardless of
actual transportation time.
- We have little direct commodity price exposure because we do not take
title to the products we store, transport and distribute.
- In connection with this offering, we are entering into a $150.0 million
credit facility that, combined with our ability to issue additional
units, will give us significant financial flexibility.
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SUMMARY OF RISK FACTORS
RISKS INHERENT IN OUR BUSINESS
- We may not be able to generate sufficient cash from operations to allow
us to pay the minimum quarterly distribution.
- Our financial results depend on the demand for the refined petroleum
products that we store and distribute.
- When prices for the future delivery of petroleum products that we store
in our marine terminals fall below current prices, customers are less
likely to store these products, thereby reducing our storage revenues.
- We depend on petroleum product pipelines owned and operated by others to
supply our terminals.
- Williams Energy Marketing and Trading is our largest customer, and any
reduction in its use of our terminal facilities could reduce our ability
to pay cash distributions to you.
- Our ammonia pipeline and terminals system is dependent on three
customers.
- High natural gas prices increase ammonia production costs and may reduce
the amount of ammonia transported through our ammonia pipeline and
terminals system.
- Changes in the federal government's policy regarding farm subsidies could
negatively impact the demand for ammonia and result in decreased shipments
through our ammonia pipeline and terminals system.
- Our marine and inland terminals encounter competition from other terminal
companies, and our ammonia pipeline and terminals system encounters
competition from rail carriers and another ammonia pipeline.
RISKS INHERENT IN AN INVESTMENT IN WILLIAMS ENERGY PARTNERS
- Cost reimbursements due our general partner may be substantial and will
reduce our cash available for distribution to you.
- Even if our unitholders wish to remove our general partner, they cannot
do so without the general partner's consent.
- You will experience immediate dilution in net tangible book value of
$1.37 per common unit.
- We may issue additional common units without your approval, which would
dilute your ownership interest.
TAX RISKS TO COMMON UNITHOLDERS
- The IRS could treat us as a corporation for tax purposes, which would
substantially reduce the cash available for distribution to you.
- A successful IRS contest of the federal income tax positions we take may
adversely impact the market for common units.
- You may be required to pay taxes even if you do not receive any cash
distributions.
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PARTNERSHIP STRUCTURE AND MANAGEMENT
Our operations will be conducted through, and our operating assets will be
owned by, our subsidiaries. We will own our interests in our subsidiaries
through our operating partnership, Williams OLP, L.P. Upon consummation of the
offering of the common units and the related transactions:
- We will own a 98.9899% limited partner interest in Williams OLP, L.P.;
- Williams GP LLC, our general partner and a Williams subsidiary, will own
a 1% general partner interest in us, a 1.0101% general partner interest
in Williams OLP, L.P., and all of the incentive distribution rights,
which entitle our general partner to receive a higher percentage of
distributable cash when cash distributions exceed $0.575 per unit in any
quarter; and
- Subsidiaries of Williams will own an aggregate 65.6% limited partner
interest in us.
Our general partner will own a 2% general partner interest in us and our
operating partnership on a combined basis. In this prospectus, we refer to this
interest owned by the general partner as its combined 2% general partner
interest. Our general partner is entitled to distributions on its general
partner interest and to distributions, if any, on its incentive distribution
rights.
Our general partner has sole responsibility for conducting our business and
managing our operations. Some of the senior executives who currently manage our
business also manage and operate the businesses of Williams or its subsidiaries.
The general partner does not receive any management fee or other compensation in
connection with its management of our business, but it is reimbursed for direct
and indirect expenses incurred on our behalf. For a description of the
reimbursement of expenses, please read "Certain Relationships and Related
Transactions -- Omnibus Agreement."
Our principal executive offices are located at One Williams Center, Tulsa,
Oklahoma 74172, and our phone number is (918) 573-2000.
The chart on the following page depicts the organization and ownership of
Williams Energy Partners and its operating partnership, after giving effect to
the offering and the related transactions. The percentages reflected in the
organization chart represent the approximate ownership interests in Williams
Energy Partners and Williams OLP, L.P., individually and not on a combined
basis, unlike the other presentations in this prospectus.
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[Chart Depicting Structure of the Williams Energy Partners Entities]
5
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THE OFFERING
Common units offered....... 3,750,000 common units.
4,312,500 common units if the underwriters exercise
their over-allotment option in full. To the extent
that the underwriters do not exercise this option,
affiliates of Williams will purchase these common
units at the initial public offering price.
Units outstanding after
this offering.............. 5,679,694 common units and 5,679,694 subordinated
units, each representing a 49% limited partner
interest in Williams Energy Partners.
Cash distributions......... We intend to make minimum quarterly distributions
of $0.525 per common unit. In general, we intend to
pay cash distributions each quarter in the
following manner:
- first, 98% to the common units and 2% to the
general partner, until each common unit has
received a minimum quarterly distribution of
$0.525 plus any arrearages from prior quarters;
and
- second, 98% to the subordinated units and 2% to
the general partner, until each subordinated unit
has received a minimum quarterly distribution of
$0.525.
If cash distributions exceed $0.575 per unit in any
quarter, our general partner will receive a higher
percentage of the cash we distribute in excess of
that amount, in increasing percentages up to 50%.
We must distribute all of our cash on hand at the
end of each quarter, less reserves established by
our general partner. We refer to this cash as
"available cash," and we define its meaning in our
partnership agreement and in the glossary in
Appendix C. The amount of available cash may be
greater than or less than the minimum quarterly
distribution.
We believe that, based on the assumptions listed on
page 28 of the prospectus, we will have sufficient
cash from operations for each quarter to make the
minimum quarterly distribution of $0.525 for each
quarter through March 31, 2002. The amount of pro
forma cash available for distribution generated
during 1999 and the first three quarters of 2000
would have been sufficient to allow us to pay the
minimum quarterly distribution during these
periods. Please read "Cash Available for
Distribution."
Subordination period....... The subordination period will end once we meet the
financial tests in the partnership agreement, but
it generally cannot end before December 31, 2005.
When the subordination period ends, all remaining
subordinated units will convert into common units,
and the common units will no longer be entitled to
arrearages.
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Early conversion of
subordinated units......... If we meet the financial tests in the partnership
agreement for any quarter on or after December 31,
2003, 25% of the subordinated units will convert
into common units. If we meet these tests for any
quarter ending on or after December 31, 2004, an
additional 25% of the subordinated units will
convert into common units. The early conversion of
the second 25% of the subordinated units may not
occur until at least one year after the early
conversion of the first 25% of the subordinated
units.
Issuance of additional
units...................... In general, during the subordination period we can
issue up to 2,839,847 additional common units, or
50% of the common units outstanding immediately
after this offering, without obtaining unitholder
approval. We can also issue an unlimited number of
common units for acquisitions which increase cash
flow from operations per unit on a pro forma basis.
Voting rights.............. Unlike the holders of common stock in a
corporation, you will have only limited voting
rights on matters affecting our business. You will
have no right to elect our general partner on an
annual or other continuing basis. The general
partner may not be removed except by the vote of
the holders of at least 66 2/3% of the outstanding
units, including units owned by the general partner
and its affiliates.
Limited call right......... If at any time not more than 20% of the outstanding
common units are held by persons other than our
general partner and its affiliates, our general
partner has the right, but not the obligation, to
purchase all of the remaining common units at a
price not less than the then current market price
of the common units.
Estimated ratio of taxable
income to distributions.... We estimate that if you own the common units you
purchase in this offering through December 31,
2003, you will be allocated, on a cumulative basis,
an amount of federal taxable income for that period
that will be approximately % of the cash
distributed to you with respect to that period.
Please read "Tax Considerations -- Tax Treatment of
Unitholders -- Ratio of Taxable Income to
Distributions" for the basis of this estimate.
Exchange listing........... We have applied to list the common units on the New
York Stock Exchange under the symbol "WEG."
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA FOR
WILLIAMS ENERGY PARTNERS L.P.
The following table shows selected historical financial and operating data
for the Williams Energy Partners Predecessor, which consists of all of our
assets, and pro forma financial and operating data of Williams Energy Partners
L.P., in each case for the periods and as of the dates indicated. The selected
historical financial data for the Williams Energy Partners Predecessor for 1997,
1998 and 1999 are derived from the audited financial statements of the Williams
Energy Partners Predecessor. The selected historical financial data for the
Williams Energy Partners Predecessor as of and for the nine months ended
September 30, 1999 and 2000 are derived from the unaudited financial statements
of the Williams Energy Partners Predecessor.
The pro forma financial statements of Williams Energy Partners L.P. show
the pro forma effect of the transfer of the Williams Energy Partners Predecessor
to our operating partnership and the related transactions. The summary pro forma
financial and operating data presented below for 1999 and September 2000 are
derived from the unaudited pro forma financial statements. The pro forma balance
sheet assumes the offering and related transactions occurred as of September 30,
2000, and the pro forma statement of income assumes the offering and related
transactions occurred on January 1, 1999.
The historical financial statements included in this prospectus have been
prepared utilizing historical results and have not been adjusted for terminal
acquisitions or ammonia pipeline tariff adjustments, terminal throughput fee
adjustments or storage rate adjustments. Of these items, the most significant
impact to our financial results is the acquisition of the three Gulf Coast
marine terminal facilities in August 1999.
The pro forma financial statements have been prepared utilizing actual
results and have not been adjusted to reflect ammonia pipeline tariff
adjustments, terminal throughput fee adjustments or storage rate adjustments.
The pro forma statement of income does, however, include adjustments to reflect
the impact of significant terminal acquisitions as if they had occurred on
January 1, 1999, including the acquisition of the three Gulf Coast marine
terminal facilities in August 1999 and the New Haven, Connecticut marine
terminal facility in September 2000. A more complete explanation of the pro
forma adjustments can be found in the Notes to Pro Forma Financial Statements
for Williams Energy Partners L.P.
We define EBITDA as operating profit plus depreciation. EBITDA provides
additional information as to our ability to make the minimum quarterly
distribution and is presented solely as a supplemental measure. EBITDA should
not be considered as an alternative to net income, income before income taxes,
cash flows from operations or any other measure of financial performance
presented in accordance with generally accepted accounting principles. Our
EBITDA may not be comparable to EBITDA of other entities, and other entities may
not calculate EBITDA in the same manner as we do.
We derived the following table from, and it should be read together with
and is qualified in its entirety by reference to, the historical and pro forma
financial statements and the accompanying notes included elsewhere in this
prospectus. The table should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
8
<PAGE> 15
<TABLE>
<CAPTION>
WILLIAMS ENERGY
PARTNERS L.P.
PRO FORMA
WILLIAMS ENERGY PARTNERS PREDECESSOR -- HISTORICAL ----------------------------
---------------------------------------------------- NINE
NINE MONTHS ENDED YEAR MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30, ENDED ENDED
----------------------------- -------------------- DECEMBER 31, SEPTEMBER 30,
1997 1998 1999 1999 2000 1999 2000
------- ------- --------- --------- -------- ------------ -------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues......................... $19,526 $20,846 $ 44,388 $ 27,217 $ 53,608 $76,526 $ 58,676
Operating expenses......................... 7,176 7,618 18,635 10,451 23,545 34,864 26,162
Depreciation............................... 1,100 1,190 4,610 2,417 5,976 9,673 6,635
General and administrative................. 4,603 3,950 5,458 3,623 8,774 6,000 4,500
------- ------- --------- --------- -------- ------- --------
Total costs and expenses................... $12,879 $12,758 $ 28,703 $ 16,491 $ 38,295 $50,537 $ 37,297
------- ------- --------- --------- -------- ------- --------
Operating profit........................... $ 6,647 $ 8,088 $ 15,685 $ 10,726 $ 15,313 $25,989 $ 21,379
Interest income (expense)(a)............... 1,149 1,371 (4,775) 323 (9,836) (5,964) (5,362)
Interest capitalized....................... -- -- -- -- 40 -- 40
Other income (expense), net................ 41 (27) -- (2) -- (19) --
------- ------- --------- --------- -------- ------- --------
Income before income taxes................. $ 7,837 $ 9,432 $ 10,910 $ 11,047 $ 5,517 $20,006 $ 16,057
Income taxes............................... 2,920 3,589 4,144 4,191 2,093 -- --
------- ------- --------- --------- -------- ------- --------
Net income................................. $ 4,917 $ 5,843 $ 6,766 $ 6,856 $ 3,424 $20,006 $ 16,057
======= ======= ========= ========= ======== ======= ========
Pro forma net income per limited partner
unit..................................... $ 1.73 $ 1.39
======= ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................ $24,890 $24,997 $ 9,492 $ 6,120 $ 18,291 $ 7,599
Working capital less affiliate note
receivable(b)............................ 1,262 203 9,492 6,120 18,291 7,599
Total assets............................... 65,316 73,002 283,339 278,694 324,096 313,730
Affiliate long-term note payable........... -- -- 197,165 191,132 232,093 --
Long-term debt............................. -- -- -- -- -- 90,100
Owner's equity/partners' capital........... 54,242 60,085 66,851 66,941 70,275 216,798
CASH FLOW DATA:
Net cash flow provided by (used in):
Operating activities..................... $ 9,279 $ 8,844 $ 5,659 $ 9,576 $ 1,513
Investing activities..................... (9,279) (8,844) (237,733) (234,330) (36,441)
Financing activities..................... -- -- 232,074 224,754 34,928
OTHER DATA:
Operating margin:
Petroleum product terminals.............. $ 3,568 $ 3,599 $ 17,141 $ 9,809 $ 24,676 $33,050 $ 27,127
Ammonia pipeline and terminals system.... 8,782 9,629 8,612 6,957 5,387 8,612 5,387
EBITDA..................................... 7,747 9,278 20,295 13,143 21,289 35,662 28,014
Maintenance capital expenditures........... 1,472 1,666 2,236 2,202 2,705 3,709 2,705
OPERATING STATISTICS:
Petroleum product terminals:
Marine terminal average storage
capacity utilized per month (million
barrels)............................. N/A N/A 10.1(c) 9.1(c) 12.0(d) 13.8 14.8
Marine terminal throughput (million
barrels)............................. N/A N/A N/A N/A .8 14.5 10.6
Inland terminal throughput (million
barrels)............................. 21.3 26.8 58.1 44.4 41.6 58.1 41.6
Ammonia pipeline and terminals system:
Volume shipped (thousand tons)......... 893 896 795 603 508 795 508
</TABLE>
---------------
(a) Williams calculates interest income and expense on a monthly basis
according to the actual affiliate note receivable or payable balance.
(b) We believe excluding the affiliate note receivable from working capital
provides a more appropriate comparative representation of working capital.
The affiliate note receivable and payable result from our long-term
involvement in Williams' cash management program. The affiliate note
payable at December 31, 1999 and September 30, 2000 is not required to be
repaid prior to October 1, 2001 and accordingly has been classified as
long-term.
(c) For the year ended December 31, 1999, represents the average storage
capacity utilized for the Marine Terminals Predecessor for the five months
that we owned these assets in 1999. For the nine months ended September 30,
1999, represents the average storage capacity utilized per month for the
Marine Terminals Predecessor for the two months that we owned these assets
prior to September 30, 1999.
(d) Represents the average storage capacity utilized per month for the Marine
Terminals Predecessor, excluding one month of storage capacity utilized at
the New Haven, Connecticut facility purchased in September 2000.
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<PAGE> 16
SUMMARY OF CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Williams GP LLC, our general partner, has a legal duty to manage us in a
manner beneficial to our unitholders. This legal duty originates in statutes and
judicial decisions and is commonly referred to as a "fiduciary" duty. However,
because our general partner is a subsidiary of Williams, its officers and
directors have fiduciary duties to manage our general partner's business in a
manner beneficial to the stockholders of Williams. The officers and directors of
our general partner have significant relationships with, and responsibilities
to, Williams. For example, Keith Bailey, who will serve as a director of our
general partner, is also the Chairman and Chief Executive Officer of Williams.
Steven Malcolm, who will serve as Chairman and Chief Executive Officer of our
general partner, is also President and Chief Executive Officer of Williams
Energy Services. As a result of these relationships and others, conflicts of
interest may arise in the future between us and our unitholders, on the one
hand, and our general partner and its affiliates, on the other. For a more
detailed description of the conflicts of interest and fiduciary responsibilities
of our general partner, please read "Conflicts of Interest and Fiduciary
Responsibilities."
Our partnership agreement limits the liability and reduces the fiduciary
duties owed by our general partner to the unitholders. Our partnership agreement
also restricts the remedies available to unitholders for actions that might
otherwise constitute breaches of our general partner's fiduciary duties. By
purchasing a common unit, you are treated as having consented to various actions
contemplated in the partnership agreement and conflicts of interest that might
otherwise be considered a breach of fiduciary or other duties under applicable
state law.
We have entered into an agreement with Williams under which Williams has
generally agreed not to engage in the business of transporting, storing or
distributing ammonia in the United States or owning or operating facilities for
the storage and distribution of refined petroleum products in the continental
United States. In addition, this agreement addresses indemnification
obligations, reimbursement of general and administrative expenses, intellectual
property licenses and reimbursement of maintenance capital expenditures. For a
more detailed discussion of this agreement, please read "Certain Relationships
and Related Transactions -- Omnibus Agreement."
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<PAGE> 17
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which we are subject are
similar to those that would be faced by a corporation engaged in a similar
business. You should carefully consider the following risk factors together with
all of the other information included in this prospectus in evaluating an
investment in the common units.
If any of the following risks were actually to occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common units could decline and
you could lose all or part of your investment.
RISKS INHERENT IN OUR BUSINESS
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO ALLOW US TO
PAY THE MINIMUM QUARTERLY DISTRIBUTION.
The amount of cash we can distribute on our common units principally
depends upon the cash we generate from our operations. Because the cash we
generate from operations will fluctuate from quarter to quarter, we may not be
able to pay the minimum quarterly distribution for each quarter. Our cash
distributions will depend primarily on cash flow, including cash flow from
financial reserves and working capital borrowings, and not solely on
profitability, which will be affected by non-cash items. As a result, we may
make cash distributions during periods when we record losses and may not make
cash distributions during periods when we record net income.
OUR FINANCIAL RESULTS DEPEND ON THE DEMAND FOR THE REFINED PETROLEUM PRODUCTS
THAT WE STORE AND DISTRIBUTE.
Any sustained decrease in demand for refined petroleum products in the
markets served by our terminals could result in a significant reduction in the
volume of products that we store at our marine terminal facilities and in the
throughput in our inland terminals, and therefore reduce our cash flow and our
ability to pay cash distributions to you. Factors that could lead to a decrease
in market demand include:
- an increase in the market price of crude oil that leads to higher refined
product prices, which may reduce demand for gasoline and other petroleum
products. Market prices for refined petroleum products are subject to
wide fluctuation in response to changes in global and regional supply
over which we have no control;
- a recession or other adverse economic condition that results in lower
spending by consumers on travel, including gasoline and diesel;
- higher fuel taxes or other governmental or regulatory actions that
increase the cost of gasoline;
- an increase in fuel economy, whether as a result of a shift by consumers
to more fuel-efficient vehicles or technological advances by
manufacturers; and
- the increased use of alternative fuel sources, such as fuel cells and
solar, electric and battery-powered engines. Several state and federal
initiatives mandate this increased use.
WHEN PRICES FOR THE FUTURE DELIVERY OF PETROLEUM PRODUCTS THAT WE STORE IN OUR
MARINE TERMINALS FALL BELOW CURRENT PRICES, CUSTOMERS ARE LESS LIKELY TO STORE
THESE PRODUCTS, THEREBY REDUCING OUR STORAGE REVENUES.
This market condition is commonly referred to as "backwardation." When the
petroleum product market is in backwardation, the demand for storage capacity at
our marine terminal facilities may decrease. The forward pricing market for
petroleum products moved to backwardation in the second quarter of 1999 and
remains so today. This market condition contributed to reduced storage revenues
in the second half of 1999 and the first nine months of 2000. If this market
becomes more backwardated, it may affect our ability to pay cash distributions
to you.
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<PAGE> 18
WE DEPEND ON PETROLEUM PRODUCT PIPELINES OWNED AND OPERATED BY OTHERS TO SUPPLY
OUR TERMINALS.
Most of our inland and marine terminal facilities depend on connections
with petroleum product pipelines owned and operated by third parties. Reduced
throughput on these pipelines because of testing, line repair, damage to
pipelines, reduced operating pressures or other causes could result in our being
unable to deliver products to our customers from our terminals or receive
products for storage and could adversely affect our ability to pay cash
distributions to you.
WILLIAMS ENERGY MARKETING AND TRADING IS OUR LARGEST CUSTOMER, AND ANY REDUCTION
IN ITS USE OF OUR TERMINAL FACILITIES COULD REDUCE OUR ABILITY TO PAY CASH
DISTRIBUTIONS TO YOU.
For the nine months ended September 30, 2000, Williams Energy Marketing and
Trading accounted for approximately 25.6% of our revenues. If Williams Energy
Marketing and Trading were to decrease the throughput volume it allocates to our
terminals for any reason, we could experience difficulty in replacing those lost
volumes. Because our operating costs are primarily fixed, a reduction in
throughput would result in not only a reduction of revenues, but also a decline
in net income and cash flow of a similar magnitude, which would reduce our
ability to pay cash distributions to you. Williams Energy Marketing and Trading
could reduce the volume of throughput it allocates to us because of market
conditions or because of factors that specifically affect Williams Energy
Marketing and Trading, including a decrease in demand for products in the
markets served by our terminals or a loss of customers in those markets.
OUR AMMONIA PIPELINE AND TERMINALS SYSTEM IS DEPENDENT ON THREE CUSTOMERS.
Three customers ship all of the ammonia on our pipeline and utilize the six
terminals that we own and operate on the pipeline. We have contracts with
Farmland Industries, Inc., Agrium U.S. Inc. and Terra Nitrogen, L.P. through
June 2005 that obligate them to ship or pay for specified minimum quantities of
ammonia. The loss of any one of these customers would adversely affect our
operating results and could reduce our cash flows and adversely affect our
ability to pay cash distributions to you.
HIGH NATURAL GAS PRICES INCREASE AMMONIA PRODUCTION COSTS AND MAY REDUCE THE
AMOUNT OF AMMONIA TRANSPORTED THROUGH OUR AMMONIA PIPELINE AND TERMINALS SYSTEM.
The profitability of our customers, who produce ammonia for use as
fertilizer, partially depends on the price of natural gas, which is the
principal raw material used in the production of ammonia. If our customers are
unable to pass higher natural gas prices on to their customers, their margins
will be reduced and they may reduce shipments through our pipeline. As a result,
we would realize reduced revenues and cash flows which would adversely affect
our ability to pay cash distributions to you. Natural gas prices increased
substantially during 1999 and 2000 and are currently at an all-time high, and
our customers have shipped lower volumes of ammonia on our pipeline. Continued
high natural gas prices may cause our customers to continue to reduce their
production of ammonia and the volumes transported through our pipeline.
CHANGES IN THE FEDERAL GOVERNMENT'S POLICY REGARDING FARM SUBSIDIES COULD
NEGATIVELY IMPACT THE DEMAND FOR AMMONIA AND RESULT IN DECREASED SHIPMENTS
THROUGH OUR AMMONIA PIPELINE AND TERMINALS SYSTEM.
Our customers who ship ammonia through our pipeline primarily market the
ammonia to corn farmers in the Midwest. The government's Freedom to Farm program
enacted by the 1996 Farm Bill has provided these farmers with increased
incentives to grow corn, resulting in large corn crops over the last few years.
This program, however, ends in 2002. If the program is revised or terminated, it
could reduce farmers' incentive to grow corn and reduce the demand for the
ammonia used to fertilize the crops. In addition, the federal government and
state governments have been providing tax credits related to the production of
ethanol, for which corn is the essential element. If these tax incentives are
reduced or repealed, the demand for ammonia would be reduced and our customers
might reduce the volumes transported through our pipeline.
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<PAGE> 19
OUR MARINE AND INLAND TERMINALS ENCOUNTER COMPETITION FROM OTHER TERMINAL
COMPANIES, AND OUR AMMONIA PIPELINE AND TERMINALS SYSTEM ENCOUNTERS COMPETITION
FROM RAIL CARRIERS AND ANOTHER AMMONIA PIPELINE.
Our marine and inland terminals face competition from large, generally
well-financed companies that own many terminals, as well as from small
companies. Our marine and inland terminals also encounter competition from
integrated refining and marketing companies that own their own terminal
facilities. Our customers demand delivery of products on tight time schedules
and in a number of geographic markets. If our quality of service declines or we
cannot meet the demands of our customers, they may use our competitors.
We compete primarily with rail carriers for the transportation of ammonia.
If our customers elect to transport ammonia by rail rather than pipeline, we may
realize lower revenues and cash flows and our ability to pay cash distributions
may be adversely affected. Our ammonia pipeline also competes with the Koch
Pipeline Company LP ammonia pipeline in Iowa and Nebraska.
OUR BUSINESS IS SUBJECT TO FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS THAT
GOVERN THE ENVIRONMENTAL AND OPERATIONAL SAFETY ASPECTS OF OUR OPERATIONS.
Our marine and inland terminal facilities and ammonia pipeline and
terminals system are subject to the risk of incurring substantial costs and
liabilities under environmental and safety laws. These costs and liabilities
arise under increasingly strict environmental and safety laws, including
regulations and governmental enforcement policies, and as a result of claims for
damages to property or persons arising from our operations. Failure to comply
with these laws and regulations may result in assessment of administrative,
civil and criminal penalties, imposition of cleanup and site restoration costs
and liens and, to a lesser extent, issuance of injunctions to limit or cease
operations. If we were unable to recover these costs through increased revenues,
our ability to pay cash distributions to you could be adversely affected.
We own a number of properties that have been used for many years to
distribute or store petroleum products by third parties not under our control.
In some cases, owners, tenants or users of these properties have disposed of or
released hydrocarbons or solid wastes on or under these properties. In addition,
some of our terminals are located on or near current or former refining and
terminal operations, and there is a risk that contamination is present on these
sites. The transportation of ammonia by our pipeline is hazardous and may result
in environmental damage, including accidental releases that may cause death or
injuries to humans and farm animals and damage to crops. Please read
"Business -- Environmental and Safety Matters" for more information.
OUR OPERATIONS ARE SUBJECT TO OPERATIONAL HAZARDS AND UNFORESEEN INTERRUPTIONS
FOR WHICH WE MAY NOT BE ADEQUATELY INSURED.
Our operations are subject to operational hazards and unforeseen
interruptions such as natural disasters, adverse weather, accidents, fires,
explosions, hazardous materials releases or other events beyond our control. A
casualty might result in a loss of equipment or life, injury or extensive
property damage. We carry insurance, but this coverage may not be adequate to
cover losses that we may incur.
RISKS INHERENT IN AN INVESTMENT IN WILLIAMS ENERGY PARTNERS
COST REIMBURSEMENTS DUE OUR GENERAL PARTNER MAY BE SUBSTANTIAL AND WILL REDUCE
OUR CASH AVAILABLE FOR DISTRIBUTION TO YOU.
Prior to making any distribution on the common units, we will reimburse the
general partner and its affiliates, including officers and directors of our
general partner, for expenses they incur on our behalf. Under our omnibus
agreement, the general and administrative expenses Williams and its affiliates,
including our general partner, allocate to us may not exceed $6.0 million in
2001. This amount is subject to adjustment in future years. Please read "Certain
Relationships and Related Transactions -- Omnibus Agreement." The reimbursement
of expenses could adversely affect our ability to pay cash distributions to you.
Our general partner has sole discretion to determine the amount of these
expenses, subject to the
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<PAGE> 20
annual limit discussed above. In addition, our general partner and its
affiliates may provide us other services for which we will be charged fees as
determined by our general partner.
EVEN IF OUR UNITHOLDERS WISH TO REMOVE OUR GENERAL PARTNER, THEY CANNOT DO SO
WITHOUT THE GENERAL PARTNER'S CONSENT.
Our general partner will manage and operate Williams Energy Partners.
Unlike the holders of common stock in a corporation, you will have only limited
voting rights on matters affecting our business. Our unitholders will have no
right to elect the general partner or the directors of the general partner on an
annual or other continuing basis. Furthermore, our general partner and its
affiliates will own sufficient units upon completion of this offering to be able
to prevent its removal as general partner.
In addition, the following provisions of the partnership agreement may
discourage a person or group from attempting to remove our general partner or
otherwise change the management of Williams Energy Partners:
- if the holders of at least 66 2/3% of the units vote to remove the
general partner without cause, all remaining subordinated units will
automatically convert into common units and will share distributions with
the existing common units pro rata, existing arrearages on the common
units will be extinguished and the common units will no longer be
entitled to arrearages if we fail to pay the minimum quarterly
distribution in any quarter. Cause is narrowly defined to mean that a
court of competent jurisdiction has entered a final, non-appealable
judgment finding the general partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as our general
partner.
- any units held by a person that owns 20% or more of any class of units
then outstanding, other than the general partner and its affiliates,
cannot be voted on any matter; and
- the partnership agreement contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting the unitholders' ability
to influence the manner or direction of management.
These provisions may discourage a person or group from attempting to remove
our general partner or otherwise change our management. As a result of these
provisions, the price at which the common units will trade may be lower because
of the absence or reduction of a takeover premium in the trading price.
YOU WILL EXPERIENCE IMMEDIATE DILUTION IN NET TANGIBLE BOOK VALUE OF $1.37 PER
COMMON UNIT.
The assumed initial public offering price of $20.00 per unit exceeds pro
forma net tangible book value of $18.63 per unit. Based on the assumed price,
you will incur immediate dilution of $1.37 per common unit. Please read
"Dilution."
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT YOUR APPROVAL, WHICH WOULD DILUTE
YOUR EXISTING OWNERSHIP INTERESTS.
During the subordination period, our general partner may cause us to issue
up to 2,839,847 additional common units without your approval. Our general
partner may also cause us to issue an unlimited number of additional common
units, without your approval, in a number of circumstances, such as:
- the issuance of common units in connection with acquisitions that
increase cash flow from operations per unit on a pro forma basis;
- the conversion of subordinated units into common units;
- the conversion of the general partner interest and the incentive
distribution rights into common units as a result of the withdrawal of
our general partner; or
- issuances of common units under our long-term incentive plan.
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<PAGE> 21
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
- your proportionate ownership interest in Williams Energy Partners will
decrease;
- the amount of cash available for distribution on each unit may decrease;
- since a lower percentage of total outstanding units will be subordinated
units, the risk that a shortfall in the payment of the minimum quarterly
distribution will be borne by the common unitholders will increase;
- the relative voting strength of each previously outstanding unit may be
diminished; and
- the market price of the common units may decline.
After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of the
unitholders. Our partnership agreement does not give the unitholders the right
to approve our issuance of equity securities ranking junior to the common units.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL YOUR
UNITS AT AN UNDESIRABLE TIME OR PRICE.
If at any time our general partner and its affiliates own 80% or more of
the common units, our general partner will have the right, but not the
obligation, which it may assign to any of its affiliates or to us, to acquire
all, but not less than all, of the remaining common units held by unaffiliated
persons at a price not less than their then current market price. As a result,
you may be required to sell your common units at an undesirable time or price
and may therefore not receive any return on your investment. You may also incur
a tax liability upon a sale of your units. For further information about the
call right, please read "The Partnership Agreement -- Limited Call Right."
YOU MAY NOT HAVE LIMITED LIABILITY IF A COURT FINDS THAT UNITHOLDER ACTIONS
CONSTITUTE CONTROL OF OUR BUSINESS.
Under Delaware law, you could be held liable for our obligations to the
same extent as a general partner if a court determined that the right of
unitholders to remove our general partner or to take other action under the
partnership agreement constituted participation in the "control" of our
business.
The general partner generally has unlimited liability for the obligations
of the partnership, such as its debts and environmental liabilities, except for
those contractual obligations of the partnership that are expressly made without
recourse to the general partner.
In addition, Section 17-607 of the Delaware Revised Uniform Limited
Partnership Act provides that, under some circumstances, a unitholder may be
liable to us for the amount of a distribution for a period of three years from
the date of the distribution. Please read "The Partnership Agreement -- Limited
Liability" for a discussion of the implications of the limitations on liability
to a unitholder.
TAX RISKS TO COMMON UNITHOLDERS
You should read "Tax Considerations" for a more complete discussion of the
following expected material federal income tax consequences of owning and
disposing of common units.
THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO YOU.
The anticipated after-tax benefit of an investment in the common units
depends largely on our being treated as a partnership for federal income tax
purposes. We have not requested, and do not plan to request, a ruling from the
IRS on this or any other matter affecting us.
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<PAGE> 22
If we were classified as a corporation for federal income tax purposes, we
would pay federal income tax on our income at the corporate tax rate, which is
currently a maximum of 35%. Distributions to you would generally be taxed again
to you as corporate distributions, and no income, gains, losses or deductions
would flow through to you. Because a tax would be imposed upon us as a
corporation, the cash available for distribution to you would be substantially
reduced. Treatment of us as a corporation would result in a material reduction
in the after-tax return to the unitholders, likely causing a substantial
reduction in the value of the common units.
Current law may change so as to cause us to be taxed as a corporation for
federal income tax purposes or otherwise subject us to entity-level taxation.
The partnership agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal, state
or local income tax purposes, then the minimum quarterly distribution and the
target distribution levels will be decreased to reflect that impact on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY IMPACT THE MARKET FOR COMMON UNITS.
We have not requested a ruling from the IRS with respect to any matter
affecting us. The IRS may adopt positions that differ from the conclusions of
our counsel expressed in this prospectus or from the positions we take. It may
be necessary to resort to administrative or court proceedings to sustain our
counsel's conclusions or the positions we take. A court may not concur with our
counsel's conclusions or the positions we take. Any contest with the IRS may
materially and adversely impact the market for common units and the price at
which they trade. In addition, the costs of any contest with the IRS,
principally legal, accounting and related fees, will be borne by us and directly
or indirectly by the unitholders and the general partner.
YOU MAY BE REQUIRED TO PAY TAXES EVEN IF YOU DO NOT RECEIVE ANY CASH
DISTRIBUTIONS.
You will be required to pay federal income taxes and, in some cases, state
and local income taxes on your share of our taxable income even if you do not
receive any cash distributions from us. You may not receive cash distributions
from us equal to your share of our taxable income or even equal to the actual
tax liability that results from your share of our taxable income.
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED.
If you sell your common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax basis in those common units.
Prior distributions in excess of the total net taxable income you were allocated
for a common unit, which decreased your tax basis in that common unit, will, in
effect, become taxable income to you if the common unit is sold at a price
greater than your tax basis in that common unit, even if the price you receive
is less than your original cost. A substantial portion of the amount realized,
whether or not representing gain, may be ordinary income to you. Should the IRS
successfully contest some positions we take, you could recognize more gain on
the sale of units than would be the case under those positions, without the
benefit of decreased income in prior years. Also, if you sell your units, you
may incur a tax liability in excess of the amount of cash you receive from the
sale.
IF YOU ARE NOT AN INDIVIDUAL RESIDING IN THE UNITED STATES, YOU MAY HAVE ADVERSE
TAX CONSEQUENCES FROM OWNING COMMON UNITS.
Investment in common units by tax-exempt entities, regulated investment
companies or mutual funds and foreign persons raises issues unique to them. For
example, virtually all of our income allocated to organizations exempt from
federal income tax, including individual retirement accounts and other
retirement plans, will be unrelated business taxable income and will be taxable
to them. Very little of our income will be qualifying income to a regulated
investment company or mutual fund. Distributions to
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<PAGE> 23
foreign persons will be reduced by withholding taxes, currently at the rate of
39.6%, and foreign persons will be required to file federal income tax returns
and pay tax on their share of our taxable income.
WE WILL REGISTER AS A TAX SHELTER. THIS MAY INCREASE THE RISK OF AN IRS AUDIT OF
US OR A UNITHOLDER.
We intend to register with the IRS as a "tax shelter." We will advise you
of our tax shelter registration number once that number has been assigned. The
IRS requires that some types of entities, including some partnerships, register
as "tax shelters" in response to the perception that they claim tax benefits
that the IRS may believe to be unwarranted. As a result, we may be audited by
the IRS and tax adjustments could be made. Any unitholder owning less than a 1%
profits interest in us has very limited rights to participate in the income tax
audit process. Further, any adjustments in our tax returns will lead to
adjustments in our unitholders' tax returns and may lead to audits of
unitholders' tax returns and adjustments of items unrelated to us. You will bear
the cost of any expense incurred in connection with an examination of your
personal tax return.
WE WILL TREAT EACH PURCHASER OF UNITS AS HAVING THE SAME TAX BENEFITS WITHOUT
REGARD TO THE UNITS PURCHASED. THE IRS MAY CHALLENGE THIS TREATMENT, WHICH COULD
ADVERSELY AFFECT THE VALUE OF THE UNITS.
Because we cannot match transferors and transferees of common units, we
will adopt depreciation and amortization positions that do not conform with all
aspects of final Treasury regulations. A successful IRS challenge to those
positions could adversely affect the amount of tax benefits available to you. It
also could affect the timing of these tax benefits or the amount of gain from
your sale of common units and could have a negative impact on the value of the
common units or result in audit adjustments to your tax returns. Please read
"Tax Considerations -- Uniformity of Units" for a further discussion of the
effect of the depreciation and amortization positions we adopt.
YOU WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES IN STATES WHERE YOU DO NOT
LIVE AS A RESULT OF AN INVESTMENT IN THE UNITS.
In addition to federal income taxes, you will likely be subject to other
taxes, including state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property and in which you do not
reside. You may be required to file state and local income tax returns and pay
state and local income taxes in many or all of the jurisdictions in which we do
business. Further, you may be subject to penalties for failure to comply with
those requirements. We own assets and do business in 17 states. Fourteen of
these states do not currently impose a personal income tax on partners of
partnerships doing business in those states but who are not residents of those
states. It is your responsibility to file all United States federal, state and
local tax returns. Our counsel has not rendered an opinion on the state or local
tax consequences of an investment in the common units.
17
<PAGE> 24
USE OF PROCEEDS
We expect to receive net proceeds of approximately $70.1 million from the
sale of the 3,750,000 common units offered by this prospectus, after deducting
underwriting discounts but before paying estimated offering expenses.
Additionally, we expect to receive net proceeds of $11.3 million upon the sale
of 562,500 additional common units that will either be purchased by the
underwriters upon exercise of the over-allotment option or by affiliates of
Williams to the extent that the underwriters do not exercise the over-allotment
option. We base these amounts on an assumed public offering price of $20.00 per
unit. We intend to use the aggregate net proceeds of this offering of $81.4
million and $90.1 million of borrowings under our credit facility to:
- repay $167.4 million of debt we owe to Williams; and
- pay $4.1 million of expenses associated with the offering and the related
transactions.
As of September 30, 2000, our total debt to Williams was approximately
$232.1 million and carried a variable interest rate equal to the London
Interbank Offered Rate, or LIBOR, plus 0.75%. At September 30, 2000 this
interest rate was 7.38%. This debt matures on October 1, 2001. Please read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Description of Credit Facility"
for a discussion of our credit facility.
18
<PAGE> 25
CAPITALIZATION
The following table shows (1) our historical capitalization as of September
30, 2000 on an actual basis and (2) our pro forma capitalization as of September
30, 2000, as adjusted to reflect the offering of the common units and the
application of the net proceeds we receive in the offering and borrowings under
our credit facility in the manner described under "Use of Proceeds." We derived
this table from, and it should be read in conjunction with and is qualified in
its entirety by reference to, our historical and pro forma financial statements
and the accompanying notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
--------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
-------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents........................ $ -- $ -- $ --
======== ========= ========
Long-term debt:
Affiliate note payable......................... $232,093 $(156,100)(a) $ --
(11,250)(b)
(54,655)(c)
(10,088)(d)
Credit facility................................ -- 90,100(e) 90,100
-------- --------- --------
Total long-term debt................... $232,093 (141,993) $ 90,100
Owner's equity/partners' capital:
Owner's equity................................. $ 70,275 $ (70,275)(f) $ --
Common unitholders............................. -- 106,231(g) 106,231
Subordinated unitholders....................... -- 106,231(g) 106,231
General partner................................ -- 4,336(g) 4,336
-------- --------- --------
Total owner's equity/partners'
capital.............................. $ 70,275 $ 146,523 $216,798
-------- --------- --------
Total capitalization................... $302,368 $ 4,530 $306,898
======== ========= ========
</TABLE>
---------------
(a) Partial repayment of the affiliate note payable with $156.1 million of the
net proceeds of the offering and borrowings under the credit facility.
(b)Partial repayment of $11.3 million of the affiliate note payable with the
proceeds from the sale of 562,500 units to affiliates of Williams. To the
extent the underwriters exercise the over-allotment option, we will sell
these units to the underwriters instead of affiliates of Williams.
(c) A capital contribution of $54.7 million by an affiliate of our general
partner.
(d) An assignment of $10.1 million of receivables by us to an affiliate of our
general partner in exchange for a reduction in a corresponding amount of
debt.
(e) Borrowings of $90.1 million under the credit facility.
(f) The conversion of the equity of the Williams Energy Partners Predecessor to
common and subordinated equity of the partnership and the general partner's
interest in the partnership.
(g) The resulting equity amounts of the common and subordinated unitholders such
that each are 49% of total equity with the remaining 2% represented by the
general partner interest.
19
<PAGE> 26
DILUTION
On a pro forma basis as of September 30, 2000 after giving effect to the
offering of common units and the related transactions, our net tangible book
value was $216.0 million, or $18.63 per common unit. Purchasers of common units
in this offering will experience immediate dilution in net tangible book value
per common unit for financial accounting purposes, as illustrated in the
following table:
<TABLE>
<S> <C>
Assumed initial public offering price per common unit....... $20.00
Less: Pro forma net tangible book value per common unit
after the offering(a)..................................... 18.63
------
Immediate dilution in net tangible book value per common
unit to new investors..................................... $ 1.37
======
</TABLE>
---------------
(a) Determined by dividing the total number of units (5,679,694 common units,
5,679,694 subordinated units and the combined 2% general partner interest,
which has a dilutive effect equivalent to 231,824 units) to be outstanding
after the offering into the pro forma net tangible book value of Williams
Energy Partners, after giving effect to the application of the net proceeds
of the offering.
The following table sets forth the number of units that we will issue and
the total consideration contributed to us by the general partner and its
affiliates in respect of their units and by the purchasers of common units in
this offering upon consummation of the transactions contemplated by this
prospectus:
<TABLE>
<CAPTION>
UNITS ACQUIRED
-------------------- TOTAL
NUMBER PERCENT CONSIDERATION
---------- ------- ---------------
($ IN MILLIONS)
<S> <C> <C> <C>
General partner and its affiliates (a)(b)......... 7,841,212 67.6% $149.7
New investors..................................... 3,750,000 32.4% 75.0
---------- ------ ------
Total................................... 11,591,212 100.0% $224.7
========== ====== ======
</TABLE>
---------------
(a) Upon the consummation of the transactions contemplated by this prospectus,
the general partner and its affiliates will own an aggregate of 1,929,694
common units, 5,679,694 subordinated units and a 2% general partner interest
in Williams Energy Partners, having a dilutive effect equivalent to 231,824
units.
(b) We will record the assets contributed by the general partner at historical
cost in accordance with generally accepted accounting principles. Book value
of the consideration provided by the general partner and its affiliates, as
of September 30, 2000, after giving effect to the application of the net
proceeds of the offering, is as follows:
<TABLE>
<CAPTION>
($ IN MILLIONS)
---------------
<S> <C>
Book value of net assets contributed by affiliates of our
general partner........................................ $ 69.2
Add: Income taxes retained by affiliates of our general
partner................................................ 14.5
Consideration from the sale of 562,500 units to
affiliates of the general partner.................. 11.3
Capital contribution by an affiliate of the general
partner............................................ 54.7
------
Total consideration............................ $149.7
======
</TABLE>
20
<PAGE> 27
CASH DISTRIBUTION POLICY
DISTRIBUTIONS OF AVAILABLE CASH
General. Within approximately 45 days after the end of each quarter,
beginning with the quarter ending March 31, 2001, we will distribute all of our
available cash to unitholders of record on the applicable record date. We will
adjust downward the minimum quarterly distribution for the period from the
closing of the offering through March 31, 2001 based on the actual length of the
period.
Definition of Available Cash. We define available cash in the glossary, and
it generally means, for each fiscal quarter, all cash on hand at the end of the
quarter less the amount of cash that the general partner determines in its
reasonable discretion is necessary or appropriate to reserve for future
operations or to provide funds for distributions for any one or more of the next
four quarters.
Intent to Distribute the Minimum Quarterly Distribution. We intend, to the
extent we have sufficient available cash from operating surplus, as defined
below, to distribute to each common unit and subordinated unit at least the
minimum quarterly distribution of $0.525 per quarter or $2.10 per year. However,
there is no guarantee that we will pay the minimum quarterly distribution on the
common units in any quarter, and we will be prohibited from making any
distributions to unitholders if it would cause an event of default under our
credit facility.
OPERATING SURPLUS AND CAPITAL SURPLUS
General. All cash distributed to unitholders will be characterized either
as "operating surplus" or "capital surplus." We distribute available cash from
operating surplus differently than available cash from capital surplus.
Definition of Operating Surplus. We define operating surplus in the
glossary, and for any period it generally means:
- our cash balance on the closing date of this offering, plus
- $15.0 million, plus
- all of our cash receipts since the closing of this offering, excluding
cash from borrowings that are not working capital borrowings, sales of
equity and debt securities and sales of assets outside the ordinary
course of business, plus
- working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for the quarter, less
- all of our operating expenditures since the closing of this offering,
including the repayment of working capital borrowings, but not the
repayment of other borrowings, and including maintenance capital
expenditures.
Definition of Capital Surplus. We also define capital surplus in the
glossary, and it will generally be generated only by:
- borrowings other than working capital borrowings,
- sales of debt and equity securities, and
- sales or other disposition of assets for cash, other than inventory,
accounts receivable and other current assets sold in the ordinary course
of business or as part of normal retirements or replacements of assets.
Characterization of Cash Distributions. We will treat all available cash
distributed as coming from operating surplus until the sum of all available cash
distributed since we began operations equals the operating surplus as of the
most recent date of determination of available cash. We will treat any amount
21
<PAGE> 28
distributed in excess of operating surplus, regardless of its source, as capital
surplus. We do not anticipate that we will make any distributions from capital
surplus.
SUBORDINATION PERIOD
General. During the subordination period, which we define below, the common
units will have the right to receive distributions of available cash from
operating surplus in an amount equal to the minimum quarterly distribution of
$0.525 per quarter, plus any arrearages in the payment of the minimum quarterly
distribution on the common units from prior quarters, before any distributions
of available cash from operating surplus may be made on the subordinated units.
The purpose of the subordinated units is to increase the likelihood that during
the subordination period there will be available cash to be distributed on the
common units.
Definition of Subordination Period. We define the subordination period in
the glossary. The subordination period will extend until the first day of any
quarter beginning after December 31, 2005 that each of the following tests are
met:
- distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
- the "adjusted operating surplus" generated during each of the three
immediately preceding non-overlapping four-quarter periods equaled or
exceeded the sum of the minimum quarterly distributions on all of the
outstanding common units and subordinated units during those periods on a
fully diluted basis and the related distribution on the combined 2%
general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
Before the end of the subordination period, a portion of the subordinated
units may convert into common units on a one-for-one basis on the first day
after the record date established for the distribution for any quarter ending on
or after:
- December 31, 2003 with respect to 25% of the subordinated units; and
- December 31, 2004 with respect to 25% of the subordinated units.
The early conversions will occur if at the end of the applicable quarter
each of the following occurs:
- distributions of available cash from operating surplus on the common
units and the subordinated units equal or exceed the sum of the minimum
quarterly distributions on all of the outstanding common units and
subordinated units for each of the three non-overlapping four-quarter
periods immediately preceding that date;
- the adjusted operating surplus generated during each of the three
immediately preceding non-overlapping four-quarter periods equals or
exceeds the sum of the minimum quarterly distributions on all of the
outstanding common units and subordinated units during those periods on a
fully diluted basis and the related distribution on the 2% general
partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
However, the early conversion of the second 25% of the subordinated units may
not occur until at least one year following the early conversion of the first
25% of the subordinated units.
22
<PAGE> 29
Definition of Adjusted Operating Surplus. We define "adjusted operating
surplus" in the glossary and for any period it generally means:
- operating surplus generated during that period, less
- any net increase in working capital borrowings during that period, less
- any net reduction in cash reserves for operating expenditures during that
period not relating to an operating expenditure made during that period,
plus
- any net decrease in working capital borrowings during that period, plus
- any net increase in cash reserves for operating expenditures during that
period required by any debt instrument for the repayment of principal,
interest or premium.
Adjusted operating surplus is intended to reflect the cash generated from
operations during a particular period and therefore excludes net increases in
working capital borrowings and net drawdowns of reserves of cash generated in
prior periods.
Effect of Expiration of the Subordination Period. Upon expiration of the
subordination period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders remove our
general partner other than for cause, the subordination period will end, any
then-existing arrearages on the common units will terminate, and each
subordinated unit will immediately convert into one common unit.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter during the subordination period in the following manner:
- First, 98% to the common unitholders, pro rata, and 2% to the general
partner until we distribute for each outstanding common unit an amount
equal to the minimum quarterly distribution for that quarter,
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner until we distribute for each outstanding common unit an amount
equal to any arrearages in payment of the minimum quarterly distribution
on the common units for any prior quarters during the subordination
period;
- Third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner until we distribute for each subordinated unit an amount
equal to the minimum quarterly distribution for that quarter, and
- Thereafter, in the manner described in "-- Incentive Distribution
Rights -- Hypothetical Annualized Yield" below.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter after the subordination period in the following manner:
- First, 98% to all unitholders, pro rata, and 2% to the general partner
until we distribute for each outstanding unit an amount equal to the
minimum quarterly distribution for that quarter; and
- Thereafter, in the manner described in "-- Incentive Distribution
Rights -- Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTION RIGHTS -- HYPOTHETICAL ANNUALIZED YIELD
Incentive distribution rights represent the right to receive an increasing
percentage of quarterly distributions of available cash from operating surplus
after the minimum quarterly distribution and the
23
<PAGE> 30
target distribution levels have been achieved. Our general partner currently
holds the incentive distribution rights, but may transfer these rights
separately from its general partner interest, subject to restrictions in the
partnership agreement.
If for any quarter:
- we have distributed available cash from operating surplus to the common
and subordinated unitholders in an amount equal to the minimum quarterly
distribution; and
- we have distributed available cash from operating surplus on outstanding
common units in an amount necessary to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution;
then, we will distribute any additional available cash from operating surplus
for that quarter 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 each unit receives a total of $0.575 per unit for that quarter (the
"first target distribution");
- Second, 85% to all unitholders, pro rata, and 15% to the general partner,
until each unitholder receives a total of $0.650 per unit for that
quarter (the "second target distribution");
- Third, 75% to all unitholders, pro rata, and 25% to the general partner,
until each unitholder receives a total of $0.775 per unit for that
quarter (the "third target distribution"); and
- Thereafter, 50% to all unitholders, pro rata, and 50% to the general
partner.
In each case, the amount of the target distribution set forth above is exclusive
of any distributions to common unitholders to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution on the common units.
The following table illustrates the percentage allocations of the
additional available cash from operating surplus between the unitholders and our
general partner up to the various target distribution levels and a hypothetical
annualized percentage yield to be realized by a unitholder at each target
distribution level. For purposes of the following table, we calculated the
annualized percentage yield on a pretax basis assuming that (1) the common unit
was purchased at an amount equal to $20.00 per common unit and (2) we
distributed each quarter during the first year following the investment the
amount set forth under the column "Total Quarterly Distribution Target Amount."
We also based the calculations on the assumption that the quarterly distribution
amounts shown do not include any common unit arrearages. The amounts set forth
under "Marginal Percentage Interest in Distributions" are the percentage
interests of our general partner and the unitholders in any available cash from
operating surplus we distribute up to and including the corresponding amount in
the column "Total Quarterly Distribution Target Amount," until available cash we
distribute reaches the next target distribution level, if any. The percentage
interests shown for the unitholders and the general partner for the minimum
quarterly distribution are also applicable to quarterly distribution amounts
that are less than the minimum quarterly distribution.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
INTEREST IN
DISTRIBUTIONS
TOTAL QUARTERLY ---------------------
DISTRIBUTION HYPOTHETICAL GENERAL
TARGET AMOUNT ANNUALIZED YIELD UNITHOLDERS PARTNER
------------------------- -------------------------- ----------- -------
<S> <C> <C> <C> <C>
Minimum Quarterly
Distribution............... $0.525 10.50% 98% 2%
First Target Distribution.... up to $0.575 up to 11.50% 98% 2%
Second Target Distribution... above $0.575 up to $0.650 above 11.50% up to 13.00% 85% 15%
Third Target Distribution.... above $0.650 up to $0.775 above 13.00% up to 15.50% 75% 25%
Thereafter................... above $0.775 above 15.50% 50% 50%
</TABLE>
24
<PAGE> 31
DISTRIBUTIONS FROM CAPITAL SURPLUS
How Distributions from Capital Surplus Will Be Made. We will make
distributions of available cash from capital surplus in the following manner:
- First, 98% to all unitholders, pro rata, and 2% to the general partner,
until we distribute for each common unit that was issued in this
offering, an amount of available cash from capital surplus equal to the
initial public offering price;
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we distribute for each common unit that was issued in the
offering, an amount of available cash from capital surplus equal to any
unpaid arrearages in payment of the minimum quarterly distribution on the
common units; and
- Thereafter, we will make all distributions of available cash from capital
surplus as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. The partnership agreement
treats a distribution of capital surplus as the repayment of the initial unit
price from this initial public offering, which is a return of capital. The
initial public offering price less any distributions of capital surplus per unit
is referred to as the "unrecovered initial unit price." Each time a distribution
of capital surplus is made, the minimum quarterly distribution and the target
distribution levels will be reduced in the same proportion as the corresponding
reduction in the unrecovered initial unit price. Because distributions of
capital surplus will reduce the minimum quarterly distribution, after any of
these distributions are made, it may be easier for the general partner to
receive incentive distributions and for the subordinated units to convert into
common units. However, any distribution of capital surplus before the
unrecovered initial unit price is reduced to zero cannot be applied to the
payment of the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a unit issued in this offering in an
amount equal to the initial unit price, we will reduce the minimum quarterly
distribution and the target distribution levels to zero and we will make all
future distributions from operating surplus, with 50% being paid to the holders
of units, 48% to the holders of the incentive distribution rights and 2% to the
general partner.
ADJUSTMENT TO THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to adjusting the minimum quarterly distribution and target
distribution levels to reflect a distribution of capital surplus, we will
proportionately adjust the minimum quarterly distribution, target distribution
levels, unrecovered initial unit price, the number of common units issuable
during the subordination period without a unitholder vote and the number of
common units into which a subordinated unit is convertible if we combine our
units into fewer units or subdivide our units into a greater number of units. In
addition, if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, we will reduce the minimum quarterly distribution and the target
distribution levels by multiplying the same by one minus the sum of the highest
marginal federal corporate income tax rate that could apply and any increase in
the effective overall state and local income tax rates. For example, if we
became subject to a maximum marginal federal, and effective state and local
income tax rate of 38%, then the minimum quarterly distribution and the target
distributions levels would each be reduced to 62% of their previous levels.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
If we dissolve in accordance with the partnership agreement, we will sell
or otherwise dispose of our assets in a process called a liquidation. We will
first apply the proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and the general partner, in
accordance with their capital account balances, as adjusted to reflect any gain
or loss upon the sale or other disposition of our assets in liquidation.
25
<PAGE> 32
The allocations of gain and loss 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 Williams Energy Partners, to the extent required to permit common
unitholders to receive their unrecovered initial unit price plus the minimum
quarterly distribution for the quarter during which liquidation occurs plus any
unpaid arrearages in payment of the minimum quarterly distribution on the common
units. However, there may not be sufficient gain upon liquidation of Williams
Energy Partners to enable the holder of common units to fully recover all of
these amounts, even though there may be cash available for distribution to the
holders of subordinated units. Any further net gain recognized upon liquidation
will be allocated in a manner that takes into account the incentive distribution
rights of the general partner.
Manner of Adjustments for Gain. The manner of the adjustment is set forth
in the partnership agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any gain to the partners in the following
manner:
- First, to the general partner and the holders of units who have negative
balances in their capital accounts to the extent of and in proportion to
those negative balances;
- Second, 98% to the common unitholders, pro rata, and 2% to the general
partner until the capital account for each common unit is equal to the
sum of:
(1) the unrecovered initial unit price for that common unit; plus
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs; plus
(3) any unpaid arrearages in payment of the minimum quarterly distribution
on that common unit;
- Third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner until the capital account for each subordinated unit is
equal to the sum of:
(1) the unrecovered initial unit price on that subordinated unit; and
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;
- Fourth, 98% to all unitholders, pro rata, and 2% to the general partner,
pro rata, until we allocate under this paragraph an amount per unit equal
to:
(1) the sum of the excess of the first target distribution per unit over
the minimum quarterly distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the minimum quarterly distribution
per unit that we distributed 98% to the units, pro rata, and 2% to the
general partner, pro rata, for each quarter of our existence;
- Fifth, 85% to all unitholders, pro rata, and 15% to the general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the second target distribution per unit over
the first target distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the first target distribution per
unit that we distributed 85% to the unitholders, pro rata, and 15% to
the general partner for each quarter of our existence;
- Sixth, 75% to all unitholders, pro rata, and 25% to the general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the third target distribution per unit over
the second target distribution per unit for each quarter of our
existence; less
26
<PAGE> 33
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the second target distribution per
unit that we distributed 75% to the unitholders, pro rata, and 25% to
the general partner for each quarter of our existence;
- Thereafter, 50% to all unitholders, pro rata, and 50% to the general
partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
clause (3) of the second priority above and all of the third priority above will
no longer be applicable.
Manner of Adjustments for Losses. Upon our liquidation, we will generally
allocate any loss to the general partner and the unitholders in the following
manner:
- First, 98% to holders of subordinated units in proportion to the positive
balances in their 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 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 end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
all of the first bullet point above will no longer be applicable.
Interim Adjustments to Capital Accounts. We will make interim adjustments
to capital accounts at the time we issue additional interests in our
partnership. We will allocate any unrealized, and, for tax purposes,
unrecognized gain or loss resulting from the adjustments to the unitholders and
the general partner in the same manner as we allocate gain or loss upon
liquidation. In the event that we make positive interim adjustments to the
capital accounts, we will allocate any later negative adjustments to the capital
accounts resulting from the issuance of additional units or upon our liquidation
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 earlier positive adjustments to
the capital accounts had been made.
27
<PAGE> 34
CASH AVAILABLE FOR DISTRIBUTION
We believe that we will have sufficient available cash from operating
surplus to allow us to make the full minimum quarterly distribution on all the
outstanding units for each quarter through March 31, 2002. Available cash for
any quarter will consist generally of all cash on hand at the end of that
quarter as adjusted for reserves. Operating surplus generally consists of cash
on hand at closing of this offering, plus cash generated from operations after
deducting related expenditures and other items, plus working capital borrowings
after the end of the quarter, plus $15.0 million. The definitions of available
cash and operating surplus are contained in the glossary.
Assumptions. We base our belief that we can make the full minimum quarterly
distribution on all the outstanding units for each quarter through March 31,
2002 on the assumptions set forth below. These assumptions are based on a
comparison to our pro forma results of operations for the nine months ended
September 30, 2000, on an annualized basis.
- The average utilized storage and throughput volume at our marine terminal
facilities will increase by approximately 4% due to increased utilization
at our Galena Park facility.
- Despite the expiration at the end of 2000 of a contract that provided for
a gradual reduction of a customer's contractual commitment to utilize a
specified amount of throughput capacity during the year, the average
daily throughput of refined petroleum products delivered through our
inland terminals will only decline by approximately 2%.
- The average fee for storage services at our marine terminal facilities
will increase by approximately 4%, primarily due to contract
renegotiations.
- The average per barrel throughput fees at our inland terminals will
decline by approximately 24% due to a contract renegotiation at the end
of 2000 and anticipated lower ancillary revenues.
- The ammonia pipeline weighted average tariff rates we charge will be
approximately 3% higher than the tariff rates in effect at September 30,
2000 due to an indexing adjustment on July 1, 2001.
- The volume of product transported through our ammonia pipeline and
terminals system will increase by approximately 6% as a result of higher
fourth quarter shipments for the fall fertilizer season and as a result
of increased ammonia production, assuming a decline in natural gas
prices.
- The operating costs associated with our marine terminal facilities and
ammonia pipeline and terminals system will be comparable, while costs
associated with the inland terminals will increase by approximately 10%
because a majority of the repair and maintenance expenses for the inland
terminals are normally incurred during the latter part of the year.
- Our general and administrative costs will not exceed $6.0 million on an
annualized basis in 2001 and will not increase by more than 7% in the
first quarter of 2002.
- No material accidents or other events will occur that disrupt operations
on our marine and inland terminals or our ammonia pipeline and terminals
system.
- Market, regulatory and overall economic conditions will not change
substantially.
Although we believe our assumptions are within a range of reasonableness,
neither we nor our general partner can control whether the assumptions are
realized. If our assumptions are not realized, the actual available cash from
operating surplus that we generate could be substantially less than that
currently expected and could, therefore, be insufficient to permit us to make
cash distributions at the levels described above. Accordingly, we cannot assure
you that distributions of the minimum quarterly distribution or any other
amounts will be made.
Williams Energy Partners' Pro Forma Available Cash. The amount of available
cash from operating surplus needed to pay the minimum quarterly distribution for
one quarter and for four quarters on the
28
<PAGE> 35
common units, the subordinated units, and the general partner interest to be
outstanding immediately after the transactions is approximately:
<TABLE>
<CAPTION>
ONE QUARTER FOUR QUARTERS
----------- -------------
($ IN THOUSANDS)
<S> <C> <C>
Common units................................................ $2,982 $11,928
Subordinated units.......................................... 2,982 11,928
Combined 2% general partner interest........................ 122 488
------ -------
Total............................................. $6,086 $24,344
====== =======
</TABLE>
The amount of available cash needed to pay the minimum quarterly
distribution for four quarters on the common units, the subordinated units and
the general partner interests to be outstanding immediately after the offering
is approximately $24.3 million. If we had completed the transactions
contemplated in this prospectus on January 1, 1999, pro forma available cash
from operating surplus generated during 1999 would have been approximately $26.0
million and the amount of pro forma available cash from operating surplus
generated for the nine months ended September 30, 2000, would have been $20.0
million. These amounts would have been sufficient to allow us to pay the full
minimum quarterly distribution on the common units, the subordinated units and
the related distribution on the general partner interest during the respective
periods.
We derived the amounts of pro forma available cash from operating surplus
shown above from our pro forma financial statements in the manner described in
Appendix D. The pro forma adjustments are based upon currently available
information and specific estimates and assumptions. The pro forma financial
statements do not purport to present our results of operations had the
transactions contemplated in this prospectus actually been completed as of the
dates indicated. In addition, available cash from operating surplus as defined
in the partnership agreement is a cash accounting concept, while our pro forma
financial statements have been prepared on an accrual basis. As a result, you
should only view the amount of pro forma available cash from operating surplus
as a general indication of the amount of available cash from operating surplus
that we might have generated had Williams Energy Partners been formed in earlier
periods.
29
<PAGE> 36
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables show selected historical financial and operating data
for the Williams Energy Partners Predecessor, which consists of all of our
assets, and pro forma financial and operating data of Williams Energy Partners
L.P., in each case for the periods and as of the dates indicated. The selected
historical financial data for the Williams Energy Partners Predecessor for 1997,
1998 and 1999 are derived from the audited financial statements of the Williams
Energy Partners Predecessor. The selected historical financial data for the
Williams Energy Partners Predecessor for 1995 and 1996 as well as September 30,
1999 and 2000 are derived from the unaudited financial statements of the
Williams Energy Partners Predecessor.
The pro forma financial statements of Williams Energy Partners L.P. show
the pro forma effect of the transfer of the Williams Energy Partners Predecessor
to our operating partnership and the related transactions. The summary pro forma
financial and operating data presented below for 1999 and September 2000 are
derived from the unaudited pro forma financial statements. The pro forma balance
sheet assumes the offering and related transactions occurred as of September 30,
2000, and the pro forma statement of income assumes the offering and related
transactions occurred on January 1, 1999.
The historical financial statements included in this prospectus have been
prepared utilizing historical results and have not been adjusted for terminal
acquisitions or ammonia pipeline tariff adjustments, terminal throughput fee
adjustments or storage rate adjustments. Of these items, the most significant
impact to our financial results is the acquisition of the three Gulf Coast
marine terminal facilities in August 1999. Because of the significance of the
Gulf Coast marine terminal acquisition, we have included additional historical
financial and operating data for these facilities as a separate table entitled
Marine Terminals Predecessor. This information was derived from the unaudited
financial statements for 1995 and 1996 as well as the audited financial
statements for 1997 and 1998 and the seven month period ended July 31, 1999,
which immediately precedes our acquisition of these facilities.
The pro forma financial statements have been prepared utilizing actual
results and have not been adjusted to reflect ammonia pipeline tariff
adjustments, terminal throughput fee adjustments or storage rate adjustments.
The pro forma statement of income does, however, include adjustments to reflect
the impact of significant terminal acquisitions as if they had occurred on
January 1, 1999, including the acquisition of the Marine Terminals Predecessor
in August 1999 and the New Haven, Connecticut marine terminal facility in
September 2000. A more complete explanation of the pro forma adjustments can be
found in the Notes to Pro Forma Financial Statements for Williams Energy
Partners L.P.
We define EBITDA as operating profit plus depreciation. EBITDA provides
additional information as to our ability to make the minimum quarterly
distribution and is presented solely as a supplemental measure. EBITDA should
not be considered as an alternative to net income, income before income taxes,
cash flows from operations or any other measure of financial performance
presented in accordance with generally accepted accounting principles. Our
EBITDA may not be comparable to EBITDA of other entities, and other entities may
not calculate EBITDA in the same manner as we do.
We derived the following tables from, and they should be read together with
and are qualified in their entirety by reference to, the historical and pro
forma financial statements and the accompanying notes included elsewhere in this
prospectus. The tables should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
30
<PAGE> 37
<TABLE>
<CAPTION>
WILLIAMS ENERGY PARTNERS PREDECESSOR -- HISTORICAL
-------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
------- -------- ------- ------- --------- --------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues................. $11,399 $ 14,748 $19,526 $20,846 $ 44,388 $ 27,217 $ 53,608
Operating expenses................. 4,971 5,831 7,176 7,618 18,635 10,451 23,545
Depreciation....................... 977 940 1,100 1,190 4,610 2,417 5,976
General and administrative......... 1,602 1,971 4,603 3,950 5,458 3,623 8,774
------- -------- ------- ------- --------- --------- --------
Total costs and expenses........... $ 7,550 $ 8,742 $12,879 $12,758 $ 28,703 $ 16,491 $ 38,295
------- -------- ------- ------- --------- --------- --------
Operating profit................... $ 3,849 $ 6,006 $ 6,647 $ 8,088 $ 15,685 $ 10,726 $ 15,313
Interest income (expense)(a)....... (799) (724) 1,149 1,371 (4,775) 323 (9,836)
Interest capitalized............... -- -- -- -- -- -- 40
Other income (expense), net........ -- 1 41 (27) -- (2) --
------- -------- ------- ------- --------- --------- --------
Income before income taxes......... $ 3,050 $ 5,283 $ 7,837 $ 9,432 $ 10,910 11,047 $ 5,517
Income taxes....................... 1,090 1,781 2,920 3,589 4,144 4,191 2,093
------- -------- ------- ------- --------- --------- --------
Net income......................... $ 1,960 $ 3,502 $ 4,917 $ 5,843 $ 6,766 $ 6,856 $ 3,424
======= ======== ======= ======= ========= ========= ========
Pro forma net income per limited
partner unit.....................
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................... $14,705 $ 17,377 $24,890 $24,997 $ 9,492 $ 6,120 $ 18,291
Working capital less affiliate note
receivable(b).................... (1,310) 558 1,262 203 9,492 6,120 18,291
Total assets....................... 40,823 57,720 65,316 73,002 283,339 278,694 324,096
Affiliate long-term note payable... -- -- -- -- 197,165 191,132 232,093
Long-term debt..................... -- -- -- -- -- -- --
Owner's equity/partner's capital... 33,206 49,325 54,242 60,085 66,851 66,941 70,275
CASH FLOW DATA:
Net cash flow provided by (used
in):
Operating activities............. $ 2,239 $ 1,829 $ 9,279 $ 8,844 $ 5,659 $ 9,576 $ 1,513
Investing activities............. (2,239) (14,429) (9,279) (8,844) (237,733) (234,330) (36,441)
Financing activities............. -- 12,600 -- -- 232,074 224,754 34,928
OTHER DATA:
Operating margin:
Petroleum product terminals...... $ 804 $ 1,612 $ 3,568 $ 3,599 $ 17,141 $ 9,809 $ 24,676
Ammonia pipeline and terminals
system......................... 5,624 7,305 8,782 9,629 8,612 6,957 5,387
EBITDA............................. 4,826 6,946 7,747 9,278 20,295 13,143 21,289
Maintenance capital expenditures... 643 1,319 1,472 1,666 2,236 2,202 2,705
OPERATING STATISTICS:
Petroleum product terminals:
Marine terminal average storage
capacity utilized per month
(million barrels)............ N/A N/A N/A N/A 10.1(c) 9.1(c) 12.0(d)
Marine terminal throughput
(million barrels)............ N/A N/A N/A N/A N/A N/A .8
Inland terminal throughput
(million barrels)............ 3.8 9.1 21.3 26.8 58.1 44.4 41.6
Ammonia pipeline and terminals
system:
Volume shipped (thousand
tons)........................ 802 843 893 896 795 603 508
<CAPTION>
WILLIAMS ENERGY
PARTNERS L.P.
PRO FORMA
----------------------------
NINE
YEAR MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
($ IN THOUSANDS)
<S> <C> <C>
INCOME STATEMENT DATA:
Operating revenues................. $76,526 $ 58,676
Operating expenses................. 34,864 26,162
Depreciation....................... 9,673 6,635
General and administrative......... 6,000 4,500
------- --------
Total costs and expenses........... $50,537 $ 37,297
------- --------
Operating profit................... $25,989 $ 21,379
Interest income (expense)(a)....... (5,964) (5,362)
Interest capitalized............... -- 40
Other income (expense), net........ (19) --
------- --------
Income before income taxes......... $20,006 $ 16,057
Income taxes....................... -- --
------- --------
Net income......................... $20,006 $ 16,057
======= ========
Pro forma net income per limited
partner unit..................... $ 1.73 $ 1.39
======= ========
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................... $ 7,599
Working capital less affiliate note
receivable(b).................... 7,599
Total assets....................... 313,730
Affiliate long-term note payable... --
Long-term debt..................... 90,100
Owner's equity/partner's capital... 216,798
CASH FLOW DATA:
Net cash flow provided by (used
in):
Operating activities.............
Investing activities.............
Financing activities.............
OTHER DATA:
Operating margin:
Petroleum product terminals...... $33,050 $ 27,127
Ammonia pipeline and terminals
system......................... 8,612 5,387
EBITDA............................. 35,662 28,014
Maintenance capital expenditures... 3,709 2,705
OPERATING STATISTICS:
Petroleum product terminals:
Marine terminal average storage
capacity utilized per month
(million barrels)............ 13.8 14.8
Marine terminal throughput
(million barrels)............ 14.5 10.6
Inland terminal throughput
(million barrels)............ 58.1 41.6
Ammonia pipeline and terminals
system:
Volume shipped (thousand
tons)........................ 795 508
</TABLE>
---------------
(a) In 1995 and 1996, Williams' interest expense was allocated to its
affiliates regardless of their affiliate notes receivable or payable
balance. Although these assets maintained an affiliate notes receivable
balance with Williams during this period, they were charged interest
expense. In 1997, Williams began to calculate interest income and expense
on a monthly basis according to the actual affiliate note receivable or
payable balance.
(b) We believe excluding the affiliate note receivable from working capital
provides a more appropriate comparative representation of working capital.
The affiliate note receivable and payable result from our long-term
involvement in Williams' cash management program. The affiliate note
payable at December 31, 1999 and September 30, 2000 is not required to be
repaid prior to October 1, 2001 and accordingly has been classified as
long-term.
(c) For the year ended December 31, 1999, represents the average storage
capacity utilized for the Marine Terminals Predecessor for the five months
that we owned these assets in 1999. For the nine months ended September 30,
1999, represents the average storage capacity utilized per month for the
Marine Terminals Predecessor for the two months that we owned these assets
prior to September 30, 1999.
(d) Represents the average storage capacity utilized per month for the Marine
Terminals Predecessor, excluding one month of storage capacity utilized per
month at the New Haven, Connecticut facility purchased in September 2000.
31
<PAGE> 38
<TABLE>
<CAPTION>
MARINE TERMINALS PREDECESSOR
----------------------------------------------------
SEVEN
MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------- JULY 31,
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues....................... $ 39,154 $ 39,129 $ 38,183 $ 44,114 $24,858
Operating expenses....................... 13,051 12,975 14,668 16,418 12,389
Depreciation............................. 5,161 4,835 4,922 4,627 2,630
General and administrative............... 1,573 1,776 1,276 1,214 739
-------- -------- -------- -------- -------
Total costs and expenses....... $ 19,785 $ 19,586 $ 20,866 $ 22,259 $15,758
-------- -------- -------- -------- -------
Operating profit......................... $ 19,369 $ 19,543 $ 17,317 $ 21,855 $ 9,100
Other income (expense), net.............. 360 (71) 11 270 (19)
-------- -------- -------- -------- -------
Income before income taxes............... $ 19,729 $ 19,472 $ 17,328 $ 22,125 $ 9,081
Income taxes............................. 7,546 7,448 6,633 8,466 3,584
-------- -------- -------- -------- -------
Net income............................... $ 12,183 $ 12,024 $ 10,695 $ 13,659 $ 5,497
======== ======== ======== ======== =======
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................... $ (6,950) $ (5,151) $ (7,347) $ (8,879) $(7,614)
Total assets............................. 44,901 41,606 37,241 34,992 32,099
Divisional equity........................ 23,654 22,819 17,696 12,421 12,648
CASH FLOW DATA:
Net Cash flow provided by (used in):
Operating activities................... $ 17,343 $ 14,623 $ 17,384 $ 19,905 $ 5,627
Investing activities................... (3,910) (2,063) (1,442) (514) (915)
Financing activities................... (13,433) (12,859) (15,818) (18,934) (5,270)
OTHER DATA:
Operating margin......................... $ 26,103 $ 26,154 $ 23,515 $ 27,696 $12,469
EBITDA................................... 24,530 24,378 22,239 26,482 11,730
OPERATING STATISTICS:
Marine terminal average storage utilized
(million barrels)...................... 10.4 10.3 10.3 12.2 11.7
</TABLE>
32
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of the financial condition and
results of operations for the Williams Energy Partners Predecessor in
conjunction with the historical financial statements of the Williams Energy
Partners Predecessor included elsewhere in this prospectus. For more detailed
information regarding the basis of presentation for the following information,
you should read the notes to the historical and pro forma financial statements
for the Williams Energy Partners Predecessor.
We also include a discussion of the financial condition and results of
operations for our three Gulf Coast marine terminal facilities that we refer to
as our Marine Terminals Predecessor. We acquired these facilities in August 1999
from Amerada Hess Corporation. Because of the significance of this acquisition,
we consider the Marine Terminals Predecessor to be a predecessor entity for
accounting purposes. We include, for accounting purposes, separate financial
statements and footnotes in this prospectus representing the financial
condition, results of operations and cash flows of these assets prior to our
ownership, as well as a separate management's discussion and analysis. You
should read this analysis in conjunction with the historical financial
statements of the Marine Terminals Predecessor and the notes to those statements
found elsewhere in this prospectus.
INTRODUCTION
We are a Delaware limited partnership formed by Williams in August 2000 to
own, operate and acquire a diversified portfolio of complementary energy assets.
We are principally engaged in the storage, transportation and distribution of
refined petroleum products and ammonia. Our current asset portfolio consists of:
- four marine terminal facilities, three of which comprise our Marine
Terminals Predecessor;
- 24 inland terminals; and
- an ammonia pipeline and terminals system.
These assets were acquired and have been owned by several wholly owned
subsidiaries of Williams, which will transfer these assets, including the
related liabilities, to our operating partnership upon the closing of this
offering. The following discussion has been prepared as if the transfer of the
Williams Energy Partners Predecessor had occurred and we operated as a stand
alone business throughout the periods presented.
OVERVIEW
Our asset portfolio is complementary because our businesses earn revenue
through the sale of a number of different storage, transportation and
distribution services. Our marine terminal facilities, which are large product
storage facilities, generate revenues primarily from fees that we charge
customers for storage services. Our inland terminals earn revenues primarily
from fees that we charge based on the volumes of refined petroleum products
distributed from our terminals. Our inland terminals also earn ancillary
revenues from injecting additives into gasoline and jet fuel, from filtering jet
fuel and from rental income. Also included in ancillary revenues is the gain or
loss resulting from differences in metered-versus-physical volumes of refined
petroleum products received at our terminals. Our ammonia pipeline and terminals
system earns the majority of its revenue from transportation tariffs that we
charge for transporting ammonia through our pipeline.
Operating costs and expenses we incur in our marine and inland terminals
are principally fixed costs related to routine maintenance as well as field and
support personnel. Other costs, including fuel and power, fluctuate with storage
capacity or throughput levels. Generally, most of the operating costs for our
ammonia pipeline and terminals system fluctuate with the volume of ammonia
transported through our pipeline.
33
<PAGE> 40
Williams allocates both indirect and direct general and administrative
expenses to its subsidiaries. Indirect expenses, including legal, accounting,
treasury, engineering, information technology and other corporate services, are
based on a calculation that compares a combination of operating margins, payroll
costs and property, plant and equipment to the entire Williams organization.
Historically, the amount of indirect general and administrative expenses
allocated to us has increased as the relative size of our operations compared to
Williams' operations has increased. Direct expenses allocated by Williams are
primarily salaries and benefits of employees, officers and directors associated
with the business activities of the subsidiary. We will reimburse our general
partner and its affiliates for indirect and direct expenses they incur on our
behalf. We have agreed with our general partner, subject to future acquisitions
or other changes in the business, that the expenses to be reimbursed will not
exceed $6.0 million for 2001.
We have little direct exposure to commodity price fluctuations. We do not
trade commodities and do not intend to do so in the future. However, our
operations can be indirectly affected by overall price trends for the products
we handle. During periods when the price of a product is lower today than the
price available through the forward pricing market, the market for that product
is said to be in "contango." A contango market is favorable to our marine
terminal facilities because this market condition incentivizes customers to
store product in the near term to take advantage of expected higher future
prices. Conversely, when the price of a product today is higher than the price
available through the forward pricing market, the market is said to be
"backwardated." In a backwardated market, customers are less likely to store
product because market conditions incentivize them to sell as much product as
possible to take advantage of higher current prices. The forward pricing market
for petroleum products became backwardated in the second quarter of 1999 and
remains so today. The backwardated market contributed to reduced storage
revenues in the second half of 1999 and the first three quarters of 2000. We
cannot predict whether the current backwardated market will continue.
ACQUISITION HISTORY
We are principally engaged in the storage, transportation and distribution
of refined petroleum products and ammonia. We materially increased our
operations through a series of transactions, including:
- in September 2000, the acquisition of one marine petroleum product
terminal facility located in New Haven, Connecticut from Wyatt Energy,
Incorporated;
- in March 2000, the acquisition of a 50.0% ownership interest in one
inland petroleum product terminal in Southlake, Texas from CITGO
Petroleum Corporation;
- in August 1999, the acquisition of three marine petroleum product
terminal facilities, located in Galena Park and Corpus Christi, Texas and
Marrero, Louisiana from Amerada Hess Corporation;
- in February 1999, the acquisition of an additional 10.0% interest in
eight inland petroleum product terminals located in Georgia, North
Carolina, South Carolina, Virginia and Tennessee from Murphy Oil USA,
Inc., which increased our ownership percentage in these terminals to
78.9%;
- in January 1999, the acquisition of 12 inland petroleum product
terminals, located in Ohio, North Carolina, South Carolina, Tennessee,
Alabama, Florida and Mississippi from Amoco Oil Company;
- in December 1998, the acquisition of one inland petroleum product
terminal in Doraville, Georgia from Phillips Pipe Line Company;
- in June 1998, the acquisition of an additional 23.4% ownership interest
in eight inland petroleum product terminals located in Georgia, North
Carolina, South Carolina, Virginia and Tennessee from TOC Terminals,
Inc., which increased our ownership interest to 68.9% from 45.5%, which
we originally acquired in 1996; and
- in December 1997, the acquisition of one inland petroleum product
terminal in Dallas, Texas from Mobil Oil Corp.
34
<PAGE> 41
RESULTS OF OPERATIONS -- WILLIAMS ENERGY PARTNERS PREDECESSOR
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
FINANCIAL HIGHLIGHTS 1999 2000
-------------------- ------ ------
($ IN MILLIONS)
<S> <C> <C>
Revenues:
Petroleum product terminals............................... $18.0 $45.4
Ammonia pipeline and terminals system..................... 9.2 8.2
----- -----
Total revenues.................................... $27.2 $53.6
Operating expenses:
Petroleum product terminals............................... $ 8.2 $20.7
Ammonia pipeline and terminals system..................... 2.2 2.8
----- -----
Total operating expenses.......................... $10.4 $23.5
----- -----
Total operating margin............................ $16.8 $30.1
===== =====
OPERATING STATISTICS
------------------------------------------------------------
Petroleum product terminals:
Marine terminal facilities:
Average storage capacity utilized per month (barrels in
millions)(a).......................................... 9.1 12.0
Throughput (barrels in millions)(b).................... N/A 0.8
Inland terminals:
Throughput (barrels in millions)....................... 44.4 41.6
Ammonia pipeline and terminals system:
Volume shipped (tons in thousands)........................ 603 508
</TABLE>
---------------
(a)For the nine months ended September 30, 1999, represents the average storage
capacity utilized per month for the Marine Terminals Predecessor for the two
months that we owned these assets prior to September 30, 1999. For the nine
months ended September 30, 2000, represents the average storage capacity
utilized per month for the Marine Terminals Predecessor, excluding one month
of storage capacity utilized at the New Haven, Connecticut facility purchased
in September 2000.
(b)Represents one month of activity at the New Haven, Connecticut facility
purchased in September 2000.
Our combined revenues for the nine months ended September 30, 2000 were
$53.6 million compared to $27.2 million for the nine months ended September 30,
1999, an increase of $26.4 million, or 97%. This increase was a result of:
- an increase in petroleum product terminals revenues of $27.4 million, or
152%, due to the following:
-- an increase in the marine terminal facilities revenues of $26.3
million, from $5.4 million to $31.7 million, on an average storage
capacity utilization of 12.3 million barrels. This increase is due to
the increased volumes as a result of our acquisition of the Marine
Terminals Predecessor in August 1999 and, to a lesser extent, the
acquisition of the New Haven, Connecticut facility from Wyatt Energy in
September 2000. Included in the 2000 revenue is a $7.0 million increase
from $0.4 million in 1999 to $7.4 million in 2000 from Williams Energy
Marketing and Trading, an affiliate of our general partner, which
utilizes our facilities in connection with its trading business; and
-- an increase in inland terminal revenues of $1.1 million, from $12.6
million to $13.7 million, as ancillary revenues more than offset
reduced throughput revenues resulting from a decline in
35
<PAGE> 42
throughput volumes of 2.8 million barrels. Our throughput volume decreased
primarily because of the gradual reduction, beginning in January 2000, of a
customer's contractual commitment to utilize a specific amount of throughput
capacity. This contract was entered into in January 1999 in connection
with our acquisition of 12 inland terminals. This volume reduction was
partially offset by a volume increase resulting from the Southlake,
Texas terminal acquisition in March 2000. Included in this revenue is a
$2.9 million increase from $3.4 million in 1999 to $6.3 million in 2000
from Williams Energy Marketing and Trading. Our throughput rates
remained constant for the nine months ended 1999 and 2000;
- ammonia pipeline and terminals system revenues declined by $1.0 million,
or 11%, primarily due to a 95,000 ton, or 16%, reduction of ammonia
shipped through our pipeline. This decline was due to lower product
demand as well as the continuing impact of higher prices for natural gas,
the primary component for the production of ammonia. Wet weather during
the 2000 spring planting season resulted in reduced farm demand for
ammonia. Further, due to higher natural gas prices, our customers have
elected to produce and transport lower quantities of ammonia and to draw
more ammonia from their existing inventories to meet demand. This volume
decline was partially offset by a higher weighted average tariff of
$15.31 per ton for 2000 compared to a tariff of $14.74 per ton for 1999.
The increase in the weighted average tariff resulted from the 2000
mid-year indexing adjustment allowed under the transportation agreements
as well as the expiration of a discount received by one of our customers.
Operating expenses for the nine months ended September 30, 2000 were $23.5
million compared to $10.4 million for the nine months ended September 30, 1999,
an increase of $13.1 million, or 126%. This increase was a result of:
- an increase in petroleum product terminals expenses of $12.5 million, or
152%, due to:
-- an increase in marine terminal facilities expenses of $12.5 million,
from $2.1 million to $14.6 million, due to the acquisition and
assimilation of the Marine Terminals Predecessor, which was not
acquired until August 1999 and the New Haven, Connecticut facility
which was acquired in September 2000; and
-- no changes in inland terminal expenses of $6.1 million as an increase
of $0.2 million related to our newly acquired Southlake, Texas terminal
was offset by expense declines at our other terminal facilities;
- ammonia pipeline and terminals system operating costs increased $0.6
million, or 27%, primarily due to higher property taxes and lease
expenses, as well as timing of maintenance expenses.
Depreciation expense for the nine months ended September 30, 2000 was $6.0
million compared to $2.4 million for the nine months ended September 30, 1999,
an increase of $3.6 million, or 150%. This increase resulted principally from
the acquisition of the Marine Terminals Predecessor in August 1999.
General and administrative expenses for the nine months ended September 30,
2000 were $8.8 million compared to $3.6 million for the nine months ended
September 30, 1999, an increase of $5.2 million, or 144%. This increase resulted
principally from the acquisition of the Marine Terminals Predecessor. As a
result of this acquisition, our assets grew from approximately 0.5% to 1.4% of
the assets of the combined Williams organization, and Williams allocated more
general and administrative expenses to us.
Affiliate interest expense for the nine months ended September 30, 2000 was
$9.8 million compared to interest income of $0.3 million received in the nine
months ended September 30, 1999. Historically, we have transferred our cash
balances to Williams, resulting in an affiliate note receivable on our books on
which we earned interest equivalent to Williams' revolving credit facility rate
on the receivable balance. In August 1999, we borrowed funds from Williams in
connection with our acquisition of the Marine Terminals Predecessor, resulting
in an affiliate note payable and related interest expense.
36
<PAGE> 43
We based our income tax provision for the first nine months of 2000 and
1999 upon the effective income tax rate for the Williams Energy Partners
Predecessor for those periods of 37.9%. The effective income tax rate exceeds
the U.S. federal statutory income tax rate primarily due to state income taxes.
Net income for the nine months ended September 30, 2000 was $3.4 million
compared to $6.9 million for the nine months ended September 30, 1999, a
decrease of $3.5 million, or 51%. While the operating margin increased by $13.3
million during the period, this was more than offset by an $8.8 million increase
in depreciation and general and administrative expenses and a $10.2 million
increase in interest expense; all of which are principally a result of the
acquisition of the Marine Terminals Predecessor in August 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
FINANCIAL HIGHLIGHTS 1998 1999
-------------------- ------ ------
($ IN MILLIONS)
<S> <C> <C>
Revenues:
Petroleum product terminals............................... $ 7.1 $32.3
Ammonia pipeline and terminals system..................... 13.7 12.1
----- -----
Total revenues.................................... $20.8 $44.4
Operating expenses:
Petroleum product terminals............................... $ 3.5 $15.1
Ammonia pipeline and terminals system..................... 4.1 3.5
----- -----
Total operating expenses.......................... $ 7.6 $18.6
----- -----
Total operating margin............................ $13.2 $25.8
===== =====
</TABLE>
<TABLE>
<CAPTION>
OPERATING STATISTICS
--------------------
<S> <C> <C>
Petroleum product terminals:
Marine terminal facilities:
Average storage capacity utilized per month (barrels in
millions)(a).......................................... N/A 10.1
Inland terminals:
Throughput (barrels in millions)....................... 26.8 58.1
Ammonia pipeline and terminals system:
Volume shipped (tons in thousands)........................ 896 795
</TABLE>
---------------
(a) For the year ended December 31, 1999, represents the average storage
capacity utilized per month for the Marine Terminals Predecessor for the
five months that we owned these assets in 1999.
Our combined revenues for the year ended December 31, 1999 were $44.4
million compared to $20.8 million for the year ended December 31, 1998, an
increase of $23.6 million, or 113%. This increase is a result of:
- an increase in petroleum product terminal revenue of $25.2 million, or
355%, due to the following:
-- marine terminal facilities revenues of $15.8 million in 1999, on an
average storage capacity utilization of 10.1 million barrels. These
revenues resulted from the acquisition of the Marine Terminals
Predecessor in August 1999. Included in the revenue was $2.4 million in
affiliate revenue associated with the activities of Williams Energy
Marketing and Trading; and
-- an increase in inland terminals revenues of $9.4 million, from $7.1
million to $16.5 million, primarily due to acquisitions. These
acquisitions include 12 terminals acquired in January 1999, adding 26
million barrels of throughput, one terminal purchased in December 1998,
adding four million barrels of throughput in 1999, and an increased
ownership percentage in eight
37
<PAGE> 44
existing terminals. Included in the $9.4 million increase is an additional $2.5
million of affiliate revenue related to activities of Williams Energy Marketing
and Trading at both new and existing terminal facilities. Slightly offsetting
the increased revenues from throughput growth was a reduction in
throughput rates. Between 1998 and 1999, rates declined by $.017 per
barrel;
- a decrease in ammonia pipeline and terminals system revenues of $1.6
million primarily due to a 101,000 ton, or 11%, reduction of product
shipped through our pipeline. During 1999, the price of natural gas, the
primary component of ammonia production, increased dramatically. As a
result of higher natural gas prices, many ammonia producers reduced
production, choosing instead to sell from their inventories to meet
demand. We experienced a reduction in volumes transported as a result of
reduced ammonia production. Based on the current transportation
agreements, our tariff rates remained unchanged during this period.
However, the mix of customer shipments changed slightly, resulting in a
weighted average tariff of $14.74 per ton in 1999 versus $14.79 per ton
in 1998.
Operating expenses for the year ended December 31, 1999 were $18.6 million
compared to $7.6 million for the year ended December 31, 1998, an increase of
$11.0 million, or 145%. This increase is a result of:
- an increase in operating expenses for the petroleum product terminals of
$11.6 million, or 331%, primarily because of:
-- marine terminal facilities expenses of $6.0 million in 1999, resulting
from the acquisition of the Marine Terminals Predecessor in August
1999; and
-- an increase in inland terminals expenses of $5.6 million, from $3.5
million to $9.1 million, largely as a result of the full year
operations of 13 additional terminals as well as increased ownership
and throughput at eight existing inland terminals. The new terminals
consisted of 12 locations we acquired in January 1999 and one terminal
we acquired in December 1998;
- a decrease in operating expenses for the ammonia pipeline and terminals
system of $0.6 million, or 15%, primarily because of reductions in
routine maintenance expense. We completed an extensive valve replacement
program in 1999, resulting in reduced repair and maintenance expense.
Routine maintenance costs will continue for the system as our regular
monitoring efforts identify ongoing maintenance needs.
Depreciation expense for the year ended December 31, 1999 was $4.6 million
compared to $1.2 million for the year ended December 31, 1998, an increase of
$3.4 million, or 283%. Of this increase, $2.9 million was related to the Marine
Terminals Predecessor we acquired in August 1999. Also, depreciation increased
as a result of our other acquisitions.
General and administrative expenses for the year ended December 31, 1999
were $5.5 million compared to $4.0 million for the year ended December 31, 1998,
an increase of $1.5 million, or 38%. We acquired a significant number of inland
and marine terminals during this period. As a result of these acquisitions, our
assets became a larger percentage of the combined Williams organization, and
Williams allocated more general and administrative expenses to us.
We incurred affiliate interest expense of $5.0 million in the year ended
December 31, 1999 compared to affiliate interest income of $1.3 million received
in the year ended December 31, 1998. Historically, we have transferred our cash
balances to Williams, resulting in an affiliate note receivable on our books.
Prior to 1999, our affiliate note receivable was sufficient to fund our
acquisition and operational needs, and we earned interest equivalent to
Williams' revolving credit facility rate on the receivable balance. We borrowed
funds from Williams in connection with the acquisition of the Marine Terminals
Predecessor, resulting in an affiliate note payable and interest expense for
1999.
We based our income tax provision for the years ended December 31, 1999 and
1998 upon the effective income tax rate for the Williams Energy Partners
Predecessor for those periods of 38.0% and
38
<PAGE> 45
38.1%, respectively. The effective income tax rate exceeds the U.S. federal
statutory income tax rate primarily due to state income taxes.
Net income for the year ended December 31, 1999 was $6.8 million compared
to $5.8 million for the year ended December 31, 1998, an increase of $1.0
million, or 17%. This increase was primarily due to the acquisition of 12 inland
terminals in January 1999 and the Marine Terminals Predecessor in August 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
FINANCIAL HIGHLIGHTS 1997 1998
-------------------- ------ ------
($ IN MILLIONS)
<S> <C> <C>
Revenues:
Petroleum product terminals............................... $ 6.1 $ 7.1
Ammonia pipeline and terminals system..................... 13.4 13.7
----- -----
Total revenues.................................... $19.5 $20.8
Operating expenses:
Petroleum product terminals............................... $ 2.6 $ 3.5
Ammonia pipeline and terminals system..................... 4.6 4.1
----- -----
Total operating expenses.......................... $ 7.2 $ 7.6
----- -----
Total operating margin............................ $12.3 $13.2
===== =====
OPERATING STATISTICS
--------------------
Petroleum product terminals:
Marine terminal facilities:
Average storage capacity utilized per month (barrels in
millions)............................................. N/A N/A
Inland terminals:
Throughput (barrels in millions)....................... 21.3 26.8
Ammonia pipeline and terminals system:
Volume shipped (tons in thousands)........................ 893 896
</TABLE>
Our consolidated revenues for the year ended December 31, 1998 were $20.8
million compared to $19.5 million for the year ended December 31, 1997, an
increase of $1.3 million, or 7%. This increase is a result of:
- an increase in petroleum product terminals revenue of $1.0 million, or
16%, due to the acquisition of an additional inland terminal at Dallas,
Texas, which added 2.9 million barrels of throughput, as well as a 1.0
million barrel increase in throughput utilization at our Nashville,
Tennessee terminal. During this period, Williams Energy Marketing and
Trading extensively utilized our Nashville, Tennessee terminal to meet
its needs, especially those related to supplying Williams' growing retail
truck fueling centers. This terminal has strategic access to barge supply
in a market that was experiencing pipeline constraints. Slightly
offsetting the increased revenues from throughput growth was a reduction
in throughput rates. Between 1997 and 1998, throughput rates declined by
$.008 per barrel; and
- an increase in ammonia pipeline and terminals system revenues of $0.3
million, or 2%, due to the full year impact of a transportation tariff
increase implemented on July 1, 1997 for all three of our ammonia
customers. Our weighted average tariff grew from $14.55 per ton in 1997
to $14.79 per ton in 1998 primarily because of this increase.
39
<PAGE> 46
Operating expenses for the year ended December 31, 1998 were $7.6 million
compared to $7.2 million for the year ended December 31, 1997, an increase of
$0.4 million, or 6%. This increase is a result of:
- an increase in operating expenses for the petroleum product terminals of
$0.9 million, or 35%, primarily due to the acquisition and assimilation
of an inland terminal in Dallas, Texas and an increase in our ownership
percentage in eight of our inland terminals. This increased ownership and
increased throughput at these eight terminals resulted in additional
expense and more employees; and
- a decrease in operating expenses for the ammonia pipeline and terminals
system of $0.5 million, or 11%, primarily due to a reduction in routine
maintenance expenses. This reduction was due to timing of work performed
as part of an extensive pipeline valve replacement program begun in 1995.
Depreciation expense for the year ended December 31, 1998 was $1.2 million
compared to $1.1 million for the year ended December 31, 1997, an increase of
$0.1 million, or 9%. These results reflect the acquisition of an additional
inland terminal.
General and administrative expenses for the year ended December 31, 1998
were $4.0 million compared to $4.6 million for the year ended December 31, 1997,
a decrease of $0.6 million, or 13%. In 1998, Williams acquired another
diversified energy company. As a result of this acquisition, our assets became a
smaller percentage of the Williams organization, and Williams reduced the
general and administrative expenses allocated to us.
Affiliate interest income for the year ended December 31, 1998 was $1.3
million compared to $1.1 million for the year ended December 31, 1997, an
increase of $0.2 million, or 18%. Historically, we have transferred our cash to
Williams, resulting in an affiliate note receivable on our books. Our affiliate
note receivable was sufficient to fund our acquisition and operational needs
during this period, and we earned interest equivalent to Williams' revolving
credit facility rate on the receivable balance.
We based our income tax provision for the years ended December 31, 1998 and
1997 upon the effective income tax rate for the Williams Energy Partners
Predecessor for those periods of 38.1% and 37.3%, respectively. The effective
income tax rate exceeds the U.S. federal statutory income tax rate primarily due
to state income taxes.
Net income for the year ended December 31, 1998 was $5.8 million compared
to $4.9 million for the year ended December 31, 1997, an increase of $0.9
million, or 18%. This increase is primarily attributable to the acquisition of
an additional inland terminal and the acquisition of an increased ownership
interest in eight existing inland terminals, as well as increased tariffs for
our ammonia pipeline.
RESULTS OF OPERATIONS -- MARINE TERMINALS PREDECESSOR
In August 1999, we acquired the Marine Terminals Predecessor from Amerada
Hess Corporation. Because of the significance of this transaction, we consider
the Marine Terminals Predecessor to be a predecessor entity for accounting
purposes. We include financial statements and footnotes in this prospectus
representing the financial condition, results of operations and cash flows of
these assets prior to our ownership, as well as a separate management discussion
and analysis. You should read this analysis in conjunction with the historical
financial statements and related footnotes of the Marine Terminals Predecessor
found elsewhere in this prospectus.
40
<PAGE> 47
SEVEN MONTHS ENDED JULY 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
7 MONTHS
YEAR ENDED ENDED
FINANCIAL HIGHLIGHTS DECEMBER 31, 1998 JULY 31, 1999
-------------------- ----------------- -------------
($ IN MILLIONS)
<S> <C> <C>
Revenues................................................ $44.1 $24.9
Operating expenses...................................... 16.4 12.4
----- -----
Operating margin........................................ $27.7 $12.5
===== =====
OPERATING STATISTICS
--------------------------------------------------------
Average storage capacity utilized per month (barrels in
millions)............................................. 12.2 11.7
</TABLE>
Revenues for the seven months ended July 31, 1999 were $24.9 million
compared to $44.1 million for the year ended December 31, 1998. On an annualized
basis, 1999 revenues were slightly less than 1998 revenues due to:
- reduced demand for storage due in part to a change in market structure to
backwardation during the second quarter of 1999; and
- the continued withdrawals from storage by a significant customer at our
Galena Park and Corpus Christi facilities, resulting from the loss of a
customer to a marine terminal that is more accessible to larger ships and
the customer's completion of repairs to its own storage tank, caused
storage demand to decrease by 0.5 million barrels.
Operating expenses for the seven months ended July 31, 1999 were $12.4
million compared to $16.4 million for the year ended December 31, 1998. On an
annualized basis, 1999 expenses would have been higher than 1998 expenses
primarily because:
- repair and maintenance costs and outside services increases related to
the preparation for the sale of the Marine Terminals Predecessor by their
previous owner; and
- severance costs of $1.5 million accrued and paid under an existing
Amerada Hess Corporation severance plan.
General and administrative expenses were $0.7 million for the seven months
ended July 31, 1999 compared to $1.2 million for the year ended December 31,
1998. In 1999, general and administrative expenses were comparable with 1998 on
an annualized basis.
Depreciation expenses for the seven months ended July 31, 1999 were $2.6
million compared to $4.6 million for the year ended December 31, 1998. On an
annualized basis, depreciation in 1999 was slightly lower than 1998. As the
assets aged, they became fully depreciated and depreciation expense declined.
We based our income tax provision for the seven months ended July 31, 1999
and the year ended December 31, 1998 upon the effective income tax rate for the
predecessor entity, which was 39.5% and 38.3%, respectively. The effective
income tax rate exceeds the U.S. federal statutory income tax rate due to state
income taxes.
Net income for the seven months ended July 31, 1999 was $5.5 million
compared to $13.7 million for the year ended December 31, 1998. On an annualized
basis, net income in 1999 was lower than in 1998 primarily because of reduction
in storage capacity utilization at our Galena Park and Corpus Christi facilities
as well as increased expenses for repair and maintenance related to preparing
the assets for sale.
41
<PAGE> 48
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
FINANCIAL HIGHLIGHTS 1997 1998
-------------------- ------ ------
($ IN MILLIONS)
<S> <C> <C>
Revenues.................................................... $38.2 $44.1
Operating expenses.......................................... 14.7 16.4
----- -----
Operating margin............................................ $23.5 $27.7
===== =====
OPERATING STATISTICS
------------------------------------------------------------
Average storage capacity utilized per month (barrels in
millions)................................................. 10.3 12.2
</TABLE>
Revenues for the year ended December 31, 1998 were $44.1 million compared
to $38.2 million for the year ended December 31, 1997, an increase of $5.9
million, or 15%. This increase is primarily a result of:
- an increase in revenues at the Galena Park terminal of $3.9 million
primarily due to a 1.5 million barrel increase in storage utilization of
the terminal. This increase is primarily the result of marketing and
trading companies taking advantage of the contango market. This includes
a $4.0 million revenue increase resulting from significant new contracts
with two supply and trading companies utilizing our facilities to store
blendstocks and a $3.0 million revenue increase generated by the owner's
increased storage utilization for its trading operations. These increases
were offset by a $3.2 million revenue decrease attributed to the loss of
a customer to a marine terminal that is more accessible to larger ships
and the withdrawals from storage by a customer that completed repairs on
its own storage facility and began to use its own facility; and
- an increase in revenues at the Marrero facility of $1.5 million as a
result of a 0.4 million barrel increase in storage at the terminal. This
increased utilization resulted from increased marine vessel refueling
services, as well as an increase in storage by customers taking advantage
of the contango market.
Operating expenses for the year ended December 31, 1998 were $16.4 million
compared to $14.7 million for the year ended December 31, 1997, an increase of
$1.7 million, or 12%. This increase is primarily a result of:
- an increase in major maintenance expenses of $0.3 million, including work
done to repair damage from tropical storm Frances, repairs to a barge
dock at our Marrero facility and increased painting at our Corpus Christi
facility;
- an increase in repair and maintenance and outside services expenses of
$0.4 million for work primarily at our Galena Park facility on the vapor
recovery unit, damaged barge and ship docks, a new tank floor, pump
repairs and wiring replacement; and
- an increase in environmental expenses of $0.8 million for clean-up and
site assessment at our Corpus Christi facility and expenses at our Galena
Park facility for a waste water pond, a vapor emission fine and closure
of a coal tar plant.
General and administrative expenses for the year ended December 31, 1998
were $1.2 million compared to $1.3 million for the year ended December 31, 1997,
a decrease of $0.1 million, or 8%.
Depreciation expense for the year ended December 31, 1998 was $4.6 million
compared to $4.9 million for the year ended December 31, 1997, a decrease of
$0.3 million, or 6%. As the assets aged, they became fully depreciated and
depreciation expense declined.
We based the income tax provision for the years ended December 31, 1998 and
1997 upon the effective income tax rate for the predecessor entity for those
periods of 38.3%. The effective income tax rate exceeds the U.S. federal
statutory income tax rate due to state income taxes.
42
<PAGE> 49
Net income for the year ended December 31, 1998 was $13.7 million compared
to $10.7 million for the year ended December 31, 1997. The increase of $3.0
million, or 28%, is primarily due to the 15% increase in utilization rates at
our Marine Terminals Predecessor in response to the contango market. This
increase was partially offset by increases in repair and maintenance and
environmental expenditures.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS AND CAPITAL EXPENDITURES
Net cash provided by operating activities for the nine months ended
September 30, 2000 was $1.5 million compared to $9.6 million for the nine months
ended September 30, 1999. This decline was primarily attributable to the decline
in net income and the increased account receivable due from our affiliate,
Williams Energy Marketing and Trading. This receivable has since been collected,
bringing the affiliate receivable current to approximately $1.5 million,
representing one month's activity. Capital expenditures were $189.1 million less
during the first nine months of 2000 as compared to the first nine months of
1999 primarily due to the timing of acquisitions.
Net cash provided by operating activities for the years ended December 31,
1997, 1998 and 1999 was $9.3 million, $8.8 million and $5.7 million,
respectively. The decrease in net cash provided by operating activities in 1999
is due to the increased size of the receivable due from our affiliate. Our net
income increased 17% per year from 1997 through 1999.
Net cash used by investing activities for the years ended December 31,
1997, 1998 and 1999 was $9.3 million, $8.8 million, and $237.7 million,
respectively. We increased capital expenditures during these years to make
acquisitions of petroleum product terminals. During 1997, we acquired one inland
terminal. In 1998, we purchased an additional inland terminal and acquired
additional interests in eight existing inland terminals. In 1999, we acquired 12
inland terminals, the Marine Terminals Predecessor and an additional ownership
interest in eight existing inland terminals.
Net cash provided by financing activities for the years ended December 31,
1997, 1998 and 1999 were $0.0 million, $0.0 million and $232.1 million,
respectively. The 1999 amount represents loans received from Williams to fund
our terminal acquisitions. These loans accrued interest at Williams' revolving
credit facility interest rate of LIBOR plus an applicable margin that ranged
from 0.63% to 0.75%.
CAPITAL REQUIREMENTS
The storage, transportation and distribution business requires continual
investment to upgrade or enhance existing operations and to ensure compliance
with safety and environmental regulations. The capital requirements of our
business have consisted, and we expect them to continue to consist, primarily
of:
- maintenance capital expenditures, such as those required to maintain
equipment reliability and safety and to address environmental
regulations; and
- expansion capital expenditures to acquire additional complementary assets
to grow our business and to expand or upgrade our existing facilities,
such as projects that increase storage or throughput volumes.
We estimate that our average annual maintenance capital expenditures for
our current operations will be $4.9 million through 2003. In 2001 and 2002,
Williams will reimburse us for maintenance capital expenditures for our current
operations in excess of $4.9 million each year, subject to a maximum aggregate
reimbursement of $15.0 million over the two-year period. Please see "Certain
Relationships and Related Transactions -- Omnibus Agreement."
We are currently planning expansion and upgrade capital expenditures at our
existing facilities, including a vapor combustion unit, dock automation,
pipeline connections and a rail loading expansion. The total amount we plan to
spend for expansion is approximately $5.4 million in 2001. We expect to fund
43
<PAGE> 50
our capital expenditures, including any acquisitions, from cash provided by
operations and, to the extent necessary, from the proceeds of:
- borrowings under the revolving credit facility discussed below and other
borrowings; and
- issuance of additional common units.
DESCRIPTION OF CREDIT FACILITY
In connection with the closing of this offering, our operating partnership
will enter into a three year $150.0 million credit facility. This credit
facility will be comprised of a $75.0 million term loan and a $75.0 million
revolving credit facility. The $75.0 million revolving credit facility includes
a $20.0 million working capital sublimit that will be used for ongoing working
capital needs and general partnership purposes. The revolving credit facility
will be available for general partnership purposes, including future
acquisitions. We will borrow all of the $75.0 million term loan and $15.1
million under the revolving credit facility at the closing of the offering and
will use these borrowings along with the net proceeds of the offering to repay a
portion of the affiliate note payable we owe to Williams and to pay expenses
associated with the offering and the related transactions. Subsequent to this
offering, $59.9 million will be available under our revolving credit facility.
Our obligations under the credit facility will be unsecured. Indebtedness
under the credit facility will rank equally with all the outstanding unsecured
and unsubordinated debt of our operating partnership and will be non-recourse to
our general partner.
We may prepay all loans at any time without penalty. We must reduce all
borrowings under the working capital facility to zero for a period of at least
15 consecutive days once during each fiscal year.
Indebtedness under the credit facility will bear interest at LIBOR plus an
applicable margin that we expect will range from 1.00% to 1.45%. We will incur a
commitment fee on the unused portion of the revolving credit facility.
In addition, the credit facility contains various covenants limiting our
operating partnership's ability to:
- incur indebtedness, including maintaining the ratios described below; or
- grant liens.
The credit facility also contains covenants requiring us to maintain
specified ratios of:
- EBITDA (as defined in the credit facility), pro forma for any asset
acquisitions, to interest expense of not less than 3.0 to 1.0; and
- total debt to EBITDA, pro forma for any asset acquisitions, of not more
than 4.0 to 1.0.
ENVIRONMENTAL
Our operations are subject to environmental laws and regulations adopted by
various governmental authorities in the jurisdictions in which these operations
are conducted. We have accrued liabilities for estimated site restoration costs
to be incurred in the future at our facilities and properties, including
liabilities for environmental remediation obligations at various sites where we
have been identified as a potentially responsible party. Under our accounting
policies, liabilities are recorded when site restoration and environmental
remediation and cleanup obligations are either known or considered probable and
can be reasonably estimated. As of September 30, 2000 we had accrued
environmental liabilities of $1.8 million. We expect that Williams will perform
the remediation related to these liabilities or that we will be reimbursed by
Williams or a third party indemnitor for these liabilities.
IMPACT OF INFLATION
Although the impact of inflation has slowed in recent years, it is still a
factor in the United States economy and may increase the cost to acquire or
replace property, plant and equipment and may increase
44
<PAGE> 51
the costs of labor and supplies. To the extent permitted by competition,
regulation and our existing agreements, we have and will continue to pass along
increased costs to our customers in the form of higher fees.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, the "FASB," issued
Statement of Financial Accounting, "SFAS," No. 133 "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS 137,
which deferred the effective date of SFAS No. 133. This was followed in June
2000 by the issuance of SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends SFAS No. 133. SFAS No.
133 and No. 138 establish accounting and reporting standards for derivative
financial instruments. The standards require that all derivative financial
instruments be recorded on the balance sheet at their fair value. Changes in
fair value of derivatives will be recorded each period in earnings if the
derivative is not a hedge. If a derivative qualifies for special hedge
accounting, changes in the fair value of the derivative will either be
recognized in earnings as an offset against the change in fair value of hedged
assets, liability or firm commitments also recognized in earnings, or the
changes in fair value will be deferred on the balance sheet until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be recognized immediately in earnings.
We must adopt these standards in our financial statements effective January
1, 2001. However, we believe the impact of adopting the standards will not be
material to our financial position, results of operations or cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices. The principal market risk to which we are exposed is interest
rate risk. Debt we incur under our credit facility and the current intercompany
loans with Williams bears variable interest based on LIBOR. If the LIBOR were to
change by 0.125%, our annual debt coverage obligations would change by
approximately $0.1 million. Unless interest rates increase significantly in the
future, our exposure to interest rate market risk should be minimal.
45
<PAGE> 52
BUSINESS
INTRODUCTION
We were recently formed by Williams to own, operate and acquire a
diversified portfolio of complementary energy assets. We are principally engaged
in the storage, transportation and distribution of refined petroleum products
and ammonia. We intend to acquire additional assets in the future and have a
management team dedicated to a growth strategy. Our initial asset portfolio
consists of:
- four marine terminal facilities;
- 24 inland terminals; and
- an ammonia pipeline and terminals system.
Our marine and inland terminals store and distribute refined petroleum
products throughout 12 states. Our ammonia pipeline and terminals system
transports and distributes ammonia from production facilities in Texas and
Oklahoma to various distribution points in the Midwest for use as an
agricultural fertilizer. We do not take title to the products that we store,
transport or distribute, and we have little direct exposure to commodity price
fluctuations.
OUR RELATIONSHIP WITH WILLIAMS
One of our principal attributes is our relationship with Williams. Williams
is an integrated energy and communications company with 1999 revenues in excess
of $8.5 billion. Williams has been in the business of storing, transporting and
distributing refined petroleum products since it acquired its first pipeline in
1966. We are a key element of Williams' energy business strategy, and Williams
intends to utilize our partnership as a primary growth vehicle for its storage,
transportation and distribution businesses. Williams has a significant interest
in our partnership through its ownership of a 65.6% limited partner interest and
all of our combined 2% general partner interest.
Williams, through its energy subsidiaries, engages in transportation and
storage of natural gas and natural gas liquids, exploration and production of
oil and natural gas, the provision of natural gas gathering services (collecting
natural gas from a producing field and transporting it to a pipeline system or
gas processing facility), natural gas processing and treating and energy
marketing and trading. Williams is also engaged in several segments of the
petroleum services industry, including transportation, storage and distribution,
refining of petroleum products and retail marketing of these products at outlets
that it owns. Williams Energy Marketing and Trading utilizes our transportation
and storage and distribution facilities to satisfy a portion of the physical
handling and delivery requirements generated by its commodity trading
businesses. Williams Energy Marketing and Trading is our single largest
customer, representing approximately 25.6% of our revenues for the nine months
ended September 30, 2000. While our relationship with Williams and its
subsidiaries is a significant attribute, it is also a source of potential
conflicts. Please read "Conflicts of Interest and Fiduciary Responsibilities."
BUSINESS STRATEGY
Our primary business strategies are to:
Grow through strategic acquisitions to increase per unit cash flow. We plan
to implement an aggressive growth strategy of pursuing accretive acquisitions of
energy storage, transportation and distribution assets and businesses that are
complementary to those we currently own. As a result of ongoing consolidation
within the petroleum industry, the major oil companies are focusing on their
core competencies, such as refining and retail marketing, as well as the
exploration for and production of oil and natural gas. Some of these companies
have outsourced the distribution of gasoline and other refined petroleum
products by selling their distribution terminals to independent third parties
like us. In connection with the acquisition of inland terminals, we will
frequently enter into long-term contracts with
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<PAGE> 53
the seller, ensuring future delivery of products through these terminals. We
have done so in connection with 21 of our 24 inland terminals. We benefit from
these guaranteed volumes and are also able to aggregate additional volumes from
other customers, resulting in increased cash flow. We have made a number of
acquisitions as a result of this consolidation trend, and we expect to make more
acquisitions as this trend continues.
We will pursue these acquisitions independently, as well as jointly with
Williams. Future acquisition targets may include assets to be directly
integrated into our current operations, such as additional terminal facilities
to expand and complement our existing refined petroleum product distribution
network, or acquisitions of related businesses in which we are not currently
active. Additionally, we may have the opportunity to make acquisitions directly
from Williams in the future, though no such acquisition opportunities have been
identified to date.
We believe that our affiliation with Williams will provide us with a
competitive advantage when we jointly pursue acquisition opportunities. As is
frequently the case in the petroleum industry, potential acquisition
opportunities may have an element of commodity price risk inherent in their
operations. We expect to be able to pursue such acquisitions jointly with
Williams in a manner that minimizes or eliminates commodity price exposure to
our partnership. In these circumstances, Williams Energy Marketing and Trading
may assume most or all of the commodity price exposure inherent in the acquired
business and incorporate these risks into its overall commodity trading
operations. As a result of this affiliation, we expect to be able to
aggressively pursue acquisition targets that would otherwise not be attractive
acquisition candidates for us or other competing potential acquirers because of
the commodity price risk inherent in the target operations.
Maximize the benefits of our relationship with Williams. Williams is
engaged in numerous aspects of the energy industry and has a long history of
aggressively pursuing and consummating energy acquisitions. Through our
relationship with Williams we will have access to a significant pool of
management talent and strong relationships throughout the energy industry that
we intend to utilize to implement our strategies. Williams intends to utilize
our partnership as a primary growth vehicle for its storage, transportation and
distribution businesses. For this reason, we expect to have the opportunity to
participate with Williams in considering transactions that we would not be able
to aggressively pursue on our own. We also expect that potential sellers will be
more inclined to contact us and to solicit bids from our company as a result of
our affiliation with Williams. In addition, Williams Energy Marketing and
Trading is our largest customer, and we plan to continue to market our services
to Williams Energy Marketing and Trading.
Generate stable cash flows to make quarterly cash distributions. In
conducting our existing operations and pursuing future opportunities, we focus
on businesses and assets that generate stable cash flows. In each of our
business lines, our customers pay us fees based on the amount of product they
store, transport or distribute in our facilities. We have little direct exposure
to commodity price fluctuations because we do not take title to the products we
store, transport and distribute. However, commodity prices may affect demand for
our services. Additionally, a significant portion of our revenues is generated
under long-term contracts with our customers. In the case of our ammonia
pipeline and terminals system, we have "ship or pay" contracts in place with
each of our customers with original terms of ten years that extend through June
2005. We also have several long-term contracts in place at our marine and inland
terminals. In our terminal operations, the stability of our cash flows is
enhanced by our longstanding relationships with many of our customers, other
product shippers and terminal operators. We will continue to focus on businesses
that generate stable cash flows as we consider future acquisition opportunities.
COMPETITIVE STRENGTHS
We believe that we are well-positioned to execute successfully our business
strategies because of the following competitive strengths:
Our ability to grow through acquisitions is enhanced by our affiliation
with Williams, and we expect this relationship to provide us access to
attractive acquisition opportunities. Williams has a long history of
successfully pursuing and consummating energy acquisitions and intends to use
our partnership as a
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primary growth vehicle for its storage, transportation and distribution
businesses. Additionally, we may have the opportunity to make acquisitions
directly from Williams in the future, though no such acquisition opportunities
have been identified to date.
Our senior management team and the board of directors of the general
partner have extensive industry experience and include some of the most senior
officers of Williams. Keith Bailey, the Chairman, President and Chief Executive
Officer of Williams, will serve as a director of the general partner, and Steven
Malcolm, the President and Chief Executive Officer of Williams Energy Services,
will serve as our Chief Executive Officer and as the Chairman of the Board of
the general partner. We believe that we will benefit from the experience and
long-standing industry relationships of our senior management team.
Additionally, our senior management team will enhance our ability to benefit
from our relationship with Williams.
Our assets are strategically located in areas with a high demand for our
services. Three of our marine terminal facilities are located along the Gulf
Coast, which has the largest concentration of petroleum refineries and
petrochemical plants in the United States and is connected to most major
distribution systems. Our fourth marine terminal facility is located in close
proximity to the New York harbor, a key trading hub for refined petroleum
products. Most of our inland terminals are connected to the Colonial or
Plantation pipelines, which are the principal common carrier refined product
pipelines serving the southeastern United States. Additionally, our ammonia
pipeline and terminals system connects ammonia production facilities located in
Texas and Oklahoma with ammonia consumption areas throughout the agricultural
regions of the Midwest.
We are well-positioned as an independent terminal operator because, unlike
many integrated oil companies that provide storage and distribution services, we
do not compete with our customers. We are an independent terminal operator with
no refining or retail operations, and Williams has very limited refining and
retail operations. We believe our independent status is an advantage because
many customers prefer to contract with independent terminal operators rather
than terminal operators that are part of integrated oil companies with refining
or marketing interests. Additionally, we have long-standing relationships with
our customers and other industry participants, which we believe give us an
advantage over many of our competitors. We conduct a significant portion of our
operations pursuant to long-term contracts, which enhances the stability and
predictability of our operations. We have long-term contracts that extend
through June 2005 in place with each of the customers of our ammonia pipeline
and terminals system. As of September 30, 2000, approximately 29% of our total
marine terminal storage revenue was generated from customers under contracts
extending beyond one year. In addition, where we operate under shorter-term
contracts, we believe our long-standing customer relationships generally lead to
repeat business and the renewal of short-term contracts.
We provide distribution services to our customers through our "virtual
supply network" which provides same-day delivery of refined petroleum products
at several points along our terminal network, regardless of actual
transportation time. Our virtual supply network is made possible by Williams'
proprietary advanced inventory management tracking system, our logistics
expertise, our network of product terminals and contractual arrangements with
our customers, as well as by our longstanding relationships with our customers,
other product shippers and other terminal operators.
We have little direct commodity price exposure because we do not take title
to the products we store, transport and distribute. Substantially all of our
operations are conducted under storage contracts or involve transportation and
distribution services where we do not take title to the customers' products. As
a result, our business depends primarily upon the volumes of products that we
store, transport or distribute, and we have little direct exposure to commodity
prices. However, commodity prices may affect demand for our services. We intend
to continue to minimize our direct exposure to commodity prices in the future.
In connection with this offering, we are entering into a $150.0 million
credit facility that, combined with our ability to issue additional units, will
give us significant financial flexibility. The credit facility will be comprised
of a $75.0 million term loan to be drawn at the time of the offering and a $75.0
million revolving credit facility, of which $15.1 million will be drawn at the
time of the offering. The revolving
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credit facility will be available to fund acquisitions and will have a $20.0
million sublimit for working capital requirements. We may also issue additional
units, which, combined with our borrowing capacity, should provide us with the
resources to finance acquisitions and strategic expansion opportunities as they
arise.
PETROLEUM PRODUCT TERMINALS
INDUSTRY OVERVIEW
The U.S. refined petroleum product distribution system links oil and gas
refineries to end-users of gasoline and other refined petroleum products. It is
comprised of a network of terminals, storage facilities, pipelines, tankers,
barges, rail cars and trucks and is used to move refined petroleum products from
refineries to the ultimate end-consumer. Throughout the distribution system,
terminals play a key role in moving product to the end-user market by providing
storage, distribution, blending and other ancillary services. Products stored in
and distributed through our terminal network include:
- Refined Petroleum Products, which are the output from refineries and are
often used as fuels for consumers. Refined petroleum products include
gasoline, diesel, jet fuel, kerosene and heating oil.
- Blendstocks, which are blended with other products to change or enhance
their characteristics such as increasing a gasoline's octane or oxygen
content. Blendstocks include products such as alkylates and oxygenates.
- Heavy Oils and Feedstocks, which are often used as burner fuels or
feedstocks for further processing by refineries and petrochemical
facilities. Heavy oils and feedstocks include products such as #6 fuel
oil and vacuum gas oil.
Within our terminal network, we operate two different types of terminals:
marine terminals and inland terminals. Our marine terminal facilities are
located in close proximity to refineries and are large storage and distribution
facilities that handle refined petroleum products, blendstocks and heavy oils
and feedstocks. Our inland terminals are located in the southeastern United
States and are primarily located along third party pipelines such as Colonial,
Plantation and Explorer. These facilities receive products from pipelines and
distribute them to third parties at the terminals, who in turn deliver them to
end-users such as retail outlets. Because these terminals are unregulated, the
marketplace determines the prices we can charge for our services.
In the 1990's, the petroleum industry entered a period of consolidation.
Refiners and marketers began to pursue development of large-scale,
cost-efficient operations, thus leading to several refinery acquisitions,
alliances and joint ventures. Major integrated oil companies also began to
re-deploy their resources to their core competencies of exploration and
production, refining and retail marketing and to examine ways to lower their
distribution costs. Additionally, the Federal Trade Commission has required some
of the merging and consolidating parties to sell retail and terminal assets in
markets where they have been deemed to have excessive control.
Williams recognizes this industry consolidation as an opportunity to take
advantage of its storage and distribution experience. Since Williams' first
significant independent terminal acquisition in 1996, refiners and marketers
have demonstrated a willingness to sell their proprietary transportation and
storage and distribution networks if such a move is cost effective and if they
sell to a buyer that will provide them with quality service. Williams believes
its success in acquiring terminals is due to its experience, broad customer
relationships and ability to aggregate additional volume into these terminals,
allowing it to generate more revenues with minimal additional operating cost.
Our portfolio of terminals has resulted from Williams' acquisition
strategy. Williams has owned two of our terminals for over 20 years. Williams
utilized one of these terminals in connection with Williams' petroleum product
pipeline and utilized the other terminal in connection with its supply and
trading operations to distribute its own refinery production. In 1996, Williams
expanded its independent storage and distribution business by acquiring an
interest in eight southeastern inland terminals. In 1997 and 1998,
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Williams added two more inland terminals while also increasing its ownership
interest in the first eight. In 1999, Williams again increased its ownership
interest in the first eight terminals and also acquired 12 more inland
terminals, primarily in the Southeast. Williams is in the process of selling one
of these twelve terminals, and it will not be contributed to our partnership.
Also in 1999, Williams acquired three large marine terminal facilities located
along the Gulf Coast, further expanding Williams' storage and distribution
capabilities. These marine terminal facilities, which we operate, provide more
direct access to significant refinery production facilities and foreign imports.
In 2000, Williams acquired an interest in an additional inland terminal in Texas
and a significant marine terminal facility in Connecticut. We expect to see more
acquisition opportunities as market fundamentals continue to support the
consolidation of these businesses.
MARINE TERMINAL FACILITIES
The Gulf Coast region is a major hub for petroleum refining, representing
approximately 40% of total U.S. daily refining capacity and 66% of U.S. refining
capacity expansion from 1990 to 1999. The growth in Gulf Coast refining capacity
has resulted in part from consolidation in the petroleum industry to take
advantage of economies of scale from operating larger, concentrated refineries.
We expect this trend to continue in order to meet growing domestic and
international demand. From 1990 to 1999, the amount of petroleum products
exported from the Gulf Coast region increased by approximately 19%, or 205
million barrels. The growth in refining capacity and increased product flow
attributable to the Gulf Coast region has created a need for additional
transportation, storage and distribution facilities. In the future, the
competition resulting from the consolidation trend, combined with continued
environmental pressures, governmental regulations and market conditions, could
result in the closing of smaller, less economical inland refiners, creating even
greater demand for petroleum products refined in the Gulf Coast region.
We own and operate four marine terminal facilities, including three marine
terminal facilities located along the Gulf Coast and one terminal facility
located in Connecticut near the New York harbor. Our marine terminals are large
storage and distribution facilities that provide inventory management, storage
and distribution services for refiners and other large end-users of petroleum
products. Our marine terminal facilities have an aggregate storage capacity of
approximately 17.6 million barrels.
Our marine terminal facilities receive petroleum products by ship and
barge, short-haul pipeline connections to neighboring refineries and common
carrier pipelines. We distribute petroleum products from our marine terminals by
all of those means as well as by truck and rail. Once the product has reached
our terminal facilities, we store the product for a period of time ranging from
a few days to several months. Products that we store in our terminal facilities
include refined petroleum products, blendstocks and heavy oils and feedstocks.
In addition to providing storage and distribution services, our marine
terminal facilities provide ancillary services including heating, blending and
mixing of stored products and injection services. Many heavy oils require
heating to keep them in a liquid state. In addition, in order to meet government
specifications, products often must be combined with other products through the
blending and mixing process. Blending is the combination of products from
different storage tanks. Once the products are blended together, the mixing
process circulates the blended product through mixing lines and nozzles to
further combine the products. Finally, injection is the process of injecting
refined petroleum products with additives and dyes to comply with governmental
regulations. We also provide marine vessel fueling services, referred to as
bunkering.
Our terminals generate fees primarily through providing long term or spot
"on demand" storage services and inventory management for a variety of
customers. Refiners and chemical companies will typically use our facilities
because their facilities are inadequate, either because of size constraints or
the specialized handling requirements of the stored product. We also provide
storage services and inventory management to various industrial end users,
marketers and traders that require access to large storage capacity.
Furthermore, by linking our Galena Park, Texas facility with our inland
terminals through the
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Colonial and Explorer Pipelines, our customers can utilize our "virtual supply
network" to reduce expenses and transportation times.
We continually evaluate opportunities to add services and increase pipeline
connections to attract more customers and create additional revenues.
Furthermore, we attempt to balance our short term and long term contracts, which
allows us to maintain an acceptable base level of cash flow while also taking
advantage of increased storage revenue at times when demand for storage space is
at high levels.
The following table outlines our marine terminal locations, capacities,
primary products handled and the connections to and from these terminals:
<TABLE>
<CAPTION>
RATED STORAGE
CAPACITY PRIMARY PRODUCTS
FACILITY (IN BARRELS) HANDLED CONNECTIONS
------------------------------------ ------------- ---------------------------- ------------------------
<S> <C> <C> <C>
Galena Park, Texas.................. 8,883,800 Refined petroleum products, Pipeline, barge, ship,
blendstocks, heavy oils and rail and truck
feedstocks
Corpus Christi, Texas............... 2,711,000 Blendstocks, heavy oils and Pipeline, barge, ship
feedstocks and truck
Marrero, Louisiana.................. 2,006,000 Heavy oils and feedstocks Barge, ship, rail and
truck
New Haven, Connecticut.............. 4,005,000 Refined petroleum products, Pipeline, barge, ship
heavy oils and feedstocks and truck
----------
Total storage capacity.... 17,605,800
==========
</TABLE>
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Galena Park Facility. Our Galena Park, Texas facility is located along the
Houston Ship Channel and is one of the largest marine distribution facilities in
the United States. It has 103 tanks with an aggregate storage capacity of 8.9
million barrels, two ship docks and three barge docks. The facility stores a mix
of refined petroleum products, blendstocks and heavy oils and feedstocks. We
primarily receive products in this facility via barge and ship and distribute
products from the facility via truck, barge and pipeline.
[MAP DEPICTING THE GALENA PARK FACILITY]
An advantage of our Galena Park facility is its connectivity, which
provides our customers with access to multiple common carrier pipelines, deep
water port facilities that accommodate both ship and barge traffic and loading
and unloading facilities for trucks and rail cars. The facility has a 14-inch,
2.5-mile pipeline that runs under the Houston Ship Channel to the Witter Street
Station. The Witter Street Station is a major pipeline junction that connects
our facility to most major Gulf Coast refineries and common carrier pipelines
such as the TEPPCO Partners, L.P. and Coastal Corporation pipelines. These
refineries and pipelines provide marketers such as Valero Marketing and Supply
Company, Koch Supply and Trading Company, CITGO Petroleum Corporation, Coastal
Refining and Marketing, Inc. and Shell Oil Company with opportunities to supply
their retail and wholesale needs along our terminal network. We also own two
36-inch pipelines and one 14-inch pipeline that connect our facility to the
Colonial and Explorer pipelines, providing distribution capacity to markets in
the southeastern, east coast and midwestern United States. We also own one
active pipeline and several inactive pipelines that run to the Holland Avenue
Station and connect our facility to Equistar Chemicals' petrochemical plant. We
are contemplating expanding the connectivity of the Galena Park facility by
adding connections to the Longhorn, Orion and Seaway pipeline systems, which
serve western and mid-continent markets. We also intend to develop and expand
our heavy oil heating and blending businesses in the Galena Park facility.
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Corpus Christi Facility. Our Corpus Christi, Texas facility is located near
four major refineries and one petrochemical plant. This facility includes 47
tanks with an aggregate storage capacity of 2.7 million barrels. We primarily
receive products at our Corpus Christi facility by ship and barge through three
docks owned by the Port of Corpus Christi, and we deliver product by barge,
truck and pipeline, including Coastal's common carrier pipeline that transports
products from Corpus Christi to Houston.
[Map depicting the New Haven Facility]
We provide inventory management and storage services for the refineries and
petrochemical plants. We store blendstocks, heavy oils and feedstocks. Our
Corpus Christi facility has pipeline connections to many of the local refineries
including Koch, CITGO, Coastal and Equistar Chemicals' petrochemical plant. We
are evaluating adding additional storage capacity to meet the demand for spot
market storage, a market that our Corpus Christi facility has not historically
served. In addition, we are planning to provide bunkering services in Corpus
Christi to a customer for whom we currently provide bunkering services at Galena
Park.
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Marrero Facility. Our Marrero, Louisiana facility is located adjacent to
the Mississippi River and is 22 miles from the Port of New Orleans. This
facility has 71 tanks with an aggregate storage capacity of 2.0 million barrels
and three barge docks. We primarily receive products at our Marrero facility by
ship and barge, and we deliver products from Marrero by rail, barge and truck.
In addition, our facility is connected to a Texaco, Inc. terminal by four
separate pipelines.
[Map depicting the Marrero facility]
Our Marrero facility primarily stores heavy oils and feedstocks and
provides bunkering services for ships. Also, a major local refiner uses our
facility to store its excess production.
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New Haven Facility. Our New Haven, Connecticut facility has four refined
product terminals, the Waterfront, Forbes, 85 East and Hamden terminals, with an
aggregate refined product storage capacity of 3.6 million barrels and asphalt
tankage with 0.4 million barrels of storage capacity. Our New Haven facility
receives and distributes products by pipeline, ship, barge and truck.
[Map depicting the Marrero Facility]
Our Waterfront terminal has 0.8 million barrels of storage capacity and
handles refined petroleum products. We receive products in this terminal via
barge and ship and we deliver products from the terminal via truck, barge and
the Buckeye Pipeline. The Forbes terminal has 0.6 million barrels of storage
capacity and handles refined petroleum products. The Forbes terminal is
connected to the Waterfront terminal by four two-way 10-inch and 12-inch
pipelines that we own. The 85 East terminal has 1.4 million barrels of storage
capacity and handles refined petroleum products and asphalt. The Hamden terminal
has 1.2 million barrels of storage capacity and handles refined petroleum
products. The Hamden terminal is connected to the 85 East Terminal by a three
mile 8-inch pipeline that we own.
Customers and Contracts. We have long-standing relationships with oil
refiners, suppliers and traders at our facilities, and most of our customers
have consistently renewed their short-term contracts. As of September 30, 2000,
approximately 89% of our working storage capacity is under contract.
Approximately 41% of the revenues that we generate are from contractual
arrangements renewed on a monthly basis, approximately 30% of our revenues are
from contractual arrangements renewed on a cycle from one month to one year and
approximately 29% have a remaining contract life in excess of one year.
The largest customers at our Galena Park facility are supply, marketing and
trading companies such as Williams Energy Marketing and Trading, which is an
affiliate of our general partner, Novarco LTD, Vitol, S.A. and Bominflot, for
which we provide storage and blending services, and the U.S. government, for
which we store and distribute jet fuel.
The largest customer at our Corpus Christi facility is the Equistar
petrochemical plant. Other significant customers for the Corpus Christi facility
include local refiners such as Koch and Coastal. Approximately 49% of the
revenues for this facility come from contracts that renew on a yearly basis.
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The largest customers at our Marrero facility are supply and trading
companies such as Williams Energy Marketing and Trading and Rio Energy
International, Inc., that store and market heavy oils for use in markets in the
southeastern United States. Approximately 22% of the revenues for this facility
come from contracts with remaining terms in excess of one year. Our Marrero
facility also provides bunkering services to customers at the Port of New
Orleans.
The largest customers at the New Haven facilities are Morgan Stanley Dean
Witter, which uses the facility to store refined petroleum products in
connection with its trading and supply business, and CITGO, which uses the
facility to serve its retail gasoline and heating oil businesses. Recently,
Morgan Stanley Dean Witter contracted with the U.S. government to maintain a
portion of the newly formed heating oil Strategic Petroleum Reserve inventory.
Morgan Stanley Dean Witter will store a portion of this reserve in our New Haven
facilities.
Markets and Competition. We believe that the strong demand for our marine
terminal facilities from our refining and chemical customers results from our
cost-effective distribution services and key transportation links such as
deep-water ports. We experience the greatest demand at our marine terminals in a
"contango" market, when customers tend to store more product to take advantage
of favorable pricing expected in the future. When the opposite market condition,
known as backwardation, exists, some companies choose not to store product. The
additional heating and blending services that we provide at our marine
terminals, however, attract additional demand for our storage services and
result in increased revenue opportunities. Please read "Risk Factors -- When
prices for the future delivery of petroleum products that we store in our marine
terminals fall below current prices, customers are less likely to store these
products, thereby reducing storage revenues."
Several major and integrated oil companies have their own proprietary
storage terminals along the Gulf Coast that are currently being used in their
refining operations. If these companies choose to shut down their refining
operations and elect to store and distribute refined petroleum products through
their proprietary terminals, we would experience increased competition for the
services that we provide. In addition, several companies, including GATX
Corporation, Houston Fuel Oil Terminal Company and Oiltanking, have facilities
in the Gulf Coast region and offer competing storage and distribution services.
GATX Corporation has agreed to sell its domestic petroleum products and
chemicals terminals to Kinder Morgan Energy Partners, L.P. in a transaction
expected to close in the first quarter of 2001. Some of these companies are
substantially larger and have access to more capital than we do.
INLAND TERMINALS
We own and operate a network of 24 refined petroleum product terminals
located primarily in the southeastern United States. Our customers utilize these
facilities to take delivery of refined petroleum products transported on major
common-carrier interstate pipelines. The majority of our inland terminals
connect to the Colonial, Plantation or Explorer pipelines, and some facilities
have multiple pipeline connections. Gasoline represents approximately 60% of the
volume of product distributed through our inland terminals, with the remaining
40% consisting of distillates such as low sulfur diesel and jet fuel.
Our inland terminal facilities typically consist of multiple storage tanks
that are connected by a third-party intra-facility pipeline system. We load and
unload products through an automated system that allows products to move
directly from the common carrier pipeline to our storage tanks and directly from
our storage tanks to a truck or rail car loading rack.
We are an independent provider of storage and distribution services.
Because we do not own the products moving through our terminals, we are not
exposed to the risks of product ownership. We operate our inland terminals as
distribution terminals, and we primarily serve the retail, industrial and
commercial sales markets. We provide the following services at our inland
terminals:
- inventory and supply management through our virtual supply network;
- distribution; and
- other services such as injection of gasoline additives.
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We generate revenues by charging our customers a fee based on the amount of
product that we deliver through our terminals. We charge these fees when we
deliver the product to our customers and load it into a truck or rail car. In
addition to throughput fees, we generate revenues by charging our customers a
fee for injecting additives into gasoline, diesel and jet fuel, and for
filtering jet fuel.
Our 24 inland terminals were acquired from Amoco, Conoco, CITGO, Mobil, TOC
Terminals, Murphy Oil and Phillips Petroleum Co. We wholly own 13 of these
inland terminals and our percentage ownership of the remaining 11 inland
terminals ranges between 50% and 79%. The following table sets forth our inland
terminal locations, percentage ownership, capacities and methods of supply:
<TABLE>
<CAPTION>
TOTAL
STORAGE
PERCENTAGE CAPACITY
FACILITY OWNERSHIP (IN BARRELS) CONNECTIONS
------------------------------- ---------- ------------ -------------------------------
<S> <C> <C> <C>
Alabama
Mobile....................... 100% 135,000 Barge
Montgomery................... 100 103,590 Plantation Pipeline
Georgia
Doraville.................... 100 235,000 Colonial and Plantation
Pipelines
Albany....................... 79 124,200 Colonial Pipeline
Florida
Jacksonville................. 100 252,300 Barge and ship
Mississippi
Meridian..................... 100 97,930 Colonial and Plantation
Pipelines
Missouri
St. Charles.................. 100 118,090 Explorer Pipeline
North Carolina
Charlotte.................... 100 333,490 Colonial Pipeline
Selma........................ 79 305,000 Colonial Pipeline
Greensboro................... 60 248,200 Colonial Pipeline
Greensboro................... 79 239,100 Colonial and Plantation
Pipelines
Charlotte.................... 79 158,000 Colonial Pipeline
South Carolina
North Augusta................ 79 156,000 Colonial Pipeline
North Augusta................ 100 123,000 Colonial Pipeline
Spartanburg.................. 100 116,280 Colonial Pipeline
Tennessee
Nashville.................... 50 252,100 Colonial Pipeline and barge
Nashville.................... 100 163,480 Colonial Pipeline
Nashville.................... 79 148,000 Colonial Pipeline
Knoxville.................... 100 115,000 Colonial and Plantation
Pipelines
Chattanooga.................. 100 105,000 Colonial Pipeline
Texas
Southlake.................... 50 277,000 Explorer, Koch and UDS
Pipelines
Dallas....................... 100 199,530 Explorer and Magtex Pipelines
Virginia
Montvale..................... 79 171,000 Colonial Pipeline
Richmond..................... 79 169,200 Colonial Pipeline
---------
Total................
4,345,490
=========
</TABLE>
Our inland terminals are equipped with automated loading facilities that
are available 24 hours a day. Williams' proprietary ATLAS 2000 software system
allows us to manage inventory across our inland terminal network and bill our
customers electronically. The ATLAS system provides our customers with the
ability to manage, among other things, inventory allocations, throughput and
carrier certification from remote locations. Currently, our customers access the
ATLAS system via a dial-up modem connection. Williams is upgrading the ATLAS
system to allow our customers to access it over the internet. Under our
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omnibus agreement, Williams and its affiliates will license the use of the ATLAS
2000 software system to us. Please read "Certain Relationships and Related
Transactions-Omnibus Agreement."
Customers and Contracts. All but two of our inland terminals were acquired
by Williams over a period of five years, beginning with the acquisition of
interests in eight terminals in 1996. When Williams acquired the new terminals,
it generally entered into long-term throughput contracts with the seller under
which they agreed to continue to use the facilities. These agreements typically
last for two to ten years from the beginning of the agreement, and must be
renegotiated at the end of the term. In addition to these agreements, Williams
enters into separate contracts with new customers that typically last for one
year with a continuing one year renewal provision. Most of these contracts
contain a "minimum throughput" provision that obligates the customer to move a
minimum amount of product through our terminals or pay for terminal capacity
reserved but not used. Our customers include:
- retailers such as BP, Conoco and ExxonMobil Corporation that sell
gasoline and other petroleum products through proprietary retail
networks;
- wholesalers such as Koch that sell petroleum products to retailers as
well as to large commercial and industrial end-users;
- exchange transaction customers such as Koch and ExxonMobil, where we act
as an intermediary so that the parties to the transaction are able to
exchange petroleum products; and
- traders such as Williams Energy Marketing and Trading that arbitrage,
trade and market products stored in our terminals.
For the nine months ended September 30, 2000, Williams Energy Trading and
Marketing accounted for approximately 47.9% of our inland terminal revenues.
Markets and Competition. We compete with other independent terminal
operators as well as integrated oil companies on the basis of terminal location
and versatility, services provided and price. Our competition from independent
operators primarily comes from distribution companies with marketing and trading
arms such as TransMontaigne, Inc., independent terminal companies such as GATX
and Oiltanking and refining and marketing companies such as Motiva.
We believe that we are able to compete successfully because of our
dependable service and our experience in responding to customer needs. For
example, our distribution system incorporates Williams' proprietary inventory
management and services program to provide same-day delivery of refined
petroleum products at several points along our terminal network, regardless of
transportation time. We will continue to pursue acquisition and expansion
opportunities that provide us broader geographic coverage, higher throughput and
increased cash flow.
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AMMONIA PIPELINE AND TERMINALS SYSTEM
INDUSTRY OVERVIEW
We own and operate an 1,100-mile pipeline and terminals system. Our
pipeline transports ammonia from production facilities in Texas and Oklahoma to
terminals throughout the Midwest for ultimate distribution to end-users in Iowa,
Kansas, Minnesota, Missouri, Nebraska, Oklahoma and South Dakota. The ammonia we
transport is primarily used as a nitrogen fertilizer. Nitrogen is an essential
nutrient for plant growth and is the single most important element for
maintenance of high crop yields for all grains. Unlike other primary nutrients,
however, nitrogen must be applied each year because virtually all of its
nutritional value is consumed during the growing season. Ammonia is the most
cost-effective source of nitrogen and the simplest nitrogen fertilizer. It is
also the primary feedstock for the production of upgraded nitrogen fertilizers
and chemicals. Ammonia is produced by reacting natural gas with air at high
temperatures and pressures in the presence of catalysts. Because natural gas is
the primary feedstock for the production of ammonia, ammonia is typically
produced near abundant sources of natural gas.
Although ammonia consumption peaks in the fall and early spring, ammonia
production is reasonably consistent throughout the year. Generally, storage
facilities reach their peak storage capacities during early spring, prior to
agricultural application. As a result, we experience only limited seasonal
fluctuations for transportation services on our pipeline. Our customers inject
the ammonia they produce into our pipeline, and we transport it as a liquid to
terminal facilities and storage and upgrade facilities located in the Midwest.
OPERATIONS
We are a common carrier transportation pipeline and terminals company. We
do not produce or trade ammonia, and we do not take title to the ammonia we
transport. Rather, we earn revenue from the following sources:
- transportation tariffs for the use of our pipeline capacity; and
- throughput fees at our six company-owned terminals.
We generate approximately 97% of our revenue through transportation
tariffs. These tariffs are "postage stamp" tariffs, which means that each
shipper pays a defined rate per ton of ammonia shipped regardless of the
distance that ton of ammonia travels on our pipeline. In addition to
transportation tariffs, we also earn revenue by charging our customers for
services at the six terminals we own, including unloading ammonia from our
customers' trucks to inject it into our pipeline for shipment and removing
ammonia from our pipeline to load it into our customers' trucks.
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FACILITIES
Our pipeline was the world's first common carrier pipeline for ammonia. The
main trunk line was completed in 1968. Today, it represents one of two ammonia
pipelines operating in the United States and has a maximum annual delivery
capacity of approximately 900,000 tons. Our ammonia pipeline system originates
at production facilities in Borger, Texas, Verdigris, Oklahoma and Enid,
Oklahoma and terminates in Mankato, Minnesota.
[Map depicting the ammonia pipeline and and terminalling system]
We transport ammonia to 13 delivery points along our pipeline system. The
facilities at these points provide our customers with the ability to deliver
ammonia to distributors who sell the ammonia to farmers and to store ammonia for
future use. These facilities also provide our customers with the ability to
remove ammonia from our pipeline for distribution to upgrade facilities that
produce complex nitrogen compounds such as urea, ammonium nitrate, ammonium
phosphate and ammonium sulfate.
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The following table contains information regarding the delivery facilities
on our pipeline system:
<TABLE>
<CAPTION>
DELIVERY POINTS FACILITY OPERATIONS OWNER
------------------------------------------ --------------------------- ------------------------
<S> <C> <C>
Iowa
Early................................... Terminal and storage Agrium
Garner.................................. Terminal and storage Agrium
Terminal and storage Farmland
Terminal and storage Terra (a)
Port Neal............................... Terminal, storage, upgrade Terra
and production
Sgt. Bluff.............................. Terminal and storage Farmland
Whiting................................. Terminal and storage Williams Energy Partners
Kansas
Clay Center............................. Terminal and storage Williams Energy Partners
Conway.................................. Terminal and storage Farmland
Terminal and storage Williams Energy Partners
Minnesota
Mankato................................. Storage Farmland
Terminal and storage Williams Energy Partners
Nebraska
Beatrice................................ Terminal, storage and Agrium
upgrade
Terminal, storage and Farmland
upgrade
Blair................................... Terminal and storage Terra
Greenwood............................... Storage Farmland
Terminal and storage Williams Energy Partners
Oklahoma
Mocane.................................. Terminal and storage Williams Energy Partners
Texas
Farnsworth.............................. Terminal and storage Farmland
</TABLE>
---------------
(a) Facility owned by CF Industries, Inc. but utilized by Terra.
CUSTOMERS AND CONTRACTS
We ship ammonia for three customers:
- Farmland Industries, Inc., one of the largest farmer-owned cooperatives
in the United States;
- Agrium U.S. Inc., a division of Agrium Inc., the largest producer of
nitrogen fertilizers in North America; and
- Terra Nitrogen, L.P., a wholesaler of nitrogen fertilizer products.
Each of these companies has an ammonia production facility connected to our
pipeline as well as related storage and distribution facilities along the
pipeline. The transportation contracts with our customers extend through June
2005. Our customers are obligated to ship an aggregate minimum of 700,000 tons
per year and have historically shipped an amount in excess of the required
minimum. Our customers have been shipping ammonia through our pipeline for an
average of more than 20 years.
Each transportation contract contains a ship or pay mechanism, whereby each
customer must ship a specific minimum tonnage per year and an aggregate minimum
tonnage over the life of the contract. On July 1 of each contract year, each of
our customers nominates a tonnage that it expects to ship during the
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upcoming year. This annual commitment may be equal to or greater than the
contractual minimum tonnage. If a customer fails to ship its annual commitment,
that customer must pay for the pipeline capacity it did not use. Currently, our
customers' annual commitments represent 83% of our pipeline's 900,000 ton
capacity.
In general, our customers have historically shipped ammonia in excess of
their annual commitments. We allow our customers to "bank" any ammonia shipped
in excess of their annual commitments. If a customer has previously shipped an
amount in excess of its annual commitment, the shipper may offset subsequent
annual shipment shortfalls against the excess tonnage in its bank. There are
approximately 100,000 tons in this combined bank that may be used to offset
future ship or pay obligations.
The transportation contracts established a fixed tariff schedule per ton of
ammonia shipped for each customer for the first five years of the contract
period. Because of the long-term nature of these contracts, the shippers receive
a volume incentive tariff per ton that decreases with increased commitments.
Beginning July 1, 2000, we may adjust our tariff schedule on an annual basis
pursuant to a formula contained in the contracts. The adjustment formula takes
into consideration the cost of labor, power, property taxes and variations in
the producer price index. We use the combined increase or decrease in these
factors to calculate any increases or decreases in tariffs. Any annual
adjustment is limited to a maximum increase or decrease of 5% measured against
the rate previously in effect. These tariff adjustments cannot decrease the
tariffs to rates less than those charged in 1997.
MARKETS AND COMPETITION
Demand for nitrogen fertilizer has typically followed a combination of
weather patterns and growth in population, acres planted and fertilizer
application rates. Because natural gas is the primary feedstock for the
production of ammonia, the profitability of our customers is impacted by high
natural gas prices. To the extent our customers are unable to pass on higher
costs to their customers, they may reduce shipments through our pipeline.
We compete primarily with ammonia shipped by rail carriers, but we believe
we have a distinct advantage over rail carriers because ammonia is a gas under
normal atmospheric conditions and must be either placed under pressure or cooled
to -33 degrees Celsius to be shipped or stored. Because the transportation and
storage of ammonia requires specialized handling, we believe that pipeline
transportation is the safest and most cost-effective method for transporting
bulk quantities of ammonia.
We also compete to a limited extent in the areas served by the far northern
segment of our ammonia pipeline and terminals system with the Koch Pipeline
Company LP pipeline, an ammonia pipeline owned and operated by Koch. The Koch
pipeline originates on the Gulf Coast and transports domestically produced and
imported ammonia.
TARIFF REGULATION
INTERSTATE REGULATION
The Surface Transportation Board, a part of the U.S. Department of
Transportation, has jurisdiction over interstate pipeline transportation of
ammonia. The Surface Transportation Board succeeds the Interstate Commerce
Commission which previously regulated pipeline transportation of ammonia.
The Surface Transportation Board is responsible for rate regulation of
pipeline transportation of commodities "other than water, gas or oil." These
transportation rates must be reasonable, and a pipeline carrier may not
unreasonably discriminate among its shippers. If the Surface Transportation
Board finds that a carrier's rates violate these statutory commands, it may
prescribe a reasonable rate. In determining a reasonable rate, the Surface
Transportation Board will consider, among other factors, the effect of the rate
on the volumes transported by that carrier, the carrier's revenue needs and the
availability of other economic transportation alternatives.
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The Surface Transportation Board does not need to provide rate relief
unless shippers lack effective competitive alternatives. If the Surface
Transportation Board determines that effective competitive alternatives are not
available and a pipeline holds market power, then it must determine whether the
pipeline rates are reasonable. The Board generally applies "constrained market
pricing" principles in its economic analysis. Constrained market pricing
provides two alternative methodologies for examining the reasonableness of a
carrier's rates. The first approach examines a carrier's existing system to
determine whether the carrier is already earning sufficient funds to cover its
costs and provide a sufficient return on investment, or would earn sufficient
funds after eliminating unnecessary costs from specifically identified
inefficiencies and cross-subsidies in its operations. The second approach
calculates the revenue requirements that a hypothetical, new and optimally
efficient carrier would need to meet in order to serve the complaining shippers.
Customers that protest rates in Surface Transportation Board proceedings
may use any methodology they choose that is consistent with constrained market
pricing principles. When addressing revenue adequacy, a complainant must provide
more than a single period snapshot of a carrier's costs and revenues. The
complainant must measure whether a carrier earns adequate revenues over a period
of time, as measured by a multi-period discounted cash flow analysis.
Finally, the Surface Transportation Board has held that unreasonable
discrimination occurs when (1) there is a disparity in rates, (2) the
complaining party is competitively injured, (3) the carrier is the common source
of both the allegedly prejudicial and preferential treatment and (4) the
disparity in rates is not justified by transportation conditions.
INTRASTATE REGULATION
Because in some instances we transport ammonia between two terminals in the
same state, our pipeline operations are subject to regulation by the state
regulatory authorities in Iowa, Nebraska, Oklahoma and Texas. Although the
Oklahoma Corporation Commission and the Texas Railroad Commission have the
authority to regulate our rates, the state commissions have generally not
investigated the rates or practices of ammonia pipelines in the absence of
shipper complaints.
SAFETY AND MAINTENANCE
We monitor our marine terminals, inland terminals and ammonia pipeline and
terminals system on a regular basis to ensure reliability, safety and efficiency
of our assets. We believe that our assets have been constructed and are
maintained in all material respects in accordance with applicable federal, state
and local laws, including, where applicable, the regulations of the Department
of Transportation, and accepted industry standards.
ENVIRONMENTAL AND SAFETY
GENERAL
Our operation of terminals and associated facilities in connection with the
storage and transportation of crude oil and other liquid hydrocarbons together
with our operation of an ammonia pipeline are subject to stringent and complex
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. As an owner or lessee and
operator of these facilities, we must comply with these laws and regulations at
the federal, state and local levels. As with the industry generally, our
compliance with existing and anticipated laws and regulations increases the cost
of planning, constructing, and operating our terminals, pipeline, and other
facilities. Included in our construction and operation costs are capital cost
items necessary to maintain or upgrade our equipment and facilities. Failure to
comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, imposition of remedial actions,
and issuance of injunctions or construction bans or delays on ongoing
operations. We believe that our operations are in material compliance with
applicable environmental laws and regulations. However, these laws and
regulations are subject to frequent change
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and we cannot assure you that the cost to comply with these laws and regulations
in the future will not have a material adverse effect on our financial position
or results of operations.
INDEMNIFICATION
As described below, we will be indemnified for environmental liabilities by
Williams Energy Services and Williams Natural Gas Liquids, Inc., and by the
entities from which Williams originally acquired our assets. Williams Energy
Services and Williams Natural Gas Liquids, Inc. are major operating subsidiaries
of Williams with combined 1999 revenues in excess of $3.5 billion. We will also
be a beneficiary of environmental insurance relating to our marine terminal
facilities. We summarize the terms and limitations of these indemnification
agreements and insurance policies below.
Williams Energy Services and Williams Natural Gas Liquids, Inc. have agreed
to indemnify us for up to $15.0 million for environmental liabilities that
exceed the amounts covered by the seller indemnities and insurance coverage
described below. The indemnity applies to environmental liabilities arising from
conduct prior to the closing of this offering and discovered within three years
of closing of this offering. Liabilities resulting from a change in law after
the closing of this offering are excluded from this indemnity.
In accordance with our acquisition agreement with Amerada Hess, Hess will
indemnify us for environmental and other liabilities related to the three Gulf
Coast marine terminals acquired in August 1999, including:
- Indemnification for specified cleanup actions of pre-acquisition releases
of hazardous substances. This indemnity is capped at a maximum of $15.0
million. Hess, however, has no liability until the aggregate amount of
initial losses is in excess of a $2.5 million deductible, and then Hess is
liable only for the succeeding $12.5 million in losses. This indemnity
will remain in effect until July 30, 2004.
- Indemnification for already known and required cleanup actions at the
Corpus Christi, Texas and Galena Park, Texas terminals. This indemnity has
no limit and will remain in effect until July 30, 2014.
- Indemnification for a variety of pre-acquisition fines and claims that
may be imposed or asserted under the Superfund Law and RCRA or analogous
state laws. This indemnity is not subject to any limit or deductible
amount.
- Indemnification for breaches of environmental representations and
warranties made in the Hess acquisition agreement, if any. This indemnity
is subject to both the $15.0 million limit and the $2.5 million deductible
mentioned above and will remain in effect until January 31, 2001.
In addition to these indemnities, Hess retained liability for the
performance of corrective actions associated with a cooling tower at the Corpus
Christi, Texas terminal and a vapor recovery unit and process safety management
compliance matter at the Galena Park, Texas terminal.
We have insurance against the first $2.5 million of environmental
liabilities related to the Hess terminals that arose prior to closing of the
acquisition from Hess, with a deductible of $0.3 million, and any environmental
liabilities in excess of $15.0 million up to an aggregate of $50.0 million.
In connection with the acquisition of the New Haven, Connecticut marine
terminal facility acquired from Wyatt Energy and the acquisition of our inland
terminals, the sellers of those terminals agreed to indemnify us against
specified environmental liabilities. We also have insurance for up to $25.0
million of environmental liabilities for the New Haven marine terminal facility,
with a deductible of $0.3 million.
HAZARDOUS SUBSTANCES AND WASTES
In most instances, the environmental laws and regulations affecting our
operations relate to the release of hazardous substances, or solid wastes into
the water or soils, and include measures to control pollution
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of the environment. For instance, the Comprehensive Environmental Response,
Compensation and Liability Act, also known as the "Superfund" law, and
comparable state laws impose liability, without regard to fault or the legality
of the original conduct, on certain classes of persons who are considered to be
responsible for the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
the hazardous substances. Under the Superfund law, these persons may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to natural
resources, and for the costs of certain health studies. The Superfund law also
authorizes the Environmental Protection Agency or "EPA" and, in some instances,
third parties to act in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons the
costs they incur. It is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly caused
by hazardous substances or other pollutants released into the environment. In
the course of our ordinary operations, we may generate waste that falls within
the Superfund law's definition of a "hazardous substance" and as a result, we
may be jointly and severally liable under the Superfund law for all or part of
the costs required to clean up sites at which those hazardous substances have
been released into the environment.
Our operations also generate wastes, including hazardous wastes, that are
subject to the requirements of the federal Resource Conservation and Recovery
Act or "RCRA" and comparable state statutes. We are not currently required to
comply with a substantial portion of the RCRA requirements because our
operations routinely generate only small quantities of hazardous wastes and we
do not hold ourselves out as a hazardous waste treatment, storage or disposal
facility operator that is required to obtain a RCRA hazardous waste permit.
While RCRA currently exempts a number of wastes, including many oil and gas
exploration and production wastes, from being subject to hazardous waste
requirements, the EPA from time to time will consider the adoption of stricter
disposal standards for non-hazardous wastes. Moreover, it is possible that
additional wastes, which could include non-hazardous wastes currently generated
during operations, will in the future be designated as "hazardous wastes."
Hazardous wastes are subject to more rigorous and costly storage and disposal
requirements than are non-hazardous wastes. Any changes in the regulations could
have a material adverse effect on our capital expenditures or operating
expenses.
We currently own or lease properties where hydrocarbons are being or have
been handled for many years. Although we have utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or other
wastes may have been disposed of or released on, under or from the properties
owned or leased by us or on or under other locations where these wastes have
been taken for disposal. In addition, many of these properties have been
operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under our control. These properties and
wastes disposed thereon may be subject to the Superfund law, RCRA and analogous
state laws. Under these laws, we could be required to remove or remediate
previously disposed wastes, including wastes disposed of or released by prior
owners or operators, to clean up contaminated property, including groundwater
contaminated by prior owners or operators, or to make capital improvements to
prevent future contamination.
We are currently evaluating soil and groundwater conditions at a number of
our properties where historical operations conducted primarily by former site
owners or operators or more recent operations conducted by us may have resulted
in releases of hydrocarbons or other wastes. These investigations and possible
cleanup activities are either under consideration or already have been or will
be initiated at our terminals in Mobile, Alabama; Doraville and South Albany,
Georgia; St. Charles, Missouri; Greensboro and Selma, North Carolina; North
Augusta, South Carolina; Nashville, Tennessee; Dallas and Galena Park, Texas;
and Montvale and Richmond, Virginia; and an ammonia terminal facility in Early,
Iowa. We expect to conduct a number of these investigatory and cleanup
activities at an estimated cost of $1.7 million. In other instances, however,
prior owners or operators of these properties are performing or are expected to
perform these activities pursuant to contractual requirements that make these
prior owners or operators responsible for performing the activities.
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ABOVEGROUND STORAGE TANKS
States in which we operate typically have laws and regulations governing
above ground tanks containing liquid substances. Generally, these laws and
regulations require that these tanks include secondary containment systems or
that the operators take alternative precautions to ensure that no contamination
results from any leaks or spills from the tanks. Although there is not currently
a federal statute dedicated to regulating these above ground tanks, there is a
possibility that a law could one day be passed in the United States. We believe
we are in material compliance with all applicable above ground storage tank laws
and regulations. As part of our assessment of facility operations, we have
identified some above ground tanks at our terminals in Nashville, Tennessee;
Charlotte, North Carolina; and Selma, North Carolina; that either are, or are
suspected of being, coated with lead-based paints. The removal and disposal of
any paints that are found to be lead-based, whenever such activities are
conducted in the future as part of our day-to-day maintenance activities, will
require increased handling by us. However, we do not expect the costs associated
with this increased handling to be significant. Although we cannot assure you,
we believe that the future implementation of above ground storage tank laws or
regulations will not have a material adverse effect on our financial condition
or results of operations.
WATER DISCHARGES
Our operations can result in the discharge of pollutants, including oil.
The Oil Pollution Act was enacted in 1990 and amends provisions of the Federal
Water Pollution Control Act of 1972 or the "Water Pollution Control Act" and
other statutes as they pertain to prevention and response to oil spills. The Oil
Pollution Act subjects owners of facilities to strict, joint and potentially
unlimited liability for removal costs and certain other consequences of an oil
spill such as natural resource damages, where the spill is into navigable
waters, along shorelines or in the exclusive economic zone of the U.S. In the
event of an oil spill from one of our facilities into navigable waters,
substantial liabilities could be imposed upon us. States in which we operate
have also enacted similar laws. Regulations have been or are being developed
under the Oil Pollution Act and comparable state laws that may also impose
additional regulatory burdens on our operations. We have determined that the
secondary containment surrounding above ground tanks at our Galena Park, Texas,
terminal requires upgrading to comply with law, at an estimated cost of $0.6
million. We do not expect these expenditures to have a material adverse effect
on our financial condition or results of operations.
The Water Pollution Control Act imposes restrictions and strict controls
regarding the discharge of pollutants into navigable waters. This law and
comparable state laws require that permits be obtained to discharge pollutants
into state and federal waters and impose substantial potential liability for the
costs of noncompliance and damages. Where required, we hold discharge permits
that were issued under The Water Pollution Control Act or a state-delegated
program and we believe that we are in material compliance with the terms of
those permits. While we have experienced permit discharge exceedances at our
terminals in Selma, North Carolina and North Augusta, South Carolina, we are
resolving these exceedances by electing to make capital improvements to the
wastewater handling systems at those locations, at an estimated cost of $0.1
million per facility. In addition, similar capital expenditures to improve
wastewater handling systems are expected to be made to comply with applicable
laws at our terminal in Galena Park, Texas, at an estimated cost of $0.4
million. Neither our compliance with existing permits and foreseeable new permit
requirements nor any of the estimated capital expenditures to upgrade or replace
existing wastewater handling systems are expected to have a material adverse
effect on our financial position or results of operations.
AIR EMISSIONS
Our operations are subject to the federal Clean Air Act and comparable
state and local laws. Under such laws, permits are typically required to emit
pollutants into the atmosphere. Amendments to the federal Clean Air Act enacted
in 1990 as well as recent or soon to be proposed changes to state implementation
plans, for controlling air emissions in regional, non-attainment areas require
or will require most industrial operations in the U.S. to incur capital
expenditures in order to meet air emission control
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standards developed by the EPA and state environmental agencies. As a result of
these amendments, our facilities that emit volatile organic compounds or
nitrogen oxides are subject to increasingly stringent regulations, including
requirements that some sources install maximum or reasonably available control
technology. In addition, the amendments include an operating permit for major
sources of volatile organic compounds, which applies to some of our facilities.
We also expect that changes to the state implementation plans pertaining to air
quality in regional, non-attainment areas will have an impact on our terminals
in Doraville, Georgia and Dallas, Texas, possibly resulting in the need to
upgrade air pollution control equipment. We believe that we currently hold or
have applied for all necessary air permits and that we are in material
compliance with applicable air laws and regulations. Nevertheless, we anticipate
making capital improvements involving modification or repair of roofs and seals
on certain of our tanks at Galena Park, Texas and Corpus Christi, Texas to
comply with applicable law, at a total estimated cost of $0.3 million. In
addition, we recently received a notice of violation for air permitting issues
relating to operation of a vapor recovery unit at our terminal in Galena Park,
Texas. The alleged violation commenced while the property was operated by Hess
and continued after Williams' acquisition of the property. In order to optimize
our vapor recovery compliance, we have elected to acquire a vapor combustion
unit. The net capital cost of this vapor combustion unit, after the application
of the $0.3 million received from the prior owner, will be $2.3 million. In
addition, if any penalties are imposed on us as a result of the recently
assessed notice of violation that relates to ownership or operation of the vapor
recovery unit, then Hess has agreed to reimburse us for costs arising prior to
December 19, 2000. Although we can give no assurances, we believe implementation
of the 1990 federal Clean Air Act Amendments and any changes to the SIPs
pertaining to air quality in regional, non-attainment areas will not have a
material adverse effect on our financial condition or results of operations.
EMPLOYEE SAFETY
We are subject to the requirements of the federal Occupational Safety and
Health Act or OSHA, and comparable state statutes that regulate the protection
of the health and safety of workers. In addition, the OSHA hazard communication
standard requires that certain information be maintained about hazardous
materials used or produced in operations and that this information be provided
to employees, state and local government authorities and citizens. We believe
that our operations are in material compliance with OSHA requirements, including
general industry standards, record keeping requirements and monitoring of
occupational exposure to regulated substances.
TITLE TO PROPERTIES
Substantially all of our ammonia pipelines are constructed on rights-of-way
granted by the apparent record owners of this property and shared with other
pipelines owned by affiliates of Williams. In some instances these rights-of-way
are revocable at the election of the grantor. In many instances, lands over
which rights-of-way have been obtained are subject to prior liens which have not
been subordinated to the right-of-way grants. In some cases, not all of the
apparent record owners have joined in the right-of-way grants. We have obtained
permits from public authorities to cross over or under, or to lay facilities in
or along water courses, county roads, municipal streets and state highways, and
in some instances, these permits are revocable at the election of the grantor.
We have also obtained permits from railroad companies to cross over or under
lands or rights-of-way, many of which are also revocable at the grantor's
election. In some cases, property for pipeline purposes was purchased in fee. We
have the right of eminent domain to acquire rights-of-way and lands necessary
for our ammonia pipeline. However, the original owner of the pipeline may not
have concluded eminent domain proceedings for some rights-of-way.
Some of the leases, easements, rights-of-way, permits and licenses
transferred to us, upon our formation in connection with this offering, required
the consent of the grantor to transfer these rights, which in some instances is
a governmental entity. We will obtain third-party consents, permits and
authorizations sufficient for the transfer to us of the assets necessary for us
to operate our business in all material respects as described in this
prospectus. With respect to any consents, permits or authorizations which have
not yet been obtained, our general partner believes that these consents, permits
or
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authorizations will be obtained within a reasonable period, or that the failure
to obtain such consents, permits or authorizations will not have a material
adverse effect on the operation of our business.
Our general partner believes that we have satisfactory title to all of our
assets. Although title to these properties is subject to encumbrances in some
cases, such as customary interests generally retained in connection with
acquisition of real property, liens related to environmental liabilities
associated with historical operations, liens for current taxes and other burdens
and minor easements, restrictions and other encumbrances to which the underlying
properties were subject at the time of acquisition by our predecessor or us, our
general partner believes that none of these burdens will materially detract from
the value of our properties or from our interest in them or will materially
interfere with their use in the operation of our business.
EMPLOYEES
To carry out our operations, our general partner or its affiliates employ
approximately 175 people who provide direct support to our operations. Other
than at our Galena Park marine terminal facility, none of these employees are
represented by labor unions. The employees at our Galena Park marine terminal
facility are currently represented by a union but have indicated their unanimous
desire to terminate their union affiliation. The union has filed a lawsuit to
prevent the employees from taking this action. If the union succeeds in its
claim, we will negotiate a new labor agreement covering this facility with the
union. Our general partner considers its employee relations to be good.
LEGAL PROCEEDINGS
We are a party to various legal actions that have arisen in the ordinary
course of our business. We do not believe that the resolution of these matters
will have a material adverse effect on our financial condition or results of
operations.
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MANAGEMENT
OUR GENERAL PARTNER MANAGES WILLIAMS ENERGY PARTNERS
Our general partner manages our operations and activities. Unitholders do
not directly or indirectly participate in our management or operation. Our
general partner owes a fiduciary duty to the unitholders. Our general partner is
liable, as a general partner, for all of our debts (to the extent not paid from
our assets), except for specific non-recourse indebtedness or other obligations.
Whenever possible, our general partner intends to incur indebtedness or other
obligations that are non-recourse.
Three members of the board of directors of our general partner will serve
on a conflicts committee to review specific matters which the board of directors
believes may involve conflicts of interest. The conflicts committee will
determine if the resolution of the conflict of interest is fair and reasonable
to us. The members of the conflicts committee may not be officers or employees
of our general partner or directors, officers or employees of its affiliates.
Any matters approved by the conflicts committee will be conclusively deemed to
be fair and reasonable to us, approved by all of our partners, and not a breach
by our general partner of any duties it may owe us or our unitholders. In
addition, the members of the conflicts committee will also serve on an audit
committee which reviews our external financial reporting, recommends engagement
of our independent auditors and reviews procedures for internal auditing and the
adequacy of our internal accounting controls. The members of the conflicts
committee will also serve on the compensation committee, which will oversee
compensation decisions for the officers of Williams GP LLC as well as the
compensation plans described below.
As is commonly the case with publicly-traded limited partnerships, we are
managed and operated by the officers and are subject to the oversight of the
directors of our general partner. All of our personnel are employees of our
general partner or its affiliates.
Some officers of our general partner may spend a substantial amount of time
managing the business and affairs of Williams and its affiliates. These officers
may face a conflict regarding the allocation of their time between our business
and the other business interests of Williams. Our general partner intends to
cause its officers to devote as much time as is necessary for the proper conduct
of our business and affairs. We expect that Steven J. Malcolm will devote
approximately 15% of his time to Williams Energy Partners and that Phillip D.
Wright and Craig R. Rich will devote approximately half of their time to our
operations. Don R. Wellendorf, our Senior Vice President, Chief Financial
Officer and Treasurer, will devote substantially all of his time to our
operations. The board of directors of the general partner is presently composed
of four directors and will be expanded to seven directors upon the appointment
of three independent directors following the closing of the offering.
DIRECTORS AND EXECUTIVE OFFICERS OF WILLIAMS GP LLC
The following table sets forth certain information with respect to the
executive officers and members of the board of directors of our general partner.
Executive officers and directors are elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GENERAL PARTNER
---------------------------------------- --- ----------------------------------------
<S> <C> <C>
Steven J. Malcolm....................... 52 Chief Executive Officer and Chairman of
the Board
Phillip D. Wright....................... 45 President and Chief Operating Officer,
Director
Don R. Wellendorf....................... 48 Senior Vice President, Chief Financial
Officer and Treasurer, Director
Craig R. Rich........................... 49 General Counsel
Keith E. Bailey......................... 58 Director
</TABLE>
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<PAGE> 76
Steven J. Malcolm serves as the Chief Executive Officer and Chairman of the
board of directors of our general partner. He is currently President and Chief
Executive Officer of Williams Energy Services and has served in that capacity
since 1998. From 1994 to 1998, he served as Senior Vice President for Williams'
midstream gas and liquids division, and from 1989 to 1994, worked as Senior Vice
President of the mid-continent region for Williams Field Services. From 1984 to
1989, he held various positions with Williams Natural Gas Company, including
director of business development, director of gas management and vice president
of gas management and supply.
Phillip D. Wright serves as President, Chief Operating Officer and director
of our general partner. He is currently Senior Vice President of Enterprise
Development and Planning for Williams Energy Services and has served in that
capacity since 1996. From 1989 to 1996 he held various senior management
positions with Williams' primary refined product pipeline, Williams Pipe Line,
Williams Energy Ventures and Williams Energy Services. Prior to 1989, he spent
13 years working for Conoco, Inc.
Don R. Wellendorf serves as Senior Vice President, Chief Financial Officer,
Treasurer and director of our general partner. Since 1998, he has served as Vice
President of Strategic Development and Planning for Williams Energy Services.
Prior to Williams' merger with MAPCO Inc. in 1998, he was Vice President and
Treasurer for MAPCO from 1995 to 1998. From 1994 to 1995, he served as Vice
President and Corporate Controller for MAPCO. He began his career in 1979 as an
accountant with MAPCO and held various accounting positions with MAPCO from 1979
to 1994.
Craig R. Rich serves as general counsel of our general partner. He is
currently the Associate General Counsel of Williams Energy Services and has
served in that capacity since 1996. From 1993 to 1996, he served as General
Counsel of Williams' midstream gas and liquids division. Prior to that time, Mr.
Rich was a Senior Attorney representing Williams Gas Pipeline-West. He joined
Williams in 1985.
Keith E. Bailey serves as a director of the general partner. He is
currently Chairman of the board of directors of The Williams Companies, Inc. and
has served in that capacity since 1994. He served as President of The Williams
Companies, Inc. from 1992 to 1994 and has served as its Chief Executive Officer
since 1994. He served as Executive Vice President of The Williams Companies,
Inc. from 1986 to 1992. Mr. Bailey is also Chairman of the board of directors of
Williams Communications Group, Inc.
REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER
The general partner will not receive any management fee or other
compensation for its management of Williams Energy Partners. The general partner
and its affiliates will be reimbursed for expenses incurred on our behalf. These
expenses include the costs of employee, officer and director compensation and
benefits properly allocable to Williams Energy Partners, and all other expenses
necessary or appropriate to the conduct of the business of, and allocable to,
Williams Energy Partners. The partnership agreement provides that the general
partner will determine the expenses that are allocable to Williams Energy
Partners in any reasonable manner determined by the general partner in its sole
discretion.
EXECUTIVE COMPENSATION
Williams Energy Partners and the general partner were formed in August
2000. Accordingly, the general partner paid no compensation to its directors and
officers with respect to the 1999 fiscal year. No obligations were accrued with
respect to management incentive or retirement benefits for the directors and
officers for the 1999 fiscal year. Officers and employees of the general partner
may participate in employee benefit plans and arrangements sponsored by the
general partner or its affiliates, including plans which may be established by
the general partner or its affiliates in the future.
COMPENSATION OF DIRECTORS
Officers or employees of the general partner who also serve as directors
will not receive additional compensation. The general partner anticipates that
each independent director will receive compensation for attending meetings of
the board of directors as well as committee meetings. The amount of compensation
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to be paid to the independent directors has not yet been determined. In
addition, each independent director will be reimbursed for out-of-pocket
expenses in connection with attending meetings of the board of directors or
committees. Each director will be fully indemnified by Williams Energy Partners
for actions associated with being a director to the extent permitted under
Delaware law.
LONG-TERM INCENTIVE PLAN
The general partner has adopted the Williams Energy Partners Long-Term
Incentive Plan for employees and directors of the general partner and employees
of its affiliates who perform services for us. The long-term incentive plan
consists of three components, restricted units, unit options and bonus units.
The long-term incentive plan currently permits the grant of awards covering an
aggregate of common units. The plan is administered by the
compensation committee of the general partner's board of directors.
The general partner's board of directors in its discretion may terminate
the long-term incentive plan at any time with respect to any common units for
which a grant has not yet been made. The general partner's board of directors
also has the right to alter or amend the long-term incentive plan or any part of
the plan from time to time, including increasing the number of common units with
respect to which awards may be granted subject to unitholder approval as
required by the exchange upon which the common units are listed at that time.
However, no change in any outstanding grant may be made that would materially
impair the rights of the participant without the consent of the participant.
Restricted Units. A restricted unit is a "phantom" unit that entitles the
grantee to receive a common unit upon the vesting of the phantom unit, or in the
discretion of the compensation committee, cash equivalent to the value of a
common unit. We expect to grant an aggregate of approximately
restricted units to employees of the general partner and its affiliates. The
compensation committee may, in the future, determine to make additional grants
under the plan to employees and directors containing such terms as the
compensation committee shall determine under the plan. In general, restricted
units granted to employees will vest three years from the date of grant. In
addition, the restricted units will vest upon a change of control of the general
partner or upon the achievement of specified financial objectives.
If a grantee's employment or membership on the board of directors
terminates for any reason, the grantee's restricted units will be automatically
forfeited unless, and to the extent, the compensation committee provides
otherwise. Common units to be delivered upon the vesting of rights may be common
units acquired by the general partner in the open market, common units already
owned by the general partner, common units acquired by the general partner
directly from us or any other person or any combination of the foregoing. The
general partner will be entitled to reimbursement by us for the cost incurred in
acquiring common units. If we issue new common units upon vesting of the
restricted units, the total number of common units outstanding will increase.
Following the subordination period, the compensation committee, in its
discretion, may grant tandem distribution equivalent rights with respect to
restricted units.
We intend the issuance of the common units pursuant to the restricted unit
plan to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation of the
common units. Therefore, plan participants will not pay any consideration for
the common units they receive, and we will receive no remuneration for the
units.
Unit Options. The long-term incentive plan currently permits the grant of
options covering common units. No grants have been made under the long-term
incentive plan. The compensation committee may, in the future, determine to make
grants under the plan to employees and directors containing such terms as the
committee shall determine. Unit options will have an exercise price equal to the
fair market value of the units on the date of grant. In general, unit options
granted will become exercisable over a period determined by the compensation
committee. In addition, the unit options will become exercisable upon a change
in control of the general partner or upon the achievement of specified financial
objectives.
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Upon exercise of a unit option, the general partner will acquire common
units in the open market, or directly from us or any other person, or use common
units already owned by the general partner, or any combination of the foregoing.
The general partner will be entitled to reimbursement by us for the difference
between the cost incurred by the general partner in acquiring these common units
and the proceeds received by the general partner from an optionee at the time of
exercise. Thus, the cost of the unit options will be borne by us. If we issue
new common units upon exercise of the unit options, the total number of common
units outstanding will increase, and the general partner will pay us the
proceeds it received from the optionee upon exercise of the unit option. The
unit option plan has been designed to furnish additional compensation to
employees and directors and to align their economic interests with those of
common unitholders.
Bonus Units. The long-term incentive plan currently permits the grant of up
to common units to employees and directors on such basis as the
compensation committee may determine. We intend for the grants of bonus units to
serve as rewards for extraordinary performance. The general partner may acquire
the bonus units in the open market, directly from us or any other person, use
common units already owned by the general partner or any combination of the
foregoing. The general partner will be entitled to reimbursement by us for the
cost incurred in acquiring common units. To the extent we issue new common units
to grant bonus units, the total number of common units outstanding will
increase.
MANAGEMENT INCENTIVE PLAN
The general partner has adopted the Williams Management Incentive Plan. The
management incentive plan is designed to enhance the performance of the general
partner's key employees by rewarding them with cash awards for achieving annual
financial and operational performance objectives. The compensation committee in
its discretion may determine individual participants and payments, if any, for
each fiscal year. The board of directors of the general partner may amend or
change the management incentive plan at any time. We will reimburse the general
partner for payments and costs incurred under the plan.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units that will
be issued upon the consummation of this offering and the related transactions
and held by beneficial owners of 5% or more of the units, by directors of the
general partner, by each named executive officer and by all directors and
executive officers of the general partner as a group. Williams GP LLC is owned
through Williams Energy Services and Williams Natural Gas Liquids, Inc., which
are subsidiaries of The Williams Companies, Inc. The address of The Williams
Companies, Williams Energy Services, Williams Natural Gas Liquids and Williams
GP LLC is One Williams Center, Tulsa, Oklahoma 74172.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF PERCENTAGE
COMMON UNITS COMMON UNITS SUBORDINATED SUBORDINATED OF TOTAL
TO BE TO BE UNITS TO BE UNITS TO BE UNITS TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
------------------------------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Williams Energy Services............. 1,559,193 27.5% 4,589,193 80.8% 54.1%
Williams Natural Gas Liquids, Inc.... 370,501 6.5% 1,090,501 19.2% 12.9%
Steven J. Malcolm (a)................ -- -- -- -- --
Phillip D. Wright.................... -- -- -- -- --
Don R. Wellendorf.................... -- -- -- -- --
Craig R. Rich........................ -- -- -- -- --
Keith E. Bailey (b).................. -- -- -- -- --
All directors and executive officers
as a group (five persons).......... -- -- -- -- --
</TABLE>
---------------
(a) Does not include any common units or subordinated units to be owned by
Williams Energy Services or by Williams Natural Gas Liquids, Inc. upon
consummation of this offering. Mr. Malcolm in his capacity as Chairman and Chief
Executive Officer of Williams Energy Services and as Chairman, President and
Director of Williams Natural Gas Liquids, Inc. may be deemed to beneficially own
these units.
(b) Does not include any common units or subordinated units to be owned by
Williams Energy Services or by Williams Natural Gas Liquids, Inc. upon
consummation of this offering. Mr. Bailey in his capacity as Chairman and Chief
Executive Officer of The Williams Companies, Inc., which is the owner of
Williams Energy Services and Williams Natural Gas Liquids, Inc., may be deemed
to beneficially own these units.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
After this offering, affiliates of Williams will own 1,929,694 common units
and 5,679,694 subordinated units representing an aggregate 65.6% limited partner
interest in us and Williams OLP, L.P. In addition, Williams GP LLC will own an
aggregate 2% general partner interest in us and Williams OLP, L.P. The general
partner's ability, as general partner, to manage and operate Williams Energy
Partners and Williams' affiliates' ownership of an aggregate 65.6% limited
partner interest in us effectively gives the general partner the right to veto
some actions of Williams Energy Partners and to control the management of
Williams Energy Partners.
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES
The following table summarizes the distributions and payments to be made by
us to our general partner and its affiliates in connection with the formation,
ongoing operation and the liquidation of Williams Energy Partners. These
distributions and payments were determined by and among affiliated entities and
are not the result of arm's length negotiations.
FORMATION STAGE
The consideration received
by our general partner and
its affiliates for the
transfer of the
affiliates' interests in
the subsidiaries and a
capital contribution..... 1,929,694 common units and 5,679,694 subordinated
units;
an aggregate 2% general partner interest in
Williams Energy Partners and Williams OLP, LP on a
combined basis;
the incentive distribution rights; and
$167.4 million of the net proceeds of the offering
of the common units and the borrowings under the
credit facility.
OPERATIONAL STAGE
Distributions of available
cash to our general partner
and its affiliates....... Cash distributions will generally be made 98% to
the unitholders, including to affiliates of the
general partner as holders of common units and
subordinated units, and 2% to the general partner.
In addition, if distributions exceed the target
levels in excess of the minimum quarterly
distribution, our general partner will be entitled
to receive increasing percentages of the
distributions, up to 50% of the distributions above
the highest target level.
Assuming we have sufficient available cash to pay
the full minimum quarterly distribution on all of
our outstanding units for four quarters, our
general partner and its affiliates would receive a
distribution of approximately $0.5 million on the
combined 2% general partner interest and a
distribution of approximately $16.0 million on
their common and subordinated units.
Payments to our general
partner and its
affiliates............... Our general partner and its affiliates will not
receive any management fee or other compensation
for the management of Williams Energy Partners. Our
general partner and its affiliates will be
reimbursed, however, for direct and indirect
expenses incurred on our behalf. On a
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<PAGE> 81
pro forma basis for 1999, we have agreed with our
general partner, that the expense reimbursement to
the general partner and its affiliates would have
been $6.0 million. Please read "-- Omnibus
Agreement -- General and Administrative Expenses"
below.
Withdrawal or removal of
our general partner........ If our general partner withdraws in violation of
the partnership agreement or is removed for cause,
a successor general partner has the option to buy
the general partner interests and incentive
distribution rights for a cash price equal to fair
market value. If our general partner withdraws or
is removed under any other circumstances, the
departing general partner has the option to require
the successor general partner to buy the departing
general partner interests and its incentive
distribution rights for a cash price equal to fair
market value.
If either of these options is not exercised, the
departing general partner's interests and incentive
distribution rights will automatically convert into
common units equal to the fair market value of
those interests. In addition, we will be required
to pay the departing general partner for expense
reimbursements.
LIQUIDATION STAGE
Liquidation................ Upon our liquidation, the partners, including our
general partner, will be entitled to receive
liquidating distributions according to their
particular capital account balances.
RIGHTS OF OUR GENERAL PARTNER
Upon consummation of this offering, our general partner and its affiliates
will own 1,929,694 common units and 5,679,694 subordinated units, representing
an aggregate 65.6% limited partner interest in Williams Energy Partners (60.8%
if the Underwriters' over-allotment option is exercised in full). In addition,
our general partner will own an aggregate 2% general partner interest in
Williams Energy Partners and the operating partnership on a combined basis.
Through the general partner's ability, as general partner, to manage and operate
our business and Williams' affiliates' ownership of 1,929,694 common units and
all of the outstanding subordinated units, the general partner will control the
management of our business.
AGREEMENTS GOVERNING THE TRANSACTIONS
Williams Energy Partners, the general partner and some other parties will
enter into the various documents and agreements that will effect some
transactions, including the vesting of assets in, and the assumption of
liabilities by, the subsidiaries, and the application of the proceeds of this
offering. These agreements will not be the result of arm's-length negotiations,
and we cannot assure you that they, or that any of the transactions which they
provide for, will be effected on terms at least as favorable to the parties to
these agreements as they could have been obtained from unaffiliated third
parties. All of the transaction expenses incurred in connection with these
transactions, including the expenses associated with vesting assets into our
subsidiaries, will be paid from the proceeds of this offering.
OMNIBUS AGREEMENT
At the closing of the offering, we will enter into an agreement with
Williams and its affiliates and our general partner, that will govern:
- potential competition among us and the other parties to the agreement;
- allocation of general and administrative expenses;
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- indemnification for environmental liabilities and right of way defects or
failures;
- the grant of a license for use of the ATLAS 2000 software system and
other intellectual property; and
- reimbursement of maintenance capital expenditures.
Competition
Williams and its affiliates have agreed that they will not own or operate
assets that are used to transport, store or distribute ammonia in the United
States or store or distribute refined petroleum products in the continental
United States. We refer to these assets below as "restricted assets." Williams
will not be prohibited from owning or operating the following restricted assets:
- any restricted assets owned, leased or operated by Williams at the
closing of this offering;
- any restricted assets acquired after the closing of this offering with a
fair market value not greater than $20.0 million;
- any restricted assets constructed by Williams after the closing of this
offering with construction costs not greater than $20.0 million; and
- any restricted assets constructed or acquired by Williams after the
closing of the offering that are connected to assets owned by Williams or
are primarily related to and located within 50 miles of Williams' refinery
in Memphis, Tennessee.
If Williams acquires or constructs restricted assets other than those
identified above, it shall offer to sell such assets to us within six months of
acquiring or completing construction. If we and Williams are unable to agree on
the terms of the sale, we and Williams will appoint a mutually-agreed-upon,
nationally-recognized investment banking firm to determine the fair market value
of the restricted assets. Once the investment bank submits its valuation of the
restricted assets to Williams and us, we will have the right, but not the
obligation, to purchase the business in accordance with the following process:
- If the valuation of the investment bank is in the range between the
proposed sale and purchase values of Williams and us, we will have the
right to purchase the business at the valuation submitted by the
investment bank.
- If the valuation of the investment bank is less than the proposed
purchase value submitted by us, we will have the right to purchase the
business for the amount submitted by us.
- If the valuation of the investment bank is greater than the proposed sale
value submitted by Williams, we will have the right to purchase the
business for the amount submitted by Williams.
If we elect not to purchase any restricted assets, Williams will be
permitted to own or operate such assets without limitation.
General and Administrative Expenses
In 2001, we will reimburse the general partner or Williams for general and
administrative expenses of not more than $6.0 million. This amount may increase
during the first ten years following the closing of the offering as follows:
- In each year after 2001, the amount of general and administrative
expenses allocated to us by Williams and the general partner may increase
by no more than the greater of 7% or the percentage increase in the
producer price index for that year.
- If we make an acquisition, our general and administrative expense
allocation may increase by the amount of these expenses included in our
valuation of the business we acquire.
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Indemnification
Williams Energy Services and Williams Natural Gas Liquids, Inc. will
indemnify us for up to $15.0 million of environmental liabilities as described
under "Business -- Environmental Regulation -- General." Williams Natural Gas
Liquids, Inc. will also indemnify us for right of way defects or failures in our
ammonia pipeline for 15 years after the date of this offering. For a description
of other environmental indemnities from which we benefit, see
"Business -- Environmental."
ATLAS 2000 License
Williams and its affiliates will grant a license to us for the use of the
ATLAS 2000 software system and other intellectual property, including our logo,
for as long as Williams controls our general partner, at no charge.
Maintenance Capital Expenditures
In 2001 and 2002 Williams will reimburse us for maintenance capital
expenditures for our current operations in excess of $4.9 million, subject to a
maximum aggregate reimbursement of $15.0 million over the two year period
related to our current operations in 2001 and 2002.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Conflicts of interest exist and may arise in the future as a result of the
relationships between our general partner and its affiliates (including
Williams), on the one hand, and Williams Energy Partners and its limited
partners, on the other hand. The directors and officers of our general partner
have fiduciary duties to manage the general partner in a manner beneficial to
its owners. At the same time, our general partner has a fiduciary duty to manage
Williams Energy Partners in a manner beneficial to Williams Energy Partners and
the unitholders.
The partnership agreement contains provisions that allow our general
partner to take into account the interests of parties in addition to ours in
resolving conflicts of interest. In effect, these provisions limit our general
partner's fiduciary duties to the unitholders. The partnership agreement also
restricts the remedies available to unitholders for actions taken that might,
without those limitations, constitute breaches of fiduciary duty. Whenever a
conflict arises between our general partner or its affiliates, on the one hand,
and Williams Energy Partners or any other partner, on the other, the general
partner will resolve that conflict. A conflicts committee of the board of
directors of the general partner will, at the request of the general partner,
review conflicts of interest. Our general partner will not be in breach of its
obligations under the partnership agreement or its duties to us or the
unitholders if the resolution of the conflict is considered to be fair and
reasonable to us. Any resolution is considered to be fair and reasonable to us
if that resolution is:
- approved by the conflicts committee, although no party is obligated to
seek approval and the general partner may adopt a resolution or course of
action that has not received approval;
- on terms no less favorable to us than those generally being provided to
or available from unrelated third parties; or
- fair to us, taking into account the totality of the relationships between
the parties involved, including other transactions that may be
particularly favorable or advantageous to us.
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In resolving a conflict, our general partner may, unless the resolution is
specifically provided for in the partnership agreement, consider:
- the relative interests of the parties involved in the conflict or
affected by the action;
- any customary or accepted industry practices or historical dealings with
a particular person or entity; and
- generally accepted accounting practices or principles and other factors
it considers relevant, if applicable.
Conflicts of interest could arise in the situations described below, among
others:
ACTIONS TAKEN BY OUR GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH AVAILABLE FOR
DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE RIGHT TO CONVERT SUBORDINATED
UNITS.
The amount of cash that is available for distribution to unitholders is
affected by decisions of our general partner regarding matters, including:
- amount and timing of asset purchases and sales;
- cash expenditures;
- borrowings;
- issuance of additional units; and
- the creation, reduction or increase of reserves in any quarter.
In addition, borrowings by Williams Energy Partners and its affiliates do
not constitute a breach of any duty owed by the general partner to the
unitholders, including borrowings that have the purpose or effect of:
- enabling our general partner to receive distributions on any subordinated
units held by it or the incentive distribution rights; or
- hastening the expiration of the subordination period.
For example, in the event we have not generated sufficient cash from our
operations to pay the minimum quarterly distribution on our common units and our
subordinated units, the partnership agreement permits us to borrow funds which
would enable us to make this distribution on all outstanding units. In addition,
distributions made with borrowed money will allow the general partner to satisfy
the performance tests required for conversion of subordinated units into common
units, if, in the aggregate, we have generated sufficient cash from our
operations during the test period to meet the conversion requirements. Please
read "Cash Distribution Policy -- Subordination Period."
The partnership agreement provides that Williams Energy Partners and our
subsidiaries may borrow funds from our general partner and its affiliates. Our
general partner and its affiliates may not borrow funds from us, the operating
partnership or the subsidiaries.
WE DO NOT HAVE ANY OFFICERS OR EMPLOYEES AND RELY SOLELY ON OFFICERS AND
EMPLOYEES OF OUR GENERAL PARTNER AND ITS AFFILIATES.
Affiliates of our general partner conduct businesses and activities of
their own in which we have no economic interest. If these separate activities
are significantly greater than our activities, there could be material
competition for the time and effort of the officers and employees who provide
services to our general partner. The officers of our general partner are not
required to work full time on our affairs. These officers are required to devote
significant time to the affairs of Williams or its affiliates and are
compensated by them for the services rendered to them.
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WE WILL REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES FOR EXPENSES.
We will reimburse the general partner and its affiliates for costs incurred
in managing and operating Williams Energy Partners, including costs incurred in
rendering corporate staff and support services to Williams Energy Partners. The
partnership agreement provides that the general partner will determine the
expenses that are allocable to Williams Energy Partners in any reasonable manner
determined by the general partner in its sole discretion.
THE GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY REGARDING OUR OBLIGATIONS.
The general partner intends to limit the liability of the general partner
under contractual arrangements so that the other party has recourse only to our
assets and not against the general partner or its assets. The partnership
agreement provides that any action taken by the general partner to limit its or
our liability is not a breach of the general partner's fiduciary duties, even if
we could have obtained more favorable terms without the limitation on liability.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH US.
Any agreements between us on the one hand, and the general partner and its
affiliates, on the other, will not grant to the unitholders, separate and apart
from us, the right to enforce the obligations of the general partner and its
affiliates in our favor.
CONTRACTS BETWEEN US, ON THE ONE HAND, AND THE GENERAL PARTNER AND ITS
AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS.
The partnership agreement allows the general partner to pay itself or its
affiliates for any services rendered, provided these services are rendered on
terms that are fair and reasonable to us. The general partner may also enter
into additional contractual arrangements with any of its affiliates on our
behalf. Neither the partnership agreement nor any of the other agreements,
contracts and arrangements between us and the general partner and its affiliates
are or will be the result of arm's-length negotiations.
All of these transactions entered into after the sale of the common units
offered in this offering are to be on terms that are fair and reasonable to
Williams Energy Partners.
The general partner and its affiliates will have no obligation to permit us
to use any facilities or assets of the general partner and its affiliates,
except as may be provided in contracts entered into specifically dealing with
that use. There is no obligation of the general partner and its affiliates to
enter into any contracts of this kind.
COMMON UNITS ARE SUBJECT TO THE GENERAL PARTNER'S LIMITED CALL RIGHT.
The general partner may exercise its right to call and purchase common
units as provided in the partnership agreement or assign this right to one of
its affiliates or to us. The general partner may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise this right. As a
result, a common unitholder may have his common units purchased from him at an
undesirable time or price. Please read "The Partnership Agreement -- Limited
Call Right."
WE MAY NOT CHOOSE TO RETAIN SEPARATE COUNSEL FOR OURSELVES OR FOR THE HOLDERS OF
COMMON UNITS.
The attorneys, independent accountants and others who perform services for
us have been retained by the general partner. Attorneys, independent accountants
and others who perform services for us are selected by the general partner or
the conflicts committee and also may perform services for the general partner
and its affiliates. We may retain separate counsel for ourselves or the holders
of common units in the event of a conflict of interest between the general
partner and its affiliates, on the one hand, and us or the holders of common
units, on the other, depending on the nature of the conflict. We do not intend
to do so in most cases.
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THE GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH US.
The partnership agreement provides that the general partner will be
restricted from engaging in any business activities other than those incidental
to its ownership of interests in us. Except as provided in the partnership
agreement, affiliates of the general partner are not prohibited from engaging in
other businesses or activities, including those that might be in direct
competition with us.
FIDUCIARY DUTIES OWED TO UNITHOLDERS BY OUR GENERAL PARTNER ARE PRESCRIBED BY
LAW AND THE PARTNERSHIP AGREEMENT
Our general partner is accountable to us and our unitholders as a
fiduciary. The Delaware Act provides that Delaware limited partnerships may, in
their partnership agreements, restrict or expand the fiduciary duties owed by
the general partner to limited partners and the partnership.
Our partnership agreement contains various provisions restricting the
fiduciary duties that might otherwise be owed by the general partner. The
following is a summary of the material restrictions of the fiduciary duties owed
by our general partner to the limited partners:
State-law fiduciary duty
standards.................. Fiduciary duties are generally considered to
include an obligation to act with due care and
loyalty. The duty of care, in the absence of a
provision in a partnership agreement providing
otherwise, would generally require a general
partner to act for the partnership in the same
manner as a prudent person would act on his own
behalf. The duty of loyalty, in the absence of a
provision in a partnership agreement providing
otherwise, would generally prohibit a general
partner of a Delaware limited partnership from
taking any action or engaging in any transaction
where a conflict of interest is present.
The Delaware Act generally provides that a limited
partner may institute legal action on behalf of the
partnership to recover damages from a third party
where a general partner has refused to institute
the action or where an effort to cause a general
partner to do so is not likely to succeed. In
addition, the statutory or case law of some
jurisdictions may permit a limited partner to
institute legal action on behalf of himself and all
other similarly situated limited partners to
recover damages from a general partner for
violations of its fiduciary duties to the limited
partners.
Partnership agreement
modified standards......... Our partnership agreement contains provisions that
waive or consent to conduct by our general partner
and its affiliates that might otherwise raise
issues as to compliance with fiduciary duties or
applicable law. For example, our partnership
agreement permits our general partner to make a
number of decisions in its "sole discretion." This
entitles the general partner to consider only the
interests and factors that it desires and it has no
duty or obligation to give any consideration to any
interest of, or factors affecting, us, our
affiliates or any limited partner. Other provisions
of the partnership agreement provide that the
general partner's actions must be made in its
reasonable discretion. These standards reduce the
obligations to which the general partner would
otherwise be held.
Our partnership agreement generally provides that
affiliated transactions and resolutions of
conflicts of interest not involving a required vote
of unitholders must be "fair and reasonable" to us
under the
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factors previously set forth. In determining
whether a transaction or resolution is "fair and
reasonable" our general partner may consider
interests of all parties involved, including its
own. Unless our general partner has acted in bad
faith, the action taken by our general partner
shall not constitute a breach of its fiduciary
duty. These standards reduce the obligations to
which our general partner would otherwise be held.
In addition to the other more specific provisions
limiting the obligations of our general partner,
our partnership agreement further provides that our
general partner and its officers and directors will
not be liable for monetary damages to us, the
limited partners or assignees for errors of
judgment or for any acts or omissions if the
general partner and those other persons acted in
good faith.
In order to become one of our limited partners, a common unitholder is
required to agree to be bound by the provisions in the partnership agreement,
including the provisions discussed above. This is in accordance with the policy
of the Delaware Act favoring the principle of freedom of contract and the
enforceability of partnership agreements. The failure of a limited partner or
assignee to sign a partnership agreement does not render the partnership
agreement unenforceable against that person.
We must indemnify our general partner and its officers, directors,
employees, affiliates, partners, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by the
general partner or these other persons. We must provide this indemnification if
our general partner or these persons acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than the general
partner) not opposed to, our best interests. We also must provide this
indemnification for criminal proceedings if our general partner or these other
persons had no reasonable cause to believe their conduct was unlawful. Thus, our
general partner could be indemnified for its negligent acts if it met these
requirements concerning good faith and our best interests. Please read "The
Partnership Agreement -- Indemnification."
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DESCRIPTION OF THE COMMON UNITS
THE UNITS
The common units and the subordinated units represent limited partner
interests in us. The holders of units are entitled to participate in partnership
distributions and exercise the rights or privileges available to limited
partners under our partnership agreement. For a description of the relative
rights and preferences of holders of common units and subordinated units in and
to partnership distributions, please read "Common Units," "Cash Distribution
Policy" and "Description of Subordinated Units." For a description of the rights
and privileges of limited partners under our partnership agreement, including
voting rights, please read "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
DUTIES
Bank of New York will serve as registrar and transfer agent for the common
units. We pay all fees charged by the transfer agent for transfers of common
units, except the following that must be paid by unitholders:
- surety bond premiums to replace lost or stolen certificates, taxes and
other governmental charges;
- special charges for services requested by a holder of a common unit; and
- other similar fees or charges.
There is no charge to unitholders for disbursements of our cash
distributions. We will indemnify the transfer agent, its agents and each of
their stockholders, directors, officers and employees against all claims and
losses that may arise out of acts performed or omitted for its activities in
that capacity, except for any liability due to any gross negligence or
intentional misconduct of the indemnified person or entity.
RESIGNATION OR REMOVAL
The transfer agent may resign, by notice to us, or be removed by us. The
resignation or removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its acceptance of
the appointment. If no successor has been appointed and accepted the appointment
within 30 days after notice of the resignation or removal, the general partner
may act as the transfer agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
The transfer of the common units to persons that purchase directly from the
underwriters will be accomplished through the completion, execution and delivery
of a transfer application by the investor. Any later transfers of a common unit
will not be recorded by the transfer agent or recognized by us unless the
transferee executes and delivers a transfer application. By executing and
delivering a transfer application, the transferee of common units:
- becomes the record holder of the common units and is an assignee until
admitted into our partnership as a substituted limited partner;
- automatically requests admission as a substituted limited partner in our
partnership;
- agrees to be bound by the terms and conditions of, and executes, our
partnership agreement;
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- represents that the transferee has the capacity, power and authority to
enter into the partnership agreement;
- grants powers of attorney to officers of our general partner and any
liquidator of us as specified in the partnership agreement; and
- makes the consents and waivers contained in the partnership agreement.
An assignee will become a substituted limited partner of our partnership
for the transferred common units upon the consent of our general partner and the
recording of the name of the assignee on our books and records. The general
partner may withhold its consent in its sole discretion.
A transferee's broker, agent or nominee may complete, execute and deliver a
transfer application. We are entitled to treat the nominee holder of a common
unit as the absolute owner. In that case, the beneficial holder's rights are
limited solely to those that it has against the nominee holder as a result of
any agreement between the beneficial owner and the nominee holder.
Common units are securities and are transferable according to the laws
governing 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 our partnership for the transferred common
units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only:
- the right to assign the common unit to a purchaser or other transferee;
and
- the right to transfer the right to seek admission as a substituted
limited partner in our partnership for 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; and
- may not receive some federal income tax information or reports furnished
to record holders of common units.
The transferor of common units has a duty to provide the transferee with
all information that may be necessary to transfer the common units. The
transferor does not have a duty to insure the execution of the transfer
application by the transferee and has no liability or responsibility if the
transferee neglects or chooses not to execute and forward the transfer
application to the transfer agent. Please read "The Partnership
Agreement -- Status as Limited Partner or Assignee."
Until a common unit has been transferred on our books, we and the transfer
agent, may treat the record holder of the unit as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations.
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DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of limited partner interests in
our partnership, and the rights of holders to participate in distributions to
partners differ from, and are subordinated to, the rights of the holders of
common units. For any given quarter, any available cash will first be
distributed to the general partner and to the holders of common units, until the
holders of common units have received the minimum quarterly distribution plus
any arrearages, and then will be distributed to the holders of subordinated
units. Please read "Cash Distribution Policy."
CONVERSION OF SUBORDINATED UNITS
The subordination period will generally extend until the first day of any
quarter beginning after December 31, 2005, in which each of the following events
occurs:
(1) distributions of available cash from operating surplus on the
common units and the subordinated units equal or exceed the sum of the
minimum quarterly distributions on all of the outstanding common units and
subordinated units for each of the three non-overlapping four-quarter
periods immediately preceding that date;
(2) the adjusted operating surplus generated during each of the three
immediately preceding non-overlapping four-quarter periods equals or
exceeds the sum of the minimum quarterly distributions on all of the
outstanding common units and subordinated units during those periods on a
fully diluted basis and the related distribution on the 2% general partner
interest during those periods; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
Before the end of the subordination period, 25% of the subordinated units
(up to 1,419,924 subordinated units) will convert early into common units on a
one-for-one basis on the first day after the record date established for the
distribution for any quarter ending on or after December 31, 2003, and 25% of
the subordinated units (up to 1,419,924 subordinated units) will convert early
into common units on a one-for-one basis on the first day after the record date
established for the distribution for any quarter ending on or after December 31,
2004, if at the end of the applicable quarter each of the following three events
occurs:
(1) distributions of available cash from operating surplus on the
common units and the subordinated units equal or exceed the sum of the
minimum quarterly distributions on all of the outstanding common units and
subordinated units for each of the three non-overlapping four-quarter
periods immediately preceding that date;
(2) the adjusted operating surplus generated during each of the three
immediately preceding non-overlapping four-quarter periods equals or
exceeds the sum of the minimum quarterly distributions on all of the
outstanding common units and subordinated units during those periods on a
fully diluted basis and the related distribution on the 2% general partner
interest during those periods; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
provided, however, that the early conversion of the second 25% of the
subordinated units may not occur until at least one year following the early
conversion of the first 25% of the 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 then
participate, pro rata, with the other common units in distributions of available
cash. In addition, if Williams GP LLC is removed as our general partner under
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circumstances where cause does not exist and units held by the general partner
and its affiliates are not voted in favor of that removal:
- the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- the general partner will have the right to convert its general partner
interests and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
LIMITED VOTING RIGHTS
Holders of subordinated units sometimes vote as a single class together
with the common units and sometimes vote as a class separate from the holders of
common units. Holders of subordinated units, like holders of common units, have
very limited voting rights. During the subordination period, common units and
subordinated units each vote separately as a class on the following matters:
(1) a sale or exchange of all or substantially all of our assets;
(2) the election of a successor general partner in connection with the
removal of the general partner;
(3) dissolution or reconstitution;
(4) a merger;
(5) issuance of limited partner interests in some circumstances; and
(6) some amendments to the partnership agreement, including any
amendment that would cause us to be treated as an association taxable as a
corporation.
The subordinated units are not entitled to vote on approval of the
withdrawal of the general partner or the transfer by the general partner of its
general partner interest or incentive distribution rights under some
circumstances. Removal of the general partner requires:
- a 66 2/3% vote of all outstanding units voting as a single class; and
- the election of a successor general partner by the holders of a majority
of the outstanding common units and subordinated units, voting as
separate classes.
Under the partnership agreement, the general partner generally will be
permitted to effect amendments to the partnership agreement that do not
materially adversely affect unitholders without the approval of any unitholders.
DISTRIBUTIONS UPON LIQUIDATION
If we liquidate during the subordination period, in some circumstances
holders of outstanding common units will be entitled to receive more per unit in
liquidating distributions than holders of outstanding subordinated units. The
per unit difference will be dependent upon the amount of gain or loss that we
recognize in liquidating our assets. Following conversion of the subordinated
units into common units, all units will be treated the same upon liquidation.
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THE PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. Our partnership agreement, as well as the partnership agreement of
the operating partnership are included as exhibits to the registration statement
of which this prospectus constitutes a part. We will provide prospective
investors with a copy of these agreements upon request at no charge.
We summarize the following provisions of the partnership agreement
elsewhere in this prospectus:
- With regard to the transfer of common units, please read "Description of
the Common Units -- Transfer of Common Units."
- With regard to distributions of available cash, please read "Cash
Distribution Policy."
- With regard to allocations of taxable income and taxable loss, please
read "Tax Considerations."
ORGANIZATION
We were organized on August 30, 2000 and will have a perpetual existence.
PURPOSE
Our purpose under the partnership agreement is limited to serving as the
limited partner of the operating partnership and engaging in any business
activities that may be engaged in by the operating partnership or that are
approved by the general partner. The partnership agreement of the operating
partnership provides that the operating partnership may, directly or indirectly,
engage in:
(1) its operations as conducted immediately before our initial public
offering;
(2) any other activity approved by the general partner but only to the
extent that the general partner reasonably determines that, as of the date
of the acquisition or commencement of the activity, the activity generates
"qualifying income" as this term is defined in Section 7704 of the Internal
Revenue Code; or
(3) any activity that enhances the operations of an activity that is
described in (1) or (2) above.
Although the general partner has the ability to cause us, the operating
partnership or its subsidiaries to engage in activities other than the
transportation of ammonia and the storage, transportation and distribution of
petroleum products, the general partner has no current plans to do so. The
general partner is authorized in general to perform all acts deemed necessary to
carry out our purposes and to conduct our business.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to the general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for our qualification, continuance or
dissolution. The power of attorney also grants the general partner the authority
to amend, and to make consents and waivers under, the partnership agreement.
CAPITAL CONTRIBUTIONS
Unitholders are not obligated to make additional capital contributions,
except as described below under "-- Limited Liability."
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of our
business within the meaning of the Delaware Act and that he otherwise acts in
conformity with the provisions of the partnership agreement, his liability under
the Delaware Act will be limited, subject to possible exceptions, to the
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amount of capital he is obligated to contribute to us for his common units plus
his share of any undistributed profits and assets. If it were determined,
however, that the right, or exercise of the right, by the limited partners as a
group:
- to remove or replace the general partner;
- to approve some amendments to the partnership agreement; or
- to take other action under the partnership agreement;
constituted "participation in the control" of our business for the purposes of
the Delaware Act, then the limited partners could be held personally liable for
our obligations under the laws of Delaware, to the same extent as the general
partner. This liability would extend to persons who transact business with us
who reasonably believe that the limited partner is a general partner. Neither
the partnership agreement nor the Delaware Act specifically provides for legal
recourse against the general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this does not mean
that a limited partner could not seek legal recourse, we know of no precedent
for this type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a distribution
to a partner if, after the distribution, all liabilities of the limited
partnership, other than liabilities to partners on account of their partnership
interests and liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair value of the assets
of the limited partnership. For the purpose of determining the fair value of the
assets of a limited partnership, the Delaware Act provides that the fair value
of property subject to liability for which recourse of creditors is limited
shall be included in the assets of the limited partnership only to the extent
that the fair value of that property exceeds the nonrecourse liability. The
Delaware Act provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was in violation of
the Delaware Act shall be liable to the limited partnership for the amount of
the distribution for three years. Under the Delaware Act, an assignee who
becomes a substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except the
assignee is not obligated for liabilities unknown to him at the time he became a
limited partner and that could not be ascertained from the partnership
agreement.
Our subsidiaries conduct business in 17 states. Maintenance of our limited
liability as a limited partner of the operating partnership, may require
compliance with legal requirements in the jurisdictions in which the operating
partnership conducts business, including qualifying our subsidiaries to do
business there. Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly established in many
jurisdictions. If it were determined that we were, by virtue of our limited
partner interest in the operating partnership or otherwise, conducting business
in any state without compliance with the applicable limited partnership or
limited liability company statute, or that the right or exercise of the right by
the limited partners as a group to remove or replace the general partner, to
approve some amendments to the partnership agreement, or to take other action
under the partnership agreement constituted "participation in the control" of
our business for purposes of the statutes of any relevant jurisdiction, then the
limited partners could be held personally liable for our obligations under the
law of that jurisdiction to the same extent as the general partner under the
circumstances. We will operate in a manner that the general partner considers
reasonable and necessary or appropriate to preserve the limited liability of the
limited partners.
ISSUANCE OF ADDITIONAL SECURITIES
The partnership agreement authorizes us to issue an unlimited number of
additional limited partner interests and other equity securities for the
consideration and on the terms and conditions established by the general partner
in its sole discretion without the approval of any limited partners. During the
subordination period, however, except as we discuss in the following paragraph,
we may not issue equity securities ranking senior to the common units or an
aggregate of more than 2,839,847 additional common
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units or units on a parity with the common units, in each case, without the
approval of the holders of a majority of the outstanding common units and
subordinated units, voting as separate classes.
During or after the subordination period, we may issue an unlimited number
of common units as follows:
- upon exercise of the underwriters' over-allotment option or, to the
extent that the over-allotment option is not exercised, to affiliates of
our general partner;
- upon conversion of the subordinated units;
- under employee benefit plans;
- upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal of the general partner;
- in the event of a combination or subdivision of common units; or
- in connection with an acquisition or a capital improvement that increases
cash flow from operations per unit on a pro forma basis.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our distributions of available cash. In addition, the
issuance of additional partnership interests may dilute the value of the
interests of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership securities interests that,
in the sole discretion of the general partner, have special voting rights to
which the common units are not entitled.
Upon issuance of additional partnership securities, the general partner
will be required to make additional capital contributions to the extent
necessary to maintain its combined 2% general partner interest in us and the
operating partnership. Moreover, the general partner will have the right, which
it may from time to time assign in whole or in part to any of its affiliates, to
purchase common units, subordinated units or other equity securities whenever,
and on the same terms that, we issue those securities to persons other than the
general partner and its affiliates, to the extent necessary to maintain its
percentage interest, including its interest represented by common units and
subordinated units, that existed immediately prior to each issuance. The holders
of common units will not have preemptive rights to acquire additional common
units or other partnership interests.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
GENERAL
Amendments to the partnership agreement may be proposed only by or with the
consent of the general partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment, other than the
amendments discussed below, the general partner must seek written approval of
the holders of the number of units required to approve the amendment or call a
meeting of the limited partners to consider and vote upon the proposed
amendment. Except as we describe below, an amendment must be approved:
- during the subordination period, by a majority of the common units,
excluding those common units held by our general partner and its
affiliates, and a majority of the subordinated units, voting as separate
classes; and
- after the subordination period, by a majority of the common units.
We refer to the voting provisions described above as a "unit majority."
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PROHIBITED AMENDMENTS
No amendment may be made that would:
(1) enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or class of
limited partner interests so affected;
(2) enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable, reimbursable or
otherwise payable by us to the general partner or any of its affiliates
without the consent of the general partner, which may be given or withheld
in its sole discretion;
(3) change the term of our partnership;
(4) provide that our partnership is not dissolved upon an election to
dissolve our partnership by the general partner that is approved by the
holders of a majority of the outstanding common units and subordinated
units, voting as separate classes; or
(5) give any person the right to dissolve our partnership other than
the general partner's right to dissolve our partnership with the approval
of the holders of a majority of the outstanding common units and
subordinated units, voting as separate classes.
The provision of the partnership agreement preventing the amendments having the
effects described in clauses (1) through (5) above can be amended upon the
approval of the holders of at least 90% of the outstanding units voting together
as a single class.
NO UNITHOLDER APPROVAL
The general partner may generally make amendments to the partnership
agreement without the approval of any limited partner or assignee to reflect:
(1) a change in our name, the location of our principal place of
business, our registered agent or our registered office;
(2) the admission, substitution, withdrawal or removal of partners in
accordance with the partnership agreement;
(3) a change that, in the sole discretion of the general partner, is
necessary or advisable for us to qualify or to continue our qualification
as a limited partnership or a partnership in which the limited partners
have limited liability under the laws of any state or to ensure that
neither we, the operating partnership nor the subsidiaries will be treated
as an association taxable as a corporation or otherwise taxed as an entity
for federal income tax purposes;
(4) an amendment that is necessary, in the opinion of our counsel, to
prevent us or our general partner or its directors, officers, agents or
trustees, from in any manner being subjected to the provisions of the
Investment Company Act of 1940, the Investment Advisors Act of 1940, or
"plan asset" regulations adopted under the Employee Retirement Income
Security Act of 1974, whether or not substantially similar to plan asset
regulations currently applied or proposed;
(5) subject to the limitations on the issuance of additional common
units or other limited or general partner interests described above, an
amendment that in the discretion of the general partner is necessary or
advisable for the authorization of additional limited or general partner
interests;
(6) any amendment expressly permitted in the partnership agreement to
be made by the general partner acting alone;
(7) an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of the partnership
agreement;
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(8) any amendment that, in the discretion of the general partner, is
necessary or advisable for the formation by us of, or our investment in,
any corporation, partnership or other entity, as otherwise permitted by the
partnership agreement;
(9) a change in our fiscal year or taxable year and related changes;
and
(10) any other amendments substantially similar to any of the matters
described in (1) through (9) above.
In addition, the general partner may make amendments to the partnership
agreement without the approval of any limited partner or assignee if those
amendments, in the discretion of the general partner:
(1) do not adversely affect the limited partners in any material
respect;
(2) are necessary or advisable to satisfy any requirements, conditions
or guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state statute;
(3) are necessary or advisable to facilitate the trading of limited
partner interests or to comply with any rule, regulation, guideline or
requirement of any securities exchange on which the limited partner
interests are or will be listed for trading, compliance with any of which
the general partner deems to be in our best interest and the best interest
of limited partners;
(4) are necessary or advisable for any action taken by the general
partner relating to splits or combinations of units under the provisions of
the partnership agreement; or
(5) are required to effect the intent expressed in this prospectus or
the intent of the provisions of the partnership agreement or are otherwise
contemplated by the partnership agreement.
OPINION OF COUNSEL AND UNITHOLDER APPROVAL
Our general partner will not be required to obtain an opinion of counsel
that an amendment will not result in a loss of limited liability to the limited
partners or result in our being treated as an entity for federal income tax
purposes if one of the amendments described above under "-- No Unitholder
Approval" should occur. No other amendments to the partnership agreement will
become effective without the approval of holders of at least 90% of the units
unless we obtain an opinion of counsel to the effect that the amendment will not
affect the limited liability under applicable law of any of our limited partners
or cause us, the operating partnership or our subsidiaries to be taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not previously taxed as such).
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding units in relation to other
classes of units will require the approval of at least a unit majority. Any
amendment that reduces the voting percentage required to take any action must be
approved by the affirmative vote of limited partners constituting not less than
the voting requirement sought to be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The partnership agreement generally prohibits the general partner, without
the prior approval of the holders of units representing a unit majority, from
causing us to, among other things, sell, exchange or otherwise dispose of all or
substantially all of our assets in a single transaction or a series of related
transactions, including by way of merger, consolidation or other combination, or
approving on our behalf the sale, exchange or other disposition of all or
substantially all of the assets of our subsidiaries. The general partner may,
however, mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of our assets without that approval. The general partner may
also sell all or substantially all of our assets under a foreclosure or other
realization upon those encumbrances without that approval.
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If conditions specified in the partnership agreement are satisfied, the
general partner may merge us or any of our subsidiaries into, or convey some or
all of our assets to, a newly formed entity if the sole purpose of that merger
or conveyance is to change our legal form into another limited liability entity.
The unitholders are not entitled to dissenters' rights of appraisal under the
partnership agreement or applicable Delaware law in the event of a merger or
consolidation, a sale of substantially all of our assets or any other
transaction or event.
TERMINATION AND DISSOLUTION
We will continue as a limited partnership until terminated under the
partnership agreement. We will dissolve upon:
(1) the election of the general partner to dissolve us, if approved by
the holders of units representing a unit majority;
(2) the sale, exchange or other disposition of all or substantially
all of our assets and properties and our subsidiaries;
(3) the entry of a decree of judicial dissolution of us; or
(4) the withdrawal or removal of our general partner or any other
event that results in its ceasing to be the general partner other than by
reason of a transfer of its general partner interest in accordance with the
partnership agreement or withdrawal or removal following approval and
admission of a successor.
Upon a dissolution under clause (4), the holders of units representing a
unit majority may also elect, within specific time limitations, to reconstitute
us and continue our business on the same terms and conditions described in the
partnership agreement by forming a new limited partnership on terms identical to
those in the partnership agreement and having as general partner an entity
approved by the holders of a majority of the outstanding common units and
subordinated units, voting as separate classes, subject to our receipt of an
opinion of counsel to the effect that:
(1) the action would not result in the loss of limited liability of
any limited partner, and
(2) neither us, the reconstituted limited partnership nor the
operating partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of that right to continue.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the liquidator authorized to wind up our affairs will,
acting with all of the powers of the general partner that the liquidator deems
necessary or desirable in its judgment, liquidate our assets and apply the
proceeds of the liquidation as provided in "Cash Distribution
Policy -- Distributions of Cash upon Liquidation." The liquidator may defer
liquidation of our assets for a reasonable period of time or distribute assets
to partners in kind if it determines that a sale would be impractical or would
cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
Except as described below, our general partner has agreed not to withdraw
voluntarily as our general partner or general partner of the operating
partnership prior to December 31, 2010 without obtaining the approval of the
holders of at least a majority of the outstanding common units, excluding common
units held by the general partner and its affiliates, and furnishing an opinion
of counsel regarding limited liability and tax matters. On or after December 31,
2010 our general partner may withdraw as general partner without first obtaining
approval of any unitholder by giving 90 days' written notice, and that
withdrawal will not constitute a violation of the partnership agreement.
Notwithstanding the information above, our general partner may withdraw without
unitholder approval upon 90 days' notice to the limited partners if
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at least 50% of the outstanding common units are held or controlled by one
person and its affiliates other than the general partner and its affiliates. In
addition, the partnership agreement permits our general partner in some
instances to sell or otherwise transfer all of its general partner interest in
us without the approval of the unitholders. Please read "-- Transfer of General
Partner Interest and Incentive Distribution Rights."
Upon the withdrawal of the general partner under any circumstances, other
than as a result of a transfer by the general partner of all or a part of its
general partner interest in us, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is not elected, or
is elected but an opinion of counsel regarding limited liability and tax matters
cannot be obtained, we will be dissolved, wound up and liquidated, unless within
180 days after that withdrawal, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, agree in
writing to continue our business and to appoint a successor general partner.
Please read "-- Termination and Dissolution."
The general partner may not be removed unless that removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units,
including units held by the general partner and its affiliates, and we receive
an opinion of counsel regarding limited liability and tax matters. Any removal
of the general partner is also subject to the approval of a successor general
partner by the vote of the holders of a majority of the outstanding common units
and subordinated units, voting as separate classes. The ownership of more than
33 1/2% of the outstanding units by the general partner and its affiliates would
give it the practical ability to prevent its removal. At the closing of this
offering, affiliates of the general partner will own 65.6% of the outstanding
units.
The partnership agreement also provides that if Williams GP LLC is removed
as our general partner under circumstances where cause does not exist and units
held by the general partner and its affiliates are not voted in favor of that
removal:
(1) the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one basis;
(2) any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
(3) the general partner will have the right to convert its general
partner interest and its incentive distribution rights into common units or
to receive cash in exchange for those interests.
Withdrawal or removal of Williams GP LLC as our general partner also
constitutes withdrawal or removal, as the case may be, of Williams GP LLC as the
general partner of the operating partnership.
In the event of removal of a general partner under circumstances where
cause exists or withdrawal of a general partner where that withdrawal violates
the partnership agreement, a successor general partner will have the option to
purchase the general partner interest and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where a general partner withdraws
or is removed by the limited partners, the departing general partner will have
the option to require the successor general partner to purchase the general
partner interest of the departing general partner and its incentive distribution
rights for the fair market value. In each case, this fair market value will be
determined by agreement between the departing general partner and the successor
general partner. If no agreement is reached, an independent investment banking
firm or other independent expert selected by the departing general partner and
the successor general partner will determine the fair market value. Or, if the
departing general partner and the successor general partner cannot agree upon an
expert, then an expert chosen by agreement of the experts selected by each of
them will determine the fair market value.
If the option described above is not exercised by either the departing
general partner or the successor general partner, the departing general
partner's general partner interest and its incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests as
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determined by an investment banking firm or other independent expert selected in
the manner described in the preceding paragraph.
In addition, we will be required to reimburse the departing general partner
for all amounts due the departing general partner, including, without
limitation, all employee-related liabilities, including severance liabilities,
incurred for the termination of any employees employed by the departing general
partner or its affiliates for our benefit.
TRANSFER OF GENERAL PARTNER INTERESTS AND INCENTIVE DISTRIBUTION RIGHTS
Except for transfer by our general partner of all, but not less than all,
of its general partner interest in us and the operating partnership to:
(1) an affiliate of the general partner, or
(2) another person as part of the merger or consolidation of the
general partner with or into another person or the transfer by the general
partner of all or substantially all of its assets to another person,
our general partner may not transfer all or any part of its general partner
interest in us and the operating partnership to another person prior to December
31, 2010 without the approval of the holders of at least a majority of the
outstanding common units, excluding common units held by the general partner and
its affiliates. As a condition of this transfer, the transferee must assume the
rights and duties of the general partner to whose interest that transferee has
succeeded, agree to be bound by the provisions of the partnership agreement,
furnish an opinion of counsel regarding limited liability and tax matters, agree
to acquire all of the general partner's interest in the operating partnership
and agree to be bound by the provisions of the partnership agreements of the
operating partnership. The general partner and its affiliates may at any time,
however, transfer common units and subordinated units to one or more persons,
without unitholder approval, except that they may not transfer subordinated
units to us. At any time, the members of the general partner may sell or
transfer all or part of their membership interests in the general partner to an
affiliate without the approval of the unitholders. The general partner or its
affiliates or a later holder may transfer its incentive distribution rights to
an affiliate or another person as part of its merger or consolidation with or
into, or sale of all or substantially all of its assets to, that person without
the prior approval of the unitholders; but, in each case, the transferee must
agree to be bound by the provisions of the partnership agreement. Prior to
December 31, 2010, other transfers of the incentive distribution rights will
require the affirmative vote of holders of a majority of the outstanding common
units and subordinated units, voting as separate classes. On or after December
31, 2010, the incentive distribution rights will be freely transferable.
CHANGE OF MANAGEMENT PROVISIONS
The partnership agreement contains specific provisions that are intended to
discourage a person or group from attempting to remove Williams GP LLC as our
general partner or otherwise change management. If any person or group other
than the general partner and its affiliates acquires beneficial ownership of 20%
or more of any class of units, that person or group loses voting rights on all
of its units. This loss of voting rights does not apply to any person or group
that acquires the units from our general partner or its affiliates and any
transferees of that person or group approved by our general partner.
The partnership agreement also provides that if the general partner is
removed under circumstances where cause does not exist and units held by the
general partner and its affiliates are not voted in favor of that removal:
(1) the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one basis;
(2) any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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(3) the general partner will have the right to convert its general
partner interest and its incentive distribution rights into common units or
to receive cash in exchange for those interests.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the general
partner and its affiliates, the general partner will have the right, which it
may assign in whole or in part to any of its affiliates or to us, to acquire
all, but not less than all, of the remaining limited partner interests of the
class held by unaffiliated persons as of a record date to be selected by the
general partner, on at least ten but not more than 60 days notice. The purchase
price in the event of this purchase is the greater of:
(1) the highest cash price paid by either of the general partner or
any of its affiliates for any limited partner interests of the class
purchased within the 90 days preceding the date on which the general
partner first mails notice of its election to purchase those limited
partner interests; and
(2) the current market price as of the date three days before the date
the notice is mailed.
As a result of the general partner's right to purchase outstanding limited
partner interests, a holder of limited partner interests may have his limited
partner interests purchased at an undesirable time or price. The tax
consequences to a unitholder of the exercise of this call right are the same as
a sale by that unitholder of his common units in the market. Please read "Tax
Considerations -- Disposition of Common Units."
MEETINGS; VOTING
Except as described below regarding a person or group owning 20% or more of
any class of units then outstanding, unitholders or assignees who are record
holders of units on the record date will be entitled to notice of, and to vote
at, meetings of our limited partners and to act upon matters for which approvals
may be solicited. Common units that are owned by an assignee who is a record
holder, but who has not yet been admitted as a limited partner, will be voted by
the general partner at the written direction of the record holder. Absent
direction of this kind, the common units will not be voted, except that, in the
case of common units held by the general partner on behalf of non-citizen
assignees, the general partner will distribute the votes on those common units
in the same ratios as the votes of limited partners on other units are cast.
The general partner does not anticipate that any meeting of unitholders
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the unitholders may be taken either at a meeting of the
unitholders or without a meeting if consents in writing describing the action so
taken are signed by holders of the number of units as would be necessary to
authorize or take that action at a meeting. Meetings of the unitholders may be
called by the general partner or by unitholders owning at least 20% of the
outstanding units of the class for which a meeting is proposed. Unitholders may
vote either in person or by proxy at meetings. The holders of a majority of the
outstanding units of the class or classes for which a meeting has been called,
represented in person or by proxy, will constitute a quorum unless any action by
the unitholders requires approval by holders of a greater percentage of the
units, in which case the quorum will be the greater percentage.
Each record holder of a unit has a vote according to his percentage
interest in us, although additional limited partner interests having special
voting rights could be issued. Please read "-- Issuance of Additional
Securities." However, if at any time any person or group, other than the general
partner and its affiliates, or a direct or subsequently approved transferee of
the general partner or its affiliates, acquires, in the aggregate, beneficial
ownership of 20% or more of any class of units then outstanding, that person or
group will lose voting rights on all of its units and the units may not be voted
on any matter and will not be considered to be outstanding when sending notices
of a meeting of unitholders, calculating required votes, determining the
presence of a quorum or for other similar purposes. Common units held in nominee
or street name account will be voted by the broker or other nominee in
accordance with the instruction of
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the beneficial owner unless the arrangement between the beneficial owner and his
nominee provides otherwise. Except as the partnership agreement otherwise
provides, subordinated units will vote together with common units as a single
class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of common units under the partnership
agreement will be delivered to the record holder by us or by the transfer agent.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "-- Limited Liability," the common units
will be fully paid, and unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner for the right to
share in allocations and distributions from us, including liquidating
distributions. The general partner will vote and exercise other powers
attributable to common units owned by an assignee that has not become a
substitute limited partner at the written direction of the assignee. See
"-- Meetings; Voting." Transferees that do not execute and deliver a transfer
application will be treated neither as assignees nor as record holders of common
units, and will not receive cash distributions, federal income tax allocations
or reports furnished to holders of common units. Please read "Description of the
Common Units -- Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If we are or become subject to federal, state or local laws or regulations
that, in the reasonable determination of the general partner, create a
substantial risk of cancellation or forfeiture of any property that we have an
interest in because of the nationality, citizenship or other related status of
any limited partner or assignee, we may redeem the units held by the limited
partner or assignee at their current market price. In order to avoid any
cancellation or forfeiture, the general partner may require each limited partner
or assignee to furnish information about his nationality, citizenship or related
status. If a limited partner or assignee fails to furnish information about this
nationality, citizenship or other related status within 30 days after a request
for the information or the general partner determines after receipt of the
information that the limited partner or assignee is not an eligible citizen, the
limited partner or assignee may be treated as a non-citizen assignee. In
addition to other limitations on the rights of an assignee that is not a
substituted limited partner, a non-citizen assignee does not have the right to
direct the voting of his units and may not receive distributions in kind upon
our liquidation.
INDEMNIFICATION
Under the partnership agreement, in most circumstances, we will indemnify
the following persons, to the fullest extent permitted by law, from and against
all losses, claims, damages or similar events:
(1) the general partner;
(2) any departing general partner;
(3) any person who is or was an affiliate of a general partner or any
departing general partner;
(4) any person who is or was a member, partner, officer, director,
employee, agent or trustee of the general partner or any departing general
partner or any affiliate of a general partner or any departing general
partner; or
(5) any person who is or was serving at the request of a general
partner or any departing general partner or any affiliate of a general
partner or any departing general partner as an officer, director, employee,
member, partner, agent or trustee of another person.
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Any indemnification under these provisions will only be out of our assets.
Unless it otherwise agrees in its sole discretion, the general partner will not
be personally liable for, or have any obligation to contribute or loan funds or
assets to us to enable us to effectuate, indemnification. We may purchase
insurance against liabilities asserted against and expenses incurred by persons
for our activities, regardless of whether we would have the power to indemnify
the person against liabilities under the partnership agreement.
BOOKS AND REPORTS
The general partner is required to keep appropriate books of our business
at our principal offices. The books will be maintained for both tax and
financial reporting purposes on an accrual basis. For tax and fiscal reporting
purposes, our fiscal year is the calendar year.
We will furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we will also
furnish or make available summary financial information within 90 days after the
close of each quarter.
We will furnish each record holder of a unit with information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. This information is expected to be furnished in summary form so
that some complex calculations normally required of partners can be avoided. Our
ability to furnish this summary information to unitholders will depend on the
cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns,
regardless of whether he supplies us with information.
RIGHT TO INSPECT OUR BOOKS AND RECORDS
The partnership agreement provides that a limited partner can, for a
purpose reasonably related to his interest as a limited partner, upon reasonable
demand and at his own expense, have furnished to him:
(1) a current list of the name and last known address of each partner;
(2) a copy of our tax returns;
(3) information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on which each
became a partner;
(4) copies of the partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of attorney
under which they have been executed;
(5) information regarding the status of our business and financial
condition; and
(6) any other information regarding our affairs as is just and
reasonable.
The general partner may, and intends to, keep confidential from the limited
partners trade secrets or other information the disclosure of which the general
partner believes in good faith is not in our best interests or which we are
required by law or by agreements with third parties to keep confidential.
REGISTRATION RIGHTS
Under the partnership agreement, we have agreed to register for resale
under the Securities Act of 1933 and applicable state securities laws any common
units, subordinated units or other partnership securities proposed to be sold by
the general partner or any of its affiliates or their assignees if an exemption
from the registration requirements is not otherwise available. These
registration rights continue for two years following any withdrawal or removal
of Williams GP LLC as our general partner. We are obligated to pay all expenses
incidental to the registration, excluding underwriting discounts and
commissions. Please read "Units Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered by this prospectus, affiliates
of the general partner will hold 1,929,694 common units and 5,679,694
subordinated units. All of these subordinated units will convert into common
units at the end of the subordination period and some may convert earlier. The
sale of these units could have an adverse impact on the price of the common
units or on any trading market that may develop.
The common units sold in the offering will generally be freely transferable
without restriction or further registration under the Securities Act of 1933,
except that any common units owned by an "affiliate" of our company may not be
resold publicly other than in compliance with the registration requirements of
the Securities Act of 1933 or under an exemption under Rule 144 or otherwise.
Rule 144 permits securities acquired by an affiliate of the issuer to be sold
into the market in an amount that does not exceed, during any three-month
period, the greater of:
(1) 1% of the total number of the securities outstanding; or
(2) the average weekly reported trading volume of the common units for
the four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of sale
provisions, notice requirements and the availability of current public
information about us. A person who is not deemed to have been an affiliate of
our company at any time during the three months preceding a sale, and who has
beneficially owned his common units for at least two years, would be entitled to
sell common units under Rule 144 without regard to the public information
requirements, volume limitations, manner of sale provisions and notice
requirements of Rule 144.
Prior to the end of the subordination period, we may not issue equity
securities of the partnership ranking prior or senior to the common units or an
aggregate of more than 2,839,847 additional common units or an equivalent amount
of securities ranking on a parity with the common units, without the approval of
the holders of a majority of the outstanding common units and subordinated
units, voting as separate classes. The 2,839,847 number is subject to adjustment
in the event of a combination or subdivision of common units and will exclude
common units issued:
- upon exercise of the underwriters' over-allotment option or, to the
extent the over-allotment option is not exercised, to affiliates of our
general partner;
- upon conversion of subordinated units;
- in connection with our making acquisitions or capital improvements that
would have resulted, on a pro forma basis, in an increase in adjusted
operating surplus on a per unit basis for the preceding four-quarter
period;
- under an employee benefit plan; or
- upon conversion of the general partner interests and incentive
distribution rights as a result of the withdrawal of the general partner.
The partnership agreement provides that, after the subordination period, we
may issue an unlimited number of limited partner interests of any type without a
vote of the unitholders. The partnership agreement does not restrict our ability
to issue equity securities ranking junior to the common units at any time. Any
issuance of additional common units or other equity securities would result in a
corresponding decrease in the proportionate ownership interest in us represented
by, and could adversely affect the cash distributions to and market price of,
common units then outstanding. Please read "The Partnership
Agreement -- Issuance of Additional Securities."
Under the partnership agreement, Williams GP LLC and its affiliates have
the right to cause us to register under the Securities Act of 1933 and state
laws the offer and sale of any units that they hold.
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Subject to the terms and conditions of the partnership agreement, these
registration rights allow the general partner and its affiliates or their
assignees holding any units to require registration of any of these units and to
include any of these units in a registration by us of other units, including
units offered by us or by any unitholder. Williams GP LLC will continue to have
these registration rights for two years following its withdrawal or removal as
our general partner. In connection with any registration of this kind, we will
indemnify each unitholder participating in the registration and its officers,
directors and controlling persons from and against any liabilities under the
Securities Act of 1933 or any state securities laws arising from the
registration statement or prospectus. We will bear all costs and expenses
incidental to any registration, excluding any underwriting discounts and
commissions. Except as described below, the general partner and its affiliates
may sell their units in private transactions at any time, subject to compliance
with applicable laws.
Williams Energy Partners, Williams and their affiliates have agreed not to
sell any common units they beneficially own for a period of 180 days from the
date of this prospectus. Please read "Underwriting" for a description of these
lock-up provisions.
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TAX CONSIDERATIONS
This section is a summary of all the material tax considerations that may
be relevant to prospective unitholders who are individual citizens or residents
of the United States and, unless otherwise noted in the following discussion,
expresses the opinion of Vinson & Elkins L.L.P., special counsel to the general
partner and us, insofar as it relates to matters of United States federal income
tax law and legal conclusions with respect to those matters. This section is
based upon current provisions of the Internal Revenue Code, existing and
proposed regulations and current administrative rulings and court decisions, all
of which are subject to change. Later changes in these authorities may cause the
tax consequences to vary substantially from the consequences described below.
Unless the context otherwise requires, references in this section to "us" or
"we" are references to Williams Energy Partners and the operating partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, nonresident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts (IRAs), real estate investment trusts (REITs)or mutual
funds. Accordingly, we recommend that each prospective unitholder consult, and
depend on, his own tax advisor in analyzing the federal, state, local and
foreign tax consequences particular to him of the ownership or disposition of
common units.
All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section, unless otherwise noted, are the
opinion of counsel and are based on the accuracy of the representations made by
us.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the common units and the prices
at which common units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by the unitholders and the general partner.
Furthermore, the tax treatment of us, or of an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read "-- Tax
Consequences of Unit Ownership -- Treatment of Short Sales");
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees"); and
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "-- Tax Consequences of Unit Ownership -- Section
754 Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of whether
cash distributions are made to him by the partnership. Distributions by a
partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
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No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our status or the status of the operating partnership as
partnerships for federal income tax purposes or whether our operations generate
"qualifying income" under Section 7704 of the Code. Instead, we will rely on the
opinion of counsel that, based upon the Internal Revenue Code, its regulations,
published revenue rulings and court decisions and the representations described
below, we and the operating partnership will be classified as a partnership for
federal income tax purposes.
In rendering its opinion, counsel has relied on factual representations
made by us and the general partner. The representations made by us and our
general partner upon which counsel has relied are:
(a) Neither we nor the operating partnership will elect to be treated
as a corporation; and
(b) For each taxable year, more than 90% of our gross income will be
income from sources that our counsel has opined or will opine, is
"qualifying income" within the meaning of Section 7704(d) of the Internal
Revenue Code.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly-traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
income and gains derived from the transportation, storage and processing of
crude oil, natural gas and products thereof and fertilizer. Other types of
qualifying income include interest other than from a financial business,
dividends, gains from the sale of real property and gains from the sale or other
disposition of assets held for the production of income that otherwise
constitutes qualifying income. We estimate that less than 7% of our current
income is not qualifying income; however, this estimate could change from time
to time. Based upon and subject to this estimate, the factual representations
made by us and the general partner and a review of the applicable legal
authorities, counsel is of the opinion that at least 90% of our current gross
income constitutes qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
in return for stock in that corporation, and then distributed that stock to the
unitholders in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and us so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
tax basis in his common units, or taxable capital gain, after the unitholder's
tax basis in his common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the units.
The discussion below is based on the conclusion that we will be classified
as a partnership for federal income tax purposes.
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LIMITED PARTNER STATUS
Unitholders who have become limited partners of Williams Energy Partners
will be treated as partners of Williams Energy Partners for federal income tax
purposes. Also:
(a) assignees who have executed and delivered transfer applications,
and are awaiting admission as limited partners, and
(b) unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units,
will be treated as partners of Williams Energy Partners for federal income tax
purposes. As there is no direct authority addressing assignees of common units
who are entitled to execute and deliver transfer applications and become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, counsel's opinion does not extend to these
persons. Furthermore, a purchaser or other transferee of common units who does
not execute and deliver a transfer application may not receive some federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application for those
common units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to those units for federal income tax purposes. Please read
"-- Tax Consequences of Unit Ownership -- Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in Williams Energy Partners for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return his
share of our income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by him. Consequently, we may
allocate income to a unitholder even if he has not received a cash distribution.
Each unitholder will be required to include in income his allocable share of our
income, gains, losses and deductions for our taxable year ending with or within
his taxable year.
Treatment of Distributions. Distributions by us to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "-- Disposition of Common Units"
below. Any reduction in a unitholder's share of our liabilities for which no
partner, including the general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. To the extent our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he must recapture
any losses deducted in previous years. Please read "-- Limitations on
Deductibility of Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his share of our nonrecourse
liabilities, and thus will result in a corresponding deemed distribution of
cash. A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his common units, if the
distribution reduces the unitholder's share of our "unrealized receivables,"
including depreciation recapture, and/or substantially appreciated "inventory
items," both as defined in the Internal Revenue Code, and collectively, "Section
751 Assets."
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To that extent, he will be treated as having been distributed his proportionate
share of the Section 751 Assets and having exchanged those assets with us in
return for the non-pro rata portion of the actual distribution made to him. This
latter deemed exchange will generally result in the unitholder's realization of
ordinary income. That income will equal the excess of (1) the non-pro rata
portion of that distribution over (2) the unitholder's tax basis for the share
of Section 751 Assets deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions. We estimate that a purchaser of
common units in this offering who owns those common units from the date of
closing of this offering through December 31, 2003, will be allocated an amount
of federal taxable income for that period that will be less than % of the
cash distributed with respect to that period. We anticipate that after the
taxable year ending December 31, 2003, the ratio of allocable taxable income to
cash distributions to the unitholders will increase. These estimates are based
upon the assumption that gross income from operations will approximate the
amount required to make the minimum quarterly distribution on all units and
other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond our control. Further, the estimates are based on
current tax law and tax reporting positions that we will adopt and with which
the IRS could disagree. Accordingly, we cannot assure you that these estimates
will prove to be correct. The actual percentage of distributions that will
constitute taxable income could be higher or lower, and any differences could be
material and could materially affect the value of the common units.
Basis of Common Units. A unitholder's initial tax basis for his common
units will be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his share of our income
and by any increases in his share of our nonrecourse liabilities. That basis
will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to be capitalized. A
limited partner will have no share of our debt which is recourse to the general
partner, but will have a share, generally based on his share of profits, of our
nonrecourse liabilities. Please read "-- Disposition of Common Units --
Recognition of Gain or Loss."
Limitations on Deductibility of Losses. The deduction by a unitholder of
his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder, if more than 50%
of the value of the corporate unitholder's stock is owned directly or indirectly
by five or fewer individuals or some tax-exempt organizations, to the amount for
which the unitholder is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A unitholder must recapture
losses deducted in previous years to the extent that distributions cause his at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that his tax basis or at risk
amount, whichever is the limiting factor, is subsequently increased. Upon the
taxable disposition of a unit, any gain recognized by a unitholder can be offset
by losses that were previously suspended by the at risk limitation but may not
be offset by losses suspended by the basis limitation. Any excess loss above
that gain previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire or
hold his units, if the lender of those borrowed funds owns an interest in us, is
related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our nonrecourse
liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income
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from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses we generate will only be available to offset our passive income
generated in the future and will not be available to offset income from other
passive activities or investments, including our investments or investments in
other publicly-traded partnerships, or salary or active business income. Passive
losses that are not deductible because they exceed a unitholder's share of
income we generate may be deducted in full when he disposes of his entire
investment in us in a fully taxable transaction with an unrelated party. The
passive activity loss rules are applied after other applicable limitations on
deductions, including the at risk rules and the basis limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." The IRS has announced that Treasury
Regulations will be issued that characterize net passive income from a
publicly-traded partnership as investment income for purposes of the limitations
on the deductibility of investment interest. 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. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or the
general partner or any former unitholder, we are authorized to pay those taxes
from our funds. That payment, if made, will be treated as a distribution of cash
to the partner on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are authorized to
treat the payment as a distribution to all current unitholders. We are
authorized to amend the partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
later distributions, so that after giving effect to these distributions, the
priority and characterization of distributions otherwise applicable under the
partnership agreement is maintained as nearly as is practicable. Payments by us
as described above could give rise to an overpayment of tax on behalf of an
individual partner in which event the partner would be required to file a claim
in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made to the
common units in excess of distributions to the subordinated units, or incentive
distributions are made to the general partner, gross income will be allocated to
the recipients to the extent of these distributions. If we have a net loss for
the entire year, that loss will be allocated first to the general partner and
the unitholders in accordance with their percentage interests in us to the
extent of their positive capital accounts and, second, to the general partner.
Specified items of our income, gain, loss and deduction will be allocated
to account for the difference between the tax basis and fair market value of
property contributed to us by the general partner and its
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affiliates, referred to in this discussion as "Contributed Property." The effect
of these allocations to a unitholder purchasing common units in this offering
will be essentially the same as if the tax basis of our assets were equal to
their fair market value at the time of this offering. In addition, items of
recapture income will be allocated to the extent possible to the partner who was
allocated the deduction giving rise to the treatment of that gain as recapture
income in order to minimize the recognition of ordinary income by some
unitholders. Finally, although we do not expect that our operations will result
in the creation of negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be allocated in an amount
and manner to eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction, other than
an allocation required by the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the fair market value
of Contributed Property, and "tax" capital account, credited with the tax basis
of Contributed Property, referred to in this discussion as the "Book-Tax
Disparity", will generally be given effect for federal income tax purposes in
determining a partner's share of an item of income, gain, loss or deduction only
if the allocation has substantial economic effect. In any other case, a
partner's share of an item will be determined on the basis of his interest in
us, which will be determined by taking into account all the facts and
circumstances, including his relative contributions to us, the interests of all
the partners in profits and losses, the interest of all the partners in cash
flow and other nonliquidating distributions and rights of all the partners to
distributions of capital upon liquidation.
Counsel is of the opinion that, with the exception of the issues described
in "-- Tax Consequences of Unit Ownership -- Section 754 Election" and
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees," allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partner's share of an item of
income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
those units. If so, he would no longer be a partner for those units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period:
- any of our income, gain, loss or deduction with respect to those units
would not be reportable by the unitholder;
- any cash distributions received by the unitholder as to those units would
be fully taxable; and
- all of these distributions would appear to be ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership interests. Please
also read "-- Disposition of Common Units -- Recognition of Gain or Loss."
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The current minimum tax
rate for noncorporate taxpayers is 26% on the first $175,000 of alternative
minimum taxable income in excess of the exemption amount and 28% on any
additional alternative minimum taxable income. Prospective unitholders should
consult with their tax advisors as to the impact of an investment in units on
their liability for the alternative minimum tax.
Tax Rates. In general the highest effective United States federal income
tax rate for individuals for 2000 is 39.6% and the maximum United States federal
income tax rate for net capital gains of an individual for 2000 is 20% if the
asset disposed of was held for more than 12 months at the time of disposition.
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Section 754 Election. We will make the election permitted by Section 754 of
the Internal Revenue Code. That election is irrevocable without the consent of
the IRS. The election will generally permit us to adjust a common unit
purchaser's tax basis in our assets ("inside basis") under Section 743(b) of the
Internal Revenue Code to reflect his purchase price. This election does not
apply to a person who purchases common units directly from us. The Section
743(b) adjustment belongs to the purchaser and not to other partners. For
purposes of this discussion, a partner's inside basis in our assets will be
considered to have two components: (1) his share of our tax basis in our assets
("common basis") and (2) his Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal Revenue Code
require, if the remedial allocation method is adopted (which we will adopt), a
portion of the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury Regulation Section 1.167(c)-l(a)(6), a Section
743(b) adjustment attributable to property subject to depreciation under Section
167 of the Internal Revenue Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using either the
straight-line method or the 150% declining balance method. Under our partnership
agreement, the general partner is authorized to take a position to preserve the
uniformity of units even if that position is not consistent with these Treasury
Regulations. Please read "-- Tax Treatment of Operations -- Uniformity of
Units."
Although counsel is unable to opine as to the validity of this approach
because there is no clear authority on this issue, we intend to depreciate the
portion of a Section 743(b) adjustment attributable to unrealized appreciation
in the value of Contributed Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the common basis
of the property, or treat that portion as non-amortizable to the extent
attributable to property the common basis of which is not amortizable. This
method is consistent with the regulations under Section 743 but is arguably
inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6) which is not
expected to directly apply to a material portion of our assets. To the extent
this Section 743(b) adjustment is attributable to appreciation in value in
excess of the unamortized Book-Tax Disparity, we will apply the rules described
in the Treasury Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may take a depreciation or amortization
position under which all purchasers acquiring units in the same month would
receive depreciation or amortization, whether attributable to common basis or a
Section 743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our assets. This kind of aggregate approach may
result in lower annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read "-- Tax Treatment of
Operations -- Uniformity of Units."
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have, among other items, a greater amount of depreciation
and depletion deductions and his share of any gain or loss on a sale of our
assets would be less. Conversely, a Section 754 election is disadvantageous if
the transferee's tax basis in his units is lower than those units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the units may be affected either favorably or unfavorably
by the election.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue Code. The IRS could
seek to reallocate some or all of any Section 743(b) adjustment allocated by us
to our tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. We cannot assure you that the determinations we
make will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether. Should the IRS
require a different basis adjustment to be made, and should, in our opinion, the
expense of compliance exceed the benefit of the
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election, we may seek permission from the IRS to revoke our Section 754
election. If permission is granted, a subsequent purchaser of units may be
allocated more income than he would have been allocated had the election not
been revoked.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year. We use the year ending December 31 as
our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of our
income, gain, loss and deduction for our taxable year ending within or with his
taxable year. In addition, a unitholder who has a taxable year ending on a date
other than December 31 and who disposes of all of his units following the close
of our taxable year but before the close of his taxable year must include his
share of our income, gain, loss and deduction in income for his taxable year,
with the result that he will be required to include in income for his taxable
year his share of more than one year of our income, gain, loss and deduction.
Please read "-- Disposition of Common Units -- Allocations Between Transferors
and Transferees."
Initial Tax Basis, Depreciation and Amortization. The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between the fair market
value of our assets and their tax basis immediately prior to this offering will
be borne by the general partner and its affiliates. Please read "-- Allocation
of Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property we own will likely be required to recapture some or all, of
those deductions as ordinary income upon a sale of his interest in us. Please
read "-- Tax Consequences of Unit Ownership -- Allocation of Income, Gain, Loss
and Deduction" and "-- Disposition of Common Units -- Recognition of Gain or
Loss."
The costs incurred in selling our units (called "syndication expenses")
must be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as a syndication cost.
Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates of basis are subject to
challenge and will not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the character and
amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years and incur interest and penalties with respect to those
adjustments.
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount
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realized will be measured by the sum of the cash or the fair market value of
other property received by him plus his share of our nonrecourse liabilities.
Because the amount realized includes a unitholder's share of our nonrecourse
liabilities, the gain recognized on the sale of units could result in a tax
liability in excess of any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable income for
a common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than the unitholder's tax basis in that common unit, even if the price received
is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally be
taxed at a maximum rate of 20%. A portion of this gain or loss, which will
likely be substantial, however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Net capital loss may offset
capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. Although the
ruling is unclear as to how the holding period of these interests is determined
once they are combined, recently finalized regulations allow a selling
unitholder who can identify common units transferred with an ascertainable
holding period to elect to use the actual holding period of the common units
transferred. Thus, according to the ruling, a common unitholder will be unable
to select high or low basis common units to sell as would be the case with
corporate stock, but, according to the regulations, may designate specific
common units sold for purposes of determining the holding period of units
transferred. A unitholder electing to use the actual holding period of common
units transferred must consistently use that identification method for all
subsequent sales or exchanges of common units. A unitholder considering the
purchase of additional units or a sale of common units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
this ruling and application of the final regulations.
Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or related persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations
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that treat a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as having
constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the applicable
exchange on the first business day of the month (the "Allocation Date").
However, gain or loss realized on a sale or other disposition of our assets
other than in the ordinary course of business will be allocated among the
unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be allocated
income, gain, loss and deduction realized after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between unitholders. If this method
is not allowed under the Treasury Regulations, or only applies to transfers of
less than all of the unitholder's interest, our taxable income or losses might
be reallocated among the unitholders. We are authorized to revise our method of
allocation between unitholders to conform to a method permitted under future
Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes
of them prior to the record date set for a cash distribution for that quarter
will be allocated items of our income, gain, loss and deductions attributable to
that quarter but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who sells or exchanges units is
required to notify us in writing of that sale or exchange within 30 days after
the sale or exchange. We are required to notify the IRS of that transaction and
to furnish specified information to the transferor and transferee. However,
these reporting requirements do not apply to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. 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 describe the amount of
the consideration received 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 will be considered to have been terminated for
tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than 12
months of our taxable income or loss being includable in his taxable income for
the year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject us to, any tax legislation
enacted before the termination.
UNIFORMITY OF UNITS
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. In the absence of uniformity, we may be unable to
completely comply with a number of federal income tax requirements, both
statutory and regulatory. A lack of uniformity can result from a literal
application of Treasury Regulation Section 1.167(c)-1(a)(6). Any non-uniformity
could have a negative impact on the value of the units. Please read "-- Tax
Consequences of Unit Ownership -- Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property, to
the extent of any unamortized Book-Tax Disparity, using a rate of depreciation
or amortization derived from the depreciation or amortization method and
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useful life applied to the common basis of that property, or treat that portion
as nonamortizable, to the extent attributable to property the common basis of
which is not amortizable, consistent with the regulations under Section 743,
even though that position may be inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6) which is not expected to directly apply to a material portion
of our assets. Please read "-- Tax Consequences of Unit Ownership -- Section 754
Election." To the extent that the Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, we will
apply the rules described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken, we may adopt a
depreciation and amortization position under which all purchasers acquiring
units in the same month would receive depreciation and amortization deductions,
whether attributable to a common basis or Section 743(b) adjustment, based upon
the same applicable rate as if they had purchased a direct interest in our
property. If this position is adopted, it may result in lower annual
depreciation and amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and amortization deductions
not taken in the year that these deductions are otherwise allowable. This
position will not be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on the unitholders.
If we choose not to utilize this aggregate method, we may use any other
reasonable depreciation and amortization method to preserve the uniformity of
the intrinsic tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If this
challenge were sustained, the uniformity of units might be affected, and the
gain from the sale of units might be increased without the benefit of additional
deductions. Please read "-- Disposition of Common Units -- Recognition of Gain
or Loss."
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder which is a tax-exempt
organization will be unrelated business taxable income and will be taxable to
them.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States because
of the ownership of units. As a consequence they will be required to file
federal tax returns to report their share of our income, gain, loss or deduction
and pay federal income tax at regular rates on their share of our net income or
gain. And, under rules applicable to publicly traded partnerships, we will
withhold (currently at the rate of 39.6%) on cash distributions made quarterly
to foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our transfer agent
on a Form W-8 or applicable substitute form in order to obtain credit for these
withholding taxes.
In addition, because a foreign corporation that owns units will be treated
as engaged in a United States trade or business, that corporation may be subject
to the United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its share of our income and gain, as adjusted for changes
in the foreign corporation's "U.S. net equity," which are effectively connected
with the conduct of a United States trade or business. That tax may be reduced
or eliminated by an income tax treaty between the United States and the country
in which the foreign corporate unitholder is a "qualified resident." In
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addition, this type of unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
sale or disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business of the foreign unitholder.
Apart from the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has owned less than 5%
in value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the sale or disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take various
accounting and reporting positions, some of which have been mentioned earlier,
to determine his share of income, gain, loss and deduction. We cannot assure you
that those positions will yield a result that conforms to the requirements of
the Internal Revenue Code, regulations or administrative interpretations of the
IRS. Neither we nor counsel can assure prospective unitholders that the IRS will
not successfully contend in court that those positions are impermissible. Any
challenge by the IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each unitholder to adjust a prior year's
tax liability, and possibly may result in an audit of his own return. Any audit
of a unitholder's return could result in adjustments not related to our returns
as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code requires
that one partner be designated as the "Tax Matters Partner" for these purposes.
The partnership agreement names Williams GP LLC as our Tax Matters Partner.
The Tax Matters Partner will make some elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review, by which all the unitholders are bound, of a final partnership
administrative adjustment and, if the Tax Matters Partner fails to seek judicial
review, judicial review may be sought by any unitholder having at least a 1%
interest in profits or by any group of unitholders having in the aggregate at
least a 5% interest in profits. However, only one action for judicial review
will go forward, and each unitholder with an interest in the outcome may
participate.
A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of this
consistency requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;
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(b) whether the beneficial owner is
(1) a person that is not a United States person,
(2) a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the foregoing, or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred
for the beneficial owner; and
(d) specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
Registration as a Tax Shelter. The Internal Revenue Code requires that "tax
shelters" be registered with the Secretary of the Treasury. The temporary
Treasury Regulations interpreting the tax shelter registration provisions of the
Internal Revenue Code are extremely broad. It is arguable that we are not
subject to the registration requirement on the basis that we will not constitute
a tax shelter. However, we will register as a tax shelter with the Secretary of
Treasury in the absence of assurance that we will not be subject to tax shelter
registration and in light of the substantial penalties which might be imposed if
registration is required and not undertaken.
ISSUANCE OF THIS REGISTRATION NUMBER DOES NOT INDICATE THAT INVESTMENT IN
US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
IRS.
We will supply our tax shelter registration number to you when one has been
assigned to us. A unitholder who sells or otherwise transfers a unit in a later
transaction must furnish the registration number to the transferee. The penalty
for failure of the transferor of a unit to furnish the registration number to
the transferee is $100 for each failure. The unitholders must disclose our tax
shelter registration number on Form 8271 to be attached to the tax return on
which any deduction, loss or other benefit we generate is claimed or on which
any of our income is included. A unitholder who fails to disclose the tax
shelter registration number on his return, without reasonable cause for that
failure, will be subject to a $250 penalty for each failure. Any penalties
discussed are not deductible for federal income tax purposes.
Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:
(1) for which there is, or was, "substantial authority," or
(2) as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.
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More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will be subject to other taxes,
including state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in which you are a
resident. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in us. We will initially own property or do business in 17 states.
Fourteen of these states do not currently impose a personal income tax on
partners of partnerships doing business in those states but who are not
residents of those states. Although you may not be required to file a return and
pay taxes in some of those states because your income from that state falls
below the filing and payment requirement, you will be required to file state
income tax returns and to pay state income taxes in many of these states in
which we do business or own property and may be subject to penalties for failure
to comply with those requirements. In some states, tax losses may not produce a
tax benefit in the year incurred and also may not be available to offset income
in subsequent taxable years. Some of the states may require us, or we may elect,
to withhold a percentage of income from amounts to be distributed to a
unitholder who is not a resident of the state. Withholding, the amount of which
may be greater or less than a particular unitholder's income tax liability to
the state, generally does not relieve a nonresident unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the amounts distributed
by us. Please read "-- Tax Consequences of Unit Ownership -- Entity-Level
Collections." Based on current law and our estimate of our future operations,
the general partner anticipates that any amounts required to be withheld will
not be material. We may also own property or do business in other states in the
future.
It is the responsibility of each unitholder to investigate the legal and
tax consequences, under the laws of pertinent states and localities, of his
investment in us. Accordingly, 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 United States federal tax returns, that may be required of
him. Counsel has not rendered an opinion on the state or local tax consequences
of an investment in us.
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INVESTMENT IN WILLIAMS ENERGY PARTNERS BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to additional
considerations because the investments of these plans are subject to the
fiduciary responsibility and prohibited transaction provisions of ERISA, and
restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other things,
consideration should be given to:
(a) whether the investment is prudent under Section 404(a)(1)(B) of
ERISA;
(b) whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of ERISA; and
(c) whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential after-tax
investment return.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in us is authorized by the appropriate governing instrument and is a
proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibits employee benefit plans, and also IRAs that are not considered part of
an employee benefit plan, from engaging in specified transactions involving
"plan assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether the plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that the general partner also would be
fiduciaries of the plan and our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Internal Revenue Code.
The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under some circumstances. Under these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things,
(a) the equity interests acquired by employee benefit plans are
publicly offered securities; i.e., the equity interests are widely held by
100 or more investors independent of the issuer and each other, freely
transferable and registered under some provisions of the federal securities
laws,
(b) the entity is an "operating company," -- i.e., it is primarily
engaged in the production or sale of a product or service other than the
investment of capital either directly or through a majority owned
subsidiary or subsidiaries, or
(c) there is no significant investment by benefit plan investors,
which is defined to mean that less than 25% of the value of each class of
equity interest, disregarding some interests held by the general partner,
its affiliates, and some other persons, is held by the employee benefit
plans referred to above, IRAs and other employee benefit plans not subject
to ERISA, including governmental plans.
Our assets should not be considered "plan assets" under these regulations
because it is expected that the investment will satisfy the requirements in (a)
above.
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
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UNDERWRITING
Under the terms of an underwriting agreement, which will be filed as an
exhibit to the registration statement relating to this prospectus, each of the
underwriters named below for whom Lehman Brothers Inc., Banc of America
Securities LLC, Dain Rauscher Incorporated, A.G. Edwards & Sons, Inc. and UBS
Warburg LLC are acting as representatives, have severally agreed to purchase
from us the respective number of common units opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS COMMON UNITS
------------ ------------
<S> <C>
Lehman Brothers Inc...................................
Banc of America Securities LLC........................
Dain Rauscher Incorporated............................
A.G. Edwards & Sons, Inc. ............................
UBS Warburg LLC.......................................
--------
Total.......................................
========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase the common units depend on the satisfaction of the conditions contained
in the underwriting agreement, and that if any of the common units are purchased
by the underwriters, all of the common units must be purchased. The conditions
contained in the underwriting agreement include the condition that all the
representations and warranties made by Williams Energy Partners to the
underwriters are true, that there has been no material adverse change in the
condition of Williams Energy Partners or in the financial markets and that
Williams Energy Partners deliver to the underwriters customary closing
documents.
The following table shows the underwriting fees to be paid to the
underwriters by Williams Energy Partners in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional common units. This underwriting fee
is the difference between the initial price to the public and the amount the
underwriters pay to Williams Energy Partners to purchase the common units. On a
per unit basis, the underwriting fee is % of the initial price to public.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per unit.................................................... $ $
Total............................................. $ $
</TABLE>
Williams Energy Partners has been advised by the underwriters that the
underwriters propose to offer the common units directly to the public at the
initial price to the public set forth on the cover page of this prospectus and
to dealers (who may include the underwriters) at this price to the public less a
concession not in excess of $ per unit. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $ per unit to certain
brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
Williams Energy Services, Williams Natural Gas Liquids, Inc., Williams
Energy Partners, our general partner and the operating partnership have agreed
to indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act of 1933 and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement, or to
contribute to payments that may be required to be made in respect of these
liabilities.
Williams Energy Partners has granted to the underwriters an option to
purchase up to an aggregate of 562,500 additional common units at the initial
price to the public less the underwriting discount set forth on the cover page
of this prospectus exercisable solely to cover over-allotments, if any. Such
option may be exercised at any time until 30 days after the date of this
prospectus. If this option is exercised, each underwriter will be committed,
subject to satisfaction of the conditions specified in the underwriting
agreement, to purchase a number of additional common units proportionate to the
underwriter's initial commitment as indicated in the preceding table, and we
will be obligated, pursuant to the option, to sell
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these common units to the underwriters. To the extent that the underwriters do
not exercise this option, affiliates of Williams will purchase these common
units at the initial public offering price.
Williams and its affiliates, including Williams Energy Services, Williams
Natural Gas Liquids, Inc., Williams Energy Partners and our general partner and
the directors and executive officers of the general partner have agreed that
they will not, directly or indirectly, sell, offer or otherwise dispose of any
common units or enter into any derivative transaction with similar effect as a
sale of common units for a period of 180 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc. The restrictions
described in this paragraph do not apply to:
- The sale of common units to the underwriters;
- The sale of any common units to affiliates of Williams, to the extent the
over-allotment option is not exercised; or
- Common units issued by Williams Energy Partners under the long-term
incentive plan or upon the exercise of options issued under the long-term
incentive plan.
Lehman Brothers Inc., in its sole discretion, may release the units subject
to lock-up agreements in whole or in part at any time with or without notice.
When determining whether or not to release units from lock-up agreements, Lehman
Brothers Inc. will consider, among other factors, the unitholders' reasons for
requesting the release, the number of units for which the release is being
requested and market conditions at the time.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment transactions involve sales by the underwriters of the
common units in excess of the number of units the underwriters are
obligated to purchase, which creates a syndicate short position. The
short position may be either a covered short position or a naked short
position. In a covered short position, the number of units over-alloted
by the underwriters is not greater than the number of units they may
purchase in the over-allotment option. In a naked short position, the
number of units involved is greater than the number of units in the
over-allotment option. The underwriters may close out any short position
by either exercising their over-allotment option and/or purchasing common
units in the open market.
- Syndicate covering transactions involve purchases of the common units in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of the common
units to close out the short position, the underwriters will consider,
among other things, the price of common units available for purchase in
the open market as compared to the price at which they may purchase
common units through the over-allotment option. If the underwriters sell
more common units than could be covered by the over-allotment option, a
naked short position, the position can only be closed out by buying
common units in the open market. A naked short position is more likely to
be created if the underwriters are concerned that there could be downward
pressure on the price of the common units in the open market after
pricing that could adversely affect investors who purchase in the
offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common units originally sold by the
syndicate member are purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the common units or preventing or
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retarding a decline in the market price of the common units. As a result, the
price of the common units may be higher than the price that might otherwise
exist in the open market.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common units or preventing or retarding a decline in the market price of the
common units. As a result, the price of the common units may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common units. In addition, neither
we nor any of the underwriters make representation that the representatives will
engage in these stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
We have applied to list the common units on The New York Stock Exchange
under the symbol "WEG."
Prior to this offering, there has been no public market for the common
units. The initial public offering price was determined by negotiation between
us and the representatives. The principal factors considered in determining the
public offering price included the following:
- the information set forth in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
units of generally comparable entities.
Some of the underwriters or their affiliates have from time to time
provided investment banking, financial advisory, trustee and lending services to
Williams Energy Partners and its affiliates in the ordinary course of business
for which they have received customary fees, and they may continue to do so.
Williams Energy Partners estimates that total expenses of the offering,
other than underwriting discounts and commissions, will be approximately $3.3
million.
Because the National Association for Securities Dealers, Inc. views the
common units offered hereby as interests in a direct participation program, the
offering is being made in compliance with Rule 2810 of the NASD's Conduct Rules.
Investor suitability with respect to the common units should be judged similarly
to the suitability with respect to other securities that are listed for trading
on a national securities exchange.
Purchasers of the common units offered in this prospectus may be required
to pay stamp taxes and other charges under the laws and practices of the country
of purchase, in addition to the offering price listed on the cover of this
prospectus.
No sales to accounts of which the underwriter exercises discretionary
authority may be made without the prior written approval of the customer.
Fidelity Capital Markets, a division of National Financial Services LLC, is
acting as an underwriter of this offering and will facilitate electronic
distribution through the Internet.
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VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for us by Vinson &
Elkins L.L.P. Certain legal matters in connection with the common units offered
hereby will be passed upon for the underwriters by Andrews & Kurth L.L.P.
EXPERTS
The financial statements described below, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given on the authority of such firm
as experts in accounting and auditing:
- Balance sheet of Williams Energy Partners L.P. as of October 13, 2000
- Balance sheet of Williams GP LLC as of October 13, 2000
- Combined financial statements of Williams Energy Partners Predecessor (A
Division of The Williams Companies, Inc.) as of December 31, 1998 and
1999 and for each of the three years in the period ended December 31,
1999
- Combined financial statements of Marine Terminals Predecessor (A Division
of Amerada Hess Corporation) as of December 31, 1998 and July 31, 1999
and for each of the two years in the period ended December 31, 1998 and
the seven months ended July 31, 1999.
117
<PAGE> 124
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 regarding the common units. This prospectus does not
contain all of the information found in the registration statement. For further
information regarding Williams Energy Partners and the common units offer by
this prospectus, you may desire to review the full registration statement,
including its exhibits and schedules, filed under the Securities Act of 1933.
The registration statement of which this prospectus forms a part, including its
exhibits and schedules, may be inspected and copied at the public reference room
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of the materials may also be obtained from the SEC at
prescribed rates by writing to the public reference room maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330.
The SEC maintains a World Wide Web site on the Internet at
http://www.sec.gov. Our registration statement, of which this prospectus
constitutes a part, can be downloaded from the SEC's website and can also be
inspected and copied at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
We intend to furnish our unitholders annual reports containing our audited
financial statements and furnish or make available quarterly reports containing
our unaudited interim financial information for the first three fiscal quarters
of each of our fiscal years.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking
statements. These statements can be identified by the use of forward-looking
terminology including "may," "believe," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. These forward-looking
statements involve risks and uncertainties. When considering these
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus. The risk factors and other factors
noted throughout this prospectus could cause our actual results to differ
materially from those contained in any forward-looking statement.
118
<PAGE> 125
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Williams Energy Partners L.P. Pro Forma Financial
Statements:
Introduction.............................................. F-2
Pro Forma Balance Sheet as of September 30, 2000.......... F-3
Pro Forma Statements of Income for the nine months ended
September 30, 2000 and the year ended December 31,
1999................................................... F-4
Notes to Pro Forma Financial Statements................... F-5
Williams Energy Partners Predecessor Combined Financial
Statements:
Report of Independent Auditors............................ F-7
Combined Balance Sheets as of December 31, 1998 and 1999
and September 30, 2000 (unaudited)..................... F-8
Combined Statements of Income and Owner's Equity for the
years ended December 31, 1997, 1998 and 1999 and the
nine months ended September 30, 1999 and 2000
(unaudited)............................................ F-9
Combined Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and the nine months
ended September 30, 1999 and 2000 (unaudited).......... F-10
Notes to Combined Financial Statements.................... F-11
Marine Terminals Predecessor Combined Financial Statements:
Report of Independent Auditors............................ F-22
Combined Balance Sheets as of December 31, 1998 and July
31, 1999............................................... F-23
Combined Statements of Income and Divisional Equity for
the years ended December 31, 1997 and 1998 and the
seven months ended July 31, 1999....................... F-24
Combined Statements of Cash Flows for the years ended
December 31, 1997 and 1998 and the seven months ended
July 31, 1999.......................................... F-25
Notes to Combined Financial Statements.................... F-26
Williams Energy Partners L.P. Financial Statements:
Report of Independent Auditors............................ F-30
Balance Sheet as of October 13, 2000...................... F-31
Note to Balance Sheet..................................... F-32
Williams GP LLC Financial Statements:
Report of Independent Auditors............................ F-33
Balance Sheet as of October 13, 2000...................... F-34
Note to Balance Sheet..................................... F-35
</TABLE>
F-1
<PAGE> 126
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
INTRODUCTION
The pro forma financial statements are based upon the historical combined
financial position and results of operations of the petroleum product terminals
and ammonia pipeline system businesses of the Williams Energy Partners
Predecessor. Williams Energy Partners L.P. (the "Partnership") will own and
operate these businesses effective with the closing of the offering. This
transfer will be recorded at historical cost as it is considered to be a
reorganization of entities under common control. Unless the context otherwise
requires, references herein to the Partnership include the Partnership and its
operating partnership. The pro forma financial statements for the Partnership
have been derived from the historical financial statements of the Williams
Energy Partners Predecessor set forth elsewhere in this Prospectus and are
qualified in their entirety by reference to such historical financial statements
and related notes contained therein. The pro forma financial statements have
been prepared on the basis that the Partnership will be treated as a partnership
for federal income tax purposes. The unaudited pro forma financial statements
should be read in conjunction with the notes accompanying such pro forma
financial statements and with the historical financial statements and related
notes set forth elsewhere in this Prospectus.
The pro forma financial statements may not be indicative of the results
that actually would have occurred if the Partnership had assumed the operations
of the Williams Energy Partners Predecessor on the dates indicated or which
would be obtained in the future.
F-2
<PAGE> 127
WILLIAMS ENERGY PARTNERS L.P.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMPANY PARTNERSHIP
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- $ 86,250(a) $ --
(5,700)(b)
90,100(c)
(3,300)(d)
(167,350)(e)
Accounts receivable....................................... 14,106 (262)(f) 9,507
(1,361)(g)
(1,791)(h)
(1,185)(i)
Affiliate account receivable.............................. 8,436 (6,936)(j) 1,500
Other current assets...................................... 1,650 (14)(i) 1,636
-------- --------- --------
Total current assets................................ $ 24,192 $ (11,549) $ 12,643
Property, plant and equipment............................... $336,730 $ (736)(i) 335,290
(704)(f)
Less: accumulated depreciation and amortization............. 37,756 (35)(i) 37,721
-------- --------- --------
Net property, plant and equipment........................... $298,974 $ (1,405) $297,569
Affiliate long-term accounts receivable..................... -- 1,788(f) 1,788
Other noncurrent assets..................................... 930 800(b) 1,730
-------- --------- --------
Total assets........................................ $324,096 $ (10,366) $313,730
======== ========= ========
LIABILITIES AND CAPITAL
Accounts payable............................................ $ 3,178 $ (853)(i) $ 2,325
Accrued payroll taxes and benefits.......................... 996 996
Accrued taxes other than income............................. 1,720 1,720
Other current liabilities................................... 7 (4)(i) 3
-------- --------- --------
Total current liabilities........................... $ 5,901 $ (857) $ 5,044
Affiliate note payable...................................... 232,093 (167,350)(e) --
(1,361)(g)
(1,791)(h)
(6,936)(j)
(54,655)(k)
Long-term debt.............................................. -- 90,100(c) 90,100
Deferred income taxes....................................... 14,039 442(f) --
(14,481)(l)
Environmental liabilities................................... 1,788 1,788
Owner's equity.............................................. 70,275 (1,043)(i) --
14,481(l)
54,655(k)
(138,368)(m)
Partners' capital:
Common unitholders........................................ -- 86,250(a) 106,231
(4,900)(b)
(3,300)(d)
380(f)
27,801(m)
Subordinated unitholders.................................. -- 106,231(m) 106,231
General partner........................................... -- 4,336(m) 4,336
-------- --------- --------
Total partners' capital............................. $ -- $ 216,798 $216,798
-------- --------- --------
Total liabilities and partners' capital............. $324,096 $ (10,366) $313,730
======== ========= ========
</TABLE>
See accompanying notes to pro forma financial statements.
F-3
<PAGE> 128
WILLIAMS ENERGY PARTNERS L.P.
PRO FORMA STATEMENTS OF INCOME
(IN THOUSANDS -- EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------------------------ ----------------------------------------
WILLIAMS WILLIAMS
ENERGY MARINE ENERGY
PARTNERS TERMINAL PARTNERS
PREDECESSOR PREDECESSOR PARTNERSHIP PREDECESSOR PARTNERSHIP
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $44,388 $24,858 $(1,116)(h) $ 76,526 $53,608 $ (675)(h) $ 58,676
(284)(i) (7)(i)
8,680(n) 5,750(n)
Costs and expenses:
Operating expenses.... $18,635 $12,389 $ (128)(f) $ 34,864 $23,545 $ (86)(f) $ 26,162
(322)(i) (97)(i)
4,290(n) 2,800(n)
Depreciation.......... 4,610 2,630 (19)(i) 9,673 5,976 (16)(i) 6,635
1,437(o) 675(n)
1,015(n)
General and
administrative
expense............. 5,458 739 (60)(i) 6,000 8,774 (14)(i) 4,500
2,010(n) 1,500(n)
(2,147)(p) (5,760)(p)
------- ------- ------- ---------- ------- ------- ----------
Total costs and
expenses...... $28,703 $15,758 $ 6,076 $ 50,537 $38,295 $ (998) $ 37,297
------- ------- ------- ---------- ------- ------- ----------
Operating profit........ $15,685 $ 9,100 $ 1,204 $ 25,989 $15,313 $ 6,066 $ 21,379
Interest expense........ (4,775) 30(i) (5,964) (9,836) 26(i) (5,362)
(952)(q) 4,648(q)
(267)(r) (200)(r)
Interest capitalized.... -- -- -- -- 40 40
Other income
(expense)............. -- (19) -- (19) -- -- --
------- ------- ------- ---------- ------- ------- ----------
Income before income
taxes................. $10,910 $ 9,081 $ 15 $ 20,006 $ 5,517 $10,540 $ 16,057
Provision for income
taxes................. 4,144 3,584 (7,728)(s) -- 2,093 (2,093)(s) --
------- ------- ------- ---------- ------- ------- ----------
Net income.............. $ 6,766 $ 5,497 $ 7,743 $ 20,006 $ 3,424 $12,633 $ 16,057
======= ======= ======= ========== ======= ======= ==========
General partner's
interest in net
income................ $ 400(t) $ 321(t)
========== ==========
Limited partners'
interest in net
income................ $ 19,606 $ 15,736
========== ==========
Net income per limited
partner's unit........ $ 1.73(t) $ 1.39(t)
========== ==========
Weighted average number
of limited partners
units outstanding..... 11,359 11,359
========== ==========
</TABLE>
See accompanying notes to pro forma financial statements.
F-4
<PAGE> 129
WILLIAMS ENERGY PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(UNAUDITED)
The pro forma adjustments have been prepared as if the transactions to be
effected at the closing of this offering had taken place on September 30, 2000,
in the case of the pro forma balance sheet or as of January 1, 1999, in the case
of the pro forma statements of income for the year ended December 31, 1999, and
the nine months ended September 30, 2000. The adjustments are based upon
currently available information and certain estimates and assumptions, and
therefore the actual adjustments will differ from the pro forma adjustments.
However, management believes that the assumptions provide a reasonable basis for
presenting the significant effects of the transactions as contemplated and that
the pro forma adjustments give appropriate effect to those assumptions and are
properly applied in the pro forma financial information.
(a)Reflects the proceeds to Williams Energy Partners L.P. of $75.0 million from
the issuance and sale of 3,750,000 units at an assumed initial public
offering price of $20.00 per unit. Also reflects the proceeds of $11.3
million from the sale of 562,500 common units associated with the
over-allotment option to affiliates of Williams at $20.00 per unit.
(b)Reflects the payment of debt financing fees and underwriter commissions and
expenses of $0.8 million and $4.9 million, respectively. The debt financing
fees will be capitalized and amortized over the life of the associated debt,
and the underwriter commissions and expenses will be allocated to the common
units.
(c)Represents the borrowing of $90.1 million under the credit facility.
(d)Reflects the payment of $3.3 million for the estimated costs of legal and
other professional fees and costs associated with the offering.
(e)Reflects the partial repayment of the affiliate note payable with $167.4
million of the net proceeds of the offering and borrowing under the credit
facility.
(f)Represents environmental capital expenditures, liabilities and expenses which
have been or will be indemnified by Williams.
(g)Represents the assignment to Williams of a receivable from Amerada Hess
Corporation resulting from tank and other repair expenses associated with the
acquisition of the Gulf Coast marine terminal facilities in exchange for a
reduction in the affiliate note payable.
(h)Represents the assignment to Williams of a receivable from Amerada Hess
Corporation resulting from a revenue guarantee provided by Amerada Hess
Corporation for a specified period after the acquisition of the Gulf Coast
marine terminal facilities. This assignment is in exchange for a reduction in
the affiliate note payable.
(i)Reflects an adjustment to exclude a terminal that is included in the Williams
Energy Partners Predecessor historical financial statements that is in the
process of being sold and will not be part of the on-going Partnership
operations. The adjustment assumes the sale occurred on January 1, 1999.
(j)Reflects the assignment of accumulated affiliate receivables to an affiliate
of our general partner for a reduction in the affiliate note payable. These
receivables represent several months' activity, and the assignment eliminates
all but one month's receivable activity related to the affiliate.
(k)Represents the capital contribution by an affiliate of our general partner of
$54.7 million.
(l)Represents the retention by Williams of deferred income taxes as income taxes
will be the responsibility of the unitholders and not the Partnership.
F-5
<PAGE> 130
WILLIAMS ENERGY PARTNERS L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(m)Represents the conversion of the adjusted equity of the Williams Energy
Partners Predecessor of $138.3 million from owner's equity to common and
subordinate equity of the Partnership and the general partner's interest in
the Partnership. The conversion is as follows:
- $27.8 million for 1,929,694 common units;
- $106.2 million for 5,679,694 subordinated units; and
- $4.3 million for the general partner's interest.
After the conversion, the equity amounts of the common and subordinated
unitholders are each 49% of total equity, with the remaining 2% equity
representing the general partner equity.
(n)Reflects the additional revenue and expenses from the terminal facility
acquired from Wyatt Energy, Incorporated as if the facility had been acquired
on January 1, 1999.
(o)Reflects additional depreciation for the Gulf Coast marine terminal
facilities acquired from Amerada Hess Corporation as if the facilities had
been acquired on January 1, 1999.
(p)Reflects adjustments to general and administrative costs associated with the
Partnership. While the direct and allocated general and administrative costs
incurred by the general partner may be significantly higher, the general
partner has agreed to only charge $6.0 million, collectively, of its general
and administrative costs and those allocated from Williams to the
Partnership.
(q)Reflects adjustments to properly state interest expense for the $90.1 million
outstanding balance on the credit facility plus fees for the $59.9 million of
unused availability on the revolving credit facility. The weighted average
interest rates for the outstanding credit facility were 6.43% and 7.47% for
the year ended December 31, 1999 and the nine months ended September 30,
2000, respectively. If interest rates were to change by 0.125%, our annual
debt coverage obligations would change by approximately $0.1 million.
(r)Reflects the amortization of deferred debt service cost over the life of the
term credit facility.
(s)Pro form net income excludes federal and state income taxes as income taxes
will be the responsibility of the unitholders and not the Partnership.
(t)The general partner's allocation of net income is based on its combined 2%
interest in the Partnership. The general partner's 2% allocation of net
income has been deducted before calculating the net income per limited
partners' unit. The computation of net income per limited partner unit
assumes that 5,679,694 common units and 5,679,694 subordinated units were
outstanding at all times during the periods presented.
F-6
<PAGE> 131
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Williams Companies, Inc.
We have audited the accompanying combined balance sheets of Williams Energy
Partners Predecessor (A Division of The Williams Companies, Inc.) (See Note 1)
as of December 31, 1998 and 1999, and the related combined statements of income
and owner's equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
The Williams Companies, Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Williams Energy
Partners Predecessor (A Division of The Williams Companies, Inc.) (See Note 1)
at December 31, 1998 and 1999, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
October 13, 2000
F-7
<PAGE> 132
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1998 1999 2000
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable....................................... $ 3,098 $ 9,480 $ 14,106
Affiliate accounts receivable............................. 818 4,745 8,436
Affiliate note receivable................................. 24,794 -- --
Deferred income taxes..................................... -- 227 --
Other current assets...................................... 16 497 1,650
------- -------- --------
Total current assets.............................. $28,726 $ 14,949 $ 24,192
Property, plant and equipment, at cost...................... $70,763 $299,105 $336,730
Less: accumulated depreciation............................ 26,487 31,043 37,756
------- -------- --------
Net property, plant and equipment................. $44,276 $268,062 $298,974
Other noncurrent assets..................................... -- 328 930
------- -------- --------
Total assets...................................... $73,002 $283,339 $324,096
======= ======== ========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,118 $ 3,943 $ 3,178
Accrued income taxes due affiliate........................ 2,284 -- --
Accrued payroll and benefits.............................. 30 660 996
Accrued taxes other than income........................... 295 240 1,720
Environmental liabilities................................. -- 598 --
Other liabilities......................................... 2 16 7
------- -------- --------
Total current liabilities......................... $ 3,729 $ 5,457 $ 5,901
Affiliate note payable...................................... -- 197,165 232,093
Deferred income taxes....................................... 8,277 12,174 14,039
Environmental liabilities................................... 911 1,692 1,788
Commitments and contingencies
Owner's equity.............................................. 60,085 66,851 70,275
------- -------- --------
Total liabilities and owner's equity.............. $73,002 $283,339 $324,096
======= ======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 133
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
COMBINED STATEMENTS OF INCOME AND OWNER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Third party................................ $17,541 $18,817 $37,469 $23,372 $39,862
Affiliate.................................. 1,985 2,029 6,919 3,845 13,746
------- ------- ------- ------- -------
Total revenues..................... $19,526 $20,846 $44,388 $27,217 $53,608
Costs and expenses:
Operating.................................. $ 7,176 $ 7,618 $18,635 $10,451 $23,545
Depreciation............................... 1,100 1,190 4,610 2,417 5,976
Affiliate general and administrative....... 4,603 3,950 5,458 3,623 8,774
------- ------- ------- ------- -------
Total costs and expenses........... $12,879 $12,758 $28,703 $16,491 $38,295
------- ------- ------- ------- -------
Operating profit............................. $ 6,647 $ 8,088 $15,685 $10,726 $15,313
Affiliate interest income (expense).......... 1,149 1,371 (4,775) 323 (9,836)
Interest capitalized......................... -- -- -- -- 40
Other income (expense)....................... 41 (27) -- (2) --
------- ------- ------- ------- -------
Income before income taxes................... $ 7,837 $ 9,432 $10,910 $11,047 $ 5,517
Provision for income taxes................... 2,920 3,589 4,144 4,191 2,093
------- ------- ------- ------- -------
Net income................................... $ 4,917 $ 5,843 $ 6,766 $ 6,856 $ 3,424
======= ======= ======= ======= =======
Owner's Equity:
At beginning of period..................... $49,325 $54,242 $60,085 $60,085 $66,851
Net income................................. 4,917 5,843 6,766 6,856 3,424
------- ------- ------- ------- -------
At end of period........................... $54,242 $60,085 $66,851 $66,941 $70,275
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-9
<PAGE> 134
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------
1997 1998 1999 1999 2000
------- ------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income............................ $ 4,917 $ 5,843 $ 6,766 $ 6,856 $ 3,424
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation....................... 1,100 1,190 4,610 2,417 5,976
Deferred income taxes.............. 1,067 1,243 4,144 4,191 2,093
Changes in components of operating
assets and liabilities:
Accounts receivable.............. 297 47 (6,382) (2,018) (4,626)
Affiliate receivable............. (751) (67) (3,927) (404) (3,691)
Accounts payable................. 284 468 2,825 452 (765)
Accrued income taxes due
affiliate..................... 1,852 493 (2,315) (2,284) --
Accrued payroll and benefits..... -- 30 630 523 336
Accrued taxes other than
income........................ (186) 105 (55) 106 1,480
Other current and noncurrent
assets and liabilities........ 699 (508) (637) (263) (2,714)
------- ------- --------- --------- --------
Net cash provided by operating
activities.................. $ 9,279 $ 8,844 $ 5,659 $ 9,576 $ 1,513
Investing Activities:
Additions to property, plant &
equipment.......................... $(1,991) $(5,178) $ (4,327) $ (2,211) $ (5,341)
Purchases of businesses............... (2,000) (2,500) (223,300) (223,300) (31,100)
Proceeds from sale of property, plant
& equipment........................ 18 -- 9 9 --
Advances on affiliate note
receivable......................... (7,009) (5,177) (10,115) (8,828) --
Receipts on affiliate note
receivable......................... 1,703 4,011 -- -- --
------- ------- --------- --------- --------
Net cash used by investing
activities.................. $(9,279) $(8,844) $(237,733) $(234,330) $(36,411)
Financing Activities:
Payments on affiliate note payable.... $ -- $ -- $ -- $ -- $ (4,227)
Proceeds from affiliate note
payable............................ -- -- 232,074 224,754 39,155
------- ------- --------- --------- --------
Net cash provided (used) by
financing activities........ $ -- $ -- $ 232,074 $ 224,754 $ 34,928
------- ------- --------- --------- --------
Change in cash.......................... $ -- $ -- $ -- $ -- $ --
Cash at beginning of period............. -- -- -- -- --
------- ------- --------- --------- --------
Cash at end of period................... $ -- $ -- $ -- $ -- $ --
======= ======= ========= ========= ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 135
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS
UNAUDITED.)
1. BASIS OF PRESENTATION
The accompanying combined financial statements and related notes present
the combined financial position, results of operations, cash flows and owner's
equity of: (a) selected non-system petroleum product terminals owned by Williams
Energy Ventures, Inc. ("WEV"), and (b) Williams Ammonia Pipeline, Inc.
Non-system petroleum product terminals refer to those petroleum product
terminals owned by WEV that are not directly connected to its affiliate's
petroleum pipeline. Both WEV and Williams Ammonia Pipeline, Inc. are
wholly-owned subsidiaries of The Williams Companies, Inc. ("Williams"). These
operations are collectively referred to as the "Williams Energy Partners
Predecessor" or "Williams Facilities." These combined financial statements are
prepared in connection with the proposed public offering of limited partner
units in Williams Energy Partners L.P. (the "Partnership") which was formed in
August 2000 and which will own the businesses previously conducted by Williams
Facilities. All significant intercompany transactions have been eliminated.
The petroleum product terminal operations consist of 27 independent
petroleum product terminal facilities and associated storage facilities, located
throughout 12 states primarily in the South, Southeast and Gulf Coast areas of
the United States. For 11 of these petroleum product terminals, Williams
Facilities owns varying undivided ownership interests. From inception, ownership
of these assets has been structured as an ownership of an undivided interest in
assets, not as an ownership interest in a partnership, limited liability
company, joint venture or other form of entity. Marketing and invoicing is
controlled separately by each owner and each owner is responsible for any loss,
damage or injury that may occur to their own customers. As a result, Williams
Facilities applies proportionate consolidation for their interests in these
assets.
2. DESCRIPTION OF BUSINESSES
Williams Facilities owns and operates certain petroleum product terminal
facilities and an interstate common carrier ammonia pipeline and terminals
system.
PETROLEUM PRODUCT TERMINALS
Most of the Williams Facilities' petroleum product terminals are
strategically located along and/or near third party pipelines or petroleum
refineries. The petroleum product terminals provide a variety of services such
as distribution, storage, blending, inventory management and additive injection
to a diverse customer group including end-users in the downstream refining,
retail, commercial trading, industrial, governmental and petrochemical
industries. Products stored in and distributed through the petroleum product
terminal network include refined petroleum products, blendstocks and heavy oils
and feedstocks.
AMMONIA PIPELINE AND TERMINALS SYSTEM
The ammonia pipeline and terminals system consists of an ammonia pipeline
and six company-owned terminals. Shipments on the pipeline primarily originate
from ammonia production plants located in Borger, Texas and Enid and Verdigris,
Oklahoma for transport to terminals throughout the midwest for ultimate
distribution to end-users in Iowa, Kansas, Minnesota, Missouri, Nebraska,
Oklahoma and South Dakota. The ammonia transported through the system is used
primarily as nitrogen fertilizer. Approximately 97% of ammonia system revenues
are generated from transportation tariffs received from three customers, who are
obligated under "ship or pay" contracts to ship an aggregate minimum of 700,000
tons per year but have historically shipped an amount in excess of the required
minimum. The current ammonia transportation contracts extend through June 2005.
The tariffs charged by the interstate
F-11
<PAGE> 136
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ammonia pipeline are regulated by the Surface Transportation Board of the U.S.
Department of Transportation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL DATA
The interim financial data are unaudited; however, in the opinion of
management, the interim financial data includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results for the nine-month periods ended September 30, 1999 and 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Expenditures for
maintenance and repairs are charged to operations in the period incurred. The
costs of property, plant and equipment sold or retired and the related
accumulated depreciation is removed from the accounts in the period of sale or
disposition.
Depreciation of property, plant and equipment is provided on the
straight-line basis. Gains and losses on the disposal of property, plant and
equipment are recorded in the income statement.
IMPAIRMENT OF LONG-LIVED ASSETS
Williams Facilities evaluates its long-lived assets of identifiable
business activities for impairment when events or changes in circumstances
indicate, in management's judgment, that the carrying value of such assets may
not be recoverable. The determination of whether an impairment has occurred is
based on management's estimate of undiscounted future cash flows attributable to
the assets as compared to the carrying value of the assets. If an impairment has
occurred, the amount of the impairment recognized is determined by estimating
the fair value for the assets and recording a provision for loss if the carrying
value is greater than fair value.
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
REVENUE RECOGNITION
Revenues are recognized in the month that services are rendered.
INCOME TAXES
Williams Facilities' operations are included in the Williams' consolidated
federal income tax return. Williams Facilities income tax provisions are
computed as though separate returns are filed. Deferred income taxes are
computed using the liability method and are provided on all temporary
differences between the financial basis and tax basis of Williams Facilities'
assets and liabilities.
F-12
<PAGE> 137
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE STOCK-BASED AWARDS
Williams' employee stock-based awards are accounted for under provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Williams' fixed plan common stock
options do not result in compensation expense, because the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant.
ENVIRONMENTAL
Environmental expenditures that relate to current or future revenues are
expensed or capitalized based upon the nature of the expenditures. Expenditures
that relate to an existing condition caused by past operations that do not
contribute to current or future revenue generation are expensed. Environmental
liabilities are recorded independently of any potential claim for recovery.
Receivables are recognized in cases where the realization of reimbursements of
remediation costs are considered probable. Accruals related to environmental
matters are generally determined based on site-specific plans for remediation,
taking into account prior remediation experience of Williams Facilities and
Williams.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, which deferred the effective date of SFAS No. 133. This was
followed in June 2000 by the issuance of SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends SFAS No.
133. SFAS No. 133 and No. 138 establishes accounting and reporting standards for
derivative financial instruments. The standards require that all derivative
financial instruments be recorded on the balance sheet at their fair value.
Changes in fair value of derivatives will be recorded each period in earnings if
the derivative is not a hedge. If a derivative qualifies for special hedge
accounting, changes in the fair value of the derivative will either be
recognized in earnings as an offset against the change in fair value of the
hedged assets, liability or firm commitments also recognized in earnings, or the
changes in fair value will be deferred on the balance sheet until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be recognized immediately in earnings. Williams Facilities
will adopt these standards effective January 1, 2001.
Management currently believes the impact of adopting the Standards will not
be material to Williams Facilities' financial position or results of operations.
This assessment is subject to change because Management continues to pursue
implementation efforts, and market prices and possible derivative positions
could change between now and the date of adoption.
4. ACQUISITIONS
Petroleum product terminal facilities and partial ownership interests in
several petroleum product terminals were acquired for cash during the periods
presented and are described below. All acquisitions were accounted for as
purchases and the results of operations of the acquired petroleum product
terminals are included with the combined results of operations from their
acquisition dates.
In September 2000, Williams Facilities purchased a northeastern petroleum
product terminal facility from Wyatt Energy, Incorporated and its affiliates for
approximately $30.8 million.
In March 2000, Williams Facilities purchased a 50.0% ownership interest in
CITGO Petroleum Corporation's petroleum product terminal located in Southlake,
Texas for approximately $0.3 million.
F-13
<PAGE> 138
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1999, Williams Facilities acquired from Amerada Hess Corporation
("Hess") three storage and distribution petroleum product terminals and Terminal
Pipeline Company ("TPC"), a wholly owned subsidiary of Hess, for approximately
$212 million. The petroleum product terminals are located in Galena Park and
Corpus Christi, Texas and Marrero, Louisiana. TPC is a common carrier pipeline
that begins at a connection east of the Houston Ship Channel and terminates at
the Galena Park terminal.
In January 1999, Williams Facilities purchased 11 petroleum product
terminals owned by Amoco Oil Company. The petroleum product terminals, located
in Ohio, North Carolina, South Carolina, Tennessee, Alabama, Florida and
Mississippi, were acquired for approximately $6.9 million. In addition, Williams
Facilities acquired Amoco's 60.0% interest in a twelfth petroleum product
terminal, located in Greensboro, North Carolina, for approximately $1.0 million.
In December 1998, Williams Facilities purchased a petroleum product
terminal owned by Phillips Pipe Line Company in Doraville, Georgia for
approximately $2.2 million.
In June 1998, Williams Facilities acquired an additional 23.4% ownership
interest in eight Southern Facilities ("SOFAC") petroleum product terminals from
TOC Terminals, Inc. for approximately $0.3 million, which increased Williams
Facilities' ownership interest to 68.9% from the 45.5% interest it initially
acquired in 1996. The SOFAC petroleum product terminals, operated by Williams
Facilities, are located in Georgia, North Carolina, South Carolina, Virginia and
Tennessee. In February 1999, Williams Facilities increased its ownership
interest in the SOFAC petroleum product terminals to 78.9% by purchasing an
additional 10.0% ownership interest from Murphy Oil USA, Inc. for approximately
$3.4 million.
In December 1997, Williams Facilities purchased a petroleum product
terminal owned by Mobil Oil Corp. in Dallas, Texas for approximately $2.0
million.
The following summarized unaudited pro forma financial information for the
years ended December 31, 1998 and 1999 assumes each acquisition closing prior to
January 1, 2000 had occurred on January 1 of the year immediately preceding the
year of the acquisition (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Revenues:
Williams Energy Partners Predecessor...................... $20,846 $44,388
Acquired businesses....................................... 59,118 24,858
------- -------
Combined.......................................... $79,964 $69,246
======= =======
Net income:
Williams Energy Partners Predecessor...................... $ 5,843 $ 6,766
Acquired businesses....................................... 14,256 2,986
------- -------
Combined.......................................... $20,099 $ 9,752
======= =======
</TABLE>
The pro forma results include operating results prior to the acquisitions
and adjustments to interest expense and income taxes. The pro forma consolidated
results do not purport to be indicative of results that would have occurred had
the acquisitions been in effect for the periods presented, nor do they purport
to be indicative of results that will be obtained in the future.
The purchase prices of the above acquisitions were allocated to various
categories of property, plant and equipment and liabilities based upon the fair
value of the assets acquired and liabilities assumed. Williams Facilities
recorded environmental liabilities of $0.2 million, $0.1 million and $1.2
million associated with the above acquisitions in 1997, 1998 and 1999,
respectively.
F-14
<PAGE> 139
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
------------------ SEPTEMBER 30, DEPRECIABLE
1998 1999 2000 LIVES
------- -------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Construction work-in-progress.......... $ 2,771 $ 5,588 $ 10,615
Land and right-of-way.................. 3,666 7,011 23,673
Buildings.............................. 667 5,780 6,921 30 years
Storage tanks.......................... 15,528 175,450 143,173 30 years
Pipeline and station equipment......... 41,435 41,737 44,963 30-67 years
Processing equipment................... 5,634 62,477 106,323 30 years
Other.................................. 1,062 1,062 1,062 10-30 years
------- -------- --------
Total........................ $70,763 $299,105 $336,730
======= ======== ========
</TABLE>
6. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Williams Energy Marketing and Trading, an affiliate customer, Farmland
Industries, Inc., Agrium U.S. Inc., Terra Nitrogen, L.P., BP and Conoco, Inc.
are major customers of Williams Facilities. No other customer accounted for more
than 10% of total revenues during 1997, 1998 and 1999. Williams Energy Marketing
and Trading, Conoco Inc., and BP are customers of the petroleum product terminal
segment. Farmland Industries, Inc., Agrium U.S. Inc. and Terra Nitrogen, L.P.,
are customers of the ammonia pipeline segment. The percentage of revenues
derived by customer is provided below:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Customer A................................................ 35.4% 36.3% 15.1%
Customer B................................................ 20.4% 18.6% 8.0%
Customer C................................................ 19.3% 18.6% 8.3%
Customer D................................................ 14.0% 10.8% 4.0%
Customer E................................................ 0.0% 0.0% 13.9%
Williams Energy Marketing and Trading..................... 9.1% 10.1% 15.6%
----- ----- -----
Total................................................ 98.2% 94.4% 64.9%
===== ===== =====
</TABLE>
Accounts receivable balances of Farmland Industries, Inc., Agrium U.S.
Inc., Terra Nitrogen, L.P., Conoco, Inc. and Williams Energy Marketing and
Trading accounted for 77.3% of total accounts and affiliate receivables at
December 31, 1998. Accounts receivable balances of BP and Williams Energy
Marketing and Trading accounted for 41.0% of total accounts and affiliate
receivables at December 31, 1999.
Any issues impacting our customers could impact Williams Facilities'
overall exposure to credit risk. While sales to petroleum product terminal and
ammonia pipeline customers are generally unsecured, the financial condition and
creditworthiness of customers are routinely evaluated.
Demand for nitrogen fertilizer has typically followed a combination of
weather patterns and growth in population, acres planted and fertilizer
application rates. Because natural gas is the primary feedstock for the
production of ammonia, the profitability of our customers is impacted by high
natural gas prices. To the extent they are unable to pass on higher costs to
their customers, they may reduce shipments through the pipeline.
F-15
<PAGE> 140
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. EMPLOYEE BENEFIT PLANS
The ammonia pipeline shares rights-of-way with the natural gas liquids
pipeline of an affiliate, Mid-America Pipeline Inc. The operations of the
ammonia pipeline and terminals system are conducted by Mid-America Pipeline's
employees and, as such, the ammonia pipeline and terminals system has no
employees. Substantially all of Williams Facilities' petroleum product terminal
employees are covered by Williams' noncontributory defined benefit pension plans
and health care plan that provides postretirement medical benefits to certain
retired employees. Contributions for pension and postretirement medical benefits
related to Williams Facilities' participation in the Williams plans were $0.1
million, $0.1 million and $0.2 million in 1997, 1998 and 1999, respectively.
Williams maintains various defined contribution plans in which employees
supporting Williams Facilities are included. Williams Facilities' costs related
to these plans were $0.1 million, $0.1 million and $0.2 million in 1997, 1998
and 1999, respectively.
8. RELATED PARTY TRANSACTIONS
Williams charges its affiliates, including Williams Facilities, for certain
corporate administrative expenses, which are directly identifiable or allocable
to the affiliates. Allocated general corporate expenses are based on a
three-factor formula which considers operating margins, property, plant and
equipment and payroll. Details of such charges are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Direct costs.............................. $3,177 $2,585 $3,351 $2,006 $4,335
Allocated costs........................... 1,426 1,365 2,107 1,617 4,439
------ ------ ------ ------ ------
Total general and administrative
expenses...................... $4,603 $3,950 $5,458 $3,623 $8,774
====== ====== ====== ====== ======
</TABLE>
The above costs are reflected in affiliate general and administrative
expenses in the accompanying combined statements of income. Direct costs charged
from Williams represent the direct costs of services provided by Williams at
Williams Facilities' request. In management's estimation, the allocation
methodologies used are reasonable and the direct and allocated expenses
represent amounts that would have been incurred on a stand-alone basis.
Williams Facilities is a participant in Williams' cash management program.
As of September 30, 2000 (unaudited) and December 31, 1999 and 1998, Williams
Facilities' net amount of affiliate note receivable/ payable consists of an
unsecured promissory note agreement with Williams for both advances to and from
Williams. The advances are due on demand; however, Williams has committed to not
require payment of the advances due prior to October 1, 2001. Therefore, the
affiliate note payable is classified as noncurrent at June 30, 2000, and
December 31, 1999.
Affiliate interest income or expense is calculated at the London Interbank
Offered Rate ("LIBOR") plus a spread based on the outstanding balance of the
note receivable or note payable with Williams. The spread is equivalent to the
spread above LIBOR rates on Williams' revolving credit facility. The interest
rate of the note with Williams was 6.03% and 7.38% at September 30, 1999 and
2000 (unaudited), respectively, and 5.72% and 6.45% at December 31, 1998 and
1999, respectively. As the interest rate on the affiliate note
payable/receivable is variable, the carrying value of the affiliate note payable
or receivable at September 30, 1999 and 2000, and December 31, 1998 and 1999,
approximates its fair value.
F-16
<PAGE> 141
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1997 1998 1999 1999 2000
------ ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................. $1,625 $2,073 $ -- $ -- $ --
State............................... 228 273 -- -- --
Deferred:
Federal............................. 942 1,092 3,646 3,693 1,844
State............................... 125 151 498 498 249
------ ------ ------ ------ ------
$2,920 $3,589 $4,144 $4,191 $2,093
====== ====== ====== ====== ======
</TABLE>
Reconciliations from the provision for income taxes at the U.S. federal
statutory rate to the effective tax rate for the provision for income taxes are
as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1997 1998 1999 1999 2000
------ ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income taxes at statutory rate........ $2,743 $3,301 $3,819 $3,866 $1,931
Increase (decrease) resulting from:
State taxes, net of federal income
tax benefit...................... 229 276 324 324 161
Other............................... (52) 12 1 1 1
------ ------ ------ ------ ------
Provision for income taxes............ $2,920 $3,589 $4,144 $4,191 $2,093
====== ====== ====== ====== ======
</TABLE>
Significant components of deferred tax liabilities and assets are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1998 1999 2000
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities:
Property, plant and equipment....................... $8,623 $16,526 $26,651
Deferred tax assets:
Net operating loss carryforward..................... $ -- $ 3,709 $11,933
Environmental liability............................. 346 870 679
------ ------- -------
Total deferred tax assets................... $ 346 $ 4,579 $12,612
------ ------- -------
Net deferred tax liabilities................ $8,277 $11,947 $14,039
====== ======= =======
</TABLE>
For the year 1999, Williams Facilities recognized a $9.8 million federal
net operating loss for income tax purposes.
Payments to Williams in lieu of income taxes were $1.9 million and $2.3
million for the years ended December 31, 1998 and 1999, respectively.
F-17
<PAGE> 142
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK-BASED COMPENSATION
Williams Facilities does not issue stock options, stock-appreciation
rights, restricted stock or deferred stock. Employees receive such awards from
Williams. Williams has several plans providing for common-stock-based awards to
employees. The plans permit the granting of various types of awards including,
but not limited to, stock options, stock-appreciation rights, restricted stock
and deferred stock. Awards may be granted for no consideration other than prior
and future services or based on certain financial performance targets being
achieved. The purchase price per share for stock options and the grant price for
stock-appreciation rights may not be less than the market price of the
underlying stock on the date of grant. Depending upon terms of the respective
plans, stock options generally become exercisable after three or five years,
subject to accelerated vesting if certain future Williams' stock prices or if
specific Williams' financial performance targets are achieved. Stock options
expire 10 years after grant.
The following summary reflects Williams' stock option activity for 1997,
1998 and 1999, for those employees solely supporting Williams Facilities'
operations:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year............................ 20,004 $16.16 27,504 $20.56 39,402 $24.72
Granted........................... 14,000 24.57 13,400 31.98 16,600 40.26
Exercised......................... (6,500) 15.66 (1,502) 13.31 (2,000) 16.69
------ ------ ------
Outstanding -- ending of year..... 27,504 20.56 39,402 24.72 54,002 29.79
====== ====== ======
Exercisable at end of year........ 13,504 16.40 26,002 20.98 54,002 29.79
====== ====== ======
</TABLE>
The following summary provides information about outstanding and
exercisable Williams stock options, held by Williams Facilities employees, at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
EXERCISE CONTRACTUAL
RANGE OF EXERCISE PRICES OPTIONS PRICE LIFE
------------------------ ------- --------- -----------
<S> <C> <C> <C>
$16.13 to $23.00....................................... 18,668 $19.61 7.1 years
$27.38 to $34.38....................................... 18,734 30.67 8.5 years
$39.94 to $40.50....................................... 16,600 40.26 9.5 years
------
Total........................................ 54,002 $29.79 8.5 years
======
</TABLE>
The estimated fair value at the date of grant of options for Williams
common stock granted in 1997, 1998 and 1999, using the Black-Scholes option
pricing model, is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Weighted-average grant date fair value of options for
Williams common stock granted during the year............. $7.15 $8.19 $11.90
Assumptions:
Dividend yield............................................ 1.7% 2.0% 1.5%
Volatility................................................ 26.0% 25.0% 28.0%
Risk-free interest rate................................... 6.1% 5.3% 5.6%
Expected life (years)..................................... 5.0 5.0 5.0
</TABLE>
F-18
<PAGE> 143
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma net income, assuming Williams Facilities had applied the
fair-value method of SFAS No. 123, "Accounting for Stock-Based Compensation" in
measuring compensation costs beginning with 1997 employee stock-based awards,
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- -------------------- --------------------
PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA REPORTED
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income................. $4,837 $4,917 $5,785 $5,843 $6,579 $6,766
</TABLE>
Pro forma amounts for 1997 include the remaining total compensation expense
from the awards made in 1996, because these awards fully vested in 1997 as a
result of the accelerated vesting provisions. Pro forma amounts for 1998 include
the remaining total compensation expense from the awards made in 1997, because
these awards fully vested in 1998 as a result of the accelerated vesting
provisions. Pro forma amounts for 1999 include the remaining total compensation
expense from Williams awards made in 1998 and the total compensation expense
from Williams awards made in 1999 as a result of the accelerated vesting
provisions. Since compensation expense from stock options is recognized over the
future years' vesting period for pro forma disclosure purposes, and additional
awards generally are made each year, pro forma amounts may not be representative
of future years' amounts.
11. SEGMENT DISCLOSURES
Management evaluates performance based upon segment profit or loss from
operations which includes revenues from affiliate and external customers,
operating expenses, depreciation and affiliate general and administrative
expenses. The accounting policies of the segments are the same as those
described in Note 3 -- Summary of Significant Accounting Policies. Affiliate
revenues are accounted for as if the sales were to unaffiliated third parties,
that is, at current market prices.
Williams Facilities' reportable segments are strategic business units that
offer different products and services. The segments are managed separately
because each segment requires different marketing strategies and business
knowledge.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------------------- -------------------------------
PETROLEUM PETROLEUM
PRODUCT AMMONIA PRODUCT AMMONIA
TERMINALS PIPELINE TOTAL TERMINALS PIPELINE TOTAL
--------- -------- -------- --------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Third party customers......................... $ 14,212 $ 9,160 $ 23,372 $ 31,617 $ 8,245 $ 39,862
Affiliate customers........................... 3,845 -- 3,845 13,746 -- 13,746
-------- ------- -------- -------- ------- --------
Total revenues.......................... $ 18,057 $ 9,160 $ 27,217 $ 45,363 $ 8,245 $ 53,608
Operating expenses.............................. $ 8,248 $ 2,203 $ 10,451 $ 20,687 $ 2,858 $ 23,545
Depreciation.................................... 1,937 480 2,417 5,493 483 5,976
Affiliate general and administrative expenses... 2,449 1,174 3,623 7,503 1,271 8,774
-------- ------- -------- -------- ------- --------
Segment profit.................................. $ 5,423 $ 5,303 $ 10,726 $ 11,680 $ 3,633 $ 15,313
======== ======= ======== ======== ======= ========
Additions to long-lived assets.................. $225,257 $ 254 $225,511 $ 36,133 $ 308 $ 36,441
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999 AS OF SEPTEMBER 30, 2000
------------------------------ ------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Affiliate note receivable....................... $191,132 $ -- $191,132 $232,093 $ -- $232,093
Total assets.................................... 256,729 21,965 278,694 302,357 21,739 324,096
</TABLE>
F-19
<PAGE> 144
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1999
------------------------------ ------------------------------ -------------------------------
PETROLEUM PETROLEUM PETROLEUM
PRODUCT AMMONIA PRODUCT AMMONIA PRODUCT AMMONIA
TERMINALS PIPELINE TOTAL TERMINALS PIPELINE TOTAL TERMINALS PIPELINE TOTAL
--------- -------- ------- --------- -------- ------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Third party
customers............ $ 4,128 $13,413 $17,541 $ 5,114 $13,703 $18,817 $ 25,330 $12,139 $ 37,469
Affiliate customers.... 1,985 -- 1,985 2,029 -- 2,029 6,919 -- 6,919
------- ------- ------- ------- ------- ------- -------- ------- --------
Total revenues... $ 6,113 $13,413 $19,526 $ 7,143 $13,703 $20,846 $ 32,249 $12,139 $ 44,388
Operating expenses....... $ 2,545 $ 4,631 $ 7,176 $ 3,544 $ 4,074 $ 7,618 $ 15,108 $ 3,527 $ 18,635
Depreciation............. 498 602 1,100 562 628 1,190 3,969 641 4,610
Affiliate general and
administrative
expenses............... 2,374 2,229 4,603 2,049 1,901 3,950 3,915 1,543 5,458
------- ------- ------- ------- ------- ------- -------- ------- --------
Segment profit........... $ 696 $ 5,951 $ 6,647 $ 988 $ 7,100 $ 8,088 $ 9,257 $ 6,428 $ 15,685
======= ======= ======= ======= ======= ======= ======== ======= ========
Additions to long-lived
assets................. $ 2,630 $ 1,361 $ 3,991 $ 6,403 $ 1,275 $ 7,678 $227,243 $ 384 $227,627
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1999
----------------------------- ----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Affiliate note
receivable............. $ -- $23,628 $23,628 $ -- $24,794 $24,794 $ -- $ -- $ --
Affiliate note payable -- -- -- -- -- -- 197,165 -- 197,165
Total assets............. 17,414 47,902 65,316 19,321 53,681 73,002 261,425 21,914 283,339
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
In conjunction with the acquisition of the Gulf Coast marine terminals,
Hess disclosed to Williams Facilities that there are no material claims, actions
or proceedings, other than environmental, pending or threatened against Hess
relating to the assets acquired by Williams. Hess agreed to indemnify Williams
Facilities against all demands, actions or causes of action, judgments, damages,
obligations, liabilities and claims of every type and nature, other than for
environmental matters, incurred by Williams Facilities within 18 months after
the close date. Hess' maximum liability for such matters is limited to $5.0
million, unless the indemnification is related to any claims related to TPC, in
which case Hess' liability is limited to $1.0 million.
In addition, Hess has disclosed to Williams Facilities all suits, actions,
claims, arbitrations, administrative, governmental investigation, or other legal
proceedings pending or threatened, against or related to the assets acquired by
Williams Facilities, which arise under environmental law. Hess agreed to
indemnify Williams Facilities against all environmental claims and losses
arising from any matters included in that disclosure. In the event that Hess'
disclosure is determined by Williams Facilities to be untrue within 18 months
after the close date, Williams Facilities will be liable for the first $2.5
million of environmental losses, Hess will be liable for the next $12.5 million
of losses, and Williams Facilities will assume responsibility for any losses in
excess of $15.0 million. At September 30, 2000 and December 31, 1999, Williams
Facilities had accrued $1.2 million for costs that may not be recoverable under
Hess' indemnification.
Estimated liabilities for environmental costs, primarily associated with
the petroleum product terminal operations, were $0.9 million and $2.3 million at
December 31, 1998 and 1999, respectively, and $1.8 million at September 30, 2000
(unaudited). Management estimates that expenditures for environmental
remediation liabilities will be incurred over the next five years. Receivables
associated with environmental liabilities of $0.2 million and $0.3 million at
December 31, 1998 and 1999, respectively, and $0.3 million at September 30, 2000
(unaudited), have been recognized as recoverable from third parties. These
estimates, provided on an undiscounted basis, were determined based primarily on
data provided by
F-20
<PAGE> 145
WILLIAMS ENERGY PARTNERS PREDECESSOR
(A DIVISION OF THE WILLIAMS COMPANIES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
a third-party environmental evaluation consultant. These liabilities have been
classified as current or noncurrent based on management's estimates regarding
the timing of actual payments.
Williams Facilities is party to various other claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, the ultimate resolution of all claims, legal actions and complaints
after consideration of amounts accrued, insurance coverage, or other
indemnification arrangements will not have a material adverse effect upon
Williams Facilities' future financial position, results of operations or cash
flows.
Capital expenditure commitments were $4.4 million at December 31, 1999.
13. RECENT DEVELOPMENTS
Williams Facilities plans to enter into an agreement with the Partnership,
whereby Williams will contribute Williams Facilities in exchange for certain of
the proceeds from an initial public offering of common units of the Partnership
and long-term debt. The transaction is expected to close prior to March 31,
2001. The general partner of the Partnership is Williams GP LLC. Williams
Facilities' deferred income tax liabilities and a portion of the affiliate note
payable will be contributed as Williams' investment in common and subordinated
units of the Partnership as well as in the general partner of the Partnership.
Williams will also reimburse the Partnership for certain environmental
remediation costs incurred by the Partnership related to environmental matters
after the closing date.
F-21
<PAGE> 146
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Williams Companies, Inc.
We have audited the accompanying combined balance sheets of Marine
Terminals Predecessor (A Division of Amerada Hess Corporation) (see Note 1) as
of December 31, 1998 and July 31, 1999, and the related combined statements of
income and divisional equity and cash flows for the years ended December 31,
1997 and 1998 and the seven months ended July 31, 1999. These financial
statements are the responsibility of The Williams Companies, Inc.'s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Marine Terminals
Predecessor (A Division of Amerada Hess Corporation) (see Note 1), at December
31, 1998 and July 31, 1999, and the results of their operations and their cash
flows for the years ended December 31, 1997 and 1998 and the seven months ended
July 31, 1999, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
October 13, 2000
F-22
<PAGE> 147
MARINE TERMINALS PREDECESSOR
(A DIVISION OF AMERADA HESS CORPORATION)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1998 1999
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 581 $ 23
Accounts receivable....................................... 2,416 1,694
Due from affiliates....................................... 433 248
Deferred income taxes..................................... -- 52
Other current assets...................................... 159 394
------- -------
Total current assets.............................. $ 3,589 $ 2,411
Property, plant and equipment, net.......................... 31,403 29,688
------- -------
Total assets...................................... $34,992 $32,099
======= =======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable.......................................... $ 447 $ 1,678
Customer prepayments...................................... 558 --
Accrued severance......................................... -- 1,475
Accrued environmental liabilities......................... -- 455
Accrued property taxes.................................... 1,361 875
Other accrued liabilities................................. 236 268
Income taxes payable -- parent............................ 9,866 5,274
------- -------
Total current liabilities......................... $12,468 $10,025
Accrued environmental liabilities........................... 1,360 1,233
Deferred income taxes....................................... 8,743 8,193
Commitments and contingencies
Divisional equity........................................... 12,421 12,648
------- -------
Total liabilities and divisional equity........... $34,992 $32,099
======= =======
</TABLE>
See accompanying notes.
F-23
<PAGE> 148
MARINE TERMINALS PREDECESSOR
(A DIVISION OF AMERADA HESS CORPORATION)
COMBINED STATEMENTS OF INCOME AND DIVISIONAL EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
----------------------- ENDED
1997 1998 JULY 31, 1999
---------- ---------- -------------
<S> <C> <C> <C>
Revenues................................................... $ 37,104 $ 39,979 $22,480
Affiliate revenues......................................... 1,079 4,135 2,378
-------- -------- -------
Total revenues................................... $ 38,183 $ 44,114 $24,858
Costs and expenses:
Operating and maintenance................................ $ 14,668 $ 16,418 $12,389
General and administrative allocated from affiliate...... 1,144 1,097 638
General and administrative............................... 132 117 101
Depreciation............................................. 4,922 4,627 2,630
-------- -------- -------
Total costs and expenses......................... $ 20,866 $ 22,259 $15,758
-------- -------- -------
Operating profit........................................... $ 17,317 $ 21,855 $ 9,100
Other income (expense), net................................ 11 270 (19)
-------- -------- -------
Income before income taxes................................. $ 17,328 $ 22,125 $ 9,081
Income taxes............................................... 6,633 8,466 3,584
-------- -------- -------
Net income................................................. $ 10,695 $ 13,659 $ 5,497
======== ======== =======
Divisional Equity:
At beginning of period..................................... $ 22,819 $ 17,696 $12,421
Net income................................................. 10,695 13,659 5,497
Distributions to parent, net............................... (15,818) (18,934) (5,270)
-------- -------- -------
At end of period........................................... $ 17,696 $ 12,421 $12,648
======== ======== =======
</TABLE>
See accompanying notes.
F-24
<PAGE> 149
MARINE TERMINALS PREDECESSOR
(A DIVISION OF AMERADA HESS CORPORATION)
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
----------------------- ENDED
1997 1998 JULY 31, 1999
---------- ---------- -------------
<S> <C> <C> <C>
Operating activities:
Net income............................................... $ 10,695 $ 13,659 $ 5,497
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 4,922 4,627 2,630
Deferred income taxes................................. (553) (1,132) (602)
Changes in operating assets and liabilities:
Accounts receivable................................. 1,051 (1,219) 722
Other current assets................................ 84 119 (235)
Accounts payable.................................... 230 (220) 1,231
Customer prepayments................................ -- 558 (558)
Due from affiliates................................. (126) (307) 185
Other accrued liabilities........................... 23 50 32
Accrued severance................................... -- -- 1,475
Accrued environmental liabilities................... -- 762 328
Accrued property taxes.............................. 718 (66) (486)
Income taxes payable -- parent...................... 340 3,074 (4,592)
-------- -------- -------
Net cash provided by operating activities........ $ 17,384 $ 19,905 $ 5,627
Investing activities:
Additions to property, plant and equipment............... $ (1,442) $ (514) $ (915)
-------- -------- -------
Net cash used in investing activities............ $ (1,442) $ (514) $ (915)
Financing activities:
Distributions to parent, net............................. $(15,818) $(18,934) $(5,270)
-------- -------- -------
Net cash used in financing activities............ $(15,818) $(18,934) $(5,270)
-------- -------- -------
Net change in cash......................................... $ 124 $ 457 $ (558)
Cash at beginning of period................................ -- 124 581
-------- -------- -------
Cash at end of period...................................... $ 124 $ 581 $ 23
======== ======== =======
Supplemental cash flow information:
Cash paid to parent for income taxes..................... $ 6,846 $ 6,524 $ 8,778
======== ======== =======
</TABLE>
See accompanying notes.
F-25
<PAGE> 150
MARINE TERMINALS PREDECESSOR
(A DIVISION OF AMERADA HESS CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On May 10, 1999, The Williams Companies, Inc. ("Williams"), through a
wholly owned subsidiary, entered into a transaction to purchase from Amerada
Hess Corporation ("Hess" or the "Parent") its Gulf Coast Division terminals
("Gulf Coast Terminals") and Terminal Pipeline Company ("TPC"), a wholly owned
subsidiary of Hess, for approximately $211 million. The transaction closed on
July 30, 1999 with an effective date of August 1, 1999. The Gulf Coast Terminals
consisted of three storage and distribution terminals located in Houston and
Corpus Christi, Texas and Marrero, Louisiana, which have marine, pipeline, rail
and truck capabilities for loading and unloading. TPC is a pipeline that begins
at a connection east of the Houston Ship Channel and terminates at the Houston
terminal.
The accompanying combined financial statements include the historical
accounts of the Gulf Coast Terminals and TPC (collectively the "Marine Terminals
Predecessor" or "Gulf Coast Marine Facilities"). All significant transactions
and balances between the storage and distribution terminals and TPC were
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from storage, distribution and transportation activities were
recognized upon providing services to the customer.
ACCOUNTS RECEIVABLE
The Gulf Coast Marine Facilities provided services primarily to companies
in the energy industry. The Gulf Coast Marine Facilities performed ongoing
credit evaluations of its customers' financial condition and frequently required
payments in advance. The Gulf Coast Marine Facilities had no allowance for
doubtful accounts recorded at December 31, 1998 or July 31, 1999.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were recorded at cost. Depreciation was
provided using the straight-line method over the estimated useful lives of the
related assets, ranging from five to 20 years. Upon retirement or sale, the Gulf
Coast Marine Facilities would remove the cost of the assets and the related
accumulated depreciation from the accounts and reflect any resulting gains or
losses in the statement of income.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures were expensed or capitalized as appropriate,
depending upon their future economic benefit. Expenditures that related to an
existing condition caused by past operations, and that did not have future
economic benefit, were expensed. Liabilities for these expenditures were
recorded on an undiscounted basis when environmental assessments and/or cleanups
were probable, and the costs could be reasonably estimated.
INCOME TAXES
The Gulf Coast Marine Facilities' operations were included in Hess'
consolidated federal income tax return. Gulf Coast Marine Facilities income tax
provisions are computed as though separate returns are filed. Deferred income
taxes were computed using the liability method and were provided on all
temporary differences between the financial basis and tax basis of the Gulf
Coast Marine Facilities' assets and
F-26
<PAGE> 151
MARINE TERMINALS PREDECESSOR
(A DIVISION OF AMERADA HESS CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities. Valuation allowances were established to reduce deferred tax assets
to an amount that was more likely than not to be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment, at cost, and the related
accumulated depreciation at December 31, 1998 and July 31, 1999 were as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Terminals................................................... $113,873 $115,063
Buildings................................................... 888 888
Pipeline.................................................... 2,906 2,906
Construction work in progress............................... 286 10
Land........................................................ 2,131 2,131
Other....................................................... 868 851
-------- --------
Total property, plant and equipment............... $120,952 $121,849
Accumulated depreciation.................................... (89,549) (92,161)
-------- --------
Property, plant and equipment, net................ $ 31,403 $ 29,688
======== ========
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Gulf Coast Marine Facilities was allocated from Hess a portion of
general corporate governance costs, which included, among other things, costs
attributable to senior management, human resources, treasury and information
technology. Allocations were determined based on estimates of the actual time
spent by personnel within each of the Hess cost centers providing services to
the Gulf Coast Marine Facilities. These allocated costs totaled $0.4 million,
$0.3 million and $0.2 million for the years ended December 31, 1997 and 1998 and
the seven months ended July 31, 1999, respectively.
In addition, Hess administered all benefits for employees of the Gulf Coast
Marine Facilities. An allocation of the total cost of employee benefits incurred
by Hess was reflected in the accounts of the Gulf Coast Marine Facilities.
Allocations were determined based on the employees working directly for Gulf
Coast Marine Facilities. Such costs included, among other things, the cost of
employer contributions to Hess' defined contribution plan, pension expense
attributable to Hess' defined benefit plan, payroll taxes and insurance
benefits. These allocated costs totaled $0.8 million, $0.8 million and $0.5
million for the years ended December 31, 1997 and 1998, and seven months ended
July 31, 1999, respectively. In management's estimation, the allocation
methodologies used related to general corporate governance and employee benefit
costs are reasonable and allocated expenses represent amounts that would have
been incurred on a stand-alone basis.
Approximately 45% of the Gulf Coast Marine Facilities employees were
employed under a union contract that expires on April 30, 2001. The employees
filed a petition with the National Labor Relations Board to decertify the
contract as a result of the acquisition by Williams. The union has in turn filed
a
F-27
<PAGE> 152
MARINE TERMINALS PREDECESSOR
(A DIVISION OF AMERADA HESS CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
lawsuit to prevent employees from taking this action. If the union lawsuit is
successful, we intend to renegotiate a new labor agreement covering this
facility with the union.
Certain cash transactions occurred between the Gulf Coast Marine Facilities
and Hess during the periods described in the financial statements, including
several distributions from the Gulf Coast Marine Facilities to Hess. Beginning
in October 1998, all cash receipts from external customers for services provided
by the Gulf Coast Marine Facilities were remitted to a lockbox and swept to a
Hess corporate bank account. Also beginning in October 1998, all disbursements
to external parties for services provided to the Gulf Coast Marine Facilities
were made from a Hess corporate bank account. The net activity from these
transactions was presented as "distributions to parent, net" in the accompanying
statements of cash flows.
5. INCOME TAXES
Components of the provision for income taxes for the years ended December
31, 1997 and 1998, and seven months ended July 31, 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Federal:
Current.................................................. $6,247 $8,343 $3,640
Deferred................................................. (481) (984) (524)
------ ------ ------
$5,766 $7,359 $3,116
State:
Current.................................................. $ 939 $1,255 $ 546
Deferred................................................. (72) (148) (78)
------ ------ ------
$ 867 $1,107 $ 468
------ ------ ------
Total............................................ $6,633 $8,466 $3,584
====== ====== ======
</TABLE>
Differences between the provision for income taxes and income taxes
computed using the U.S. federal statutory income tax rate (35%) for the years
ended December 31, 1997 and 1998 and seven months ended July 31, 1999 and were
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Amount computed using the statutory rate................... $6,065 $7,744 $3,178
State income taxes (net of federal benefit)................ 564 719 305
Nondeductible expenditures................................. -- -- 97
Other...................................................... 4 3 4
------ ------ ------
Provision for income taxes....................... $6,633 $8,466 $3,584
====== ====== ======
</TABLE>
The significant components of deferred tax assets and liabilities at
December 31, 1998 and July 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment............................. $9,262 $8,678
Deferred tax assets:
Environmental liabilities................................. 519 537
------ ------
Net deferred tax liabilities...................... $8,743 $8,141
====== ======
</TABLE>
F-28
<PAGE> 153
MARINE TERMINALS PREDECESSOR
(A DIVISION OF AMERADA HESS CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. CONTINGENCIES
On April 27, 1993, the Texas Natural Resource Conservation Commission
("TNRCC," then known as the Texas Water Commission) notified Hess of alleged
violations of the Texas Water Code as a result of alleged discharges of
hydrocarbon compounds into the groundwater in the vicinity of the Gulf Coast
Marine Facilities' terminal in Corpus Christi, Texas. The Gulf Coast Marine
Facilities settled all civil liabilities with TNRCC that might have attached as
a result of the alleged discharge of hydrocarbons and certain specified waste
disposal and wastewater discharge allegations during 1999 for $0.3 million.
The Gulf Coast Marine Facilities investigated and disclosed to TNRCC
allegations made to its internal reporting hotline of noncompliance with state
environmental regulations at the Galena Park, Texas terminal. The Gulf Coast
Marine Facilities' investigations focused on whether (i) the vapor control
system at Galena Park met applicable regulatory requirements during loading of
marine vessels; and (ii) Galena Park implemented required controls on air
emissions resulting from tank cleaning operations. It is not possible for the
management of the Gulf Coast Marine Facilities to state whether any proceedings
arising out of the investigations will be commenced against the Gulf Coast
Marine Facilities, or what claims would be asserted or what relief would be
sought.
The Gulf Coast Marine Facilities accrued $1.3 million and $1.7 million at
December 31, 1998 and July 31, 1999, respectively, related to all known
environmental liabilities associated with its operations. These estimates,
provided on an undiscounted basis, were determined based primarily on data
provided by a third-party environmental evaluation service. These liabilities
were classified as current or noncurrent based on management's estimates
regarding the timing of actual payments.
The Gulf Coast Marine Facilities was from time-to-time involved in other
judicial and administrative proceedings, including proceedings relating to other
environmental matters. Although the ultimate outcome of these proceedings cannot
be ascertained, some of them may be resolved adversely to the Gulf Coast Marine
Facilities. In management's opinion, based upon currently known facts and
circumstances, such proceedings in the aggregate will not have a material
adverse effect on the financial condition, results of operations or cash flows
of the Gulf Coast Marine Facilities.
7. SIGNIFICANT CUSTOMER CONCENTRATIONS
The Gulf Coast Marine Facilities' sales to one customer, Equistar,
represented 32%, 24%, and 20% of total sales for the years ended December 31,
1997 and 1998, and the seven months ended July 31, 1999, respectively.
F-29
<PAGE> 154
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Williams Companies, Inc.
We have audited the accompanying balance sheet of Williams Energy Partners
L.P. as of October 13, 2000. This balance sheet is the responsibility of The
Williams Companies, Inc.'s management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Williams Energy Partners L.P. at
October 13, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
October 13, 2000
F-30
<PAGE> 155
WILLIAMS ENERGY PARTNERS L.P.
BALANCE SHEET
OCTOBER 13, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $1,000
------
Total assets...................................... $1,000
======
PARTNERS' EQUITY
Limited partner's equity.................................... $ 990
General partner's equity.................................... 10
------
Total partners' equity............................ $1,000
======
</TABLE>
See accompanying note.
F-31
<PAGE> 156
WILLIAMS ENERGY PARTNERS L.P.
NOTE TO BALANCE SHEET
1. NATURE OF OPERATIONS
Williams Energy Partners L.P. ("Partnership") is a Delaware limited
partnership formed on August 30, 2000 to ultimately acquire the petroleum
product terminal and ammonia pipeline and terminals system assets of Williams
Energy Partners Predecessor (A Division of The Williams Companies, Inc.). In
order to simplify Partnership's obligations under the laws of selected
jurisdictions in which Partnership will conduct business, Partnership's
activities will be conducted through a 99%-owned operating partnership.
Partnership intends to offer 3,750,000 common units, representing limited
partner interests, pursuant to a public offering and to concurrently issue
1,929,694 common units and 5,679,694 subordinated units, representing additional
limited partner interests, to an affiliate of The Williams Companies, Inc., as
well as an aggregate 2% general partner interest in Partnership and its
operating partnership on a combined basis to Williams GP LLC.
Williams GP LLC, as general partner, contributed $10 and an affiliate of
The Williams Companies, Inc., as the organizational limited partner, contributed
$990 to Partnership on October 13, 2000. There have been no other transactions
involving Partnership as of October 13, 2000.
F-32
<PAGE> 157
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Williams Companies, Inc.
We have audited the accompanying balance sheet of Williams GP LLC as of
October 13, 2000. This balance sheet is the responsibility of the Williams
Companies, Inc.'s management. Our responsibility is to express an opinion on
this balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Williams GP LLC at October 13,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
October 13, 2000
F-33
<PAGE> 158
WILLIAMS GP LLC
BALANCE SHEET
OCTOBER 13, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 990
Investment in Williams Energy Partners L.P................ 10
------
Total assets...................................... $1,000
======
OWNER'S EQUITY
Owner's Equity.............................................. $1,000
------
Total owner's equity.............................. $1,000
======
</TABLE>
See accompanying note.
F-34
<PAGE> 159
WILLIAMS GP LLC
NOTE TO BALANCE SHEET
1. NATURE OF OPERATIONS
Williams GP LLC ("General Partner") is a Delaware limited liability company
formed on August 30, 2000 to become the general partner of Williams Energy
Partners L.P. ("Partnership"). General Partner is an indirect wholly-owned
subsidiary of The Williams Companies, Inc. General Partner owns a 1% general
partner interest in Partnership. General Partner intends to purchase a 1%
general partner interest in the Partnership's 99%-owned operating partnership
once the operating partnership is formed.
On October 13, 2000, an affiliate of The Williams Companies, Inc.
contributed $1,000 to Williams GP LLC in exchange for a 100% ownership interest.
General Partner has invested $10 in Partnership. There have been no other
transactions involving General Partner as of October 13, 2000.
F-35
<PAGE> 160
APPENDIX
A
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
WILLIAMS ENERGY PARTNERS L.P.
<PAGE> 161
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions................................................. A-1
Section 1.2. Construction................................................ A-14
ARTICLE II.
ORGANIZATION
Section 2.1. Formation................................................... A-15
Section 2.2. Name........................................................ A-15
Section 2.3. Registered Office; Registered Agent; Principal Office; Other
Offices..................................................... A-15
Section 2.4. Purpose and Business........................................ A-15
Section 2.5. Powers...................................................... A-16
Section 2.6. Power of Attorney........................................... A-16
Section 2.7. Term........................................................ A-17
Section 2.8. Title to Partnership Assets................................. A-17
ARTICLE III.
RIGHTS OF LIMITED PARTNERS
Section 3.1. Limitation of Liability..................................... A-18
Section 3.2. Management of Business...................................... A-18
Section 3.3. Outside Activities of the Limited Partners.................. A-18
Section 3.4. Rights of Limited Partners.................................. A-18
ARTICLE IV.
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
Section 4.1. Certificates................................................ A-19
Section 4.2. Mutilated, Destroyed, Lost or Stolen Certificates........... A-19
Section 4.3. Record Holders.............................................. A-20
Section 4.4. Transfer Generally.......................................... A-20
Section 4.5. Registration and Transfer of Limited Partner Interests...... A-20
Section 4.6. Transfer of the General Partner's General Partner
Interest.................................................... A-21
Section 4.7. Transfer of Incentive Distribution Rights................... A-22
Section 4.8. Restrictions on Transfers................................... A-22
Section 4.9. Citizenship Certificates; Non-citizen Assignees............. A-23
Section 4.10. Redemption of Partnership Interests of Non-citizen
Assignees................................................... A-23
ARTICLE V.
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1. Organizational Contributions................................ A-24
Section 5.2. Contributions by the General Partner and its Affiliates..... A-25
Section 5.3. Contributions by Initial Limited Partners and Reimbursement
of the General Partner...................................... A-25
Section 5.4. Interest and Withdrawal..................................... A-25
Section 5.5. Capital Accounts............................................ A-26
Section 5.6. Issuances of Additional Partnership Securities.............. A-28
Section 5.7. Limitations on Issuance of Additional Partnership
Securities.................................................. A-29
Section 5.8. Conversion of Subordinated Units............................ A-30
Section 5.9. Limited Preemptive Right.................................... A-31
Section 5.10. Splits and Combination...................................... A-31
Section 5.11. Fully Paid and Non-Assessable Nature of Limited Partner
Interests................................................... A-32
</TABLE>
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ARTICLE VI.
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1. Allocations for Capital Account Purposes.................... A-32
Section 6.2. Allocations for Tax Purposes................................ A-38
Section 6.3. Requirement and Characterization of Distributions;
Distributions to Record Holders............................. A-39
Section 6.4. Distributions of Available Cash from Operating Surplus...... A-40
Section 6.5. Distributions of Available Cash from Capital Surplus........ A-41
Section 6.6. Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels......................................... A-41
Section 6.7. Special Provisions Relating to the Holders of Subordinated
Units....................................................... A-42
Section 6.8. Special Provisions Relating to the Holders of Incentive
Distribution Rights......................................... A-42
Section 6.9. Entity-Level Taxation....................................... A-42
ARTICLE VII.
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1. Management.................................................. A-43
Section 7.2. Certificate of Limited Partnership.......................... A-44
Section 7.3. Restrictions on General Partner's Authority................. A-45
Section 7.4. Reimbursement of the General Partner........................ A-45
Section 7.5. Outside Activities.......................................... A-46
Section 7.6. Loans from the General Partner; Loans or Contributions from
the Partnership; Contracts with Affiliates; Certain
Restrictions on the General Partner......................... A-47
Section 7.7. Indemnification............................................. A-48
Section 7.8. Liability of Indemnitees.................................... A-49
Section 7.9. Resolution of Conflicts of Interest......................... A-50
Section 7.10. Other Matters Concerning the General Partner................ A-51
Section 7.11. Purchase or Sale of Partnership Securities.................. A-52
Section 7.12. Registration Rights of the General Partner and its
Affiliates.................................................. A-52
Section 7.13. Reliance by Third Parties................................... A-53
ARTICLE VIII.
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1. Records and Accounting...................................... A-54
Section 8.2. Fiscal Year................................................. A-54
Section 8.3. Reports..................................................... A-54
ARTICLE IX.
TAX MATTERS
Section 9.1. Tax Returns and Information................................. A-55
Section 9.2. Tax Elections............................................... A-55
Section 9.3. Tax Controversies........................................... A-55
Section 9.4. Withholding................................................. A-55
ARTICLE X.
ADMISSION OF PARTNERS
Section 10.1. Admission of Initial Limited Partners....................... A-56
Section 10.2. Admission of Substituted Limited Partner.................... A-56
Section 10.3. Admission of Successor General Partner...................... A-56
Section 10.4. Admission of Additional Limited Partners.................... A-56
Section 10.5. Amendment of Agreement and Certificate of Limited
Partnership................................................. A-57
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ARTICLE XI.
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1. Withdrawal of the General Partner........................... A-57
Section 11.2. Removal of the General Partner.............................. A-58
Section 11.3. Interest of Departing Partner and Successor General
Partner..................................................... A-59
Section 11.4. Termination of Subordination Period, Conversion of
Subordinated Units and Extinguishment of Cumulative Common
Unit Arrearages............................................. A-60
Section 11.5. Withdrawal of Limited Partners.............................. A-60
ARTICLE XII.
DISSOLUTION AND LIQUIDATION
Section 12.1. Dissolution................................................. A-60
Section 12.2. Continuation of the Business of the Partnership After
Dissolution................................................. A-60
Section 12.3. Liquidator.................................................. A-61
Section 12.4. Liquidation................................................. A-62
Section 12.5. Cancellation of Certificate of Limited Partnership.......... A-62
Section 12.6. Return of Contributions..................................... A-62
Section 12.7. Waiver of Partition......................................... A-62
Section 12.8. Capital Account Restoration................................. A-62
ARTICLE XIII.
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1. Amendment to be Adopted Solely by the General Partner....... A-63
Section 13.2. Amendment Procedures........................................ A-64
Section 13.3. Amendment Requirements...................................... A-64
Section 13.4. Special Meetings............................................ A-65
Section 13.5. Notice of a Meeting......................................... A-65
Section 13.6. Record Date................................................. A-65
Section 13.7. Adjournment................................................. A-65
Section 13.8. Waiver of Notice; Approval of Meeting; Approval of
Minutes..................................................... A-65
Section 13.9. Quorum...................................................... A-66
Section 13.10. Conduct of a Meeting........................................ A-66
Section 13.11. Action Without a Meeting.................................... A-66
Section 13.12. Voting and Other Rights..................................... A-67
ARTICLE XIV.
MERGER
Section 14.1. Authority................................................... A-67
Section 14.2. Procedure for Merger or Consolidation....................... A-67
Section 14.3. Approval by Limited Partners of Merger or Consolidation..... A-68
Section 14.4. Certificate of Merger....................................... A-69
Section 14.5. Effect of Merger............................................ A-69
ARTICLE XV.
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1. Right to Acquire Limited Partner Interests.................. A-70
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ARTICLE XVI.
GENERAL PROVISIONS
Section 16.1. Addresses and Notices....................................... A-72
Section 16.2. Further Action.............................................. A-72
Section 16.3. Binding Effect.............................................. A-72
Section 16.4. Integration................................................. A-72
Section 16.5. Creditors................................................... A-72
Section 16.6. Waiver...................................................... A-72
Section 16.7. Counterparts................................................ A-73
Section 16.8. Applicable Law.............................................. A-73
Section 16.9. Invalidity of Provisions.................................... A-73
Section 16.10. Consent of Partners......................................... A-73
</TABLE>
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AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
WILLIAMS ENERGY PARTNERS L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF WILLIAMS
ENERGY PARTNERS L.P. dated as of , 2000, is entered into by and among
Williams GP LLC, a Delaware corporation, as the General Partner, and Williams
Energy Services, a Delaware corporation, as the Organizational Limited Partner,
together with any other Persons who become Partners in the Partnership or
parties hereto as provided herein. In consideration of the covenants, conditions
and agreements contained herein, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. Definitions.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value
of an Adjusted Property that is attributable to positive adjustments made to
such Carrying Value as a result of Book-Up Events. For purposes of determining
the extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is
reduced as a result of a Book-Down Event and the Carrying Value of other
property is increased as a result of such Book-Down Event, an allocable
portion of any such increase in Carrying Value shall be treated as
Additional Book Basis; provided that the amount treated as Additional Book
Basis pursuant hereto as a result of such Book-Down Event shall not exceed
the amount by which the Aggregate Remaining Net Positive Adjustments after
such Book-Down Event exceeds the remaining Additional Book Basis
attributable to all of the Partnership's Adjusted Property after such
Book-Down Event (determined without regard to the application of this
clause (ii) to such Book-Down Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"Excess Additional Book Basis"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
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"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b)
decreased by (i) the amount of all losses and deductions that, as of the end of
such fiscal year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
or otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i)
or 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury Regulation Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The
"Adjusted Capital Account" of a Partner in respect of a General Partner
Interest, a Common Unit, a Subordinated Unit or an Incentive Distribution Right
or any other specified interest in the Partnership shall be the amount which
such Adjusted Capital Account would be if such General Partner Interest, Common
Unit, Subordinated Unit, Incentive Distribution Right or other interest in the
Partnership were the only interest in the Partnership held by a Partner from and
after the date on which such General Partner Interest, Common Unit, Subordinated
Unit, Incentive Distribution Right or other interest was first issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in Working
Capital Borrowings during such period and (ii) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period, and (b) plus (i) any net decrease
in Working Capital Borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included in
clause (a)(i) of the definition of Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. The General Partner shall, in its discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of Contributed
Properties contributed to the Partnership in a single or integrated transaction
among each separate property on a basis proportional to the fair market value of
each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited
Partnership of Williams Energy Partners L.P., as it may be amended, supplemented
or restated from time to time.
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"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under this
Agreement and who has executed and delivered a Transfer Application as required
by this Agreement, but who has not been admitted as a Substituted Limited
Partner.
"Associate" means, when used to indicate a relationship with any Person,
(a) any corporation or organization of which such Person is a director, officer
or partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date,
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such Quarter, and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such Quarter resulting from
Working Capital Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves that is necessary or appropriate
in the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the General Partner
may not establish cash reserves pursuant to (iii) above if the effect of
such reserves would be that the Partnership is unable to distribute the
Minimum Quarterly Distribution on all Common Units, plus any Cumulative
Common Unit Arrearage on all Common Units, with respect to such Quarter;
and, provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such Quarter
but on or before the date of determination of Available Cash with respect
to such Quarter shall be deemed to have been made, established, increased
or reduced, for purposes of determining Available Cash, within such Quarter
if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter
shall equal zero.
"Book Basis Derivative Items" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
"Book-Down Event" means an event which triggers a negative adjustment to
the Capital Accounts of the Partners pursuant to Section 5.5(d).
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
5.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
"Book-Up Event" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
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"Business Day" means Monday through Friday of each week, except that a
legal holiday recognized as such by the government of the United States of
America or the states of New York or Texas shall not be regarded as a Business
Day.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
were the only interest in the Partnership held by a Partner from and after the
date on which such General Partner Interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement or the Contribution and Conveyance Agreement.
"Capital Improvement" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new capital assets (including, without limitation, pipeline
systems, terminals, storage facilities and related assets), in each case made to
increase the operating capacity or revenues of the Partnership Group from the
operating capacity or revenues of the Partnership Group existing immediately
prior to such addition, improvement, acquisition or construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and (b)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cause" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as general
partner of the Partnership.
"Certificate" means a certificate (i) substantially in the form of Exhibit
A to this Agreement, (ii) issued in global form in accordance with the rules and
regulations of the Depositary or (iii) in such other form as may be adopted by
the General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more Common Units or a certificate, in such form as may be
adopted by the General Partner in its discretion, issued by the Partnership
evidencing ownership of one or more other Partnership Securities.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 7.12(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
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"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
successor law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part
of the Partnership Interests of all Limited Partners and Assignees and of the
General Partner (exclusive of its interest as a holder of the General Partner
Interest and Incentive Distribution Rights) and having the rights and
obligations. specified with respect to Common Units in this Agreement. The term
"Common Unit" does not refer to a Subordinated Unit prior to its conversion into
a Common Unit pursuant to the terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Conflicts Committee" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are neither
security holders, officers nor employees of the General Partner nor officers,
directors or employees of any Affiliate of the General Partner.
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership. Once the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no longer constitute a
Contributed Property, but shall be deemed an Adjusted Property.
"Contribution and Conveyance Agreement" means that certain Contribution,
Conveyance and Assumption Agreement, dated as of the Closing Date, among the
General Partner, the Partnership, the Operating Partnership and certain other
parties, together with the additional conveyance documents and instruments
contemplated or referenced thereunder.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act,
6 Del C. sec. 17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Depositary" means, with respect to any Units issued in global form, The
Depository Trust Company and its successors and permitted assigns.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes to
do business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
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"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $[ ] per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
2001, it means the product of $[ ] multiplied by a fraction of which the
numerator is the number of days in such period, and of which the denominator is
[ ]), subject to adjustment in accordance with Sections 6.6 and 6.9.
"General Partner" means Williams GP LLC and its successors and permitted
assigns as general partner of the Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced by
Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General Partner
to comply with the terms and provisions of this Agreement.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
"Holder" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
"Incentive Distribution Right" means a non-voting Limited Partner Interest
issued to the General Partner in connection with the transfer of substantially
all of its general partner interest in Williams Ammonia Pipeline, L.P. and
Williams Terminals, L.P. to the Partnership pursuant to Section 5.2, which
Partnership Interest will confer upon the holder thereof only the rights and
obligations specifically provided in this Agreement with respect to Incentive
Distribution Rights (and no other rights otherwise available to or other
obligations of a holder of a Partnership interest). Notwithstanding anything in
this Agreement to the contrary, the holder of an Incentive Distribution Right
shall not be entitled to vote such Incentive Distribution Right on any
Partnership matter except as may otherwise be required by law.
"Incentive Distributions" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"Indemnified Persons" has the meaning assigned to such term in Section
7.12(c).
"Indemnitee" means (a) the General Partner, (b) any Departing Partner, (c)
any Person who is or was an Affiliate of the General Partner or any Departing
Partner, (d) any Person who is or was a member, partner, officer, director,
employee, agent or trustee of any Group Member, the General Partner or any
Departing Partner or any Affiliate of any Group Member, the General Partner or
any Departing Partner, and (e) any Person who is or was serving at the request
of the General Partner or any Departing Partner or any Affiliate of the General
Partner or any Departing Partner as an officer, director, employee, member,
partner, agent, fiduciary or trustee of another Person; provided, that a Person
shall not be an Indemnitee by reason of providing, on a fee-for-services basis,
trustee, fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means the General Partner (with respect to the
Incentive Distribution Rights received by it pursuant to Section 5.2) Williams
Natural Gas Liquids, Inc., Williams Energy Services and the Underwriters, in
each case upon being admitted to the Partnership in accordance with Section
10.1.
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"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of Units is initially sold by the
Partnership, as determined by the General Partner, in each case adjusted as the
General Partner determines to be appropriate to give effect to any distribution,
subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than Working Capital
Borrowings and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (other than the Common Units sold to the Underwriters pursuant to
the exercise of their over-allotment option); and (c) sales or other voluntary
or involuntary dispositions of any assets of any Group Member other than (i)
sales or other dispositions of inventory, accounts receivable and other assets
in the ordinary course of business, and (ii) sales or other dispositions of
assets as part of normal retirements or replacements.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner prior to its withdrawal from the Partnership,
each Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 11.3 or (b) solely for purposes
of Articles V, VI, VII and IX, each Assignee; provided, however, that when the
term "Limited Partner" is used herein in the context of any vote or other
approval, including without limitation Articles XIII and XIV, such term shall
not, solely for such purpose, include any holder of an Incentive Distribution
Right except as may otherwise be required by law.
"Limited Partner Interest" means the ownership interest of a Limited
Partner or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term "Limited Partner Interest" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Quarterly Distribution" means $[ ] per Unit per Quarter (or
with respect to the period commencing on the Closing Date and ending on March
31, 2001, it means the product of $[ ]
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multiplied by a fraction of which the numerator is the number of days in such
period and of which the denominator is [ ]), subject to adjustment in
accordance with Sections 6.6 and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 5.5(b) and shall
not include any items specially allocated under Section 6.1(d); provided that
the determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 5.5(b) and shall not
include any items specially allocated under Section 6.1(d); provided that the
determination of the items that have been specially allocated under Section
6.1(d) shall be made as if Section 6.1(d)(xii) were not in this Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and shall
not include any items of income, gain or loss specially allocated under Section
6.1(d).
"Non-citizen Assignee" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.9.
"Nonrecourse Built-in Gain" means with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or pledge
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
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"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of Treasury Regulation Section 1.704-2(b), are attributable
to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b).
"Omnibus Agreement" means that Omnibus Agreement, dated as of the Closing
Date, among The Williams Companies, Inc., the General Partner, the Partnership
and the Operating Partnership.
"Operating Expenditures" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
debt service payments, and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness shall not constitute Operating Expenditures.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to Partners. Where capital expenditures are made in part for
Acquisitions or for Capital Improvements and in part for other purposes,
the General Partner's good faith allocation between the amounts paid for
each shall be conclusive.
"Operating Partnership" means Williams OLP, L.P., a Delaware limited
partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement
of Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus" means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $15 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions (except to the
extent specified in Section 6.5) and (iii) all cash receipts of the
Partnership Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from Working Capital Borrowings, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating Surplus, within
such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
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"Organizational Limited Partner" means Williams Energy Services, Inc. in
its capacity as the organizational limited partner of the Partnership pursuant
to this Agreement.
"Outstanding" means, with respect to Partnership Securities, all
Partnership Securities that are issued by the Partnership and reflected as
outstanding on the Partnership's books and records as of the date of
determination; provided, however, that if at any time any Person or Group (other
than the General Partner or its Affiliates) beneficially owns 20% or more of any
Outstanding Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not be voted on any
matter and shall not be considered to be Outstanding when sending notices of a
meeting, of Limited Partners to vote on any matter (unless otherwise required by
law), calculating required votes, determining the presence of a quorum or for
other similar purposes under this Agreement, except that Common Units so owned
shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such
Common Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided, further, that the
foregoing limitation shall not apply (i) to any Person or Group who acquired 20%
or more of any Outstanding Partnership Securities of any class then Outstanding
directly from the General Partner or its Affiliates or (ii) to any Person or
Group who acquired 20% or more of any Outstanding Partnership Securities of any
class then Outstanding directly or indirectly from a Person or Group described
in clause (i) provided that the General Partner shall have notified such Person
or Group in writing that such limitation shall not apply.
"Over-Allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
"Partnership" means Williams Energy Partners L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and
any Subsidiary of any such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include the General Partner Interest and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation rights
relating to an equity interest in the Partnership), including without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"Percentage Interest" means as of any date of determination (a) as to the
General Partner (with respect to its General Partner Interest), an aggregate
1.0%, (b) as to any Unitholder or Assignee holding Units, the product obtained
by multiplying (i) 99% less the percentage applicable to paragraph (c) by (ii)
the quotient obtained by dividing (A) the number of Units held by such
Unitholder or Assignee by (B) the total number of all Outstanding Units, and (c)
as to the holders of additional Partnership
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Securities issued by the Partnership in accordance with Section 5.6, the
percentage established as a part of such issuance. The Percentage Interest with
respect to an Incentive Distribution Right shall at all times be zero.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their relative Percentage Interests
and (c) when modifying holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in accordance with
the relative number of Incentive Distribution Rights held by each such holder.
"Purchase Date" means the date determined by the General Partner as the
date for purchase of all Outstanding Units of a certain class (other than Units
owned by the General Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter,
or with respect to the first fiscal quarter after the Closing Date the portion
of such fiscal quarter after the Closing Date, of the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution or to
participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the General Partner has caused to be kept as of the opening of business on such
Business Day.
"Redeemable Interests" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-48866) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General Partner (as holder of the
General Partner Interest), the excess of (a) the Net Positive Adjustments of the
General Partner as of the end of such period over
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(b) the sum of the General Partner's Share of Additional Book Basis Derivative
Items with respect to the General Partner Interest for each prior taxable
period, and (iii) with respect to the holders of Incentive Distribution Rights,
the excess of (a) the Net Positive Adjustments of the holders of Incentive
Distribution Rights as of the end of such period over (b) the sum of the Share
of Additional Book Basis Derivative Items of the holders of the Incentive
Distribution Rights for each prior taxable period.
"Required Allocations" means (a) any limitation imposed on any allocation
of Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and
(b) any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"Residual Gain" or "Residual Loss" means any item of gain or loss; as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Restricted Business" has the meaning assigned to such term in the Omnibus
Agreement.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $[ ] per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
2001, it means the product of $[ ] multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is [ ]), subject to adjustment in accordance with Sections 6.6
and 6.9.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or Subordinated Units,
the amount that bears the same ratio to such Additional Book Basis Derivative
Items as the Unitholders' Remaining Net Positive Adjustments as of the end of
such period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, (ii) with respect to the General Partner (as holder of the General Partner
Interest), the amount that bears the same ratio to such additional Book Basis
Derivative Items as the General Partner's Remaining Net Positive Adjustments as
of the end of such period bears to the Aggregate Remaining Net Positive
Adjustment as of that time, and (iii) with respect to the Partners holding
Incentive Distribution Rights, the amount that bears the same ratio to such
Additional Book Basis Derivative Items as the Remaining Net Positive Adjustments
of the Partners holding the Incentive Distribution Rights as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustments as of that
time.
"Special Approval" means approval by a majority of the members of the
Conflicts Committee.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees (other than of
holders of the Incentive Distribution Rights) and having the rights and
obligations specified with respect to Subordinated Units in this Agreement. The
term "Subordinated Unit" as used herein does not include a Common Unit.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after December 31, 2005 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution (or portion thereof for the first fiscal
quarter after the Closing Date) on all Outstanding Common Units and
Subordinated Units during such periods and (B) the Adjusted Operating
Surplus generated during each of the three consecutive, non-overlapping
four-Quarter
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periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the Common Units and Subordinated
Units that were Outstanding during such periods on a fully diluted basis
(i.e., taking into account for purposes of such determination all
Outstanding Common Units, all Outstanding Subordinated Units, all Common
Units and Subordinated Units issuable upon exercise of employee options
that have, as of the date of determination, already vested or are scheduled
to vest prior to the end of the Quarter immediately following the Quarter
with respect to which such determination is made, and all Common Units and
Subordinated Units that have as of the date of determination, been earned
by but not yet issued to management of the Partnership in respect of
incentive compensation), plus the related distribution on the General
Partner Interest in the Partnership and on the general partner interest in
the Operating Partnership, during such periods and (ii) there are no
Cumulative Common Unit Arrearages; and
(b) the date on which the General Partner is removed as general
partner of the Partnership upon the requisite vote by holders of
Outstanding Units under circumstances where Cause does not exist and Units
held by the General Partner and its Affiliates are not voted in favor of
such removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of such Person or
a combination thereof, (b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned, directly or
indirectly, at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or (c) any other Person
(other than a corporation or a partnership) in which such Person, one or more
Subsidiaries of such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors or
other governing body of such-Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in
Section 14.2(b).
"Third Target Distribution" means $[ ] per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on March 31,
2001, it means the product of $[ ] multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is [ ]), subject to adjustment in accordance with Sections 6.6
and 6.9.
"Third Target Liquidation Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(F).
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"Transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time to
time by the Partnership to act as registrar and transfer agent for the Common
Units; provided that if no Transfer Agent is specifically designated for any
other Partnership Securities, the General Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule I to
the Underwriting Agreement who purchases Common Units pursuant thereto.
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"Underwriting Agreement" means the Underwriting Agreement dated
[ ], 2000 among the Underwriters, the Partnership and certain other
parties, providing for the purchase of Common Units by such Underwriters.
"Unit" means a Partnership Security that is designated as a "Unit" and
shall include Common Units and Subordinated Units but shall not include (i) a
General Partner Interest or (ii) Incentive Distribution Rights.
"Unitholders" means the holders of Common Units and Subordinated Units.
"Unit Majority" means, during the Subordination Period, at least a majority
of the Outstanding Common Units, excluding any Common Units held by the General
Partner and its Affiliates, voting as a class and at least a majority of the
Outstanding Subordinated Units voting as a class, and thereafter, at least a
majority of the Outstanding Common Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the fair market
value of such property as of such date (as determined under Section 5.5(d)) over
(b) the Carrying Value of such property as of such date (prior to any adjustment
to be made pursuant to Section 5.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the Carrying Value
of such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
"Unrecovered Capital" means at any time, with respect to a Unit, the
Initial Unit Price less the sum of all distributions constituting Capital
Surplus theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any distributions in kind) in
connection with the dissolution and liquidation of the Partnership theretofore
made in respect of an Initial Common Unit, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of such Units.
"US GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
"Working Capital Borrowings" means borrowings exclusively for working
capital purposes made pursuant to a credit facility or other arrangement
requiring all such borrowings thereunder to be reduced to a relatively small
amount each year for an economically meaningful period of time.
SECTION 1.2. Construction.
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) the term "include" or "includes" means
includes, without limitation, and "including" means including, without
limitation.
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ARTICLE II.
ORGANIZATION
SECTION 2.1. Formation.
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the original Agreement of Limited
Partnership of Williams Energy Partners L.P. in its entirety. This amendment and
restatement shall become effective on the date of this Agreement. Except as
expressly provided to the contrary in this Agreement, the rights, duties
(including fiduciary duties), liabilities and obligations of the Partners and
the administration, dissolution and termination of the Partnership shall be
governed by the Delaware Act, All Partnership Interests shall constitute
personal property of the owner thereof for all purposes and a Partner has no
interest in specific Partnership property.
SECTION 2.2. Name.
The name of the Partnership shall be "Williams Energy Partners L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner in its sole discretion,
including the name of the General Partner. The words "Limited Partnership,"
"Ltd." or similar words or letters shall be included in the Partnership's name
where necessary for the purpose of complying with the laws of any jurisdiction
that so requires. The General Partner in its discretion may change the name of
the Partnership at any time and from time to time and shall notify the Limited
Partners of such change in the next regular communication to the Limited
Partners.
SECTION 2.3. Registered Office; Registered Agent; Principal Office; Other
Offices.
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at 1209 Orange Street,
Wilmington, Delaware 19801, and the registered agent for service of process on
the Partnership in the State of Delaware at such registered office shall be The
Corporation Trust Company. The principal office of the Partnership shall be
located at One Williams Center, Tulsa, Oklahoma 74172 or such other place as the
General Partner may from time to time designate by notice to the Limited
Partners. The Partnership may maintain offices at such other place or places
within or outside the State of Delaware as the General Partner deems necessary
or appropriate. The address of the General Partner shall be One Williams Center,
Tulsa Oklahoma 74172 or such other place as the General Partner may from time to
time designate by notice to the Limited Partners.
SECTION 2.4. Purpose and Business.
The Purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a Partner of the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon, the
Partnership as a partner of the Operating Partnership pursuant to the Operating
Partnership Agreement or otherwise, (b) engage directly in, or enter into or
form any corporation, partnership, joint venture, limited liability company or
other arrangement to engage indirectly in, any business activity that the
Operating Partnership is permitted to engage in by the Operating Partnership
Agreement and, in connection therewith, to exercise all of the rights and powers
conferred upon the Partnership pursuant to the agreements relating to such
business activity, (c) engage directly in, or enter into or form any
corporation, partnership, joint venture, limited liability company or other
entity or arrangement to engage indirectly in, any business activity that the
General Partner approves and which lawfully may be conducted by a limited
partnership organized pursuant to the Delaware Act and, in connection therewith,
to exercise all of the rights and powers conferred upon the Partnership pursuant
to the agreements relating to such business activity; provided, however, that
the General Partner reasonably determines, as of the date of the acquisition or
commencement of such activity, that such activity (i) generates "qualifying
income" (as such term is defined pursuant to Section 7704 of the Code) or a
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Subsidiary, or a Partnership activity that generates qualifying income, or (ii)
enhances the operations of an activity of the Operating Partnership and (d) do
anything necessary or appropriate to the foregoing, including the making of
capital contributions or loans to a Group Member. The General Partner has no
obligation or duty to the Partnership, the Limited Partners, or the Assignees to
propose or approve, and in its discretion may decline to propose or approve, the
conduct by the Partnership of any business.
SECTION 2.5. Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in Section
2.4 and for the protection and benefit of the Partnership.
SECTION 2.6. Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner and, if a Liquidator shall have been selected pursuant to
Section 12.3, the Liquidator, (and any successor to the Liquidator by merger,
transfer, assignment, election or otherwise) and each of their authorized
officers and attorneys-in-fact, as the case may be, with full power of
substitution, as his true and lawful agent and attorney-in-fact, with full power
and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B) all
certificates, documents and other instruments that the General Partner or
the Liquidator deems necessary or appropriate to reflect, in accordance
with its terms, any amendment, change, modification or restatement of this
Agreement; (C) all certificates, documents and other instruments (including
conveyances and a certificate of cancellation) that the General Partner or
the Liquidator deems necessary or appropriate to reflect the dissolution
and liquidation of the Partnership pursuant to the terms of this Agreement;
(D) all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X, XI or XII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments (including agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or
the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner and the Liquidator may exercise the power of attorney made
in this Section 2.6(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XIII or as may be otherwise expressly provided for in this Agreement.
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(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death, incompetency,
disability, incapacity, dissolution, bankruptcy or termination of any Limited
Partner or Assignee and the transfer of all or any portion of such Limited
Partner's or Assignee's Partnership Interest and shall extend to such Limited
Partner's or Assignee's heirs, successors, assigns and personal representatives.
Each such Limited Partner or Assignee hereby agrees to be bound by any
representation made by the General Partner or the Liquidator acting in good
faith pursuant to such power of attorney; and each such Limited Partner or
Assignee, to the maximum extent permitted by law, hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of the
General Partner or the Liquidator taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within 15 days after receipt of the request
therefor, such further designation, powers of attorney and other instruments as
the General Partner or the Liquidator deems necessary to effectuate this
Agreement and the purposes of the Partnership.
SECTION 2.7. Term.
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the dissolution of the Partnership in accordance with the
provisions of Article XII. The existence of the Partnership as a separate legal
entity shall continue until the cancellation of the Certificate of Limited
Partnership as provided in the Delaware Act.
SECTION 2.8. Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner, one or more of its Affiliates or one or more nominees, as
the General Partner may determine. The General Partner hereby declares and
warrants that any Partnership assets for which record title is held in the name
of the General Partner or one or more of its Affiliates or one or more nominees
shall be held by the General Partner or such Affiliate or nominee for the use
and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use reasonable
efforts to cause record title to such assets (other than those assets in respect
of which the General Partner determines that the expense and difficulty of
conveyancing makes transfer of record title to the Partnership impracticable) to
be vested in the Partnership as soon as reasonably practicable; provided,
further, that, prior to the withdrawal or removal of the General Partner or as
soon thereafter as practicable, the General Partner shall use reasonable efforts
to effect the transfer of record title to the Partnership and, prior to any such
transfer, will provide for the use of such assets in a manner satisfactory to
the General Partner. All Partnership assets shall be recorded as the property of
the Partnership in its books and records, irrespective of the name in which
record title to such Partnership assets is held.
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ARTICLE III.
RIGHTS OF LIMITED PARTNERS
SECTION 3.1. Limitation of Liability.
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
SECTION 3.2. Management of Business.
No Limited Partner or Assignee, in its capacity as such, shall participate
in the operation, management or control (within the meaning of the Delaware Act)
of the Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the Partnership. Any
action taken by any Affiliate of the General Partner or any officer, director,
employee, manager, member, general partner, agent or trustee of the General
Partner or any of its Affiliates, or any officer, director, employee, manager,
member, general partner, agent or trustee of a Group Member, in its capacity as
such, shall not be deemed to be participation in the control of the business of
the Partnership by a limited partner of the Partnership (within the meaning of
Section 17-303(a) of the Delaware Act) and shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners or Assignees under this
Agreement.
SECTION 3.3. Outside Activities of the Limited Partners.
Subject to the provisions of Section 7.5 and the Omnibus Agreement, which
shall continue to be applicable to the Persons referred to therein, regardless
of whether such Persons shall also be Limited Partners or Assignees, any Limited
Partner or Assignee shall be entitled to and may have business interests and
engage in business activities in addition to those relating to the Partnership,
including business interests and activities in direct competition with the
Partnership Group. Neither the Partnership nor any of the other Partners or
Assignees shall have any rights by virtue of this Agreement in any business
ventures of any Limited Partner or Assignee.
SECTION 3.4. Rights of Limited Partners.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash
and a description and statement of the Net Agreed Value of any other
Capital Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
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(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the nature
of trade secrets or (ii) other information the disclosure of which the General
Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the Partnership the
primary purpose of which is to circumvent the obligations set forth in this
Section 3.4).
ARTICLE IV.
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
SECTION 4.1. Certificates.
Upon the Partnership's issuance of Common Units or Subordinated Units to
any Person, the Partnership shall issue one or more Certificates in the name of
such Person evidencing the number of such Units being so issued. In addition,
(a) upon the General Partner's request, the Partnership shall issue to it one or
more Certificates in the name of the General Partner evidencing its interests in
the Partnership and (b) upon the request of any Person owning Incentive
Distribution Rights or any other Partnership Securities other than Common Units
or Subordinated Units, the Partnership shall issue to such Person one or more
certificates evidencing such Incentive Distribution Rights or other Partnership
Securities other than Common Units or Subordinated Units. Certificates shall be
executed on behalf of the Partnership by the Chairman of the Board, President or
any Vice President and the Secretary or any Assistant Secretary of the General
Partner. No Common Unit Certificate shall be valid for any purpose until it has
been countersigned by the Transfer Agent; provided, however, that if the General
Partner elects to issue Common Units in global form, the Common Unit
Certificates shall be valid upon receipt of a certificate from the Transfer
Agent certifying that the Common Units have been duly registered in accordance
with the directions of the Partnership and the Underwriters. Subject to the
requirements of Section 6.7(b), the Partners holding Certificates evidencing
Subordinated Units may exchange such Certificates for Certificates evidencing
Common Units on or after the date on which such Subordinated Units are converted
into Common Units pursuant to the terms of Section 5.8.
SECTION 4.2. Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate officers of the General Partner on behalf of the Partnership shall
execute, and the Transfer Agent shall countersign and deliver in exchange
therefor, a new Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall countersign
a new Certificate in place of any Certificate previously issued if the Record
Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to
the Partnership, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety or
sureties and with fixed or open penalty as the
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Partnership may reasonably direct, in its sole discretion, to indemnify the
Partnership, the Partners, the General Partner and the Transfer Agent
against any claim that may be made on account of the alleged loss,
destruction or theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner or Assignee shall
be precluded from making any claim against the Partnership, the General Partner
or the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 4.2, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Transfer
Agent) reasonably connected therewith.
SECTION 4.3. Record Holders.
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which such Partnership interests are listed
for trading. Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent of any of the
foregoing) is acting as nominee, agent or in some other representative capacity
for another Person in acquiring and/or holding Partnership Interests, as between
the Partnership on the one hand, and such other Persons on the other, such
representative Person (a) shall be the Partner or Assignee (as the case may be)
of record and beneficially, (b) must execute and deliver a Transfer Application
and (c) shall be bound by this Agreement and shall have the rights and
obligations of a Partner or Assignee (as the case may be) hereunder and as, and
to the extent, provided for herein.
SECTION 4.4. Transfer Generally.
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its General Partner Interest to another Person who
becomes the General Partner, by which the holder of a Limited Partner Interest
assigns such Limited Partner Interest to another Person who is or becomes a
Limited Partner or an Assignee, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article IV.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any member or stockholder of the General Partner of any or all of
the issued and outstanding membership interests or capital stock of the General
Partner.
SECTION 4.5. Registration and Transfer of Limited Partner Interests.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests. The
Transfer Agent is hereby appointed registrar and transfer agent for the purpose
of registering Common Units and
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transfers of such Common Units as herein provided. The Partnership shall not
recognize transfers of Certificates evidencing Limited Partner Interests unless
such transfers are effected in the manner described in this Section 4.5. Upon
surrender of a Certificate for registration of transfer of any Limited Partner
Interests evidenced by a Certificate, and subject to the provisions of Section
4.5(b), the appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and in the case of Common Units, the
Transfer Agent shall countersign and deliver, in the name of the holder or the
designated transferee or transferees, as required pursuant to the holder's
instructions, one or more new Certificates evidencing the same aggregate number
and type of Limited Partner Interests as was evidenced by the Certificate so
surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall not
recognize any transfer of Limited Partner interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and such Certificates are accompanied by a Transfer Application duly
executed by the transferee (or the transferee's attorney-in-fact duly authorized
in writing). No charge shall be imposed by the Partnership for such transfer;
provided, that as a condition to the issuance of any new Certificate under this
Section 4.5, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed with respect
thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests and
the admission of any new Limited Partner shall not constitute an amendment to
this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in
respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested admission
as a Substituted Limited Partner, (ii) agreed to comply with and be bound by and
to have executed this Agreement, (iii) represented and warranted that such
transferee has the right, power and authority and, if an individual, the
capacity to enter into this Agreement, (iv) granted the powers of attorney set
forth in this Agreement and (v) given the consents and approvals and made the
waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any time
to transfer their Subordinated Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or more Persons.
SECTION 4.6. Transfer of the General Partner's General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to December 31, 2010, the
General Partner shall not transfer all or any part of its General Partner
Interest to a Person unless such transfer (i) has been approved by the prior
written consent or vote of the holders of at least a majority of the Outstanding
Common Units (excluding Common Units held by the General Partner and its
Affiliates) or (ii) is of all, but not less than all, of its General Partner
Interest to (A) an Affiliate of the General Partner or (B) another Person in
connection with the merger or consolidation of the General Partner with or into
another Person or the transfer by the General Partner of all or substantially
all of its assets to another Person.
(b) Subject to Section 4.6(c) below, on or after December 31, 2010, the
General Partner may transfer all or any of its General Partner Interest without
Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to another
Person shall be permitted unless (i) the transferee agrees to assume the rights
and duties of the General Partner under this Agreement and the Operating
Partnership Agreement and to be bound by the provisions of this Agreement and
the Operating Partnership Agreement, (ii) the Partnership receives an Opinion of
Counsel that such transfer would not result in the
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loss of limited liability of any Limited Partner or of any limited partner of
the Operating Partnership or cause the Partnership or the Operating Partnership
to be treated as an association taxable as a corporation or otherwise to be
taxed as an entity for federal income tax purposes (to the extent not already so
treated or taxed) and (iii) such transferee also agrees to purchase all (or the
appropriate portion thereof, if applicable) of the partnership or membership
interest of the General Partner as the general partner or managing member of
each other Group Member. In the case of a transfer pursuant to and in compliance
with this Section 4.6, the transferee or successor (as the case may be) shall,
subject to compliance with the terms of Section 10.3, be admitted to the
Partnership as a General Partner immediately prior to the transfer of the
Partnership Interest, and the business of the Partnership shall continue without
dissolution.
SECTION 4.7. Transfer of Incentive Distribution Rights.
Prior to December 31, 2010, a holder of Incentive Distribution Rights may
transfer any or all of the Incentive Distribution Rights held by such holder
without any consent of the Unitholders (a) to an Affiliate or (b) to another
Person in connection with (i) the merger or consolidation of such holder of
Incentive Distribution Rights with or into such other Person or (ii) the
transfer by such holder of all or substantially all of its assets to such other
Person. Any other transfer of the Incentive Distribution Rights prior to
December 31, 2010, shall require the prior approval of holders at least a
majority of the Outstanding Common Units (excluding Common Units held by the
General Partner and its Affiliates). On or after December 31, 2010, the General
Partner or any other holder of Incentive Distribution Rights may transfer any or
all of its Incentive Distribution Rights without Unitholder approval.
Notwithstanding anything herein to the contrary, no transfer of Incentive
Distribution Rights to another Person shall be permitted unless the transferee
agrees to be bound by the provisions of this Agreement. The General Partner
shall have the authority (but shall not be required) to adopt such reasonable
restrictions on the transfer of Incentive Distribution Rights and requirements
for registering the transfer of Incentive Distribution Rights as the General
Partner, in its sole discretion, shall determine are necessary or appropriate.
SECTION 4.8. Restrictions on Transfers.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership Interests
shall be made if such transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with jurisdiction over
such transfer, (ii) terminate the existence or qualification of the Partnership
or Operating Partnership under the laws of the jurisdiction of its formation, or
(iii) cause the Partnership or Operating Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes (to the extent not already so treated or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or
Operating Partnership becoming taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes. The restrictions may be imposed by
making such amendments to this Agreement as the General Partner may determine to
be necessary or appropriate to impose such restrictions; provided, however, that
any amendment that the General Partner believes, in the exercise of its
reasonable discretion, could result in the delisting or suspension of trading of
any class of Limited Partner Interests on the principal National Securities
Exchange on which such class of Limited Partner Interests is then traded must be
approved, prior to such amendment being effected, by the holders of at least a
majority of the Outstanding Limited Partner Interests of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
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(d) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
SECTION 4.9. Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or
local law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee, the
General Partner may request any Limited Partner or Assignee to furnish to the
General Partner, within 30 days after receipt of such request, an executed
Citizenship Certification or such other information concerning his nationality,
citizenship or other related status (or, if the Limited Partner or Assignee is a
nominee holding for the account of another Person, the nationality, citizenship
or other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Partnership Interests owned by such Limited Partner or Assignee shall be subject
to redemption in accordance with the provisions of Section 4.10. In addition,
the General Partner may require that the status of any such Partner or Assignee
be changed to that of a Non-citizen Assignee and, thereupon, the General Partner
shall be substituted for such Non-citizen Assignee as the Limited Partner in
respect of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner Interests
other than those of Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 12.4 but shall be
entitled to the cash equivalent thereof, and the Partnership shall provide cash
in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the General
Partner, request admission as a Substituted Limited Partner with respect to any
Limited Partner Interests of such Non-citizen Assignee not redeemed pursuant to
Section 4.10, and upon his admission pursuant to Section 10.2, the General
Partner shall cease to be deemed to be the Limited Partner in respect of the
Non-citizen Assignee's Limited Partner Interests.
SECTION 4.10. Redemption of Partnership Interests of Non-citizen Assignees.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee establishes
to the satisfaction of the General Partner that such Limited Partner or Assignee
is an Eligible Citizen or has transferred his Partnership Interests to a Person
who is an Eligible Citizen and who furnishes a Citizenship Certification to the
General Partner prior to the date fixed for redemption as provided below, redeem
the Partnership Interest of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The
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notice shall be deemed to have been given when so mailed. The notice shall
specify the Redeemable Interests, the date fixed for redemption, the place
of payment, that payment of the redemption price will be made upon
surrender of the Certificate evidencing the Redeemable Interests and that
on and after the date fixed for redemption no further allocations or
distributions to which the Limited Partner or Assignee would otherwise be
entitled in respect of the Redeemable Interests will accrue or be made.
(ii) The aggregate redemption price for Redeemable Interests shall be
an amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Limited Partner Interests
of the class to be so redeemed multiplied by the number of Limited Partner
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner,
in cash or by delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at the rate of
10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Limited Partner or
Assignee, at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Interests, duly endorsed in blank or
accompanied by an assignment duly executed in blank, the Limited Partner or
Assignee or his duly authorized representative shall be entitled to receive
the payment therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.10 shall also be applicable to Limited
Partner Interests held by a Limited Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the recipient of a notice of
redemption from transferring his Limited Partner Interest before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon receipt
of notice of such a transfer, the General Partner shall withdraw the notice of
redemption, provided the transferee of such Limited Partner Interest certifies
to the satisfaction of the General Partner in a Citizenship Certification
delivered in connection with the Transfer Application that he is an Eligible
Citizen. If the transferee fails to make such certification, such redemption
shall be effected from the transferee on the original redemption date.
ARTICLE V.
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
SECTION 5.1. Organizational Contributions.
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $10.00 for an interest in the Partnership and has been admitted as
the General Partner of the Partnership, and the Organizational Limited Partner
made an initial Capital Contribution to the Partnership in the amount of $990.00
for an interest in the Partnership and has been admitted as a Limited Partner of
the Partnership. As of the Closing Date, the interest of the Organizational
Limited Partner shall be redeemed as provided in the Contribution and Conveyance
Agreement; the initial Capital Contributions of each Partner shall thereupon be
refunded; and the Organizational Limited Partner shall cease to be a Limited
Partner of the Partnership. Ninety-nine percent of any interest or other profit
that may have resulted from the investment or other use of such initial Capital
Contributions shall be allocated and distributed to the Organizational Limited
Partner, and the balance thereof shall be allocated and distributed to the
General Partner.
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SECTION 5.2. Contributions by the General Partner and its Affiliates.
(a) On the Closing Date and pursuant to the Contribution and Conveyance
Agreement, (i) the General Partner shall contribute to the Partnership, as a
Capital Contribution, all of its interest in Williams Ammonia Pipeline, L.P., a
Delaware limited partnership, and all of its interest in Williams Terminals,
L.P., a Texas limited partnership, in exchange for (A) the continuation of its
General Partner Interest, subject to all of the rights, privileges and duties of
the General Partner under this Agreement, and (B) the Incentive Distribution
Rights, (ii) Williams Natural Gas Liquids, Inc., will contribute to the
Partnership, as a Capital Contribution, all of its limited partner interest in
the Operating Partnership in exchange for Common Units and Subordinated
Units and (iii) Williams Energy Services will contribute to the Partnership, as
a Capital Contribution, all of its limited partner interest in the Operating
Partnership in exchange for Common Units and Subordinated Units.
(b) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the Common Units issued in the Initial
Offering or pursuant to the Over-Allotment Option), the General Partner shall be
required to make additional Capital Contributions equal to 1/99th of any amount
contributed to the Partnership by the Limited Partners in exchange for such
additional Limited Partner Interests. Except as set forth in the immediately
preceding sentence and Article XII, the General Partner shall not be obligated
to make any additional Capital Contributions to the Partnership.
SECTION 5.3. Contributions by Initial Limited Partners and Reimbursement of the
General Partner.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. In exchange for such Capital Contributions by the
Underwriters, the Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount equal to the
quotient obtained by dividing (i) the cash contribution to the Partnership by or
on behalf of such Underwriter by (ii) the Issue Price per Initial Common Unit.
(b) Upon the exercise of the Over-Allotment Option, each Underwriter shall
contribute to the Partnership cash in an amount equal to the Issue Price per
Initial Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option Closing
Date. In exchange for such Capital Contributions by the Underwriters, the
Partnership shall issue Common Units to each Underwriter on whose behalf such
Capital Contribution is made in an amount equal to the quotient obtained by
dividing (i) the cash contributions to the Partnership by or on behalf of such
Underwriter by (ii) the Issue Price per Initial Common Unit. Upon receipt by the
Partnership of the Capital Contributions from the Underwriters as provided in
this Section 5.3(b), the Partnership shall use such cash to redeem from the
General Partner or its Affiliates that number of Common Units held by the
General Partner or its Affiliates equal to the number of Common Units issued to
the Underwriters as provided in this Section 5.3(b).
(c) No Limited Partner Interests will be issued or issuable as of or at the
Closing Date other than (i) the Common Units issuable pursuant to subparagraph
(a) hereof in aggregate number equal to , (ii) the "Option Units" as
such term is used in the Underwriting Agreement in an aggregate number up to
issuable upon exercise of the Over-Allotment Option pursuant to
subparagraph (c) hereof, (iii) the Subordinated Units issuable to the
General Partner or its Affiliates pursuant to Section 5.2 hereof, and (iv) the
Incentive Distribution Rights.
SECTION 5.4. Interest and Withdrawal.
No interest on Capital Contributions shall be paid by the Partnership. No
Partner or Assignee shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent, if any, that distributions made pursuant to
this Agreement or upon termination of the Partnership may be considered as such
by law and then only to the extent provided for in this Agreement. Except to the
extent expressly provided in this Agreement, no Partner or Assignee shall have
priority over any other Partner or Assignee
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either as to the return of Capital Contributions or as to profits, losses or
distributions. Any such return shall be a compromise to which all Partners and
Assignees agree within the meaning of 47-502(b) of the Delaware Act.
SECTION 5.5. Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner
of Partnership Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate Capital
Account
with respect to such Partnership Interest in accordance with the rules of
Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be
increased by (i) the amount of all Capital Contributions made to the Partnership
with respect to such Partnership Interest pursuant to this Agreement and (ii)
all items of Partnership income and gain (including, without limitation, income
and gain exempt from tax) computed in accordance with Section 5.5(b) and
allocated with respect to such Partnership Interest pursuant to Section 6.1, and
decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed
distributions of cash or property made with respect to such Partnership Interest
pursuant to this Agreement and (y) all items of Partnership deduction and loss
computed in accordance with Section 5.5(b) and allocated with respect to such
Partnership Interest pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership or any other
Subsidiary that is classified as a partnership for federal income tax
purposes.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to
be taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to
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the Carrying Value of any Partnership property subject to depreciation,
cost recovery or amortization, any further deductions for such
depreciation, cost recovery or amortization attributable to such property
shall be determined (A) as if the adjusted basis of such property were
equal to the Carrying Value of such property immediately following such
adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same. method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Partnership
Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section
5.8 by a holder thereof (other than a transfer to an Affiliate unless, the
General Partner elects to have this subparagraph 5.5(c)(ii) apply), the
Capital Account maintained for such Person with respect to its Subordinated
Units or converted Subordinated Units will (A) first, be allocated to the
Subordinated Units or converted Subordinated Units to be transferred in an
amount equal to the product of (x) the number of such Subordinated Units or
converted Subordinated Units to be transferred and (y) the Per Unit Capital
Amount for a Common Unit, and (B) second, any remaining balance in such
Capital Account will be retained by the transferor, regardless of whether
it has retained any Subordinated Units or converted Subordinated Units.
Following any such allocation, the transferor's Capital Account, if any,
maintained with respect to the retained Subordinated Units or converted
Subordinated Units, if any, will have a balance equal to the amount
allocated under clause (B) above, and the transferee's Capital Account
established with respect to the transferred Subordinated Units or converted
Subordinated Units will have a balance equal to the amount allocated under
clause (A) above.
(d) (i) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for
cash or Contributed Property or the conversion of the General Partner's Combined
Interest to Common Units pursuant to Section 11.3(b), the Capital Account of all
Partners and the Carrying Value of each Partnership property immediately prior
to such issuance shall be adjusted upward or downward to reflect any Unrealized
Gain or Unrealized Loss attributable to such Partnership property, as if such
Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each
such property immediately prior to such issuance and had been allocated to the
Partners at such time pursuant to Section 6.1(c) in the same manner as any item
of gain or loss actually recognized during such period would have been
allocated. In determining such Unrealized Gain or Unrealized Loss, the aggregate
cash amount and fair market value of all Partnership assets (including, without
limitation, cash or cash equivalents) immediately prior to the issuance of
additional Partnership Interests shall be determined by the General Partner
using such reasonable method of valuation as it may adopt; provided, however,
that the General Partner, in arriving at such valuation, must take fully into
account the fair market value of the Partnership Interests of all Partners at
such time. The General Partner shall allocate such aggregate value among the
assets of the Partnership (in such manner as it determines in its discretion to
be reasonable) to arrive at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property (other than a
distribution
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of cash that is not in redemption or retirement of a Partnership Interest),
the Capital Accounts of all Partners and the Carrying Value of all
Partnership property shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership
property, as if such Unrealized Gain or Unrealized Loss had been recognized
in a sale of such property immediately prior to such distribution for an
amount equal to its fair market value, and had been allocated to the
Partners, at such time, pursuant to Section 6.1(c) in the same manner as
any item of gain or loss actually recognized during such period would have
been allocated. In determining such Unrealized Gain or Unrealized Loss the
aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior
to a distribution shall (A) in the case of an actual distribution which is
not made pursuant to Section 12.4 or in the case of a deemed contribution
and/or distribution, be determined and allocated in the same manner as that
provided in Section 5.5(d)(i) or (B) in the case of a liquidating
distribution pursuant to Section 12.4, be determined and allocated by the
Liquidator using such reasonable method of valuation as it may adopt.
SECTION 5.6. Issuances of Additional Partnership Securities.
(a) Subject to Section 5.7, the Partnership may issue additional
Partnership Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership purpose at any time
and from time to time to such Persons for such consideration and on such terms
and conditions as shall be established by the General Partner in its sole
discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series of
Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) the rights upon dissolution and liquidation of the
Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion or exchange and, if so, the
terms and conditions of such conversion or exchange; (vi) the terms and
conditions upon which each Partnership Security will be issued, evidenced by
certificates and assigned or transferred; and (vii) the right, if any, of each
such Partnership Security to vote on Partnership matters, including matters
relating to the relative designations, preferences, rights, powers and duties of
such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this Section
5.6, (ii) the conversion of the General Partner Interest and Incentive
Distribution Rights into Units pursuant to the terms of this Agreement, (iii)
the admission of Additional Limited Partners and (iv) all additional issuances
of Partnership Securities. The General Partner is further authorized and
directed to specify the relative rights, powers and duties of the holders of the
Units or other Partnership Securities being so issued. The General Partner shall
do all things necessary to comply with the Delaware Act and is authorized and
directed to do all things it deems to be necessary or advisable in connection
with any future issuance of Partnership Securities or in connection with the
conversion of the General Partner Interest and Incentive Distribution Rights
into Units pursuant to the terms of this Agreement, including compliance with
any statute, rule, regulation or guideline of any federal, state or other
governmental agency or any, National Securities Exchange on which the Units or
other Partnership Securities are listed for trading.
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SECTION 5.7. Limitations on Issuance of Additional Partnership Securities.
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights relating
to) an aggregate of more than additional Parity Units without the
prior approval of the holders of a Unit Majority. In applying this limitation,
there shall be excluded Common Units and other Parity Units issued (A) in
connection with the exercise of the Over-Allotment Option pursuant to Section
5.3(b) or, if the Over-Allotment Option is not exercised, an equivalent amount
of Common Units to affiliates of the General Partner, (B) in accordance with
Section 5.7(b), (C) upon conversion of Subordinated Units pursuant to Section
5.8, (D) upon conversion of the General Partner Interest and Incentive
Distribution Rights pursuant to Section 11.3(b), (D) pursuant to the employee
benefit plans of the General Partner, the Partnership or any other Group Member
and (E) in the event of a combination or subdivision of Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the prior approval of
the Unitholders, if such issuance occurs (i) in connection with an Acquisition
or a Capital Improvement or (ii) within 365 days of, and the net proceeds from
such issuance are used to repay debt incurred in connection with, an Acquisition
or a Capital Improvement, in each case where such Acquisition or Capital
Improvement involves assets that, if acquired by the Partnership as of the date
that is one year prior to the first day of the Quarter in which such Acquisition
is to be consummated or such Capital Improvement is to be completed, would have
resulted, on a pro forma basis, in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with respect to
each of the four most recently completed Quarters (on a pro forma basis as
described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
Quarters.
If the issuance of Parity Units with respect to an Acquisition or Capital
Improvement occurs within the first four full Quarters after the Closing Date,
then Adjusted Operating Surplus as used in clauses (A) (subject to the
succeeding sentence) and (B) above shall be calculated (i) for each Quarter, if
any, that commenced after the Closing Date for which actual results of
operations are available, based on the actual Adjusted Operating Surplus of the
Partnership generated with respect to such Quarter, and (ii) for each other
Quarter, on a pro forma basis consistent with the procedures, as applicable, set
forth in Appendix D to the Registration Statement. Furthermore, the amount in
clause (A) shall be determined on a pro forma basis assuming that (1) all of the
Parity Units to be issued in connection with or within 365 days of such
Acquisition or Capital Improvement had been issued and outstanding, (2) all
indebtedness for borrowed money to be incurred or assumed in connection with
such Acquisition or Capital Improvement (other than any such indebtedness that
is to be repaid with the proceeds of such issuance of Parity Units) had been
incurred or assumed, in each case as of the commencement of such four-Quarter
period, (3) the personnel expenses that would have been incurred by the
Partnership in the operation of the acquired assets are the personnel expenses
for employees to be retained by the Partnership in the operation of the acquired
assets, and (4) the non-personnel costs and expenses are computed on the same
basis as those incurred by the Partnership in the operation of the Partnership's
business at similarly situated Partnership facilities.
(c) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the approval of the
Unitholders, if the proceeds from such issuance are used exclusively to repay up
to $ million of indebtedness of a Group Member where the aggregate amount of
distributions that would have been paid with respect to such newly issued Units
or Partnership Securities, plus the related distributions on the General Partner
Interest in the Partnership and the
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Operating Partnership in respect of the four-Quarter period ending prior to the
first day of the Quarter in which the issuance is to be consummated (assuming
such additional Units or Partnership Securities had been Outstanding throughout
such period and that distributions equal to the distributions that were actually
paid on the Outstanding Units during the period were paid on such additional
Units or Partnership Securities) did not exceed the interest costs actually
incurred during such period on the indebtedness that is to be repaid (or, if
such indebtedness was not outstanding throughout the entire period, would have
been incurred had such indebtedness been outstanding for the entire period). In
the event that the Partnership is required to pay a prepayment penalty in
connection with the repayment of such indebtedness, for purposes of the
foregoing test the number of Parity Units issued to repay such indebtedness
shall be deemed increased by the number of Parity Units that would need to be
issued to pay such penalty.
(d) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights relating
to) additional Partnership Securities having rights to distributions or in
liquidation ranking prior or senior to the Common Units, without the prior
approval of the holders of a Unit Majority.
(e) No fractional Units shall be issued by the Partnership.
SECTION 5.8. Conversion of Subordinated Units.
(a) A total of of the outstanding Subordinated Units will convert
into Common Units on a one-for-one basis on the first day after the Record Date
for distribution in respect of any Quarter ending on or after December 31, 2003,
in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Outstanding Common Units and Subordinated Units during such
periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units and Subordinated Units that were Outstanding
during such periods on a fully-diluted basis (i.e. taking into account for
purposes of such determination all Outstanding Common Units, all
Outstanding Subordinated Units, all Common Units and Subordinated Units
issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of
the Quarter immediately following the Quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that
have, as of the date of determination, been earned by but not yet issued to
management of the Partnership in respect of incentive compensation), plus
the related distribution on the General Partner Interest in the Partnership
and the Operating Partnerships, during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero.
(b) An additional of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis on the first day after the
Record Date for distribution in respect of any Quarter ending on or after
December 31, 2004, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Outstanding Common Units and Subordinated Units during such
periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units and Subordinated Units that were Outstanding
during such periods on a fully-diluted basis (i.e. taking into account for
purposes of such
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determination all Outstanding Common Units, all Outstanding Subordinated
Units, all Common Units and Subordinated Units issuable upon exercise of
employee options that have, as of the date of determination, already vested
or are scheduled to vest prior to the end of the Quarter immediately
following the Quarter with respect to which such determination is made, and
all Common Units and Subordinated Units that have, as of the date of
determination, been earned by but not yet issued to management of the
Partnership in respect of incentive compensation), plus the related
distribution on the General Partner Interest in the Partnership and the
Operating Partnerships, during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion of
Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b) at a time
when there shall be more than one holder of Subordinated Units, then, unless all
of the holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be allocated
among the holders of Subordinated Units pro rata based on the number of
Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units
pursuant to Sections 5.8(a) and (b) shall convert into Common Units on a
one-for-one basis on the first day following the Record Date for distributions
in respect of the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on a
one-for-one basis as set forth in, and pursuant to the terms of, Section 11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
SECTION 5.9. Limited Preemptive Right.
Except as provided in this Section 5.9 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The General Partner shall have the right, which it may from
time to time assign in whole or in part to any of its Affiliates, to purchase
Partnership Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons other than the
General Partner and its Affiliates, to the extent necessary to maintain the
Percentage Interests of the General Partner and its Affiliates equal to that
which existed immediately prior to the issuance of such Partnership Securities.
SECTION 5.10. Splits and Combination.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a number of
Units (including the number of Subordinated Units that may convert prior to the
end of the Subordination Period and the number of additional Parity Units that
may be issued pursuant to Section 5.7 without a Unitholder vote) are
proportionately adjusted retroactive to the beginning of the Partnership.
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination
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shall be effective and shall send notice thereof at least 20 days prior to such
Record Date to each Record Holder as of a date not less than 10 days prior to
the date of such notice. The General Partner also may cause a firm of
independent public accountants selected by it to calculate the number of
Partnership Securities to be held by each Record Holder after giving effect to
such distribution, subdivision or combination. The General Partner shall be
entitled to rely on any certificate provided by such firm as conclusive evidence
of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such changes.
If any such combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership shall require, as a condition to the
delivery to a Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(e) and this Section 5.10(d), each fractional Unit
shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to
the next higher Unit).
SECTION 5.11. Fully Paid and Non-Assessable Nature of Limited Partner Interests.
All Limited Partner Interests issued pursuant to, and in accordance with
the requirements of, this Article V shall be fully paid and non-assessable
Limited Partner Interests in the Partnership, except as such non assessability
may be affected by Section 17-607 of the Delaware Act.
ARTICLE VI.
ALLOCATIONS AND DISTRIBUTIONS
SECTION 6.1. Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) Net Income. After giving effect to the special allocations set forth in
Section 6.1(d), Net Income for each taxable year and all items of income, gain,
loss and deduction taken into account in computing Net Income for such taxable
year shall be allocated as follows:
(i) First, 100% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years;
(ii) Second, 1% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable years and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 6.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
6.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 1% to the General Partner and 99% to
the Unitholders, in accordance with their respective Percentage Interests.
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(b) Net Losses. After giving effect to the special allocations set forth in
Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 1% to the General Partner and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Losses allocated pursuant to this Section 6.1(b)(i) for the current
taxable year and all previous taxable years is equal to the aggregate Net
Income allocated to such Partners pursuant to Section 6.1(a)(iii) for all
previous taxable years, provided that the Net Losses shall not be allocated
pursuant to this Section 6.1(b)(i) to the extent that such allocation would
cause any Unitholder to have a deficit balance in its Adjusted Capital
Account at the end of such taxable year (or increase any existing deficit
balance in its Adjusted Capital Account);
(ii) Second, 1% to the General Partner and 99% to the Unitholders in
accordance with their respective Percentage Interests; provided, that Net
Losses shall not be allocated pursuant to this Section 6.1(b)(ii) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder. All
allocations under this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this Section
6.1 and after all distributions of Available Cash provided under Sections 6.4
and 6.5 have been made; provided, however, that solely for purposes of this
Section 6.1(c), Capital Accounts shall not be adjusted for distributions made
pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
(B) Second, 99% to all Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Capital plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or (b)(i) with respect to
such Common Unit for such Quarter (the amount determined pursuant to
this clause (2) is hereinafter defined as the "Unpaid MQD") plus (3) any
then existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
99% to all Unitholders holding Subordinated Units, Pro Rata, and 1% to
the General Partner until the Capital Account in respect of each
Subordinated Unit then Outstanding equals the sum of (1) its Unrecovered
Capital, determined for the taxable year (or portion thereof) to which
this allocation of gain relates, plus (2) the Minimum Quarterly
Distribution for the Quarter during which the Liquidation Date occurs,
reduced by any distribution pursuant to Section 6.4(a)(iii) with respect
to such Subordinated Unit for such Quarter;
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(D) Fourth, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) its Unrecovered Capital, plus (2)
the Unpaid MQD, plus (3) any then existing Cumulative Common Unit
Arrearage, plus (4) the excess of (aa) the First Target Distribution
less the Minimum Quarterly Distribution for each Quarter of the
Partnership's existence over (bb) the cumulative per Unit amount of any
distributions of Operating Surplus that was distributed pursuant to
Sections 6.4(a)(iv) and 6.4(b)(ii) (the sum of (1) plus (2) plus (3)
plus (4) is hereinafter defined as the "First Liquidation Target
Amount");
(E) Fifth, 85.8673% to all Unitholders, Pro Rata, 13.1327% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per
Unit amount of any distributions of Operating Surplus that was
distributed pursuant to Sections 6.4(a)(v) and 6.4(b)(iii) (the sum of
(1) plus (2) is hereinafter defined as the "Second Liquidation Target
Amount");
(F) Sixth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the Second Liquidation
Target Amount, plus (2) the excess of (aa) the Third Target Distribution
less the Second Target Distribution for each Quarter of the
Partnership's existence over (bb) the cumulative per Unit amount of any
distributions of Operating Surplus that was distributed pursuant to
Sections 6.4(a)(vi) and 6.4(b)(iv) (the sum of (1) plus (2) is
hereinafter defined as the "Third Liquidation Target Amount");
(G) Finally, any remaining amount 50.5102% to all Unitholders, Pro
Rata, 48.4898% to the holders of the Incentive Distribution Rights, Pro
Rata, and 1% to the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to
Section 5.5(d)), such Net Termination Loss shall be allocated among
the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 99% to the Unitholders holding Subordinated Units,
Pro Rata, and 1% to the General Partner until the Capital Account in
respect of each Subordinated Unit then Outstanding has been reduced to
zero;
(B) Second, 99% to all Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until the Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such taxable
period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-20)(2)(i), or any successor provision. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section
6.1(d)(i) is intended to
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comply with the Partnership Minimum Gain chargeback requirement in Treasury
Regulation Section 1.704-2(f) and shall be interpreted consistently
therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of this Section 6.1 (other than
Section 6.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-20)(2)(ii), or any successor provisions. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d), other than Section 6.1(d)(i) and other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii), with respect to
such taxable period. This Section 6.1(d)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury Regulation
Section 1.704-2(i)(4) and shall be interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section
12.4) to any Unitholder with respect to its Units for a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Unitholders with respect to
their Units (on a per Unit basis), then (1) each Unitholder receiving
such greater cash or property distribution shall be allocated gross
income in an amount equal to the product of (aa) the amount by which the
distribution (on a per Unit basis) to such Unitholder exceeds the
distribution (on a per Unit basis) to the Unitholders receiving the
smallest distribution and (bb) the number of Units owned by the
Unitholder receiving the greater distribution; and (2) the General
Partner shall be allocated gross income in an aggregate amount equal to
1/99th of the sum of the amounts allocated in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the holders of
Incentive Distribution Rights, Pro Rata, until the aggregate amount of
such items allocated to the holders of Incentive Distribution Rights
pursuant to this paragraph 6.1(d)(iii)(B) for the current taxable year
and all previous taxable years is equal to the cumulative amount of all
Incentive Distributions made to the holders of Incentive Distribution
Rights from the Closing Date to a date 45 days after the end of the
current taxable year.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an amount
and manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 6.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an allocation pursuant to
this
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Section 6.1(d)(v) shall be made only if and to the extent that such Partner
would have a deficit balance in its Capital Account as adjusted after all
other allocations provided for in this Section 6.1 have been tentatively
made as if this Section 6.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the other Partners, to revise
the prescribed ratio to the numerically closest ratio that does satisfy
such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears
the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance
with Treasury Regulation Section 1.704-2(i). If more than one Partner bears
the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(c) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking into
account allocations pursuant to Section 6.1(d)(iii), shall be allocated
100% to each Partner holding Subordinated Units that are Outstanding as of
the termination of the Subordination Period ("Final Subordinated Units") in
the proportion of the number of Final Subordinated Units held by such
Partner to the total number of Final Subordinated Units then Outstanding,
until each such Partner has been allocated an amount of gross income or
gain which increases the Capital Account maintained with respect to such
Final Subordinated Units to an amount equal to the product of (A) the
number of Final Subordinated Units held by such Partner and (B) the Per
Unit Capital Amount for a Common Unit. The purpose of this allocation is to
establish uniformity between the Capital Accounts underlying Final
Subordinated Units and the Capital Accounts underlying Common Units held by
Persons other than the General Partner and its Affiliates immediately prior
to the conversion of such Final Subordinated Units into Common Units. This
allocation method for establishing such economic uniformity will only be
available to the General Partner if the method for allocating the Capital
Account maintained with respect to the Subordinated Units between the
transferred and retained Subordinated Units pursuant to Section 5.5(c)(ii)
does not otherwise provide such economic uniformity to the Final
Subordinated Units.
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(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related Curative
Allocation not otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a decrease in Partnership Minimum Gain and
(2) Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
6.1(d)(xi)(A) shall only be made with respect to Required Allocations to
the extent the General Partner reasonably determines that such
allocations will otherwise be inconsistent with the economic agreement
among the Partners. Further, allocations pursuant to this Section
6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to
clauses (1) and (2) hereof to the extent the General Partner reasonably
determines that such allocations are likely to be offset by subsequent
Required Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof), the General Partner shall
allocate additional items of gross income and gain away from the holders
of Incentive Distribution Rights to the Unitholders and the General
Partner, or additional items of deduction and loss away from the
Unitholders and the General Partner to the holders of Incentive
Distribution Rights, to the extent that the Additional Book Basis
Derivative Items allocated to the Unitholders or the General Partner
exceed their Share of Additional Book Basis Derivative Items. For this
purpose, the Unitholders and the General Partner shall be treated as
being allocated Additional Book Basis Derivative Items to the extent
that such Additional Book Basis Derivative Items have reduced the amount
of income that would otherwise have been allocated to the Unitholders or
the General Partner under the Partnership Agreement (e.g., Additional
Book Basis Derivative Items taken into account in computing cost of
goods sold would reduce the amount of book income otherwise available
for allocation among the Partners). Any allocation made pursuant to this
Section 6.1(d)(xii)(A) shall be made after all of the other Agreed
Allocations have been made as if this Section 6.1(d)(xii) were not in
this Agreement and, to the extent necessary, shall require the
reallocation of items that have been allocated pursuant to such other
Agreed Allocations.
(B) In the case of any negative adjustments to the Capital Accounts
of the Partners resulting from a Book-Down Event or from the recognition
of a Net Termination Loss, such negative adjustment (1) shall first be
allocated, to the extent of the Aggregate Remaining Net Positive
Adjustments, in such a manner, as reasonably determined by the General
Partner, that to the extent possible the aggregate Capital Accounts of
the Partners will equal the amount which would have been the Capital
Account balance of the Partners if no prior Book-Up Events
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had occurred, and (2) any negative adjustment in excess of the Aggregate
Remaining Net Positive Adjustments shall be allocated pursuant to
Section 6.1(c) hereof.
(C) In making the allocations required under this Section
6.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to satisfy
the purpose of this Section 6.1(d)(xii).
SECTION 6.2. Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain, loss
or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2)
second, in the event such property was originally a Contributed Property,
be allocated among the Partners in a manner consistent with Section
6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to (i) adopt
such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii) amend the provisions of this
Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury
Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise
to preserve or achieve uniformity of the Limited Partner Interests (or any class
or classes thereof). The General Partner may adopt such conventions, make such
allocations and make such amendments to this Agreement as provided in this
Section 6.2(c) only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of any class or
classes of Limited Partner Interests issued and Outstanding or the Partnership,
and if such allocations are consistent with the principles of Section 704 of the
Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite any inconsistency of such
approach with Treasury Regulation Section 1.167(c)-1(a)(6) or any successor
regulations thereto. If the General Partner determines that such reporting
position cannot reasonably be taken, the General Partner may adopt depreciation
and amortization conventions under
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which all purchasers acquiring Limited Partner Interests in the same month would
receive depreciation and amortization deductions, based upon the same applicable
rate as if they had purchased a direct interest in the Partnership's property.
If the General Partner chooses not to utilize such aggregate method, the General
Partner may use any other reasonable depreciation and amortization conventions
to preserve the uniformity of the intrinsic tax characteristics of any Limited
Partner Interests that would not have a material adverse effect on the Limited
Partners or the Record Holders of any class or classes of Limited Partner
Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to any
election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction, shall for
federal income tax purposes, be determined on an annual basis and prorated on a
monthly basis and shall be allocated to the Partners as of the opening of the
New York Stock Exchange on the first Business Day of each month; provided,
however, that (i) such items for the period beginning on the Closing Date and
ending on the last day of the month in which the Option Closing Date or the
expiration of the Over-allotment Option occurs shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first Business
Day of the next succeeding month; and provided, further, that gain or loss on a
sale or other disposition of any assets of the Partnership or any other
extraordinary item of income or loss realized and recognized other than in the
ordinary course of business, as determined by the General Partner in its sole
discretion, shall be allocated to the Partners as of the opening of the New York
Stock Exchange on the first Business Day of the month in which such gain or loss
is recognized for federal income tax purposes. The General Partner may revise,
alter or otherwise modify such methods of allocation as it determines necessary
or appropriate in its sole discretion, to the extent permitted or required by
Section 706 of the Code and the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
SECTION 6.3. Requirement and Characterization of Distributions; Distributions to
Record Holders.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on March 31, 2001, an amount equal to 100% of Available Cash with
respect to such Quarter shall, subject to Section 17-607 of the Delaware Act, be
distributed in accordance with this Article VI by the Partnership to the
Partners as of the Record Date selected by the General Partner in its reasonable
discretion. All amounts of Available Cash distributed by the Partnership on any
date from any source shall be deemed to be Operating Surplus until the sum of
all amounts of Available Cash theretofore distributed by the Partnership to the
Partners pursuant to Section 6.4 equals the Operating Surplus from the Closing
Date through the close of the immediately preceding Quarter. Any remaining
amounts of Available Cash distributed by the Partnership on such date shall,
except as otherwise provided in Section 6.5, be deemed to be "Capital Surplus."
All distributions required to be made under this Agreement shall be made subject
to Section 17-607 of the Delaware Act.
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(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied and
distributed solely in accordance with, and subject to the terms and conditions
of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by
the Partnership on behalf of, or amounts withheld with respect to, all or less
than all of the Partners, as a distribution of Available Cash to such Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in such
payment by reason of an assignment or otherwise.
SECTION 6.4. Distributions of Available Cash from Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5 shall, subject to Section 17-607 of the
Delaware Act, be distributed as follows, except as otherwise required by Section
5.6(b) in respect of additional Partnership Securities issued pursuant thereto:
(i) First, 99% to the Unitholders holding Common Units, Pro Rata, and
1% to the General Partner until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, 99% to the Unitholders holding Common Units, Pro Rata,
and 1% to the General Partner until there has been distributed in respect
of each Common Unit then Outstanding an amount equal to the Cumulative
Common Unit Arrearage existing with respect to such Quarter;
(iii) Third, 99% to the Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until there has been distributed in
respect of each Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(iv) Fourth, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 85.8673% to all Unitholders, Pro Rata, 13.1327% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(vi) Sixth, 75.7653% to all Unitholders, Pro Rata, 23.2347% to the
holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(vii) Thereafter, 50.5102% to all Unitholders, Pro Rata, 48.4898% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner; provided, however, if the Minimum Quarterly Distribution,
the First Target Distribution, the Second Target Distribution and the Third
Target Distribution have been reduced to zero pursuant to the second
sentence of Section 6.6(a), the distribution of Available Cash that is
deemed to be Operating Surplus with respect to any Quarter will be made
solely in accordance with Section 6.4(a)(vii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5, subject to
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Section 17-607 of the Delaware Act, shall be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 85.8673% to all Unitholders, Pro Rata, and 13.1327% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(iv) Fourth, 75.7653% to all Unitholders, Pro Rata, and 23.2347% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(v) Thereafter, 50.5102% to all Unitholders, Pro Rata, and 48.4898% to
the holders of the Incentive Distribution Rights, Pro Rata, and 1% to the
General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section 6.4(b)(v).
SECTION 6.5. Distributions of Available Cash from Capital Surplus.
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise, 99%
to all Unitholders, Pro Rata, and 1% to the General Partner until a hypothetical
holder of a Common Unit acquired on the Closing Date has received with respect
to such Common Unit, during the period since the Closing Date through such date,
distributions of Available Cash that are deemed to be Capital Surplus in an
aggregate amount equal to the Initial Unit Price. Available Cash that is deemed
to be Capital Surplus shall then be distributed 99% to all Unitholders holding
Common Units, Pro Rata, and 1% to the General Partner until there has been
distributed in respect of each Common Unit then Outstanding an amount equal to
the Cumulative Common Unit Arrearage. Thereafter, all Available Cash shall be
distributed as if it were Operating Surplus and shall be distributed in
accordance with Section 6.4.
SECTION 6.6. Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Third Target Distribution Common Unit Arrearages and
Cumulative Common Unit Arrearages shall be proportionately adjusted in the event
of any distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other Partnership
Securities in accordance with Section 5.10. In the event of a distribution of
Available Cash that is deemed to be from Capital Surplus, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction of
which the numerator is the Unrecovered Capital of the Common Units immediately
after giving effect to such distribution and of which the denominator is the
Unrecovered Capital of the Common Units immediately prior to giving effect to
such distribution.
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(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 6.9.
SECTION 6.7. Special Provisions Relating to the Holders of Subordinated Units.
(a) Except with respect to the right to vote on or approve matters
requiring the vote or approval of a percentage of the holders of Outstanding
Common Units and the right to participate in allocations of income, gain, loss
and deduction and distributions made with respect to Common Units, the holder of
a Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8, the
Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the right
to vote as a Common Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with respect to Common
Units; provided, however, that such converted Subordinated Units shall remain
subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer its
converted Subordinated Units to a Person which is not an Affiliate of the holder
until such time as the General Partner determines, based on advice of counsel,
that a converted Subordinated Unit should have, as a substantive matter, like
intrinsic economic and federal income tax characteristics, in all material
respects, to the intrinsic economic and federal income tax characteristics of an
Initial Common Unit. In connection with the condition imposed by this Section
6.7(b), the General Partner may take whatever reasonable steps are required to
provide economic uniformity to the converted Subordinated Units in preparation
for a transfer of such converted Subordinated Units, including the application
of Sections 5.5 (c)(ii) and 6.1(d)(x); provided, however, that no such steps may
be taken that would have a material adverse effect on the Unitholders holding
Common Units represented by Common Unit Certificates.
SECTION 6.8. Special Provisions Relating to the Holders of Incentive
Distribution Rights.
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights,
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of the
holders of Outstanding Units, (ii) be entitled to any distributions other than
as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and (v),
and 12.4 or (iii) be allocated items of income, gain, loss or deduction other
than as specified in this Article VI.
SECTION 6.9. Entity-Level Taxation.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Operating Partnership
to entity-level taxation for federal income tax purposes, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted to equal the
product obtained by multiplying (a) the amount thereof by (b) one minus the sum
of (i) the highest marginal federal corporate (or other entity, as applicable)
income tax rate of the Partnership or such Operating Partnership for the taxable
year of the Partnership or the Operating Partnership in which such Quarter
occurs (expressed as a percentage) plus (ii) the effective overall state and
local income tax rate (expressed as a percentage) applicable to the Partnership
or the Operating Partnership for the calendar year next preceding the calendar
year in which such Quarter occurs (after taking into account the benefit of any
deduction allowable for federal income tax purposes with respect to the payment
of state and local income taxes), but only to the extent of the increase in such
rates resulting from such legislation
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or interpretation. Such effective overall state and local income tax rate shall
be determined for the taxable year next preceding the first taxable year during
which the Partnership or the Operating Partnership is taxable for federal income
tax purposes as an association taxable as a corporation or is otherwise subject
to entity-level taxation by determining such rate as if the Partnership or the
Operating Partnership had been subject to such state and local taxes during such
preceding taxable year.
ARTICLE VII.
MANAGEMENT AND OPERATION OF BUSINESS
SECTION 7.1. Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 7.3, shall have full power and authority to do all
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set forth in Section
2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group;
subject to Section 7.6(a), the lending of funds to other Persons (including
the Operating Partnership); the repayment of obligations of the Partnership
Group and the making of capital contributions to any member of the
Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
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(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, limited liability companies,
corporations or other relationships (including the acquisition of interests
in, and the contributions of property to, the Operating Partnership from
time to time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.8);
(xiii) unless restricted or prohibited by Section 5.7, the purchase,
sale or other acquisition or disposition of Partnership Securities, or the
issuance of additional options, rights, warrants and appreciation rights
relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the
Partnership's participation in the Operating Partnership as a partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and the Assignees and each other Person who may
acquire an interest in Partnership Securities hereby (i) approves, ratifies and
confirms the execution, delivery and performance by the parties thereto of the
Operating Partnership Agreement, the Underwriting Agreement, the Omnibus
Agreement, the Contribution and Conveyance Agreement, and the other agreements
and other described in or filed as exhibits to the Registration Statement that
are related to the transactions contemplated by the Registration Statement; (ii)
agrees that the General Partner (on its own or through any officer of the
Partnership) is authorized to execute, deliver and perform the agreements
referred to in clause (i) of this sentence and the other agreements, acts,
transactions and matters described in or contemplated by the Registration
Statement on behalf of the Partnership without any further act, approval or vote
of the Partners or the Assignees or the other Persons who may acquire an
interest in Partnership Securities; and (iii) agrees that the execution,
delivery or performance by the General Partner, any Group Member or any
Affiliate of any of them, of this Agreement or any agreement authorized or
permitted under this Agreement (including the exercise by the General Partner or
any Affiliate of the General Partner of the rights accorded pursuant to Article
XV), shall not constitute a breach by the General Partner of any duty that the
General Partner may owe the Partnership or the Limited Partners or any other
Persons under this Agreement (or any other agreements) or of any duty stated or
implied by law or equity.
SECTION 7.2. Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited
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partnership (or a partnership or other entity in which the limited partners have
limited liability) under the laws of the State of Delaware or of any other state
in which the Partnership may elect to do business or own property. Subject to
the terms of Section 3.4(a), the General Partner shall not be required, before
or after filing, to deliver or mail a copy of the Certificate of Limited
Partnership, any qualification document or any amendment thereto to any Limited
Partner.
SECTION 7.3. Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the specific
act by holders of all of the Outstanding Limited Partner Interests or by other
written instrument executed and delivered by holders of all of the Outstanding
Limited Partner Interests subsequent to the date of this Agreement, take any
action in contravention of this Agreement, including, except as otherwise
provided in this Agreement, (i) committing any act that would make it impossible
to carry on the ordinary business of the Partnership; (ii) possessing
Partnership property, or assigning any rights in specific Partnership property,
for other than a Partnership purpose; (iii) admitting a Person as a Partner;
(iv) amending this Agreement in any manner; or (v) transferring its interest as
general partner of the Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related transactions
(including by way of merger, consolidation or other combination) or approve on
behalf of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Operating Partnership, without the
approval of holders of a Unit Majority; provided however that this provision
shall not preclude or limit the General Partner's ability to mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of the
assets of the Partnership or Operating Partnership and shall not apply to any
forced sale of any or all of the assets of the Partnership or Operating
Partnership pursuant to the foreclosure of, or other realization upon, any such
encumbrance. Without the approval of holders of a Unit Majority, the General
Partner shall not, on behalf of the Partnership, (i) consent to any amendment to
the Operating Partnership Agreement or, except as expressly permitted by Section
7.9(d), take any action permitted to be taken by a partner of the Operating
Partnership, in either case, that would have a material adverse effect on the
Partnership as a partner of the Operating Partnership or (ii) except as
permitted under Sections 4.6, 11.1 and 11.2, elect or cause the Partnership to
elect a successor general partner of the Partnership or the Operating
Partnership.
SECTION 7.4. Reimbursement of the General Partner.
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement
or in the Operating Partnership Agreement, the General Partner shall not be
compensated for its services as general partner or managing member of any Group
Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments it
makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of the
General Partner to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the General
Partner in its sole discretion. Reimbursements pursuant to this Section 7.4
shall be in addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote in
respect thereof), may propose and adopt on behalf of the Partnership employee
benefit plans, employee programs and employee practices (including plans,
programs and practices involving the issuance of Partnership Securities or
options to purchase Partnership
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Securities), or cause the Partnership to issue Partnership Securities in
connection with, or pursuant to, any employee benefit plan, employee program or
employee practice maintained or sponsored by the General Partner or any of its
Affiliates, in each case for the benefit of employees of the General Partner,
any Group Member or any Affiliate, or any of them, in respect of services
performed, directly or indirectly, for the benefit of the Partnership Group. The
Partnership agrees to issue and sell to the General Partner or any of its
Affiliates any Partnership Securities that the General Partner or such Affiliate
is obligated to provide to any employees pursuant to any such employee benefit
plans, employee programs or employee practices. Expenses incurred by the General
Partner in connection with any such plans, programs and practices (including the
net cost to the General Partner or such Affiliate of Partnership Securities
purchased by the General Partner or such Affiliate from the Partnership to
fulfill options or awards under such plans, programs and practices) shall be
reimbursed in accordance with Section 7.4(b). Any and all obligations of the
General Partner under any employee benefit plans, employee programs or employee
practices adopted by the General Partner as permitted by this Section 7.4(c)
shall constitute obligations of the General Partner hereunder and shall be
assumed by any successor General Partner approved pursuant to Section 11.1 or
11.2 or the transferee of or successor to all of the General Partner's General
Partner Interest pursuant to Section 4.6.
SECTION 7.5. Outside Activities.
(a) After the Closing Date, the General Partner, for so long as it is the
General Partner of the Partnership (i) agrees that its sole business will be to
act as the general partner or managing member of the Partnership, the Operating
Partnership, and any other partnership or limited liability company of which the
Partnership or the Operating Partnership is, directly or indirectly, a partner
or member and to undertake activities that are ancillary or related thereto
(including being a limited partner in the Partnership), (ii) shall not engage in
any business or activity or incur any debts or liabilities except in connection
with or incidental to (A) its performance as general partner or managing member
of one or more Group Members or as described in or contemplated by the
Registration Statement or (B) the acquiring, owning or disposing of debt or
equity securities in any Group Member and (iii) except to the extent permitted
in the Omnibus Agreement, shall not, and shall cause its Affiliates not to,
engage in any Restricted Business.
(b) The Williams Companies, Inc. has entered into the Omnibus Agreement
with the Partnership and the Operating Partnership, which agreement sets forth
certain restrictions on the ability of The Williams Companies, Inc. and its
Affiliates to engage in Restricted Businesses.
(c) Except as specifically restricted by Section 7.5(a) and the Omnibus
Agreement, each Indemnitee (other than the General Partner) shall have the right
to engage in businesses of every type and description and other activities for
profit and to engage in and possess an interest in other business ventures of
any and every type or description, whether in businesses engaged in or
anticipated to be engaged in by any Group Member, independently or with others,
including business interests and activities in direct competition with the
business and activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty express or implied by law to
any Group Member or any Partner or Assignee. Neither any Group Member, any
Limited Partner nor any other Person shall have any rights by virtue of this
Agreement, the Operating Partnership Agreement or the partnership relationship
established hereby or thereby in any business ventures of any Indemnitee.
(d) Subject to the terms of Section 7.5(a), Section 7.5(b), Section 7.5(c)
and the Omnibus Agreement, but otherwise notwithstanding anything to the
contrary in this Agreement, (i) the engaging in competitive activities by any
Indemnitees (other than the General Partner) in accordance with the provisions
of this Section 7.5 is hereby approved by the Partnership and all Partners, (ii)
it shall be deemed not to be a breach of the General Partner's fiduciary duty or
any other obligation of any type whatsoever of the General Partner for the
Indemnitees (other than the General Partner) to engage in such business
interests and activities in preference to or to the exclusion of the Partnership
and (iii) except as set forth in the Omnibus Agreement, the General Partner and
the Indemnities shall have no obligation to present business opportunities to
the Partnership.
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(e) The General Partner and any of its Affiliates may acquire Units or
other Partnership Securities in addition to those acquired on the Closing Date
and, except as otherwise provided in this Agreement, shall be entitled to
exercise all rights of the General Partner or Limited Partner, as applicable,
relating to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 7.5(a) and Section 7.5(e)
with respect to the General Partner shall not include any Group Member or any
Subsidiary of the Group Member.
(g) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of this
Agreement purport or are interpreted to have the effect of restricting the
fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the General Partner to the Partnership and its
Limited Partners, or to constitute a waiver or consent by the Limited Partners
to any such restriction, such provisions shall be inapplicable and have no
effect in determining whether the General Partner has complied with its
fiduciary duties in connection with determinations made by it under this Section
7.5.
SECTION 7.6. Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the General
Partner.
(a) The General Partner or its Affiliates may lend to any Group Member, and
any Group Member may borrow from the General Partner or any of its Affiliates,
funds needed or desired by the Group Member for such periods of time and in such
amounts as the General Partner may determine; provided, however, that in any
such case the lending party may not charge the borrowing party interest at a
rate greater than the rate that would be charged the borrowing party or impose
terms less favorable to the borrowing party than would be charged or imposed on
the borrowing party by unrelated lenders on comparable loans made on an
arm's-length basis (without reference to the lending party's financial abilities
or guarantees). The borrowing party shall reimburse the lending party for any
costs (other than any additional interest costs) incurred by the lending party
in connection with the borrowing of such funds. For purposes of this Section
7.6(a) and Section 7.6(b), the term "Group Member" shall include any Affiliate
of a Group Member that is controlled by the Group Member. No Group Member may
lend funds to the General Partner or any of its Affiliates (other than another
Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders on
comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to a Group Member or to the General
Partner in the discharge of its duties as general partner of the Partnership.
Any services rendered to a Group Member by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 7.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership Group
than those generally being provided to or available from unrelated third parties
or (iii) any transaction that, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Partnership Group), is
equitable to the Partnership Group. The provisions of Section 7.4 shall apply to
the rendering of services described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
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(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the requirements
of this Section 7.6(e) shall be deemed to be satisfied as to (i) the
transactions effected pursuant to Sections 5.2 and 5.3, the Contribution and
Conveyance Agreement and any other transactions described in or contemplated by
the Registration Statement, (ii) any transaction approved by Special Approval,
(iii) any transaction, the terms of which are no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties, or (iv) any transaction that, taking into account the totality of
the relationships between the parties involved (including other transactions
that may be particularly favorable or advantageous to the Partnership), is
equitable to the Partnership. With respect to any contribution of assets to the
Partnership in exchange for Partnership Securities, the Conflicts Committee, in
determining whether the appropriate number of Partnership Securities are being
issued, may take into account, among other things, the fair market value of the
assets, the liquidated and contingent liabilities assumed, the tax basis in the
assets, the extent to which tax-only allocations to the transferor will protect
the existing partners of the Partnership against a low tax basis, and such other
factors as the Conflicts Committee deems relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to
permit any Group Member to use any facilities or assets of the General Partner
and its Affiliates, except as may be provided in contracts entered into from
time to time specifically dealing with such use, nor shall there be any
obligation on the part of the General Partner or its Affiliates to enter into
such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
SECTION 7.7. Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements or other amounts
arising from any and all claims, demands, actions, suits or proceedings, whether
civil, criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as an Indemnitee; provided, that in each case the Indemnitee acted in
good faith and in a manner that such Indemnitee reasonably believed to be in, or
(in the case of a Person other than the General Partner) not opposed to, the
best interests of the Partnership and, with respect to any criminal proceeding,
had no reasonable cause to believe its conduct was unlawful; provided, further,
no indemnification pursuant to this Section 7.7 shall be available to the
General Partner with respect to its obligations incurred pursuant to the
Underwriting Agreement or the Contribution and Conveyance Agreement (other than
obligations incurred by the General Partner on behalf of the Partnership or the
Operating Partnership). The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that the Indemnitee acted in a
manner contrary to that specified above. Any indemnification pursuant to this
Section 7.7 shall be made only out of the assets of the Partnership, it being
agreed that the General Partner shall not be personally liable for such
indemnification and shall have no obligation to contribute or loan any monies or
property to the Partnership to enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action; suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
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(c) The indemnification provided by this Section 7.7 shall be in addition
to any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests, as
a matter of law or otherwise, both as to actions in the Indemnitee's capacity as
an Indemnitee and as to actions in any other capacity (including any capacity
under the Underwriting Agreement), and shall continue as to an Indemnitee who
has ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner, its Affiliates and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expense that
may be incurred by such Person in connection with the Partnership's activities
or such Person's activities on behalf of the Partnership, regardless of whether
the Partnership would have the power to indemnify such Person against such
liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 7.7(a); and action taken or omitted by the
Indemnitee with respect to any employee benefit plan in the performance of its
duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is in, or not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership, nor
the obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 7.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or-in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
SECTION 7.8. Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement,
no Indemnitee shall be liable for monetary damages to the Partnership, the
Limited Partners, the Assignees or any other Persons who have acquired interests
in the Partnership Securities, for losses sustained or liabilities incurred as a
result of any act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to it
by this Agreement and perform any of the duties imposed upon it hereunder either
directly or by or through its agents, and the General Partner shall not be
responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the Partnership
or to the Partners, the General Partner and any other
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Indemnitee acting in connection with the Partnership's business or affairs shall
not be liable to the Partnership or to any Partner for its good faith reliance
on the provisions of this Agreement. The provisions of this Agreement, to the
extent that they restrict or otherwise modify the duties and liabilities of an
Indemnitee otherwise existing at law or in equity, are agreed by the Partners to
replace such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors, officers
and employees under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
SECTION 7.9. Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, the Operating Partnership, any Partner or any Assignee, on
the other, any resolution or course of action by the General Partner or its
Affiliates in respect of such conflict of interest shall be permitted and deemed
approved by all Partners, and shall not constitute a breach of this Agreement,
of the Operating Partnership Agreement, of any agreement contemplated herein or
therein, or of any duty stated or implied by law or equity, if the resolution or
course of action is, or by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership. The General Partner shall be authorized but not
required in connection with its resolution of such conflict of interest to seek
Special Approval of such resolution. Any conflict of interest and any resolution
of such conflict of interest shall be conclusively deemed fair and reasonable to
the Partnership if such conflict of interest or resolution is (i) approved by
Special Approval (as long as the material facts known to the General Partner or
any of its Affiliates regarding any proposed transaction were disclosed to the
Conflicts Committee at the time it gave its approval), (ii) on terms no less
favorable to the Partnership than those generally being provided to or available
from unrelated third parties or (iii) fair to the Partnership, taking into
account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or advantageous
to the Partnership). The General Partner may also adopt a resolution or course
of action that has not received Special Approval. The General Partner (including
the Conflicts Committee in connection with any Special Approval) shall be
authorized in connection with its determination of what is "fair and reasonable"
to the Partnership and in connection with its resolution of any conflict of
interest to consider (A) the relative interests of any party to such conflict,
agreement, transaction or situation and the benefits and burdens relating to
such interest; (B) any customary or accepted industry practices and any
customary or historical dealings with a particular Person; (C) any applicable
generally accepted accounting practices or principles; and (D) such additional
factors as the General Partner (including the Conflicts Committee) determines in
its sole discretion to be relevant, reasonable or appropriate under the
circumstances. Nothing contained in this Agreement, however, is intended to nor
shall it be construed to require the General Partner (including the Conflicts
Committee) to consider the interests of any Person other than the Partnership.
In the absence of bad faith by the General Partner, the resolution, action or
terms so made, taken or provided by the General Partner with respect to such
matter shall not constitute a breach of this Agreement or any other agreement
contemplated herein or a breach of any standard of care or duty imposed herein
or therein or, to the extent permitted by law, under the Delaware Act or any
other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a grant
of similar authority or latitude, except as otherwise provided herein, the
General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to give
any consideration to any interest of, or factors affecting, the Partnership, the
Operating
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Partnership, any Limited Partner or any Assignee, (ii) it may make such decision
in its sole discretion (regardless of whether there is a reference to "sole
discretion" or "discretion") unless another express standard is provided for, or
(iii) in "good faith" or under another express standard, the General Partner or
such Affiliate shall act under such express standard and shall not be subject to
any other or different standards imposed by this Agreement, the Operating
Partnership Agreement, any other agreement contemplated hereby or under the
Delaware Act or any other law, rule or regulation. In addition, any actions
taken by the General Partner or such Affiliate consistent with the standards of
"reasonable discretion" set forth in the definitions of Available Cash or
Operating Surplus shall not constitute a breach of any duty of the General
Partner to the Partnership or the Limited Partners. The General Partner shall
have no duty, express or implied, to sell or otherwise dispose of any asset of
the Partnership Group other than in the ordinary course of business. No
borrowing by any Group Member or the approval thereof by the General Partner
shall be deemed to constitute a breach of any duty of the General Partner to the
Partnership or the Limited Partners by reason of the fact that the purpose or
effect of such borrowing is directly or indirectly to (A) enable distributions
to the General Partner or its Affiliates (including in their capacities as
Limited Partners) to exceed 1% of the total amount distributed to all partners
or (B) hasten the expiration of the Subordination Period or the conversion of
any Subordinated Units into Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner or member of a Group Member, to approve of actions by
the general partner or managing member of such Group Member similar to those
actions permitted to be taken by the General Partner pursuant to this Section
7.9.
SECTION 7.10. Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other paper
or document believed by it to be genuine and to have been signed or presented by
the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it, and any act taken or omitted to be taken in reliance
upon the opinion (including an Opinion of Counsel) of such Persons as to matters
that the General Partner reasonably believes to be within such Person's
professional or expert competence shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly authorized
officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified, waived
or limited to the extent permitted by law, as required to permit the General
Partner to act under this Agreement or any other agreement contemplated by this
Agreement and to make any decision pursuant to the authority prescribed in this
Agreement, so long as such action is reasonably believed by the General Partner
to be in, or not inconsistent with, the best interests of the Partnership.
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SECTION 7.11. Purchase or Sale of Partnership Securities.
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities; provided that, except as permitted pursuant to
Section 4.10, the General Partner may not cause any Group Member to purchase
Subordinated Units during the Subordination Period. As long as Partnership
Securities are held by any Group Member, such Partnership Securities shall not
be considered Outstanding for any purpose, except as otherwise provided herein.
The General Partner or any Affiliate of the General Partner may also purchase or
otherwise acquire and sell or otherwise dispose of Partnership Securities for
its own account, subject to the provisions of Articles IV and X.
SECTION 7.12. Registration Rights of the General Partner and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an Affiliate of
the General Partner at the date of this Agreement notwithstanding that it may
later cease to be an Affiliate of the General Partner) holds Partnership
Securities that it desires to sell and (ii) Rule 144 of the Securities Act (or
any successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership Securities
(the "Holder") to dispose of the number of Partnership Securities it desires to
sell at the time it desires to do so without registration under the Securities
Act, then upon the request of the General Partner or any of its Affiliates, the
Partnership shall file with the Commission as promptly as practicable after
receiving such request, and use all reasonable efforts to cause to become
effective and remain effective for a period of not less than six months
following its effective date or such shorter period as shall terminate when all
Partnership Securities covered by such registration statement have been sold, a
registration statement under the Securities Act registering the offering and
sale of the number of Partnership Securities specified by the Holder; provided,
however, that the Partnership shall not be required to effect more than three
registrations pursuant to this Section 7.12(a); and provided further, that if
the Conflicts Committee determines in its good faith judgment that a
postponement of the requested registration for up to six months would be in the
best interests of the Partnership and its Partners due to a pending transaction,
investigation or other event, the filing of such registration statement or the
effectiveness thereof may be deferred for up to six months, but not thereafter.
In connection with any registration pursuant to the immediately preceding
sentence, the Partnership shall promptly prepare and file (x) such documents as
may be necessary to register or qualify the securities subject to such
registration under the securities laws of such states as the Holder shall
reasonably request; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Partnership would
become subject to general service of process or to taxation or qualification to
do business as a foreign corporation or partnership doing business in such
jurisdiction solely as a result of such registration, and (y) such documents as
may be necessary to apply for listing or to list the Partnership Securities
subject to such registration on such National Securities Exchange as the Holder
shall reasonably request, and do any and all other acts and things that may
reasonably be necessary or advisable to enable the Holder to consummate a public
sale of such Partnership Securities in such states. Except as set forth in
Section 7.12(c), all costs and expenses of any such registration and offering
(other than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration statement
as the Holder shall request. If the proposed offering pursuant to this Section
7.12(b) shall be an underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the Partnership and
the Holder in writing that in their opinion the inclusion of all or some of the
Holder's Partnership Securities would adversely and materially affect the
success of the offering, the Partnership shall include in such offering only
that number or amount, if any, of securities held by the Holder which, in the
opinion of the managing underwriter or managing underwriters, will not so
adversely and materially affect the offering. Except as set
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forth in Section 7.12(c), all costs and expenses of any such registration and
offering (other than the underwriting discounts and commissions) shall be paid
by the Partnership, without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration
referred to in this Section 7.12, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters. Further, in
addition to and not in limitation of the Partnership's obligation under Section
7.7, the Partnership shall, to the fullest extent, permitted by law, indemnify
and hold harmless the Holder, its officers, directors and each Person who
controls the Holder (within the meaning of the Securities Act) and any agent
thereof (collectively, "Indemnified Persons") against any losses, claims,
demands, actions, causes of action, assessments, damages, liabilities (joint or
several), costs and expenses (including interest, penalties and reasonable
attorneys' fees and disbursements), resulting to, imposed upon, or incurred by
the Indemnified Persons, directly or indirectly, under the Securities Act or
otherwise (hereinafter referred to in this Section 7.12(c) as a "claim" and in
the plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Partnership Securities were registered
under the Securities Act or any state securities or Blue Sky laws, in any
preliminary prospectus (if used prior to the effective date of such registration
statement), or in any summary or final prospectus or in any amendment or
supplement thereto (if used during the period the Partnership is required to
keep the registration statement current), or arising out of, based upon or
resulting from the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements made therein
not misleading; provided, however, that the Partnership shall not be liable to
any Indemnified Person to the extent that any such claim arises out of, is based
upon or results from an untrue statement or alleged untrue statement or omission
or alleged omission made in such registration statement, such preliminary,
summary or final prospectus or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Partnership by or on
behalf of such Indemnified Person specifically for use in the preparation
thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General Partner's
Affiliates) after it ceases to be a Partner of the Partnership, during a period
of two years subsequent to the effective date of such cessation and for so long
thereafter as is required for the Holder to sell all of the Partnership
Securities with respect to which it has requested during such two-year period
inclusion in a registration statement otherwise filed or that a registration
statement be filed; provided, however, that the Partnership shall not be
required to file successive registration statements covering the same
Partnership Securities for which registration was demanded during such two-year
period. The provisions of Section 7.12(c) shall continue in effect thereafter.
(e) (e) Any request to register Partnership Securities pursuant to this
Section 7.12 shall (i) specify the Partnership Securities intended to be offered
and sold by the Person making the request, (ii) express such Person's present
intent to offer such shares for distribution, (iii) describe the nature or
method of the proposed offer and sale of Partnership Securities, and (iv)
contain the undertaking of such Person to provide all such information and
materials and take all action as may be required in order to permit the
Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
SECTION 7.13. Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General Partner
to act on behalf of and in the name of the Partnership has full power and
authority to encumber, sell or otherwise use in any manner any and all assets of
the Partnership and to enter into any authorized contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the General Partner
or any such officer as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be
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available against such Person to contest, negate or disaffirm any action of the
General Partner or any such officer in connection with any such dealing. In no
event shall any Person dealing with the General Partner or any such officer or
its representatives be obligated to ascertain that the terms of the Agreement
have been complied with or to inquire into the necessity or expedience of any
act or action of the General Partner or any such officer or its representatives.
Each and every certificate, document or other instrument executed on behalf of
the Partnership by the General Partner or its representatives shall be
conclusive evidence in favor of any and every Person relying thereon or claiming
thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate, document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
ARTICLE VIII.
BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 8.1. Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partners any information required to be provided pursuant to Section
3.4(a). Any books and records maintained by or on behalf of the Partnership in
the regular course of its business, including the record of the Record Holders
and Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with U.S. GAAP.
SECTION 8.2. Fiscal Year.
The fiscal year of the Partnership shall be a fiscal year ending December
31.
SECTION 8.3. Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause to
be mailed or furnished to each Record Holder of a Unit as of a date selected by
the General Partner in its discretion, an annual report containing financial
statements of the Partnership for such fiscal year of the Partnership, presented
in accordance with U.S. GAAP, including a balance sheet and statements of
operations, Partnership equity and cash flows, such statements to be audited by
a firm of independent public accountants selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed or furnished to each Record Holder of a Unit,
as of a date selected by the General Partner in its discretion, a report
containing unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for trading, or as
the General Partner determines to be necessary or appropriate.
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ARTICLE IX.
TAX MATTERS
SECTION 9.1. Tax Returns and Information.
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax reporting
purposes with respect to a taxable year shall be furnished to them within 90
days of the close of the calendar year in which the Partnership's taxable year
ends. The classification, realization and recognition of income, gain, losses
and deductions and other items shall be on the accrual method of accounting for
federal income tax purposes.
SECTION 9.2. Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code
in accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. Notwithstanding any other provision herein contained, for the purposes
of computing the adjustments under Section 743(b) of the Code, the General
Partner shall be authorized (but not required) to adopt a convention whereby the
price paid by a transferee of a Limited Partner Interest will be deemed to be
the lowest quoted closing price of the Limited Partner Interests on any National
Securities Exchange on which such Limited Partner Interests are traded during
the calendar month in which such transfer is deemed to occur pursuant to Section
6.2(g) without regard to the actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a sixty-month period as provided in Section 709 of
the Code.
(c) Except as otherwise provided herein, the General Partner shall
determine whether the Partnership should make any other elections permitted by
the Code.
SECTION 9.3. Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing any
or all things reasonably required by the General Partner to conduct such
proceedings.
SECTION 9.4. Withholding.
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of Section
1446 of the Code), the amount withheld may at the discretion of the General
Partner be treated by the Partnership as a distribution of cash pursuant to
Section 6.3 in the amount of such withholding from such Partner.
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ARTICLE X.
ADMISSION OF PARTNERS
SECTION 10.1. Admission of Initial Limited Partners.
Upon the issuance by the Partnership of Common Units to Williams Natural
Gas Liquids, Inc., Williams Energy Services and the Underwriters as described in
Section 5.3 in connection with the Initial Offering and the execution by each
party of a Transfer Application, the General Partner shall admit such parties to
the Partnership as Initial Limited Partners in respect of the Common Units
purchased by them.
SECTION 10.2. Admission of Substituted Limited Partner.
By transfer of a Limited Partner Interest in accordance with Article IV,
the transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request admission
as a Substituted Limited Partner to such purchaser or other transferee in
respect of the transferred Limited Partner Interests. Each transferee of a
Limited Partner Interest (including any nominee holder or an agent acquiring
such Limited Partner Interest for the account of another Person) who executes
and delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Limited Partner Interests so transferred to
such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given or
withheld in the General Partner's discretion, and (y) when any such admission is
shown on the books and records of the Partnership. If such consent is withheld,
such transferee shall be an Assignee. An Assignee shall have an interest in the
Partnership equivalent to that of a Limited Partner with respect to allocations
and distributions, including liquidating distributions, of the Partnership. With
respect to voting rights attributable to Limited Partner Interests that are held
by Assignees, the General Partner shall be deemed to be the Limited Partner with
respect thereto and shall, in exercising the voting rights in respect of such
Limited Partner Interests on any matter, vote such Limited Partner Interests at
the written direction of the Assignee who is the Record Holder of such Limited
Partner Interests. If no such written direction is received, such Limited
Partner Interests will not be voted. An Assignee shall have no other rights of a
Limited Partner.
SECTION 10.3. Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 11.1 or 11.2 or
the transferee of or successor to all of the General Partner Interest pursuant
to Section 4.6 who is proposed to be admitted as a successor General Partner
shall be admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the predecessor or
transferring General Partner pursuant to Section 11.1 or 11.2 or the transfer of
the General Partner Interest pursuant to Section 4.6; provided, however, that no
such successor shall be admitted to the Partnership until compliance with the
terms of Section 4.6 has occurred and such successor has executed and delivered
such other documents or instruments as may be required to effect such admission.
Any such successor shall, subject to the terms hereof, carry on the business of
the members of the Partnership Group without dissolution.
SECTION 10.4. Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or
a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the General
Partner (i) evidence of acceptance in form satisfactory to the General Partner
of all of the terms and conditions of this Agreement, including the power of
attorney granted in Section 2.6, and (ii) such other documents or
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instruments as may be required in the discretion of the General Partner to
effect such Person's admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no
Person shall be admitted as an Additional Limited Partner without the consent of
the General Partner, which consent may be given or withheld in the General
Partner's discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person is
recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
SECTION 10.5. Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement and,
if required by law, the General Partner shall prepare and file an amendment to
the Certificate of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted pursuant to
Section 2.6.
ARTICLE XI.
WITHDRAWAL OR REMOVAL OF PARTNERS
SECTION 11.1. Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) The General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Operating Partnership);
(ii) The General Partner transfers all of its rights as General
Partner pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to Section 11.2;
(iv) The General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition for relief
under Chapter 7 of the United States Bankruptcy Code; (C) files a petition
or answer seeking for itself a liquidation, dissolution or similar relief
(but not a reorganization) under any law; (D) files an answer or other
pleading admitting or failing to contest the material allegations of a
petition filed against the General Partner in a proceeding of the type
described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks,
consents to or acquiesces in the appointment of a trustee (but not a
debtor-in-possession), receiver or liquidator of the General Partner or of
all or any substantial part of its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General Partner
of revocation of its charter without a reinstatement of its charter, under
the laws of its state of incorporation; (B) in the event the General
Partner is a partnership or a limited liability company, the dissolution
and commencement of winding up of the General Partner; (C) in the event the
General Partner is acting in such capacity by virtue of being a trustee of
a trust, the termination of the trust;
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(D) in the event the General Partner is a natural person, his death or
adjudication of incompetency; and (E) otherwise in the event of the
termination of the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing General Partner shall give notice to the
Limited Partners within 30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this Section 11.1 shall result
in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2010, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners; provided that prior to the effective date of such withdrawal, the
withdrawal is approved by Unitholders holding at least a majority of the
Outstanding Common Units (excluding Common Units held by the General Partner and
its Affiliates) and the General Partner delivers to the Partnership an Opinion
of Counsel ("Withdrawal Opinion of Counsel") that such withdrawal (following the
selection of the successor General Partner) would not result in the loss of the
limited liability of any Limited Partner or of a limited partner of the
Operating Partnership or cause the Partnership or the Operating Partnership to
be treated as an association taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes (to the extent not previously
treated as such); (ii) at any time after 12:00 midnight, Eastern Standard Time,
on December 31, 2010, the General Partner voluntarily withdraws by giving at
least 90 days' advance notice to the Unitholders, such withdrawal to take effect
on the date specified in such notice; (iii) at any time that the General Partner
ceases to be the General Partner pursuant to Section 11.1(a)(ii) or is removed
pursuant to Section 11.2; or (iv) notwithstanding clause (i) of this sentence,
at any time that the General Partner voluntarily withdraws by giving at least 90
days' advance notice of its intention to withdraw to the Limited Partners, such
withdrawal to take effect on the date specified in the notice, if at the time
such notice is given one Person and its Affiliates (other than the General
Partner and its Affiliates) own beneficially or of record or control at least
50% of the Outstanding Units. The withdrawal of the General Partner from the
Partnership upon the occurrence of an Event of Withdrawal shall also constitute
the withdrawal of the General Partner as general partner or managing member, as
the case may be, of the other Group Members. If the General Partner gives a
notice of withdrawal pursuant to Section 11.1(a)(i), the holders of a Unit
Majority, may, prior to the effective date of such withdrawal, elect a successor
General Partner. The Person so elected as successor General Partner shall
automatically become the successor general partner or managing member, as the
case may be, of the other Group Members of which the General Partner is a
general partner or a managing member. If, prior to the effective date of the
General Partner's withdrawal, a successor is not selected by the Unitholders as
provided herein or the Partnership does not receive a Withdrawal Opinion of
Counsel, the Partnership shall be dissolved in accordance with Section 12.1. Any
successor General Partner elected in accordance with the terms of this Section
11.1 shall be subject to the provisions of Section 10.3.
SECTION 11.2. Removal of the General Partner.
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such holders
for removal of the General Partner must also provide for the election of a
successor General Partner by the Unitholders holding a Unit Majority (including
Units held by the General Partner and its Affiliates). Such removal shall be
effective immediately following the admission of a successor General Partner
pursuant to Section 10.3. The removal of the General Partner shall also
automatically constitute the removal of the General Partner as general partner
or managing member, as the case may be, of the other Group Members of which the
General Partner is a general partner or a managing member. If a Person is
elected as a successor General Partner in accordance with the terms of this
Section 11.2, such Person shall, upon admission pursuant to Section 10.3,
automatically become a successor general partner or managing member, as the case
may be, of the other Group Members of which the General Partner is a
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general partner or a managing member. The right of the holders of Outstanding
Units to remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.3.
SECTION 11.3. Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the General Partner by the holders of Outstanding Units under
circumstances where Cause does not exist, if a successor General Partner is
elected in accordance with the terms of Section 11.1 or 11.2, the Departing
Partner shall have the option exercisable prior to the effective date of the
departure of such Departing Partner to require its successor to purchase its
General Partner Interest and its general partner interest (or equivalent
interest) in the other Group Members and all of its Incentive Distribution
Rights (collectively, the "Combined Interest") in exchange for an amount in cash
equal to the fair market value of such Combined Interest, such amount to be
determined and payable as of the effective date of its departure. If the General
Partner is removed by the Unitholders under circumstances where Cause exists or
if the General Partner withdraws under circumstances where such withdrawal
violates this Agreement or the Operating Partnership Agreement, and if a
successor General Partner is elected in accordance with the terms of Section
11.1 or 11.2, such successor shall have the option, exercisable prior to the
effective date of the departure of such Departing Partner, to purchase the
Combined Interest for such fair market value of such Combined Interest. In
either event, the Departing Partner shall be entitled to receive all
reimbursements due such Departing Partner pursuant to Section 7.4, including any
employee-related liabilities (including severance liabilities), incurred in
connection with the termination of any employees employed by the General Partner
for the benefit of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of the Combined
Interest shall be determined by agreement between the Departing Partner and its
successor or, failing agreement within 30 days after the effective date of such
Departing Partner's departure, by an independent investment banking firm or
other independent expert selected by the Departing Partner and its successor,
which, in turn, may rely on other experts, and the determination of which shall
be conclusive as to such matter. If such parties cannot agree upon one
independent investment banking firm or other independent expert within 45 days
after the effective date of such departure, then the Departing Partner shall
designate an independent investment banking firm or other independent expert,
the Departing Partner's successor shall designate an independent investment
banking firm or other independent expert, and such firms or experts shall
mutually select a third independent investment banking firm or independent
expert, which third independent investment banking firm or other independent
expert shall determine the fair market value of the Combined Interest. In making
its determination, such third independent investment banking firm or other
independent expert may consider the then current trading price of Units on any
National Securities Exchange on which Units are then listed, the value of the
Partnership's assets, the rights and obligations of the Departing Partner and
other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common Units
pursuant to a valuation made by an investment banking firm or other independent
expert selected pursuant to Section 11.3(a), without reduction in such
Partnership Interest (but subject to proportionate dilution by reason of the
admission of its successor). Any successor General Partner shall indemnify the
Departing Partner (or its transferee) as to all debts and liabilities of the
Partnership arising on or after the date on which the Departing Partner (or its
transferee) becomes a Limited Partner. For purposes of this Agreement,
conversion of the Combined Interest to Common Units will be characterized as if
the General Partner (or its transferee) contributed its Combined Interest to the
Partnership in exchange for the newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the terms
of Section 11.1 or 11.2 and the option described in Section 11.3(a) is not
exercised by the party entitled to do so, the successor
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General Partner shall, at the effective date of its admission to the
Partnership, contribute to the Partnership cash in the amount equal to 1/99th of
the Net Agreed Value of the Partnership's assets on such date. In such event,
such successor General Partner shall, subject to the following sentence, be
entitled to 1% of all Partnership allocations and distributions. The successor
General Partner shall cause this Agreement to be amended to reflect that, from
and after the date of such successor General Partner's admission, the successor
General Partner's interest in all Partnership distributions and allocations
shall be 1%.
SECTION 11.4. Termination of Subordination Period, Conversion of Subordinated
Units and Extinguishment of Cumulative Common Unit Arrearages.
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and automatically convert into
Common Units on a one-for-one basis and (ii) all Cumulative Common Unit
Arrearages on the Common Units will be extinguished.
SECTION 11.5. Withdrawal of Limited Partners.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited Partner
Interest becomes a Record Holder of the Limited Partner Interest so transferred,
such transferring Limited Partner shall cease to be a Limited Partner with
respect to the Limited Partner Interest so transferred.
ARTICLE XII.
DISSOLUTION AND LIQUIDATION
SECTION 12.1. Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General Partner
is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be
dissolved and such successor General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its
affairs shall be wound up, upon:
(a) an Event of Withdrawal of the General Partner as provided in Section
11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and an
Opinion of Counsel is received as provided in Section 11.1(b) or 11.2 and such
successor is admitted to the Partnership pursuant to Section 10.3;
(b) an election to dissolve the Partnership by the General Partner that is
approved by the holders of a Unit Majority;
(c) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(d) the sale of all or substantially all of the assets and properties of
the Partnership Group.
SECTION 12.2. Continuation of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within
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180 days thereafter, the holders of a Unit Majority may elect to reconstitute
the Partnership and continue its business on the same terms and conditions set
forth in this Agreement by forming a new limited partnership on terms identical
to those set forth in this Agreement and having as the successor general partner
a Person approved by the holders of a Unit Majority. Unless such an election is
made within the applicable time period as set forth above, the Partnership shall
conduct only activities necessary to wind up its affairs. If such an election is
so made, then:
(i) the reconstituted Partnership shall continue unless earlier
dissolved in accordance with this Article XII;
(ii) if the successor General Partner is not the former General
Partner, then the interest of the former General Partner shall be treated
in the manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and
the Certificate of Limited Partnership and to enter into and, as necessary,
to file a new partnership agreement and certificate of limited partnership,
and the successor general partner may for this purpose exercise the powers
of attorney granted the General Partner pursuant to Section 2.6; provided,
that the right of the holders of a Unit Majority to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the
Operating Partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
SECTION 12.3. Liquidator.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be entitled
to receive such compensation for its services as may be approved by holders of
at least a majority of the Outstanding Common Units and Subordinated Units
voting as a single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days' prior notice and may be
removed at any time, with or without cause, by notice of removal approved by
holders of at least a majority of the Outstanding Common Units and Subordinated
Units voting as a single class. Upon dissolution, removal or resignation of the
Liquidator, a successor and substitute Liquidator (who shall have and succeed to
all rights, powers and duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of at least a majority of the Outstanding
Common Units and Subordinated Units voting as a single class. The right to
approve a successor or substitute Liquidator in the manner provided herein shall
be deemed to refer also to any such successor or substitute Liquidator approved
in the manner herein provided. Except as expressly provided in this Article XII,
the Liquidator approved in the manner provided herein shall have and may
exercise, without further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner under the terms of this
Agreement (but subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers, other than the limitation on sale
set forth in Section 7.3(b)) to the extent necessary or desirable in the good
faith judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding up
and liquidation of the Partnership as provided for herein.
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SECTION 12.4. Liquidation.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to Section 17-804 of the Delaware Act and the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such terms as
the Liquidator and such Partner or Partners may agree. If any property is
distributed in kind, the Partner receiving the property shall be deemed for
purposes of Section 12.4(c) to have received cash equal to its fair market
value; and contemporaneously therewith, appropriate cash distributions must be
made to the other Partners. The Liquidator may, in its absolute discretion,
defer liquidation or distribution of the Partnership's assets for a reasonable
time if it determines that an immediate sale or distribution of all or some of
the Partnership's assets would be impractical or would cause undue loss to the
Partners. The Liquidator may, in its absolute discretion, distribute the
Partnership's assets, in whole or in part, in kind if it determines that a sale
would be impractical or would cause undue loss to the Partners.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise than in respect of their distribution rights
under Article VI. With respect to any liability that is contingent, conditional
or unmatured or is otherwise not yet due and payable, the Liquidator shall
either settle such claim for such amount as it thinks appropriate or establish a
reserve of cash or other assets to provide for its payment. When paid, any
unused portion of the reserve shall be distributed as additional liquidation
proceeds.
(c) Liquidation Distributions. All property and all cash in excess of that
required to discharge liabilities as provided in Section 12.4(b) shall be
distributed to the Partners in accordance with, and to the extent of, the
positive balances in their respective Capital Accounts, as determined after
taking into account all Capital Account adjustments (other than those made by
reason of distributions pursuant to this Section 12.4(c)) for the taxable year
of the Partnership during which the liquidation of the Partnership occurs (with
such date of occurrence being determined pursuant to Treasury Regulation Section
1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the end of such
taxable year (or, if later, within 90 days after said date of such occurrence).
SECTION 12.5. Cancellation of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
SECTION 12.6. Return of Contributions.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners or Unitholders, or any portion thereof, it being expressly understood
that any such return shall be made solely from Partnership assets.
SECTION 12.7. Waiver of Partition.
To the maximum extent permitted by law, each Partner hereby waives any
right to partition of the Partnership property.
SECTION 12.8. Capital Account Restoration.
No Limited Partner shall have any obligation to restore any negative
balance in its Capital Account upon liquidation of the Partnership. The General
Partner shall be obligated to restore any negative balance
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in its Capital Account upon liquidation of its interest in the Partnership by
the end of the taxable year of the Partnership during which such liquidation
occurs, or, if later, within 90 days after the date of such liquidation.
ARTICLE XIII.
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
SECTION 13.1. Amendment to be Adopted Solely by the General Partner.
Each Partner agrees that the General Partner, without the approval of any
Partner or Assignee, may amend any provision of this Agreement and execute,
swear to, acknowledge, deliver, file and record whatever documents may be
required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the principal
place of business of the Partnership, the registered agent of the Partnership or
the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure that
the Partnership and the Operating Partnership will not be treated as an
association taxable as a corporation or otherwise taxed as an entity for federal
income tax purposes;
(d) a change that, in the discretion of the General Partner, (i) does not
adversely affect the Limited Partners in any material respect, (ii) is necessary
or advisable to (A) satisfy any requirements, conditions or guidelines contained
in any opinion, directive, order, ruling or regulation of any federal or state
agency or judicial authority or contained in any federal or state statute
(including the Delaware Act) or (B) facilitate the trading of the Limited
Partner Interests (including the division of any class or classes of Outstanding
Limited Partner Interests into different classes to facilitate uniformity of tax
consequences within such classes of Limited Partner Interests) or comply with
any rule, regulation, guideline or requirement of any National Securities
Exchange on which the Limited Partner Interests are or will be listed for
trading, compliance with any of which the General Partner determines in its
discretion to be in the best interests of the Partnership and the Limited
Partners, (iii) is necessary or advisable in connection with action taken by the
General Partner pursuant to Section 5.10 or (iv) is required to effect the
intent expressed in the Registration Statement or the intent of the provisions
of this Agreement or is otherwise contemplated by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and any
changes that, in the discretion of the General Partner, are necessary or
advisable as a result of a change in the fiscal year or taxable year of the
Partnership including, if the General Partner shall so determine, a change in
the definition of "Quarter" and the dates on which distributions are to be made
by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership, or the General Partner or its directors, officers, trustees or
agents from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisers Act of 1940, as
amended, or "plan asset" regulations adopted under the Employee Retirement
Income Security Act of 1974, as amended, regardless of whether such are
substantially similar to plan asset regulations currently applied or proposed by
the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection with
the authorization of issuance of any class or series of Partnership Securities
pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
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(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately the
formation by the Partnership of, or investment by the Partnership in, any
corporation, partnership, joint venture, limited liability company or other
entity, in connection with the conduct by the Partnership of activities
permitted by the terms of Section 2.4;
(k) a merger or conveyance pursuant to Section 14.3(d); or
(l) any other amendments substantially similar to the foregoing.
SECTION 13.2. Amendment Procedures.
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner which consent may be given or withheld in its sole discretion. A
proposed amendment shall be effective upon its approval by the holders of a Unit
Majority, unless a greater or different percentage is required under this
Agreement or by Delaware law. Each proposed amendment that requires the approval
of the holders of a specified percentage of Outstanding Units shall be set forth
in a writing that contains the text of the proposed amendment. If such an
amendment is proposed, the General Partner shall seek the written approval of
the requisite percentage of Outstanding Units or call a meeting of the
Unitholders to consider and vote on such proposed amendment. The General Partner
shall notify all Record Holders upon final adoption of any such proposed
amendments.
SECTION 13.3. Amendment Requirements.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no provision
of this Agreement that establishes a percentage of Outstanding Units (including
Units deemed owned by the General Partner) required to take any action shall be
amended, altered, changed, repealed or rescinded in any respect that would have
the effect of reducing such voting percentage unless such amendment is approved
by the written consent or the affirmative vote of holders of Outstanding Units
whose aggregate Outstanding Units constitute not less than the voting
requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no amendment
to this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a result of an
amendment approved pursuant to Section 13.3(c), (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable to, the General Partner or any
of its Affiliates without its consent, which consent may be given or withheld in
its sole discretion, (iii) change Section 12.1(b), or (iv) change the term of
the Partnership or, except as set forth in Section 12.1(b), give any Person the
right to dissolve the Partnership.
(c) Except as provided in Section 14.3, and except as otherwise provided,
and without limitation of the General Partner's authority to adopt amendments to
this Agreement as contemplated in Section 13.1, any amendment that would have a
material adverse effect on the rights or preferences of any class of Partnership
Interests in relation to other classes of Partnership Interests must be approved
by the holders of not less than a majority of the Outstanding Partnership
Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 13.1 and except as otherwise provided by Section
14.3(b), no amendments shall become effective without the approval of the
holders of at least 90% of the Outstanding Common Units and Subordinated Units
voting as a single class unless the Partnership obtains an Opinion of Counsel to
the effect that such amendment will not affect the limited liability of any
Limited Partner under applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Units.
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SECTION 13.4. Special Meetings.
All acts of Limited Partners to be taken pursuant to this Agreement shall
be taken in the manner provided in this Article XIII. Special meetings of the
Limited Partners may be called by the General Partner or by Limited Partners
owning 20% or more of the Outstanding Limited Partner Interests of the class or
classes for which a meeting is proposed. Limited Partners shall call a special
meeting by delivering to the General Partner one or more requests in writing
stating that the signing Limited Partners wish to call a special meeting and
indicating the general or specific purposes for which the special meeting is to
be called. Within 60 days after receipt of such a call from Limited Partners or
within such greater time as may be reasonably necessary for the Partnership to
comply with any statutes, rules, regulations, listing, agreements or similar
requirements governing the holding of a meeting or the solicitation of proxies
for use at such a meeting, the General Partner shall send a notice of the
meeting to the Limited Partners either directly or indirectly through the
Transfer Agent. A meeting shall be held at a time and place determined by the
General Partner on a date not less than 10 days nor more than 60 days after the
mailing of notice of the meeting. Limited Partners shall not vote on matters
that would cause the Limited Partners to be deemed to be taking part in the
management and control of the business and affairs of the Partnership so as to
jeopardize the Limited Partners' limited liability under the Delaware Act or the
law of any other state in which the Partnership is qualified to do business.
SECTION 13.5. Notice of a Meeting.
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders of the class or classes of Limited Partner Interests for which a
meeting is proposed in writing by mail or other means of written communication
in accordance with Section 16.1. The notice shall be deemed to have been given
at the time when deposited in the mail or sent by other means of written
communication.
SECTION 13.6. Record Date.
For purposes of determining the Limited Partners entitled to notice of or
to vote at a meeting of the Limited Partners or to give approvals without a
meeting as provided in Section 13.11 the General Partner may set a Record Date,
which shall not be less than 10 nor more than 60 days before (a) the date of the
meeting (unless such requirement conflicts with any rule, regulation, guideline
or requirement of any National Securities Exchange on which the Limited Partner
Interests are listed for trading, in which case the rule, regulation, guideline
or requirement of such exchange shall govern) or (b) in the event that approvals
are sought without a meeting, the date by which Limited Partners are requested
in writing by the General Partner to give such approvals.
SECTION 13.7. Adjournment.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XIII.
SECTION 13.8. Waiver of Notice; Approval of Meeting; Approval of Minutes.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if it had occurred at a meeting
duly held after regular call and notice, if a quorum is present, either in
person or by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting,
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except when the Limited Partner does not approve, at the beginning of the
meeting, of the transaction of any business because the meeting is not lawfully
called or convened; and except that attendance at a meeting is not a waiver of
any right to disapprove the consideration of matters required to be included in
the notice of the meeting, but not so included, if the disapproval is expressly
made at the meeting.
SECTION 13.9. Quorum.
The holders of a majority of the Outstanding Limited Partner Interests of
the class or classes for which a meeting has been called (including Limited
Partner Interests deemed owned by the General Partner) represented in person or
by proxy shall constitute a quorum at a meeting of Limited Partners of such
class or classes unless any such action by the Limited Partners requires
approval by holders of a greater percentage of such Limited Partner Interests,
in which case the quorum shall be such greater percentage. At any meeting of the
Limited Partners duly called and held in accordance with this Agreement at which
a quorum is present, the act of Limited Partners holding Outstanding Limited
Partner Interests that in the aggregate represent a majority of the Outstanding
Limited Partner Interests entitled to vote and be present in person or by proxy
at such meeting shall be deemed to constitute the act of all Limited Partners,
unless a greater or different percentage is required with respect to such action
under the provisions of this Agreement, in which case the act of the Limited
Partners holding Outstanding Limited Partner Interests that in the aggregate
represent at least such greater or different percentage shall be required. The
Limited Partners present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any action
taken (other than adjournment) is approved by the required percentage of
Outstanding Limited Partner Interests specified in this Agreement (including
Limited Partner Interests deemed owned by the General Partner). In the absence
of a quorum any meeting of Limited Partners may be adjourned from time to time
by the affirmative vote of holders of at least a majority of the Outstanding
Limited Partner Interests entitled to vote at such meeting (including Limited
Partner Interests deemed owned by the General Partner) represented either in
person or by proxy, but no other business may be transacted, except as provided
in Section 13.7.
SECTION 13.10. Conduct of a Meeting.
The General Partner shall have full power and authority concerning the
manner of conducting any meeting of the Limited Partners or solicitation of
approvals in writing, including the determination of Persons entitled to vote,
the existence of a quorum, the satisfaction of the requirements of Section 13.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The General Partner shall designate a
Person to serve as chairman of any meeting and shall further designate a Person
to take the minutes of any meeting. All minutes shall be kept with the records
of the Partnership maintained by the General Partner. The General Partner may
make such other regulations consistent with applicable law and this Agreement as
it may deem advisable concerning the conduct of any meeting of the Limited
Partners or solicitation of approvals in writing, including regulations in
regard to the appointment of proxies, the appointment and duties of inspectors
of votes and approvals, the submission and examination of proxies and other
evidence of the right to vote, and the revocation of approvals in writing.
SECTION 13.11. Action Without a Meeting.
If authorized by the General Partner, any action that may be taken at a
meeting of the Limited Partners may be taken without a meeting if an approval in
writing setting forth the action so taken is signed by Limited Partners owning
not less than the minimum percentage of the Outstanding Limited Partner
Interests (including Limited Partner Interests deemed owned by the General
Partner) that would be necessary to authorize or take such action at a meeting
at which all the Limited Partners were present and voted (unless such provision
conflicts with any rule, regulation, guideline or requirement of any National
Securities Exchange on which the Limited Partner Interests are listed for
trading, in which case the rule, regulation, guideline or requirement of such
exchange shall govern). Prompt notice of the taking
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of action without a meeting shall be given to the Limited Partners who have not
approved in writing. The General Partner may specify that any written ballot
submitted to Limited Partners for the purpose of taking any action without a
meeting shall be returned to the Partnership within the time period, which shall
be not less than 20 days, specified by the General Partner. If a ballot returned
to the Partnership does not vote all of the Limited Partner Interests held by
the Limited Partners the Partnership shall be deemed to have failed to receive a
ballot for the Limited Partner Interests that were not voted. If approval of the
taking of any action by the Limited Partners is solicited by any Person other
than by or on behalf of the General Partner, the written approvals shall have no
force and effect unless and until (a) they are deposited with the Partnership in
care of the General Partner, (b) approvals sufficient to take the action
proposed are dated as of a date not more than 90 days prior to the date
sufficient approvals are deposited with the Partnership and (c) an Opinion of
Counsel is delivered to the General Partner to the effect that the exercise of
such right and the action proposed to be taken with respect to any particular
matter (i) will not cause the Limited Partners to be deemed to be taking part in
the management and control of the business and affairs of the Partnership so as
to jeopardize the Limited Partners' limited liability, and (ii) are otherwise
permissible under the state statutes then governing the rights, duties and
liabilities of the Partnership and the Partners.
SECTION 13.12. Voting and Other Rights.
(a) Only those Record Holders of the Limited Partner Interests on the
Record Date set pursuant to Section 13.6 (and also subject to the limitations
contained in the definition of "Outstanding") shall be entitled to notice of,
and to vote at, a meeting of Limited Partners or to act with respect to matters
as to which the holders of the Outstanding Limited Partner Interests have the
right to vote or to act. All references in this Agreement to votes of, or other
acts that may be taken by, the Outstanding Limited Partner Interests shall be
deemed to be references to the votes or acts of the Record Holders of such
Outstanding Limited Partner Interests.
(b) With respect to Limited Partner Interests that are held for a Person's
account by another Person (such as a broker, dealer, bank, trust company or
clearing corporation, or an agent of any of the foregoing), in whose name such
Limited Partner Interests are registered, such other Person shall, in exercising
the voting rights in respect of such Limited Partner Interests on any matter,
and unless the arrangement between such Persons provides otherwise, vote such
Limited Partner Interests in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 13.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions of
Section 4.3.
ARTICLE XIV.
MERGER
SECTION 14.1. Authority.
The Partnership may merge or consolidate with one or more corporations,
limited liability companies, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including a
general partnership or limited partnership, formed under the laws of the State
of Delaware or any other state of the United States of America, pursuant to a
written agreement of merger or consolidation ("Merger Agreement") in accordance
with this Article XIV.
SECTION 14.2. Procedure for Merger or Consolidation.
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the General Partner. If the General Partner shall
determine, in the exercise of its discretion, to consent to
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the merger or consolidation, the General Partner shall approve the Merger
Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of each of the
business entities proposing to merge or consolidate;
(b) The name and jurisdiction of formation or organization of the business
entity that is to survive the proposed merger or consolidation (the "Surviving
Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity securities
of each constituent business entity for, or into, cash, property or general or
limited partner interests, rights, securities or obligations of the Surviving
Business Entity; and (i) if any general or limited partner interests, securities
or rights of any constituent business entity are not to be exchanged or
converted solely for, or into, cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business Entity,
the cash, property or general or limited partner interests, rights, securities
or obligations of any limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity) which the holders of such general or
limited partner interests, securities or rights are to receive in exchange for,
or upon conversion of their general or limited partner interests, securities or
rights, and (ii) in the case of securities represented by certificates, upon the
surrender of such certificates, which cash, property or general or limited
partner interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity), or evidences thereof, are to be
delivered;
(e) A statement of any changes in the constituent documents or the adoption
of new constituent documents (the articles or certificate of incorporation,
articles of trust, declaration of trust, certificate or agreement of limited
partnership, operating agreement or other similar charter or governing document)
of the Surviving Business Entity to be effected by such merger or consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 14.4 or a later date specified
in or determinable in accordance with the Merger Agreement (provided, that if
the effective time of the merger is to be later than the date of the filing of
the certificate of merger, the effective time shall be fixed no later than the
time of the filing of the certificate of merger and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General Partner.
SECTION 14.3. Approval by Limited Partners of Merger or Consolidation.
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of Limited Partners, whether at a special meeting or by
written consent, in either case in accordance with the requirements of Article
VII. A copy or a summary of the Merger Agreement shall be included in or
enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a Unit
Majority unless the Merger Agreement contains any provision that, if contained
in an amendment to this Agreement, the provisions of this Agreement or the
Delaware Act would require for its approval the vote or consent of a greater
percentage of the Outstanding Limited Partner Interests or of any class of
Limited Partners, in which case such greater percentage vote or consent shall be
required for approval of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote or
consent of the Limited Partners, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation may
be abandoned pursuant to provisions therefor, if any, set forth in the Merger
Agreement.
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(d) Notwithstanding anything else contained in this Article XIV or in this
Agreement, the General Partner is permitted, in its discretion, without Limited
Partner approval, to merge the Partnership or any Group Member into, or convey
all of the Partnership's assets to, another limited liability entity which shall
be newly formed and shall have no assets, liabilities or operations at the time
of such Merger other than those it receives from the Partnership or other Group
Member if (i) the General Partner has received an Opinion of Counsel that the
merger or conveyance, as the case may be, would not result in the loss of the
limited liability of any Limited Partner or any partner in the Operating
Partnership or cause the Partnership or the Operating Partnership to be treated
as an association taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not previously treated as such),
(ii) the sole purpose of such merger or conveyance is to effect a mere change in
the legal form of the Partnership into another limited liability entity and
(iii) the governing instruments of the new entity provide the Limited Partners
and the General Partner with the same rights and obligations as are herein
contained.
SECTION 14.4. Certificate of Merger.
Upon the required approval by the General Partner and the Unitholders of a
Merger Agreement, a certificate of merger shall be executed and filed with the
Secretary of State of the State of Delaware in conformity with the requirements
of the Delaware Act.
SECTION 14.5. Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities, shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any
of those constituent business entities shall not revert and is not in any
way impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests
in property of any of those constituent business entities shall be
preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not
be deemed to result in a transfer or assignment of assets or liabilities from
one entity to another.
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ARTICLE XV.
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
SECTION 15.1. Right to Acquire Limited Partner Interests.
(a) Notwithstanding any other provision of this Agreement, if at any time
not more than 20% of the total Limited Partner Interests of any class then
Outstanding is held by Persons other than the General Partner and its
Affiliates, the General Partner shall then have the right, which right it may
assign and transfer in whole or in part to the Partnership or any Affiliate of
the General Partner, exercisable in its sole discretion, to purchase all, but
not less than all, of such Limited Partner Interests of such class then
Outstanding held by Persons other than the General Partner and its Affiliates,
at the greater of (x) the Current Market Price as of the date three days prior
to the date that the notice described in Section 15 is mailed and (y) the
highest price paid by the General Partner or any of its Affiliates for any such
Limited Partner Interest of such class purchased during the 90-day period
preceding the date that the notice described in Section 15.1(b) is mailed. As
used in this Agreement, (i) "Current Market Price" as of any date of any class
of Limited Partner Interests listed or admitted to trading on any National
Securities Exchange means the average of the daily Closing Prices (as
hereinafter defined) per limited partner interest of such class for the 20
consecutive Trading Days (as hereinafter defined) immediately prior to such
date; (ii) "Closing Price" for any day means the last sale price on such day,
regular way, or in case no such sale takes place on such day, the average of the
closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted for trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which such Limited
Partner Interests of such class are listed or admitted to trading or, if such
Limited Partner Interests of such class are not listed or admitted to trading on
any National Securities Exchange (other than the Nasdaq Stock Market), the last
quoted price on such day or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-counter market, as reported by the
Nasdaq Stock Market or such other system then in use, or, if on any such day
such Limited Partner interests of such class are not quoted by any such
organization, the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in such Limited Partner
Interests of such class selected by the General Partner, or if on any such day
no market maker is making a market in such Limited Partner Interests of such
class, the fair value of such Limited Partner Interests on such day as
determined reasonably and in good faith by the General Partner; and (iii)
"Trading Day" means a day on which the principal National Securities Exchange on
which such Limited Partner Interests of any class are listed or admitted to
trading is open for the transaction of business or, if Limited Partner Interests
of a class are not listed or admitted to trading on any National Securities
Exchange, a day on which banking institutions in New York City generally are
open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Limited Partner Interests
granted pursuant to Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the "Notice of Election to
Purchase") and shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner Interests of such
class (as of a Record Date selected by the General Partner) at least 10, but not
more than 60, days prior to the Purchase Date. Such Notice of Election to
Purchase shall also be published for a period of at least three consecutive days
in at least two daily newspapers of general circulation printed in the English
language and published in the Borough of Manhattan, New York. The Notice of
Election to Purchase shall specify the Purchase Date and the price (determined
in accordance with Section 15.1(a)) at which Limited Partner Interests will be
purchased and state that the General Partner, its Affiliate or the Partnership,
as the case may be, elects to purchase such Limited Partner Interests, upon
surrender of Certificates representing such Limited Partner interests in
exchange for payment, at such office or offices of the Transfer Agent as the
Transfer Agent may specify, or as may be required by any National Securities
Exchange on which such Limited Partner Interests are listed or admitted to
trading. Any such Notice of Election to Purchase mailed to a Record Holder of
Limited Partner Interests at his address as reflected in the records of the
Transfer Agent shall be
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conclusively presumed to have been given regardless of whether the owner
receives such notice. On or prior to the Purchase Date, the General Partner, its
Affiliate or the Partnership, as the case may be, shall deposit with the
Transfer Agent cash in an amount sufficient to pay the aggregate purchase price
of all of such Limited Partner Interests to be purchased in accordance with this
Section 15.1. If the Notice of Election to Purchase shall have been duly given
as aforesaid at least 10 days prior to the Purchase Date, and if on or prior to
the Purchase Date the deposit described in the preceding sentence has been made
for the benefit of the holders of Limited Partner Interests subject to purchase
as provided herein, then from and after the Purchase Date, notwithstanding that
any Certificate shall not have been surrendered for purchase, all rights of the
holders of such Limited Partner Interests (including any rights pursuant to
Articles IV, V, VI, and XII) shall thereupon cease, except the right to receive
the purchase price (determined in accordance with Section 15.1(a)) for Limited
Partner Interests therefor, without interest, upon surrender to the Transfer
Agent of the Certificates representing such Limited Partner Interests, and such
Limited Partner Interests shall thereupon be deemed to be transferred to the
General Partner, its Affiliate or the Partnership, as the case may be, on the
record books of the Transfer Agent and the Partnership, and the General Partner
or any Affiliate of the General Partner, or the Partnership, as the case may be,
shall be deemed to be the owner of all such Limited Partner Interests from and
after the Purchase Date and shall have all rights as the owner of such Limited
Partner Interests (including all rights as owner of such Limited Partner
Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an
Outstanding Limited Partner Interest subject to purchase as provided in this
Section 15.1 may surrender his Certificate evidencing such Limited Partner
Interest to the Transfer Agent in exchange for payment of the amount described
in Section 15.1(a), therefor, without interest thereon.
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ARTICLE XVI.
GENERAL PROVISIONS
SECTION 16.1. Addresses and Notices.
Any notice, demand, request, report or proxy materials required or
permitted to be given or made to a Partner or Assignee under this Agreement
shall be in writing and shall be deemed given or made when delivered in person
or when sent by first class United States mail or by other means of written
communication to the Partner or Assignee at the address described below. Any
notice, payment or report to be given or made to a Partner or Assignee hereunder
shall be deemed conclusively to have been given or made, and the obligation to
give such notice or report or to make such payment shall be deemed conclusively
to have been fully satisfied, upon sending of such notice, payment or report to
the Record Holder of such Partnership Securities at his address as shown on the
records of the Transfer Agent or as otherwise shown on the records of the
Partnership, regardless of any claim of any Person who may have an interest in
such Partnership Securities by reason of any assignment or otherwise. An
affidavit or certificate of making of any notice, payment or report in
accordance with the provisions of this Section 16.1 executed by the General
Partner, the Transfer Agent or the mailing organization shall be prima facie
evidence of the giving or making of such notice, payment or report. If any
notice, payment or report addressed to a Record Holder at the address of such
Record Holder appearing on the books and records of the Transfer Agent or the
Partnership is returned by the United States Postal Service marked to indicate
that the United States Postal Service is unable to deliver it, such notice,
payment or report and any subsequent notices, payments and reports shall be
deemed to have been duly given or made without further mailing (until such time
as such Record Holder or another Person notifies the Transfer Agent or the
Partnership of a change in his address) if they are available for the Partner or
Assignee at the principal office of the Partnership for a period of one year
from the date of the giving or making of such notice, payment or report to the
other Partners and Assignees. Any notice to the Partnership shall be deemed
given if received by the General Partner at the principal office of the
Partnership designated pursuant to Section 2.3. The General Partner may rely and
shall be protected in relying on any notice or other document from a Partner,
Assignee or other Person if believed by it to be genuine.
SECTION 16.2. Further Action.
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
SECTION 16.3. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
SECTION 16.4. Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
SECTION 16.5. Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
SECTION 16.6. Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
A-72
<PAGE> 237
SECTION 16.7. Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
SECTION 16.8. Applicable Law.
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
SECTION 16.9. Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
SECTION 16.10. Consent of Partners.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be bound
by the results of such action.
[Rest of Page Intentionally Left Blank]
A-73
<PAGE> 238
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above GENERAL PARTNER:
WILLIAMS GP LLC
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
ORGANIZATIONAL LIMITED PARTNER:
WILLIAMS ENERGY SERVICES
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
LIMITED PARTNERS:
All Limited Partners now and
hereafter
admitted as Limited Partners of the
Partnership, pursuant to powers of
attorney
now and hereafter executed in favor
of, and
granted and delivered to the General
Partner.
WILLIAMS GP LLC
By:
----------------------------------
Name:
---------------------------------
Title:
---------------------------------
A-74
<PAGE> 239
EXHIBIT A
TO THE AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
WILLIAMS ENERGY PARTNERS L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS IN
WILLIAMS ENERGY PARTNERS L.P.
<TABLE>
<S> <C>
No. ____________ ____________ Common
Units
</TABLE>
In accordance with Section 4.1 of the Amended and Restated Agreement of
Limited Partnership of Williams Energy Partners L.P., as amended, supplemented
or restated from time to time (the "Partnership Agreement"), Williams Energy
Partners L.P., a Delaware limited partnership (the "Partnership"), hereby
certifies that (the "Holder") is the registered owner of Common Units
representing limited partner interests in the Partnership (the "Common Units")
transferable on the books of the Partnership, in person or by duly authorized
attorney, upon surrender of this Certificate properly endorsed and accompanied
by a properly executed application for transfer of the Common Units represented
by this Certificate. The rights, preferences and limitations of the Common Units
are set forth in, and this Certificate and the Common Units represented hereby
are issued and shall in all respects be subject to the terms and provisions of,
the Partnership Agreement. Copies of the Partnership Agreement are on file at,
and will be furnished without charge on delivery of written request to the
Partnership at, the principal office of the Partnership located at One Williams
Center, Tulsa, Oklahoma 74172. Capitalized terms used herein but not defined
shall have the meanings given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement, (ii)
represented and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (iii) granted the powers of attorney provided for in the Partnership
Agreement and (iv) made the waivers and given the consents and approvals
contained in the Partnership Agreement.
This Certificate shall not be valid far any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
<TABLE>
<S> <C>
Dated: ______________ WILLIAMS ENERGY PARTNERS L.P.
Countersigned and Registered by: By: Williams GP LLC, its General Partner
By:
--------------------------------------------
as Transfer Agent and Registrar Name:
--------------------------------------------
By: By:
-------------------------------------------- --------------------------------------------
Authorized Signature Secretary
</TABLE>
A-75
<PAGE> 240
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws or
regulations:
<TABLE>
<S> <C> <C>
TEN COM as tenants in common UNIF GIFT/TRANSFERS MIN ACT
--
TEN ENT as tenants by the entireties ------------------ Custodian ------------------
-- (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts/Transfers to CD Minors Act
survivorship and not as (State)
tenants in common
</TABLE>
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
WILLIAMS ENERGY PARTNERS L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF WILLIAMS ENERGY PARTNERS L.P.
You have acquired an interest in Williams Energy Partners L.P., One
Williams Center, Tulsa, Oklahoma 74172, whose taxpayer identification number is
[ ]. The Internal Revenue Service has issued Williams Energy Partners
L.P. the following tax shelter registration number:
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN WILLIAMS ENERGY PARTNERS L.P.
You must report the registration number as well as the name and taxpayer
identification number of Williams Energy Partners L.P. on Form 8271. FORM 8271
MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN WILLIAMS
ENERGY PARTNERS L.P.
If you transfer your interest in Williams Energy Partners L.P. to another
person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address and
tax shelter registration number of Williams Energy Partners L.P. If you do not
want to keep such a list, you must (1) send the information specified above to
the Partnership, which will keep the list for this tax shelter, and (2) give a
copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could result
in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal
Revenue Code of 1986, as amended, unless such failure is shown to be due to
reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
A-76
<PAGE> 241
FOR VALUE RECEIVED, hereby assigns, conveys, sells and transfers unto
<TABLE>
<S> <C>
-------------------------------------------- --------------------------------------------
(Please print or typewrite name and address (Please insert Social Security or other
of Assignee) identifying number of Assignee)
</TABLE>
Common Units representing limited partner interests evidenced by
this Certificate, subject to the Partnership Agreement, and does hereby
irrevocably constitute and appoint as its attorney-in-fact with full
power of substitution to transfer the same on the books of Williams Energy
Partners L.P.
Date: NOTE: The signature to any
endorsement hereon must
correspond with the name as
written upon the face of this
Certificate in every
particular, without
alteration, enlargement or
change.
------------------------------------
(Signature)
------------------------------------
(Signature)
SIGNATURE(S) MUST BE GUARANTEED BY A MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY
SIGNATURE(S) GUARANTEED.
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
A-77
<PAGE> 242
APPENDIX B
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Williams Energy Partners L.P. (the
"Partnership"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as the Assignee's attorney-in-fact to execute, swear to, acknowledge
and file any document, including, without limitation, the Partnership Agreement
and any amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the powers of attorney provided for in the
Partnership Agreement, and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not defined
herein have the meanings assigned to such terms in the Partnership Agreement.
Date:
<TABLE>
<S> <C>
Social Security or other identifying number of Signature of Assignee
Assignee
Purchase Price including commissions, if any Name and Address of Assignee
</TABLE>
Type of Entity (check one):
<TABLE>
<S> <C> <C>
[ ] Individual [ ] Partnership [
] Corporation
[ ] Trust [ ] Other
(specify)
</TABLE>
Nationality (check one):
<TABLE>
<S> <C>
[ ] U.S. Citizen, Resident or Domestic Entity
[ ] Foreign Corporation [ ] Non-resident
Alien
</TABLE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income
taxation.
2. My U.S. taxpayer identification number (Social Security Number)
is __________.
3. My home address is __________.
B-1
<PAGE> 243
B. Partnership, Corporation or Other Interestholder
1. __________ is not a foreign corporation, foreign partnership,
foreign trust (Name of Interestholder) or foreign estate (as those terms
are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
__________.
3. The interestholder's office address and place of incorporation
(if applicable) is __________.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to
the Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of:
------------------------------------------------------
Name of Interestholder
------------------------------------------------------
Signature and Date
------------------------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
B-2
<PAGE> 244
APPENDIX C
GLOSSARY OF TERMS
adjusted operating surplus: For any period, operating surplus generated
during that period is adjusted to:
(a) decrease operating surplus by:
(1) any net increase in working capital borrowings during that
period; and
(2) any net reduction in cash reserves for operating expenditures
during that period not relating to an operating expenditure made during
that period; and
(b) increase operating surplus by:
(1) any net decrease in working capital borrowings during that
period; and
(2) any net increase in cash reserves for operating expenditures
during that period required by any debt instrument for the repayment of
principal, interest or premium.
Adjusted operating surplus does not include that portion of operating
surplus included in clause (a)(1) or the definition of operating surplus.
available cash: For any quarter prior to liquidation:
(a) the sum of:
(1) all cash and cash equivalents of Williams Energy Partners on
hand at the end of that quarter; and
(2) all additional cash and cash equivalents of Williams Energy
Partners on hand on the date of determination of available cash for that
quarter resulting from working capital borrowings after the end of that
quarter;
(b) less the amount of cash reserves that is necessary or appropriate
in the reasonable discretion of the general partner to:
(1) provide for the proper conduct of the business of Williams
Energy Partners (including reserves for future capital expenditures)
after that quarter;
(2) comply with applicable law or any debt instrument or other
agreement or obligation to which any member of Williams Energy Partners
is a party or its assets are subject; and
(3) provide funds for minimum quarterly distributions and
cumulative common unit arrearages for any one or more of the next four
quarters;
provided, however, that the general partner may not establish cash reserves for
distributions to the subordinated units unless the general partner has
determined that in its judgment the establishment of reserves will not prevent
Williams Energy Partners from distributing the minimum quarterly distribution on
all common units and any common unit arrearages thereon for the next four
quarters; and
provided, further, that disbursements made by Williams Energy Partners and its
subsidiaries or cash reserves established, increased or reduced after the end of
that quarter but on or before the date of determination of available cash for
that quarter shall be deemed to have been made, established, increased or
reduced, for purposes of determining available cash, within that quarter if the
general partner so determines.
barrel: One barrel of petroleum products equals 42 U.S. gallons.
capital account: The capital account maintained for a partner under the
partnership agreement. The capital account of a partner for a common unit, a
subordinated unit, an incentive distribution right or any
C-1
<PAGE> 245
other partnership interest will be the amount which that capital account would
be if that common unit, subordinated unit, incentive distribution right or other
partnership interest were the only interest in Williams Energy Partners held by
a partner.
capital surplus: All available cash distributed by us from any source will
be treated as distributed from operating surplus until the sum of all available
cash distributed since the closing of the initial public offering equals the
operating surplus as of the end of the quarter before that distribution. Any
excess available cash will be deemed to be capital surplus.
closing price: The last sale price on a day, regular way, or in case no
sale takes place on that day, the average of the closing bid and asked prices on
that day, regular way. In either case, as reported in the principal consolidated
transaction reporting system for securities listed or admitted to trading on the
principal national securities exchange on which the units of that class are
listed or admitted to trading. If the units of that class are not listed or
admitted to trading on any national securities exchange, the last quoted price
on that day. If no quoted price exists, the average of the high bid and low
asked prices on that day in the over-the-counter market, as reported by the
Nasdaq Stock Market or any other system then in use. If on any day the units of
that class are not quoted by any organization of that type, the average of the
closing bid and asked prices on that day as furnished by a professional market
maker making a market in the units of the class selected by the board of
directors of the general partner. If on that day no market maker is making a
market in the units of that class, the fair value of the units on that day as
determined reasonably and in good faith by the board of directors of the general
partner.
common units arrearage: The amount by which the minimum quarterly
distribution for a quarter during the subordination period exceeds the
distribution of available cash from operating surplus actually made for that
quarter on a common unit, cumulative for that quarter and all prior quarters
during the subordination period.
current market price: For any class of units listed or admitted to trading
on any national securities exchange as of any date, the average of the daily
closing prices for the 20 consecutive trading days immediately prior to that
date.
incentive distribution right: A non-voting limited partner partnership
interest issued to the general partner in connection with the transfer of
substantially all of its general partner interest in the operating partnerships
to Williams Energy Partners under the partnership agreement. The partnership
interest will confer upon its holder only the rights and obligations
specifically provided in the partnership agreement for incentive distribution
rights.
incentive distributions: The distributions of available cash from operating
surplus initially made to the general partner that are in excess of the general
partner's aggregate 2% general partner interest.
interim capital transactions: The following transactions if they occur
prior to liquidation:
(a) borrowings, refinancings or refundings of indebtedness and sales
of debt securities (other than for working capital borrowings and other
than for items purchased on open account in the ordinary course of
business) by Williams Energy Partners;
(b) sales of equity interests by Williams Energy Partners;
(c) sales or other voluntary or involuntary dispositions of any assets
of Williams Energy Partners (other than sales or other dispositions of
inventory, accounts receivable and other assets in the ordinary course of
business, and sales or other dispositions of assets as a part of normal
retirements or replacements).
C-2
<PAGE> 246
operating expenditures: All expenditures of Williams Energy Partners and
our subsidiaries, including, but not limited to, taxes, reimbursements of the
general partner, debt service payments and capital expenditures, subject to the
following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness will not constitute operating expenditures.
(b) Operating expenditures will not include:
(1) capital expenditures made for acquisitions or for capital
improvements;
(2) payment of transaction expenses relating to interim capital
transactions; or
(3) distributions to partners.
operating surplus: For any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of
(1) $15 million;
(2) all cash receipts of Williams Energy Partners and our
subsidiaries for the period beginning on the closing date of our initial
public offering and ending with the last day of that period, other than
cash receipts from interim capital transactions; and
(3) all cash receipts of Williams Energy Partners and our
subsidiaries after the end of that period but on or before the date of
determination of operating surplus for the period resulting from working
capital borrowings; less
(b) the sum of:
(1) operating expenditures for the period beginning on the closing
date of our initial public offering and ending with the last day of that
period; and
(2) the amount of cash reserves that is necessary or advisable in
the reasonable discretion of the general partner to provide funds for
future operating expenditures; provided however, that disbursements made
(including contributions to a member of Williams Energy Partners and our
subsidiaries or disbursements on behalf of a member of Williams Energy
Partners and our subsidiaries) or cash reserves established, increased
or reduced after the end of that period but on or before the date of
determination of available cash for that period shall be deemed to have
been made, established, increased or reduced for purposes of determining
operating surplus, within that period if the general partner so
determines.
subordination period: The subordination period will generally extend from
the closing of the initial public offering until the first to occur of:
(a) the first day of any quarter beginning after December 31, 2005 for
which:
(1) distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled or
exceeded the sum of the minimum quarterly distribution on all of the
outstanding common units and subordinated units for each of the three
non-overlapping four-quarter periods immediately preceding that date;
(2) the adjusted operating surplus generated during each of the
three immediately preceding, non-overlapping four-quarter periods
equaled or exceeded the sum of the minimum quarterly distribution on all
of the common units and subordinated units that were outstanding during
those periods on a fully-diluted basis, and the related distribution on
the general partner interests in Williams Energy Partners and the
operating partnerships; and
(3) there are no outstanding common units arrearages.
C-3
<PAGE> 247
(b) the date on which the general partner is removed as general
partner of Williams Energy Partners upon the requisite vote by limited
partners under circumstances where cause does not exist and units held by
the general partner and its affiliates are not voted in favor of the
removal.
ton: One ton of ammonia equals 9.25 U.S. barrels.
working capital borrowings: Borrowings exclusively for working capital
purposes made pursuant to a credit facility or other arrangement requiring all
borrowings thereunder to be reduced to a relatively small amount each year for
an economically meaningful period of time.
C-4
<PAGE> 248
APPENDIX D
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of Pro Forma Available Cash from
Operating Surplus and should be read in conjunction with "Cash Available for
Distribution," the Williams Energy Partners Predecessor (A Division of The
Williams Companies, Inc.) Combined Financial Statements, the Marine Terminals
Predecessor (A Division of Amerada Hess Corporation) Combined Financial
Statements and the Williams Energy Partners L.P. Unaudited Pro Forma Financial
Statements.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Pro forma net income........................................ $20,006 $16,057
Add:
Pro forma depreciation.................................... 9,673 6,635
Pro forma net interest expense............................ 5,964 5,322
Pro forma other expense................................... 19 --
------- -------
Pro forma EBITDA(a)....................................... $35,662 $28,014
Less:
Pro forma net interest expense............................ 5,964 5,322
Pro forma maintenance capital expenditures(b)............. 3,709 2,705
------- -------
Pro forma available cash from operating surplus(c)(d)....... $25,989 $19,987
======= =======
</TABLE>
---------------
(a) EBITDA is defined as operating profit plus depreciation expense.
(b) The Partnership estimates that the average annual maintenance capital
expenditures will be approximately $4.9 million through 2003. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(c) The pro forma adjustments in the pro forma financial statements are based
upon currently available information and certain estimates and assumptions.
The pro forma financial statements do not purport to present the financial
position or results of operations of the Partnership had the transactions
to be effected at the closing of this Offering actually been completed as
of the date indicated. Furthermore, the pro forma financial statements are
based on accrual accounting concepts whereas Available Cash from Operating
Surplus is defined in the Partnership Agreement on a cash accounting basis.
As a consequence, the amount of Pro Forma Cash Available from Operating
Surplus shown above should be viewed as a general indication of the amounts
of Available Cash from Operating Surplus that may in fact have been
generated by the Partnership had it been formed in earlier periods.
(d) The amount of Available Cash from Operating Surplus needed to distribute
the Minimum Quarterly Distribution for four quarters on the Common Units
and Subordinated Units to be outstanding immediately after this offering
and on the combined 2% general partner interest is approximately:
<TABLE>
<CAPTION>
FOUR THREE
QUARTERS QUARTERS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Common units................................................ $11,928 $ 8,946
Subordinated units.......................................... 11,928 8,946
General partner............................................. 488 366
------- -------
Total............................................. $24,344 $18,258
======= =======
</TABLE>
The pro forma amounts reflected above would have been sufficient to cover
the Minimum Quarterly Distribution during 1999 and the nine months ended
September 30, 2000, on all of the Common Units, the Subordinated Units and
the related distribution on the general partner interest.
D-1
<PAGE> 249
[WILLIAMS ENERGY PARTNERS]
3,750,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
----------------------------
PROSPECTUS
, 2001
----------------------------
LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC
DAIN RAUSCHER WESSELS
A.G. EDWARDS & SONS, INC.
UBS WARBURG LLC
LOGO
<PAGE> 250
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee, the NASD filing fee and the
NYSE filing fee, the amounts set forth below are estimates.
<TABLE>
<S> <C>
Registration fee........................................ $ 23,909
NASD filing fee......................................... 9,557
NYSE listing fee........................................ 109,100
Printing and engraving expenses......................... 600,000
Fees and expenses of legal counsel...................... 1,500,000
Accounting fees and expenses............................ 700,000
Transfer agent and registrar fees....................... 4,000
Miscellaneous........................................... 377,934
----------
Total......................................... $3,300,000
</TABLE>
---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The section of the Prospectus entitled "The Partnership
Agreement -- Indemnification" is incorporated herein by this reference.
Reference is made to Section of the Underwriting Agreement filed as Exhibit
1.1 to the Registration Statement. Subject to any terms, conditions or
restrictions set forth in the Partnership Agreement, Section 17-108 of the
Delaware Revised Uniform Limited Partnership Act empowers a Delaware limited
partnership to indemnify and hold harmless any partner or other person from and
against all claims and demands whatsoever.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Williams Energy Partners L.P. issued to Williams GP LLC limited partner
interests in the partnership in connection with the formation of the partnership
in August 2000 in an offering exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. Williams GP LLC is the general partner of
Williams Energy Partners L.P. and, as a result, controls Williams Energy
Partners L.P. and has knowledge of its business. There have been no other sales
of unregistered securities within the past three years.
ITEM 16. EXHIBITS.
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1** -- Form of Underwriting Agreement
3.1* -- Certificate of Limited Partnership of Williams Energy
Partners L.P.
3.2* -- Form of Amended and Restated Agreement of Limited
Partnership of Williams Energy Partners L.P. (included as
Appendix A to the Prospectus)
3.3* -- Certificate of Limited Partnership of Williams OLP, L.P.
3.4* -- Form of Amended and Restated Agreement of Limited
Partnership of Williams OLP, L.P.
3.5* -- Certificate of Formation of Williams GP LLC
3.6** -- Amended and Restated Limited Liability Company Agreement
of Williams GP LLC
5.1 -- Opinion of Craig R. Rich as to the legality of the
securities being registered
</TABLE>
II-1
<PAGE> 251
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
8.1** -- Opinion of Vinson & Elkins L.L.P. relating to tax matters
10.1** -- Form of Credit Facility
10.2** -- Form of Contribution, Conveyance and Assumption Agreement
10.3** -- Form of Williams GP LLC Long-Term Incentive Plan
10.4** -- Form of Omnibus Agreement
10.5* -- Sale of Assets Agreement, dated May 10, 1999 between
Amerada Hess Corporation and Williams Energy Ventures,
Inc., including Amendment No. 1, dated July 29, 1999,
Amendment No. 2, dated September 30, 1999, Amendment No.
3, dated September 8, 2000 and Amendment No. 4, dated
September 19, 2000
10.6* -- Asset Purchase and Sale Agreement, dated July 31, 2000
between Wyatt Energy, Incorporated and Williams Energy
Ventures, Inc., including Amendment No. 1, dated August
31, 2000
10.7** -- Products Terminalling Agreement between Williams Terminal
Holdings, L.L.C. and Williams Energy Marketing and
Trading effective as of September 16, 1999.
21.1** -- List of subsidiaries of Williams GP LLC
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Craig R. Rich (contained in Exhibit 5.1)
23.3* -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
8.1)
24.1 -- Powers of Attorney (included on the signature page)
27.1 -- Financial Data Schedule (Williams Energy Partners
Predecessor)
27.2* -- Financial Data Schedule (Marine Terminals Predecessor)
</TABLE>
---------------
* Previously filed.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 252
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Tulsa,
State of Oklahoma, on December 22, 2000.
WILLIAMS ENERGY PARTNERS L.P.
By: WILLIAMS GP LLC
its General Partner
By: /s/ DON R. WELLENDORF
----------------------------------------
Name: Don R. Wellendorf
Title: Senior Vice President, Chief
Financial
Officer and Treasurer
Each person whose signature appears below appoints Rebecca H. Hilborne,
Craig R. Rich and Shawna L. Gehres, and each of them, any of whom may act
without the joinder of the other, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
Registration Statement (including any amendment thereto) for this offering that
is to be effective upon filing pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or would do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them of their or his substitute and substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chief Executive Officer and Chairman of the
----------------------------------------------------- Board (Principal Executive Officer)
Steven J. Malcolm
* President, Chief Operating Officer and
----------------------------------------------------- Director
Phillip D. Wright
/s/ DON R. WELLENDORF Senior Vice President, Chief Financial
----------------------------------------------------- Officer, Treasurer and Director (Principal
Don R. Wellendorf Financial and Accounting Officer)
* Director
-----------------------------------------------------
Keith E. Bailey
</TABLE>
*By: /s/ CRAIG R. RICH
-------------------------------
Craig R. Rich
Attorney-in-fact
Dated: December 22, 2000
<PAGE> 253
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1** -- Form of Underwriting Agreement
3.1* -- Certificate of Limited Partnership of Williams Energy
Partners L.P.
3.2* -- Form of Amended and Restated Agreement of Limited
Partnership of Williams Energy Partners L.P. (included as
Appendix A to the Prospectus)
3.3* -- Certificate of Limited Partnership of Williams OLP, L.P.
3.4* -- Form of Amended and Restated Agreement of Limited
Partnership of Williams OLP, L.P.
3.5* -- Certificate of Formation of Williams GP LLC
3.6** -- Amended and Restated Limited Liability Company Agreement
of Williams GP LLC
5.1 -- Opinion of Craig R. Rich as to the legality of the
securities being registered
8.1** -- Opinion of Vinson & Elkins L.L.P. relating to tax matters
10.1** -- Form of Credit Facility
10.2** -- Form of Contribution, Conveyance and Assumption Agreement
10.3** -- Form of Williams GP LLC Long-Term Incentive Plan
10.4** -- Form of Omnibus Agreement
10.5* -- Sale of Assets Agreement, dated May 10, 1999 between
Amerada Hess Corporation and Williams Energy Ventures,
Inc., including Amendment No. 1, dated July 29, 1999,
Amendment No. 2, dated September 30, 1999, Amendment No.
3, dated September 8, 2000 and Amendment No. 4, dated
September 19, 2000
10.6* -- Asset Purchase and Sale Agreement, dated July 31, 2000
between Wyatt Energy, Incorporated and Williams Energy
Ventures, Inc., including Amendment No. 1, dated August
31, 2000
10.7** -- Products Terminalling Agreement between Williams Terminal
Holdings, L.L.C. and Williams Energy Marketing and
Trading, effective as of September 16, 1999.
21.1** -- List of subsidiaries of Williams GP LLC
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Craig R. Rich (contained in Exhibit 5.1)
23.3** -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit
8.1)
24.1 -- Powers of Attorney (included on the signature page)
27.1 -- Financial Data Schedule (Williams Energy Partners
Predecessor)
27.2* -- Financial Data Schedule (Marine Terminals Predecessor)
</TABLE>
---------------
* Previously filed.
** To be filed by amendment.
