<PAGE> 1
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-82269
REGISTRATION NO. 333-82269-01
REGISTRATION NO. 333-82269-02
REGISTRATION NO. 333-82269-03
REGISTRATION NO. 333-82269-04
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 2, 1999)
$235,000,000
EOTT ENERGY PARTNERS, L.P.
EOTT ENERGY FINANCE CORP.
11% SENIOR NOTES
DUE 2009
---------------------
This is an offering by EOTT Energy Partners, L.P. and EOTT Energy Finance
Corp. of their 11% Senior Notes due October 1, 2009. Interest on the notes is
payable on April 1 and October 1 of each year, beginning April 1, 2000.
On or after October 1, 2004, we may redeem the notes, and prior to October
1, 2002, we may redeem up to 35% of the notes with the proceeds of public or
private sales of our equity, in either case, at the redemption prices and on the
conditions specified in this prospectus supplement.
The notes will be unconditionally guaranteed by all of our present and
future restricted subsidiaries other than EOTT Energy Finance Corp., which will
co-issue the notes. The notes and the guarantees will rank equally with any
other unsecured senior indebtedness of EOTT Energy Partners, L.P., EOTT Energy
Finance Corp. and the subsidiary guarantors. The notes and the guarantees will
be effectively junior to any secured indebtedness of EOTT Energy Partners, L.P.,
EOTT Energy Finance Corp. and the subsidiary guarantors to the extent of the
security for that indebtedness.
Concurrently with this notes offering, we are offering 3,500,000 of our
common units to the public. This notes offering is conditioned upon the closing
of the common units offering, which is expected to occur on September 29, 1999,
at a public offering price of $16.00 with net proceeds to us, before expenses,
of $52.9 million.
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 2 OF THE
ACCOMPANYING PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE RELATED PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- ------------
<S> <C> <C>
Public offering price....................................... 100.00% $235,000,000
Underwriting discount....................................... 2.50% $ 5,875,000
Proceeds to EOTT (before expenses).......................... 97.50% $229,125,000
</TABLE>
Interest on the notes will accrue from October 1, 1999 to the date of
delivery.
The underwriters expect to deliver the notes on or about October 1, 1999.
---------------------
Joint Book-Running Managers
ING BARINGS LEHMAN BROTHERS
---------------------
PAINEWEBBER INCORPORATED
SEPTEMBER 28, 1999
<PAGE> 2
We include cross references in the prospectus to captions in these
materials where you can find further related discussions. The following table of
contents tells you where to find these captions.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Prospectus Supplement Summary............................... S-1
Risk Factors................................................ S-10
Use of Proceeds............................................. S-19
Capitalization.............................................. S-20
Selected Historical Financial Data.......................... S-21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-23
Business.................................................... S-32
Management.................................................. S-39
Principal Unitholders....................................... S-41
Description of Notes........................................ S-42
Description of Other Indebtedness........................... S-83
Certain United States Income Tax Considerations............. S-84
Underwriting................................................ S-87
Legal Matters............................................... S-88
Experts..................................................... S-88
Index to Financial Statements............................... F-1
Report of Independent Public Accountants on Unaudited
Financial Statements................................... F-2
Report of Independent Public Accountants on Audited
Financial Statements................................... F-17
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
About This Prospectus....................................... ii
Where You Can Find More Information......................... ii
Cautionary Statement Regarding Forward Looking Statements... iii
Who We Are.................................................. 1
Risk Factors................................................ 2
Conflicts of Interest and Fiduciary Responsibilities........ 7
Use of Proceeds............................................. 8
Description of the Debt Securities.......................... 8
Ratio of Earnings to Fixed Charges.......................... 13
Description of Our Common Units............................. 13
Cash Distribution Policy.................................... 15
Description of Our Partnership Agreement.................... 16
Tax Considerations.......................................... 19
Plan of Distribution........................................ 34
Legal Matters............................................... 35
Experts..................................................... 35
</TABLE>
---------------------
IMPORTANT NOTICE ABOUT INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
This document is in two parts. The first part is the prospectus supplement,
which describes our business and the specific terms of the notes we are
offering. The second part, the base prospectus, gives more general information,
some of which may not apply to the notes we are offering. Generally, when we
refer only to the "prospectus," we are referring to both parts combined.
IF THE DESCRIPTION OF THE NOTES WE ARE OFFERING VARIES BETWEEN THE
PROSPECTUS SUPPLEMENT AND THE BASE PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THE PROSPECTUS SUPPLEMENT.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING
AN OFFER OF THE NOTES IN ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU
SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS OR IN THE
DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
i
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights some basic information from this prospectus
supplement to help you understand our business and the notes. It likely does not
contain all the information that is important to you. You should carefully read
this prospectus supplement and the accompanying prospectus to understand fully
the terms of the notes, as well as the tax and other considerations that are
important to you in making your investment decision. You should also read
carefully the information about us that is contained in, and incorporated by
reference in, this prospectus. In this prospectus, the terms "EOTT," "we,"
"ours," and "us" refer to EOTT Energy Partners, L.P., EOTT Energy Finance Corp.
and the subsidiary guarantors of the notes, unless the context requires
otherwise.
THE COMPANY
We are one of the largest independent crude oil gathering and marketing
companies in North America. We gather and market from over 40,000 oil wells in
18 states and Canada, averaging 431,300 barrels per day during the second
quarter of 1999. In addition, we are engaged in interstate and intrastate crude
oil transportation, crude oil terminalling and storage activities, and crude oil
blending. Most of the crude oil we purchase directly from the oil well ("lease
crude oil") is delivered to refiners and other customers nationwide. We
transport crude oil through pipelines, including approximately 8,300 miles of
our pipeline and gathering systems, and our trucking operations, a fleet of 386
owned or leased trucks. For the three months ended June 30, 1999, our gross
margin was $55.7 million and adjusted EBITDA (as defined in note 5 on page S-8)
was $19.1 million.
Our general partner is EOTT Energy Corp., a Delaware corporation and an
indirect wholly owned subsidiary of Enron Corp. Enron is one of the world's
leading electricity, natural gas and communications companies. With over $34
billion in assets at June 30, 1999, Enron produces electricity and natural gas;
develops, constructs and operates energy facilities worldwide; delivers physical
commodities and financial and risk management services to customers around the
world; and is developing a nationwide communications network for data
transmission. Enron currently owns approximately 22% of our common units and
indirectly owns approximately 78% of our subordinated units. Enron is not a
guarantor of either the notes or the subsidiary guarantees.
We engage in the following business activities:
- GATHERING AND MARKETING. We gather, store and transport crude oil in the
United States and Canada. This involves purchasing and gathering crude
oil from producers and other sellers for subsequent sale to refiners and
other customers. We gather crude oil from over 6,000 producers and
operators, of which approximately 89% of the volumes are from independent
producers and the remaining 11% are from major integrated oil companies.
We also provide certain accounting and administrative services to some
producers and operators. We believe that our ability to offer reliable
and reasonably priced services to producers and operators is a key factor
in maintaining lease volumes and in obtaining new lease volumes. Most of
these operations are included in our North American Crude Oil -- East of
Rockies business segment.
- PIPELINE OPERATIONS. Through our common carrier pipeline systems, we
transport crude oil for our gathering and marketing operations and for
third parties pursuant to published tariff rates regulated by the Federal
Energy Regulatory Commission and state regulatory authorities. We
transported 512,800 barrels per day in the second quarter of 1999, a
significant portion of which was transported for our own gathering and
marketing operations. We conduct these operations in our Pipeline
Operations business segment. Approximately 76% of the revenues of the
Pipeline Operations business segment for the three months ended June 30,
1999, were generated from tariffs charged to our North American Crude
Oil -- East of Rockies business segment.
- CRUDE OIL BLENDING AND NATURAL GAS LIQUIDS PROCESSING. We blend West
Coast sour crude with sweet crude oil and natural gas liquids to upgrade
heavy sour crude oil into a medium gravity Alaskan North Slope type of
crude oil, which we sell to Los Angeles Basin refineries. In addition,
S-1
<PAGE> 4
we have a gas processing plant, a fractionation plant, and refrigerated
propane storage and related distribution facilities, which provide
natural gas liquids to our crude oil blending operation. We conduct these
operations in our West Coast Operations business segment.
We operate gathering systems in all major production areas in the lower 48
states. The 18 states in which we gather have represented, on average,
approximately 97% of the production in the lower 48 states from 1985 to 1997,
according to the most recent data available from the American Petroleum
Institute. These states have had a historical average annual oil production
decline rate of 2.6% over the same period; however, this may not necessarily
represent the decline rates in the particular fields from which we gather crude
oil.
ACQUISITIONS
Since 1995 we have acquired assets from several companies. The most
significant acquisition was from Koch on December 1, 1998, which almost tripled
our pipeline mileage and nearly doubled lease crude oil barrels under contract.
The following chart provides a summary of our acquisition history:
<TABLE>
<CAPTION>
SELLER DATE OF ACQUISITION ASSETS ACQUIRED CONSIDERATION PAID
- ------ ------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Texas-New Mexico
PipeLine............. May 1, 1999 1,800 miles of common $33.0 million in cash
carrier crude oil
pipelines and related
storage facilities
Koch................... December 1, 1998 3,900 miles of crude $235.6 million ($184.5
oil pipelines, crude million in cash,
oil transport trucks, 2,000,000 common units
meter stations, and 2,000,000
vehicles, storage tanks subordinated units)
and lease purchase
contracts for
approximately 180,000
barrels per day
Koch................... July 1, 1998 300 miles of crude oil $28.5 million in cash
pipelines, associated
storage facilities for
approximately 500,000
barrels and lease
purchase contracts for
up to 40,000 barrels
per day
CITGO.................. February 1, 1997 400 miles of intrastate $12.0 million in cash
and interstate common
carrier crude oil
pipelines
Amerada Hess........... December 29, 1995 614 miles of crude oil $54.0 million in cash
pipelines and related
storage facilities
</TABLE>
We believe that the crude oil industry is undergoing a period of
consolidation in which major integrated oil companies and large independent
producers are combining in order to reduce costs and focus on core businesses.
As a result, we expect this consolidation trend to result in the availability of
both gathering and marketing assets and oil and gas properties. Independent
producers are likely buyers of the oil and gas properties. We believe this trend
provides us with a significant opportunity to:
- acquire additional, strategically-placed gathering assets; and
- obtain additional lease crude oil from major integrated oil companies
that have reduced or eliminated their gathering assets and from
independents who acquire oil and gas properties sold by major integrated
oil companies.
S-2
<PAGE> 5
BUSINESS STRATEGY
Our business objective is to maintain and enhance our position as a leading
independent purchaser, gatherer, transporter and marketer of crude oil in North
America, increase our cash flow and earnings and improve our results of
operations by pursuing the following strategies:
- OPTIMIZE OUR PROFITABILITY AND INCREASE THE UTILIZATION OF OUR EXISTING
ASSETS. We have reorganized our operations into eight discrete regional
business centers that will be responsible for operating our gathering and
marketing and pipeline operations as an integrated business. These
business centers will be accountable as separate profit centers and
employees will receive incentives based on performance and profitability.
The business centers are responsible for implementing the following
initiatives:
-- In Gathering: (i) review existing lease contracts to eliminate those
that are uneconomic; (ii) increase volumes on our common carrier
pipelines by, among other things, marketing excess capacity to third
parties; and (iii) expand customer services to producers and operators,
such as division order, storage and transportation services.
-- In Marketing: (i) improve our marketing systems, as well as implement
what we believe to be the first real-time inventory information system
for our industry; (ii) utilize market intelligence from our expanded
asset base to improve operating margins among transportation, storage
and delivery alternatives; and (iii) expand customer services to
refiners, such as assisting refineries in locating competitively priced
crude oil.
- REDUCE OPERATING COSTS. We have identified several operating areas where
cost savings can be achieved and are implementing the following
initiatives: (i) increase the efficiency of our trucking fleet through
the use of central dispatch and geographical routing systems that use
satellite-based global positioning technologies; (ii) reduce the cost of
our division order services by increasing the scale of operations and
improving our database system; and (iii) consolidate our existing
information systems into an integrated management, marketing and
inventory information system.
- GROW THROUGH ACQUISITIONS. As one of the largest independent gathering
and marketing companies in the lower 48 states, we believe we are well
positioned to be a leading consolidator among gathering and marketing
companies. We continually seek acquisition opportunities and regularly
examine acquisition targets. We believe that conditions in the crude oil
industry, primarily mergers among major integrated oil companies and
independent producers, will provide significant opportunities to acquire
additional assets at attractive values. We will continue to focus on
adding pipeline assets to improve our margins and the stability of our
cash flow.
Consistent with our acquisition strategy, we are engaged in discussions
with a third party relating to a possible acquisition, although we can give you
no assurance regarding whether the acquisition will be completed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments."
COMPETITIVE STRENGTHS
We believe that the following competitive strengths will allow us to
successfully execute our business strategy:
- LARGE AND DIVERSE ASSET BASE. Our extensive asset base allows us to
select among several transportation, storage and delivery alternatives
for the crude oil that we gather and market. Depending on market
conditions, we may ship by pipeline, truck or barge, use our own storage
facilities or select alternate delivery destinations. We believe that our
asset base gives us significant flexibility in our efforts to maximize
destination prices and minimize transportation costs.
- PRESENCE IN ALL MAJOR SUPPLY AND TRADING AREAS IN THE LOWER 48
STATES. Because of our physical presence in all major markets, we have
substantial information on market conditions and are
S-3
<PAGE> 6
strategically positioned to react to changes in supply and demand that
may occur in a particular region. In addition, we are less vulnerable to
supply shortages in any one producing area or operating difficulties with
any one producer.
- ESTABLISHED TRACK RECORD OF ACQUIRING AND INTEGRATING ASSETS. Since 1995,
we have made five asset acquisitions. As a result, our pipeline miles
have increased from approximately 1,700 miles in 1995 to 8,300 miles in
1999, and average lease barrels gathered per day have increased from
251,800 in 1995 to 431,300 in the second quarter of 1999. Primarily as a
result of recent acquisitions, gross margin increased to $55.7 million
from $29.2 million, and EBITDA increased to $17.1 million from $5.7
million, for the three months ended June 30, 1999 compared to the same
period in 1998.
- ENRON RELATIONSHIP. In addition to its 2% general partnership interest,
Enron owns 3,276,811 common units and indirectly owns 7,000,000
subordinated units, which represent a limited partnership interest of
approximately 37% after giving effect to the concurrent common units
offering. Enron also provides us with credit support through a $1.0
billion credit facility. We also have the ability to consult with Enron
on a variety of operational matters, such as transportation and internal
controls, and to receive from Enron administrative support in areas such
as legal and insurance. If our general partner is no longer a member of
the Enron group, there will be a Change of Control for the purposes of
the note covenants unless there is no decline in the ratings of the notes
at any time during the following six months.
- MANAGEMENT. Our senior management team has an average of more than 13
years of experience in the industry and an average of over nine years
with EOTT or its predecessors and affiliates. Our regional business
managers have an average of 22 years of industry experience.
S-4
<PAGE> 7
THE OFFERING
THE ISSUERS................ EOTT Energy Partners, L.P. and EOTT Energy Finance
Corp. EOTT Energy Finance Corp., a Delaware
corporation, is our wholly owned subsidiary and has
been organized for the sole purpose of co-issuing
the notes.
SECURITIES OFFERED......... $235.0 million of 11% Senior Notes due October 1,
2009 (the "notes").
MATURITY................... October 1, 2009.
INTEREST PAYMENT DATES..... April 1 and October 1, commencing April 1, 2000.
RANKING.................... The notes will be general unsecured obligations of
EOTT Energy Partners, L.P. and EOTT Energy Finance
Corp. The notes will rank equally with the existing
and future senior unsecured indebtedness of EOTT
Energy Partners, L.P. and EOTT Energy Finance
Corp., will be effectively subordinated to all our
secured indebtedness to the extent of the security
for that indebtedness and will be senior to any of
our subordinated indebtedness. At June 30, 1999,
assuming this offering had been completed at that
time and giving effect to the application of the
proceeds of this notes offering and the concurrent
common units offering, we would have had
outstanding approximately $90.0 million of
indebtedness on a consolidated basis, in addition
to the notes, all of which would have been secured.
GUARANTEES................. All payments with respect to the notes (including
principal and interest) are fully, unconditionally
and irrevocably guaranteed on a senior basis,
jointly and severally, by all of our present and
future restricted subsidiaries. The guarantees will
be general unsecured obligations of the subsidiary
guarantors, will rank equally with the existing and
future senior unsecured indebtedness of the
subsidiary guarantors, will be effectively
subordinated to all the secured indebtedness of the
subsidiary guarantors to the extent of the security
for that indebtedness and will be senior to any
subordinated indebtedness of the subsidiary
guarantors. At June 30, 1999, assuming this
offering had been completed at that time and giving
effect to the application of the proceeds of this
notes offering and the concurrent common units
offering, the subsidiary guarantors would have had
approximately $90.0 million of indebtedness
outstanding on a consolidated basis in addition to
the guarantees (excluding indebtedness owed to EOTT
Energy Partners, L.P.), all of which would have
been secured indebtedness.
OPTIONAL REDEMPTION........ On or after October 1, 2004, we may redeem the
notes, and prior to October 1, 2002, we may redeem
up to 35% of the notes with the proceeds of public
or private sales of our equity, in either case, at
the redemption prices and on the conditions
specified in this prospectus supplement. The
redemption prices are discussed under the caption
"Description of Notes -- Optional Redemption."
CHANGE OF CONTROL.......... If a change of control occurs, as described under
"Description of Notes -- Repurchase at the Option
of Holders -- Change of Control," each holder of
notes will have the right to require us to purchase
his or her notes at 101% of the principal amount,
plus accrued and unpaid interest to the date of
repurchase.
S-5
<PAGE> 8
CERTAIN RESTRICTIONS....... The terms of the notes limit our ability and the
ability of our subsidiaries to:
- sell assets,
- make restricted payments,
- incur additional indebtedness,
- engage in sale and leaseback transactions,
- create liens,
- place restrictions on distributions and other
payments,
- issue or sell equity interests of restricted
subsidiaries,
- merge or consolidate with or transfer substantial
assets to another entity,
- engage in transactions with related persons and
- engage in any business other than permitted
businesses.
CONCURRENT OFFERING........ Concurrently with this notes offering, we are
offering 3,500,000 of our common units to the
public. We have also granted to the underwriters in
that offering an option to purchase up to 525,000
additional common units to cover over-allotments.
This notes offering is conditioned upon the closing
of the 3,500,000 common units offering with net
proceeds to us, before expenses, of at least $52.9
million. The common units offering is expected to
close on September 29, 1999.
USE OF PROCEEDS............ We will use the net proceeds from the sale of the
notes and sale of the common units to repay the
$175.0 million term loan from Enron, the $42.0
million bridge loan from Enron, and $50.2 million
of short-term borrowings outstanding under a
working capital facility from Enron, and for fees
and expenses and general partnership purposes.
S-6
<PAGE> 9
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following summary historical financial data as of and for each of the
years in the three year period ended December 31, 1998 are derived from our
audited financial statements, which are included elsewhere herein. The data as
of and for the three month periods ended June 30, 1999 and March 31, 1999 are
derived from our unaudited financial statements, which are included elsewhere
herein or incorporated by reference.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ENDED ------------------------------------
JUNE 30, 1999 MARCH 31, 1999 1998(1) 1997(2) 1996
-------------- -------------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT OPERATING DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue........................................ $2,259,303 $1,433,157 $5,294,697 $7,646,099 $7,469,730
Cost of sales.................................. 2,203,606 1,380,361 5,162,092 7,533,054 7,320,203
---------- ---------- ---------- ---------- ----------
Gross margin................................... 55,697 52,796 132,605 113,045 149,527
Operating expenses............................. 38,632 36,183 104,425 96,158 101,945
Depreciation and amortization.................. 8,350 8,140 20,951 16,518 15,720
Impairment of assets........................... -- -- -- 7,961 --
---------- ---------- ---------- ---------- ----------
Operating income (loss)........................ 8,715 8,473 7,229 (7,592) 31,862
Interest and related charges................... (7,318) (6,502) (10,165) (6,661) (3,659)
Other income (expense), net.................... 785 563 (1,131) (146) 606
---------- ---------- ---------- ---------- ----------
Net income (loss) before cumulative effect of
accounting change............................ $ 2,182 $ 2,534 $ (4,067) $ (14,399) $ 28,809
Cumulative effect of accounting change......... -- 1,747 -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 2,182 $ 4,281 $ (4,067) $ (14,399) $ 28,809
========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets................................... $1,241,035 $1,101,850 $ 965,820 $ 782,921 $1,026,197
Total debt(3).................................. 357,198 359,218 328,313 109,300 62,728
Partners' capital.............................. 89,805 94,856 75,582 62,093 106,173
OTHER FINANCIAL DATA:
EBITDA(4)...................................... 17,065 16,613 28,180 16,887 47,582
Adjusted EBITDA(5)............................. 19,134 14,532
Ratio of adjusted EBITDA to adjusted interest
expense(6)................................... 2.44x 1.89x
Fixed charge coverage ratio(7)................. 1.27x 1.34x n/a n/a 5.06x
Capital expenditures(8)........................ 37,476 5,588 266,569 22,837 6,723
Cash distributions to Unitholders.............. 7,233 6,935 22,842 29,681 28,831
OTHER OPERATING DATA:(9)
North American Crude Oil -- East of Rockies
Average lease volumes (mbbls/day)............ 412.2 413.6 285.6 282.4 278.6
Gross margin(10)............................. $ 19,886 $ 22,092 $ 92,071 $ 82,562 $ 117,255
EBITDA(10)................................... $ 1,712 $ 3,966 $ 37,313 $ 27,313 $ 55,950
Storage capacity (mbbls)..................... 15,100 13,700 13,700 8,200 7,400
Gross margin per lease barrel................ $ 0.53 $ 0.59 $ 0.88 $ 0.80 $ 1.15
Pipeline Operations
Total average volumes (mbbls/day)............ 512.8 382.4 188.3 142.3 103.8
Gross margin................................. $ 28,443 $ 23,564 $ 30,856 $ 19,539 $ 13,916
EBITDA....................................... $ 18,642 $ 15,567 $ 13,572 $ 7,851 $ 6,911
Pipeline miles............................... 8,300 6,200 6,200 2,300 1,700
Gross margin per barrel...................... $ 0.61 $ 0.68 $ 0.45 $ 0.38 $ 0.37
West Coast Operations
Total average volumes (mbbls/day)............ 105.8 120.3 128.0 120.3 107.1
Gross margin................................. $ 7,416 $ 7,140 $ 9,698 $ 9,342 $ 15,523
EBITDA....................................... $ 2,514 $ 2,879 $ 669 $ 558 $ 7,355
</TABLE>
(see footnotes on following page)
S-7
<PAGE> 10
- ---------------
(1) Includes one month of results of operations associated with the assets
acquired from Koch on December 1, 1998.
(2) Includes non-recurring charges of (i) $6.5 million impairment of an
information system development project, (ii) $1.5 million impairment of
three Ohio products terminals held for sale and (iii) $2.0 million of
severance costs related to the exit of the East of Rockies refined products
business and corporate realignment.
(3) Consists of loans from Enron and crude oil repurchase agreements with a
financial institution.
(4) EBITDA is computed as the sum of operating income and depreciation and
amortization. EBITDA is presented as a measure of our debt service ability,
and not as an alternative to (i) operating income (as determined by
generally accepted accounting principles) as an indicator of our operating
performance, or (ii) cash flows from operating activities (as determined by
generally accepted accounting principles) as a measure of liquidity. EBITDA
is not a calculation based on generally accepted accounting principles.
Investors should be cautioned that EBITDA as reported by us may not be
comparable in all instances to EBITDA, as reported by other companies.
(5) Adjusted EBITDA excludes (i) the impact of non-cash mark-to-market gains
for the three months ended June 30, 1999 and March 31, 1999 of $1.0 million
and $2.1 million, respectively, and (ii) $3.1 million of cost of sales
associated with covering inventory variances, largely due to the
integration of assets from Koch, in a period of rapidly rising crude oil
prices, for the three months ended June 30, 1999.
(6) Interest expense for the three months ended March 31, 1999 and June 30,
1999, respectively, has been adjusted as if the notes offering and the
concurrent common unit offering had occurred on January 1, 1999.
(7) In computing the ratio of earnings to fixed charges (i) earnings have been
based on income from continuing operations before fixed charges and (ii)
fixed charges consist of interest and the estimated interest portion of
rents. Earnings were insufficient to cover fixed charges by $4.1 million
and $14.4 million for the years ended December 31, 1998 and 1997,
respectively. The pro forma fixed charge coverage ratio for the six months
ended June 30, 1999 is 1.17x and is computed as if the notes offering and
concurrent common units offering had occurred on January 1, 1999.
(8) Includes $12.0 million in 1997 for the purchase of crude gathering and
pipeline assets from CITGO. Includes $258.1 million in 1998 for the
purchase of crude oil gathering and transportation assets from Koch. The
three months ended June 30, 1999 includes $33.0 million for the purchase of
pipeline assets from Texas-New Mexico PipeLine.
(9) Selected financial information from our principal business segments
excludes corporate overhead.
(10) Includes intersegment transportation costs charged by our Pipeline
Operations business segment for the transport of crude oil at published
pipeline tariffs. For the three months ended June 30 and March 31, 1999,
intersegment transportation costs charged by the Pipeline Operations
business segment represented $22.2 million and $20.3 million, respectively.
For 1998, 1997 and 1996, intersegment transportation costs charged by the
Pipeline Operations business segment represented $24.5 million, $13.7
million and $10.2 million, respectively.
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OUR STRUCTURE
EOTT Energy Corp., our sole general partner and an indirect wholly owned
subsidiary of Enron Corp., manages our activities and conducts our business.
Concurrent with the notes offering, we are offering 3,500,000 common units to
the public. The following chart depicts our organization and our ownership
structure after the common units offering. The percentages reflected in the
following chart represent the approximate ownership interests in each of EOTT
Energy Partners, L.P. and EOTT Energy Operating Limited Partnership,
individually, and not on an aggregate basis.
[CHART]
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RISK FACTORS
Your investment in the notes will involve some degree of risk. You should
carefully consider the following factors and the other information set forth or
incorporated by reference in this prospectus supplement and the accompanying
prospectus before deciding to purchase any notes.
RISKS RELATED TO THE NOTES
WE DO NOT HAVE THE SAME FLEXIBILITY AS OTHER TYPES OF ORGANIZATIONS TO
ACCUMULATE CASH WHICH MAY LIMIT CASH AVAILABLE TO SERVICE THE NOTES OR TO REPAY
THEM AT MATURITY.
Unlike a corporation, our partnership agreement requires us to distribute,
on a quarterly basis, 100% of our available cash to our unitholders of record
and our general partner. Available cash is generally all of our cash receipts
adjusted for cash distributions and net changes to reserves. The timing and
amount of our distributions could significantly reduce the cash available to pay
the principal, premium (if any) and interest on the notes. Our general partner
will determine the amount and timing of such distributions and has broad
discretion to establish and make additions to our reserves or the reserves of
our operating partnerships in amounts the general partner determines in its
reasonable discretion to be necessary or appropriate:
- to provide for the proper conduct of our business and the businesses of
our operating partnerships (including reserves for future capital
expenditures and for amortization or repayment of debts),
- to provide funds for distributions with respect to units for any one or
more of the next four calendar quarters, or
- because distribution of the funds would be prohibited by applicable law
or by any of our loan or other agreements or obligations.
Although our payment obligations to our unitholders are subordinate to our
payment obligations to you, the value of our units will decrease in direct
correlation with decreases in the amount we distribute per unit. Accordingly, if
we experience a liquidity problem in the future, we may not be able to issue
equity to recapitalize.
WE HAVE A HOLDING COMPANY STRUCTURE IN WHICH OUR SUBSIDIARIES CONDUCT OUR
OPERATIONS AND OWN OUR OPERATING ASSETS.
We are a holding company, and our subsidiaries conduct all of our
operations and own all of our operating assets. We have no significant assets
other than the partnership interests and the stock in our subsidiaries. As a
result, our ability to make required payments on the notes depends on the
performance of our subsidiaries and their ability to distribute funds to us. The
ability of our subsidiaries to make distributions to us may be restricted by,
among other things, credit facilities and applicable state partnership laws and
other laws and regulations. Pursuant to credit facilities, we may be required to
establish cash reserves for the future payment of principal and interest on the
amounts outstanding under the credit facilities. If we are unable to obtain the
funds necessary to pay the principal amount at maturity of the notes, to redeem
the notes or to repurchase the notes upon the occurrence of a change of control,
we may be required to adopt one or more alternatives, such as a refinancing of
the notes. We cannot assure you that we would be able to refinance the notes.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES AND THE GUARANTEES IS UNSECURED
AND EFFECTIVELY SUBORDINATED TO OUR EXISTING SECURED INDEBTEDNESS.
The notes are effectively subordinated to claims of our secured creditors
and the guarantees are effectively subordinated to the claims of secured
creditors of our subsidiary guarantors. Assuming we had completed this offering
on June 30, 1999, after giving effect to the application of the net proceeds of
the notes offering and the concurrent common units offering, the notes and the
guarantees would have been effectively subordinated to $90.0 million of secured
indebtedness. Although all of our subsidiaries, other
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than EOTT Energy Finance Corp., the co-issuer of the notes, currently guarantee
the notes, under certain circumstances we may have other subsidiaries that are
not guarantors. In that case, the notes would be effectively subordinated to the
claims of all creditors, including trade creditors and tort claimants, of our
subsidiaries that are not guarantors. In the event of the insolvency,
bankruptcy, liquidation, reorganization, dissolution or winding up of the
business of a subsidiary that is not a guarantor, creditors of that subsidiary
would generally have the right to be paid in full before any distribution is
made to us or the holders of the notes.
WE HAVE SUBSTANTIAL LEVERAGE WHICH MAY LIMIT OUR ABILITY TO COMPLY WITH THE
TERMS OF OUR INDEBTEDNESS AND MAY RESTRICT OUR ABILITY TO OPERATE.
We are significantly leveraged and have indebtedness that is substantial in
relation to our equity. As of June 30, 1999, after giving effect to both the
notes and the concurrent common unit offerings and the application of the
proceeds therefrom, we would have had approximately $325.0 million of total
indebtedness on a consolidated basis and $143.3 million in equity, resulting in
a total debt to equity ratio of 2.27 to 1.0. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." After the notes and common units
offerings, we will have the ability to incur significant additional
indebtedness. Under the incurrence of indebtedness covenant for the notes, after
giving effect to the offerings and the application of the net proceeds
therefrom, at June 30, 1999, management estimates that EOTT would have had the
capacity to incur approximately $260.0 million of additional indebtedness under
the indenture.
Our leverage could have important consequences to investors in the notes.
We will require substantial cash flow to meet our principal and interest
obligations with respect to the notes and our other consolidated indebtedness.
Our ability to make scheduled payments, to refinance our obligations with
respect to our indebtedness or our ability to obtain additional financing in the
future will depend on our financial and operating performance, which, in turn,
is subject to prevailing economic conditions and to financial, business and
other factors beyond our control. We believe that we will have sufficient cash
flow from operations and available borrowings under the Enron credit facility to
service our indebtedness, although the principal amount of the notes will likely
need to be refinanced at maturity in whole or in part. However, a significant
downturn in the hydrocarbon industry or other development adversely affecting
our cash flow could materially impair our ability to service our indebtedness.
If our cash flow and capital resources are insufficient to fund our debt service
obligations, we may be forced to refinance all or a portion of our debt or sell
assets. We cannot assure you that we would be able to refinance our existing
indebtedness or sell assets on terms that are commercially reasonable.
The instruments governing our debt contain restrictive covenants that may
prevent us from engaging in certain beneficial transactions. The agreements
governing our debt generally require us to comply with various affirmative and
negative covenants including the maintenance of certain financial ratios and
restrictions on incurring additional debt, entering into mergers, consolidations
and sales of assets, making investments and granting liens. Our leverage may
adversely affect our ability to fund future working capital, capital
expenditures and other general partnership requirements, future acquisition,
construction or development activities, or to otherwise fully realize the value
of our assets and opportunities because of the need to dedicate a substantial
portion of our cash flow from operations to payments on our indebtedness or to
comply with any restrictive terms of our indebtedness. Our leverage may also
make our results of operations more susceptible to adverse economic and industry
conditions by limiting our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate and may place us at a
competitive disadvantage as compared to our competitors that have less debt.
WE MAY NOT BE ABLE TO FUND A CHANGE OF CONTROL OFFER.
In the event of a change of control, we will be required, subject to
certain conditions, to offer to purchase all outstanding notes at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon to the date of purchase. If a change of control were to occur today, we
would not have sufficient funds available to purchase all of the outstanding
notes were they to be tendered in
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response to an offer made as a result of a change of control. We cannot assure
you that we will have sufficient funds available or that we will be permitted by
our other debt instruments to fulfill these obligations upon a change of control
in the future. See "Description of the Notes -- Repurchase at the Option of
Holders -- Change of Control."
A COURT MAY USE FRAUDULENT CONVEYANCE CONSIDERATIONS TO AVOID OR
SUBORDINATE THE SUBSIDIARY GUARANTEES.
Various applicable fraudulent conveyance laws have been enacted for the
protection of creditors. A court may use fraudulent conveyance laws to
subordinate or avoid the subsidiary guarantees of the notes issued by any of our
subsidiary guarantors. It is also possible that under certain circumstances a
court could hold that the direct obligations of a subsidiary guaranteeing the
notes could be superior to the obligations under that guarantee.
A court could avoid or subordinate the guarantee of the notes by any of our
subsidiaries in favor of that subsidiary's other debts or liabilities to the
extent that the court determined either of the following were true at the time
the subsidiary issued the guarantee:
- that subsidiary incurred the guarantee with the intent to hinder, delay
or defraud any of its present or future creditors or that such subsidiary
contemplated insolvency with a design to favor one or more creditors to
the total or partial exclusion of others; or
- that subsidiary did not receive fair consideration or reasonable
equivalent value for issuing the guarantee and, at the time it issued the
guarantee, that subsidiary:
-- was insolvent or rendered insolvent by reason of the issuance of the
guarantee,
-- was engaged or about to engage in a business or transaction for which
the remaining assets of that subsidiary constitute unreasonably small
capital, or
-- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the relevant jurisdiction. Generally, however, an entity would
be considered insolvent for purposes of the foregoing if the sum of its debts,
including contingent liabilities, were greater than the fair saleable value of
all of its assets at a fair valuation, or if the present fair saleable value of
its assets were less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and matured.
Among other things, a legal challenge of a subsidiary's guarantee of the
notes on fraudulent conveyance grounds may focus on the benefits, if any,
realized by that subsidiary as a result of our issuance of the notes. To the
extent a subsidiary's guarantee of the notes is avoided as a result of
fraudulent conveyance or held unenforceable for any other reason, the note
holders would cease to have any claim in respect of that guarantee.
YOUR ABILITY TO TRANSFER THE NOTES MAY BE LIMITED BY THE ABSENCE OF TRADING
MARKET.
The notes will be new securities for which currently there is no trading
market. We do not currently intend to apply for listing of the notes on any
securities exchange or stock market. Although the underwriters have informed us
that they currently intend to make a market in the notes, they are not obligated
to do so. In addition, they may discontinue any such market making at any time
without notice. The liquidity of any market for the notes will depend on the
number of holders of those notes, the interest of securities dealers in making a
market in those notes and other factors. Accordingly, we cannot assure you as to
the development or liquidity of any market for the notes. Historically, the
market for noninvestment grade debt has been subject to disruptions that have
caused substantial volatility in the prices of securities similar to the notes.
We cannot assure you that the market, if any, for the notes will be free from
similar disruptions. Any such disruptions may adversely effect the note holders.
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RISKS RELATED TO OUR BUSINESS
ECONOMIC AND INDUSTRY FACTORS BEYOND OUR CONTROL, INCLUDING PRODUCTION
LEVELS OF CRUDE OIL, CAN ADVERSELY AFFECT OUR GROSS MARGIN.
Our ability to pay cash distributions and service our debt obligations
depends primarily on our gross margin, which is the difference between the sales
price of crude oil and the cost of crude oil purchased, including costs paid to
third parties for transportation and handling charges. Historically, our
business has been very competitive with thin and volatile profit margins. Our
gross margin is affected by many factors beyond our control, including:
- the performance of the U.S. and world economies;
- volumes of crude oil produced in the areas we serve;
- demand for oil by refineries and other customers;
- prices for crude oil at various lease locations;
- prices for crude oil futures contracts on the New York Mercantile
Exchange;
- the competitive position of alternative energy sources; and
- the availability of pipeline and other transportation facilities that may
make crude oil production from other producing areas competitive with
crude oil production that we purchase at the lease.
The absolute price levels for crude oil do not necessarily bear a direct
relationship to our gross margins per barrel, and our gross margins per barrel
cannot be projected with any level of certainty. Due to the volatility of crude
oil prices and the decline in crude oil production, crude oil gathering margins
have suffered industry wide over the last few years. Although there has been a
general improvement in crude oil margins since 1997, margins have not returned
to historical levels.
IF WE CANNOT MAINTAIN OUR VOLUMES OF CRUDE OIL PURCHASED AT THE LEASE, OUR
ABILITY TO PAY CASH DISTRIBUTIONS AND SERVICE OUR DEBT OBLIGATIONS WILL BE
ADVERSELY AFFECTED.
Our profitability depends in part on our ability to offset volumes lost
because of natural declines in crude oil production from depleting wells or
volumes lost to competitors. This is particularly difficult in an environment of
reduced drilling activity and discontinued production operations. The amount of
drilling and production will depend in large part on crude oil prices. To the
extent that low crude oil prices result in lower volumes of lease crude oil
available for purchase, we may experience lower per barrel margins, as
competition for available lease crude oil on the basis of price intensifies. It
is possible that domestic crude oil producers may further reduce or discontinue
drilling and production operations. In addition, a sustained depression in crude
oil prices could result in the bankruptcy of some producers.
Because producers experience inconveniences in switching lease crude oil
purchasers, producers typically do not change purchasers on the basis of minor
variations in price. Thus, we may experience difficulty acquiring lease crude
oil in areas where there are existing relationships between producers and other
gatherers and purchasers of crude oil. Furthermore, we cannot assure you that we
will be successful in obtaining production made available by major oil companies
or that we will be successful in acquiring other gatherers or marketers.
OUR PERFORMANCE DEPENDS ON OUR ABILITY TO MINIMIZE BAD DEBTS AND LEGAL
LIABILITY WHEN EXTENDING CREDIT TO OPERATORS AND CUSTOMERS.
When we purchase crude oil at the lease, we often make payment to an
operator who is responsible for the correct payment and distribution of the
proceeds to other parties. If the operator does not have sufficient resources to
indemnify and defend us in case of a protest, action or complaint by those other
parties, our costs could rise. In addition, because we may extend credit to some
customers in large amounts, it is important that our credit review, evaluation
and control mechanisms work properly. Even if
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our mechanisms work properly, we cannot assure you that our customers will not
experience losses in dealings with other parties, in which case we could be
adversely affected.
A REDUCTION IN OUR CREDIT STANDING OR ABILITY TO ACCESS CAPITAL WOULD
ADVERSELY AFFECT OUR BASIC PURCHASING AND MARKETING ACTIVITIES.
Our financial resources are a major consideration for parties that enter
into transactions with us, and because of the large dollar volume of the
marketing transactions in which we engage, we have a significant need for
working capital. While we believe that our revolving credit facility will be
sufficient to support our working capital needs, any significant decrease in our
financial strength, regardless of the reason for the decrease, may:
- increase the number of transactions requiring letters of credit or other
financial support;
- make it more difficult for us to obtain letters of credit upon expiration
of our revolving credit facility;
- make it more difficult to renew our revolving credit facility upon its
expiration; or
- increase the cost of obtaining letters of credit.
If we do experience a decrease in financial strength, or if our general partner
is unsuccessful in managing our working capital position, we may be unable to
maintain or increase the level of our purchasing and marketing activities. We
cannot assure you that our revolving credit facility will be adequate or that we
will not be required to reduce our market activities because of limitations on
our ability to obtain financing for our working capital needs.
OUR ABILITY TO MAINTAIN OR INCREASE OUR GROSS MARGINS IS DEPENDENT ON THE
SUCCESS OF OUR PRICE RISK MANAGEMENT STRATEGIES.
Sophisticated price risk management strategies, including those involving
price hedges using New York Mercantile Exchange futures contracts, are very
important in maintaining or increasing our gross margins. Hedging techniques
require significant resources dedicated to the management of futures positions
and physical inventories. We cannot assure you that our price risk management
strategies will be successful in protecting us from risks or in maintaining our
gross margins at desirable levels. Furthermore, we have certain basis risks (the
risk that price relationships between delivery points, grades of crude oil or
delivery periods will change) that cannot be completely hedged, and from time to
time we enter into transactions providing for purchases and sales in future
periods in which the volumes of crude oil are balanced but where either the
purchase or the sale prices are not fixed at the time the transactions are
entered into. In these cases we are subject to the risk that prices may change
or that price changes will not occur as anticipated.
Our ability to increase our profitability and cash flow will depend to a
large extent on our success in making wise decisions regarding sources of supply
and demand for crude oil, our skill in handling the transportation and storage
of crude oil and our ability to respond to changes in the markets. The marketing
of crude oil is complex and requires detailed current knowledge of crude oil
sources and outlets and a familiarity with a number of factors including:
- types of crude oil;
- individual refinery demand for specific grades of crude oil;
- area market price structures for the different grades of crude oil;
- location of customers;
- availability of transportation facilities; and
- timing and costs (including storage) involved in delivering crude oil to
the appropriate customer.
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TECHNICAL AND STRUCTURAL IMPROVEMENTS IN THE MARKETS FOR CRUDE OIL MAY HAVE
AN ADVERSE EFFECT ON OUR PERFORMANCE.
We realize margins because of our ability to take advantage of our
gathering, storage and transportation assets and our ability to effect
transactions at many different delivery points. Developments in the markets for
crude oil or petroleum products, such as the development of more accurate price
reporting mechanisms or the introduction of additional futures contracts
involving new delivery locations and products, may adversely affect our margins.
ENVIRONMENTAL AND OTHER REGULATORY COSTS AND LIABILITIES COULD AFFECT OUR
CASH FLOW.
Our business is heavily regulated by federal, state and local agencies with
respect to environmental, safety and other regulatory matters. This regulation
increases our cost of doing business. We may be subject to substantial penalties
if we fail to comply with any regulation. We cannot assure you that regulatory
changes enacted by regulatory agencies that have jurisdiction over us will not
increase our cost of conducting business or otherwise negatively impact our
profitability, cash flow and financial condition.
We are subject to numerous laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. If an accidental leak or spill occurs in one of our pipelines or at
a storage facility, we may have to pay a significant amount to clean up the leak
or spill. The resulting costs and liabilities could negatively affect the level
of cash available to pay amounts due on our debt and for distributions to
unitholders. Although we believe that we are in compliance in all material
respects with all applicable environmental laws and regulations, we could be
adversely affected by environmental costs and liabilities that may be incurred
or increased costs resulting from failure to obtain all required regulatory
consents and approvals. Proper maintenance of pipelines is important for the
avoidance of accidental leaks and spills. The average age of our pipelines is
approximately 40 years, and we have acquired approximately 80% of our pipelines
in the past four years. While we believe we have adequately maintained our
pipelines during our ownership, we cannot assure you that these pipelines have
received proper maintenance at all times prior to our ownership. As to all of
our properties, we cannot assure you that past operating practices, including
those that were state of the art at the time employed, will not result in
significant future environmental liabilities. In addition, we cannot assure you
that in the future regulatory agencies with jurisdiction over us will not enact
additional environmental regulations that will negatively affect our
profitability, cash flow and financial condition.
Our pipelines are subject to rate regulation as well as laws relating to
safety and the environment. Federal and state agencies could change the tariffs
we may charge for common carrier pipeline transportation or impose additional
safety or environmental requirements, any of which could affect our
profitability, cash flow and financial condition.
In connection with our recent asset acquisitions from Koch and Texas-New
Mexico PipeLine, the parties agreed to allocate responsibilities for
environmental liabilities associated with the pipelines and other assets
included in these transactions. In the Koch transactions, we agreed to be
responsible for certain environmental matters. For the cleanup of pre-closing
contamination which was unknown on the closing date, we agreed to pay up to
$250,000 for each incident, subject to an overall cap of $13 million on all such
incidents in the aggregate. In the Texas-New Mexico PipeLine transaction, we
generally agreed to assume responsibility for the seller's existing cleanup
obligations. In order to minimize our exposure for remediation costs in the
Texas-New Mexico PipeLine transaction, we obtained $20 million in special
insurance coverage for known and unknown cleanup liabilities. In connection with
that insurance coverage, we, as between ourself and our insurance carrier,
remain responsible for all claims in excess of the $20 million, subject to
certain deductibles, including a $4 million EOTT retained liability and a $5
million cap on insurance coverage for known contamination. Although we believe
that we have adequately identified the anticipated environmental liabilities
associated with the Koch and Texas-New Mexico PipeLine acquisitions, we cannot
assure you that there will not be any material liabilities identified at some
future time or that we would be successful in making indemnity claims, if any.
Any claims submitted by us under any environmental insurance policy will be
subject to standard claims review by the applicable
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insurance carrier. Should an insurance carrier or an indemnifying party refuse
to honor any claim, or be unable to pay any claim, we would remain liable for
payment.
WE ARE SUBJECT TO RISKS IN PREPARING FOR THE YEAR 2000 PROBLEM.
We estimate that our critical systems will be Year 2000 ready substantially
before January 1, 2000. However, we cannot assure you that our plan to be ready
for the Year 2000 will succeed in accomplishing its purpose or that unforeseen
circumstances will not arise during the implementation of the plan that would
materially adversely affect us.
We are taking reasonable steps to identify, assess, and, where appropriate,
to replace devices that contain embedded chips. Despite these reasonable
efforts, we anticipate that we will not be able to find and remediate all
embedded chips in our systems. Further, we anticipate that third parties on whom
we depend also will not be able to find and remediate all embedded chips in
their systems. Some of the embedded chips that fail to operate or that produce
anomalous results may create system disruptions or failures. Some of these
disruptions or failures may spread from the systems in which they are located to
other systems in a cascade. These cascading failures may have adverse effects
upon our ability to maintain safe operations, and may also have adverse effects
upon our ability to serve our customers and otherwise to fulfill certain
contractual and other legal obligations. The embedded chip problem is widely
recognized as one of the more difficult aspects of the Year 2000 problem across
industries and throughout the world.
Our operations are regulated in part by governmental authorities. We expect
to satisfy these regulatory authorities' requirements for achieving Year 2000
readiness. If our reasonable expectations in this regard are in error, and if a
regulatory authority should order the temporary cessation of our operations in
one or more of these areas, the adverse effect could be material. Other
companies with whom we transact business could face similar problems that
materially adversely affect us.
We cannot assure you that suppliers upon which we depend for essential
goods and services will convert and test their mission-critical systems and
processes in a timely manner. Failure or delay by all or some of these entities,
including the U.S. and state or local governments and foreign governments, could
create substantial disruptions having a material adverse affect on our business.
OUR RAPID GROWTH MAY CAUSE DIFFICULTIES INTEGRATING NEW OPERATIONS.
Part of our business strategy includes acquiring additional assets that
will allow us to increase distributions to unitholders. In the last few years,
we have made several acquisitions that significantly increased our asset base.
Unexpected costs or challenges may arise whenever assets with different
operations are combined. Successful acquisitions require management and other
personnel to devote significant amounts of time to integrating the acquired
assets with existing operations. These efforts may temporarily distract their
attention from day-to-day business, the development or acquisition of new
properties and other business opportunities.
RISKS RELATED TO OUR PARTNERSHIP STRUCTURE
CASH DISTRIBUTIONS TO OUR UNITHOLDERS ARE NOT GUARANTEED AND MAY FLUCTUATE;
ENRON'S COMMITMENT TO SUPPORT CASH DISTRIBUTIONS ON COMMON UNITS WILL EXPIRE
AFTER 2001.
Our cash distributions are not guaranteed and may fluctuate with our
performance. Enron has a commitment to contribute to us up to $29 million ($26.5
million of which is available) if necessary to support our ability to pay the
minimum quarterly distribution of $0.475 per unit ($1.90 annualized). In
addition to the current commitment, Enron has previously contributed $21.9
million to help us pay the minimum quarterly distribution. However, Enron's
commitment to support the minimum quarterly distribution extends only to
quarters through December 31, 2001.
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OUR UNITHOLDERS WILL HAVE LIMITED VOTING RIGHTS AND WILL NOT CONTROL OUR
GENERAL PARTNER.
We are a limited partnership, operated under the direction of our general
partner. This structure affects our common unitholders in various ways
including:
- the voting rights of common unitholders are more limited than those of
holders of capital stock in a corporation;
- our common unitholders have no right to participate in our management and
have no right to elect our general partner or members of its board of
directors;
- our partnership agreement contains provisions making it difficult to
replace our general partner; and
- our general partner and its affiliates may have conflicts of interest
with our common unitholders and with us.
WE DO NOT HAVE THE SAME FLEXIBILITY AS CORPORATIONS TO ACCUMULATE CASH AND
EQUITY TO PROTECT AGAINST ILLIQUIDITY IN THE FUTURE.
Unlike a corporation, our partnership agreement requires us to make
quarterly distributions to our partners of all available cash, consisting of all
cash receipts less disbursements and any amounts reserved for commitments and
contingencies, including capital and operating costs and debt covenants. The
value of our common units is likely to decrease if the amount we distribute per
unit decreases. Accordingly, if we experience a liquidity problem in the future
and are required to reduce distributions on our common units, we may not be able
to issue equity on favorable terms.
OUR PARTNERSHIP AGREEMENT MODIFIES THE FIDUCIARY DUTIES OF OUR GENERAL
PARTNER UNDER DELAWARE LAW.
Our partnership agreement modifies fiduciary duties of our general partner
to the limited partners under Delaware law. These modifications of state law
standards of fiduciary duty may limit the ability of unitholders to challenge
successfully the actions of the general partner as being a breach of what would
otherwise have been a fiduciary duty.
UNITHOLDERS MAY HAVE NEGATIVE TAX CONSEQUENCES IF WE DEFAULT ON OUR DEBT OR
SELL ASSETS.
If we default on any of our debt, the lenders will have the right to sue us
for non-payment. Such an action could cause an investment loss and cause
negative tax consequences for unitholders through the realization of taxable
income by unitholders without a corresponding cash distribution. Likewise, if we
were to dispose of assets and realize a taxable gain while there is substantial
debt outstanding and proceeds of the sale were applied to the debt, unitholders
could have increased taxable income without a corresponding cash distribution.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT.
If at any time our general partner and its affiliates own 80% or more of
the issued and outstanding limited partner interests of any class, our general
partner will have the right to purchase all, but not less than all, of the
outstanding limited partner interests of that class that are held by
non-affiliated persons.
RISKS RELATED TO OUR CAPITAL STRUCTURE
FURTHER ISSUANCES OF UNITS BY US COULD RESULT IN DILUTION FOR UNITHOLDERS
OR HINDER ANY OF OUR FUTURE FINANCINGS.
The market price of our common units could drop as a result of sales of a
large number of common units in the market or the perception that sales of
common units could occur. These factors could also make it more difficult for us
to raise funds through future offerings of common units. In this respect you
should consider several factors.
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First, on February 12, 1999, our unitholders approved a proposal that
authorized us to issue an additional 10 million common units for any business
purpose. These units may be issued on terms and conditions established by our
general partner in its sole discretion without further approval of any limited
partners. Our partnership agreement also authorizes us to issue other limited
partner interests and other equity under the conditions specified in our
partnership agreement.
Second, our general partner has the right, which it may from time to time
assign in whole or in part to any of its affiliates, to purchase common units,
subordinated units or other equity securities from us whenever, and on the same
terms that, we issue securities to persons other than our general partner and
its affiliates, to the extent necessary to maintain the percentage interest of
our general partner and its affiliates in us that existed immediately prior to
each issuance.
Third, if some or all of our outstanding subordinated units are converted
into common units, the amount of available cash necessary to pay the minimum
quarterly distribution with respect to all of our common units would be
increased proportionately, thereby resulting in a dilution of the interest of
existing common unitholders in our cash distributions.
Fourth, if we issue more units, Enron's commitment to support our minimum
quarterly distributions will not increase, thereby resulting in a dilution of
the support obligation per unit.
Finally, a holder of 1,700,000 outstanding common units is entitled to
certain registration rights that allow it to cause us to register its units for
future sale. This unitholder has agreed for our benefit that it will not
exercise its registration rights until the earlier of March 1, 2000 and 180 days
following an underwritten offering of common units pursuant to this prospectus.
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USE OF PROCEEDS
Concurrently with this offering, we are offering 3,500,000 of our common
units to the public. The common units offering is expected to close on September
29, 1999. We will use the net proceeds from the sale of the notes and the common
units to repay the $175.0 million term loan from Enron, the $42.0 million bridge
loan from Enron, and $50.2 million of short-term borrowings outstanding under a
working capital facility from Enron, and for fees and expenses and general
partnership purposes. The term loan bears interest at the London Interbank
Offering Rate (LIBOR) plus 3.00% (8.04% for the month ended June 30, 1999) and
matures on December 31, 1999. The bridge loan bears interest at LIBOR plus 4.00%
increasing every three months by 0.25% (9.29% for the month ended June 30,
1999), and matures on December 31, 1999. The working capital facility bears
interest at LIBOR plus 2.50% (7.54% for the month ended June 30, 1999) and
matures on December 31, 2001. Substantially all of the debt outstanding under
the bridge loan, the term loan, and the working capital facility was incurred to
fund the acquisition of the Koch and Texas-New Mexico PipeLine assets. The
following table illustrates the estimated sources and uses of funds assuming
consummation of the offerings as of June 30, 1999.
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
SOURCES:
Notes offering.............................................. $235,000
Common units offering(1).................................... 56,000
--------
Total............................................. $291,000
========
USES:
Repayment of term loan from Enron........................... $175,000
Repayment of bridge loan from Enron......................... 42,000
Repayment of short-term borrowings from Enron............... 50,200
General partnership purposes................................ 13,906
Fees and expenses........................................... 9,894
--------
Total............................................. $291,000
========
</TABLE>
- ---------------
(1) Reflects an offering of 3,500,000 common units at $16.00 per unit.
S-19
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization on June 30, 1999, and as
adjusted to give effect to the sale of (i) the common units in the concurrent
offering, which is expected to close on September 29, 1999, and (ii) the notes
offered by this prospectus supplement and the application of the net proceeds
from the sale of the common units and the notes. The closing of the notes
offering is conditioned upon the closing of the 3,500,000 common units offering
with net proceeds to us, before expenses, of at least $52.9 million. You should
read our historical financial statements and notes that are included elsewhere
in this prospectus supplement for additional information about our capital
structure.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Term loan from Enron...................................... $175,000 $ --
Bridge loan from Enron.................................... 42,000 --
Short-term borrowings from Enron.......................... 50,200 --
Repurchase agreements(1).................................. 89,998 89,998
-------- --------
Total short-term debt............................. $357,198 $ 89,998
======== ========
Long-term debt.............................................. -- 235,000
Additional partnership interests............................ 2,547 2,547
Partners' capital
Common unitholders(2)..................................... 41,123 94,043
Subordinated unitholders.................................. 41,064 41,064
General partner(3)........................................ 7,618 8,153
-------- --------
Total partners' capital........................... $ 89,805 $143,260
======== ========
</TABLE>
- ---------------
(1) The crude oil repurchase agreements are used for short-term liquidity needs
and allow us to finance the storage of crude oil. We sell crude oil to the
financial institution on a spot basis and agree to repurchase the crude oil
at the same price plus a premium which, in the past, has been approximately
LIBOR plus 0.55%. We store the crude oil we sell as an agent for the
financial institution. Each repurchase agreement is settled at the end of 30
days, and can be renewed monthly; however, either party may terminate the
repurchase agreement. While the repurchase agreements have default, cross-
default, and acceleration provisions, there are no maintenance or financial
covenants associated with the agreements.
(2) Reflects an offering of 3,500,000 common units at $16.00 per unit net of an
underwriting discount of 5.50%.
(3) The adjustment includes a contribution by our general partner in an amount
equal to approximately 1% of the net proceeds from the common unit offering.
S-20
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data as of and for each of the
years in the three year period ended December 31, 1998 are derived from our
audited financial statements, which are included elsewhere herein. The data as
of and for the six month periods ended June 30, 1999 and June 30, 1998 are
derived from our unaudited financial statements, which are included elsewhere
herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------
1999 1998 1998(1) 1997(2) 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue................................................ $3,692,460 $2,571,279 $5,294,697 $7,646,099 $7,469,730
Cost of sales.......................................... 3,583,967 2,514,576 5,162,092 7,533,054 7,320,203
---------- ---------- ---------- ---------- ----------
Gross margin........................................... 108,493 56,703 132,605 113,045 149,527
Operating expenses..................................... 74,815 46,825 104,425 96,158 101,945
Depreciation and amortization.......................... 16,490 9,078 20,951 16,518 15,720
Impairment of assets................................... -- -- -- 7,961 --
---------- ---------- ---------- ---------- ----------
Operating income (loss)................................ 17,188 800 7,229 (7,592) 31,862
Interest and related charges........................... (13,820) (3,823) (10,165) (6,661) (3,659)
Other income (expense), net............................ 1,348 26 (1,131) (146) 606
---------- ---------- ---------- ---------- ----------
Net income (loss) before cumulative effect of
accounting change.................................... $ 4,716 $ (2,997) $ (4,067) $ (14,399) $ 28,809
========== ========== ========== ========== ==========
Net income (loss)...................................... $ 6,463 $ (2,997) $ (4,067) $ (14,399) $ 28,809
========== ========== ========== ========== ==========
Basic net income (loss) per unit before cumulative
effect of accounting change:
- Common............................................. $ 0.17 $ (0.15) $ (0.17) $ (0.75) $ 1.50
========== ========== ========== ========== ==========
- Subordinated....................................... $ 0.24 $ (0.16) $ (0.26) $ (0.75) $ 1.50
========== ========== ========== ========== ==========
Diluted net income (loss) per unit before cumulative
effect of accounting change.......................... $ 0.19 $ (0.16) $ (0.21) $ (0.75) $ 1.50
========== ========== ========== ========== ==========
Cash distributions per common unit..................... $ 0.95 $ 0.95 $ 1.90 $ 1.90 $ 1.90
========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets........................................... $1,241,035 $ 684,547 $ 965,820 $ 782,921 $1,026,197
Total debt(3).......................................... 357,198 157,440 328,313 109,300 62,728
Additional partnership interests(4).................... 2,547 19,452 21,928 12,775 9,091
Partners' capital...................................... 89,805 47,696 75,582 62,093 106,173
OTHER FINANCIAL DATA:
Capital expenditures(5)................................ 43,064 3,268 266,569 22,837 6,723
Cash distributions to unitholders...................... 14,168 11,400 22,842 29,681 28,831
Fixed charge coverage ratio(6)......................... 1.30x n/a n/a n/a 5.06x
Pro forma fixed charge coverage ratio(7)............... 1.17x
</TABLE>
- ---------------
(1) Includes one month of results of operations associated with the assets
acquired from Koch on December 1, 1998.
(2) Includes non-recurring charges of (i) $6.5 million impairment of an
information system development project, (ii) $1.5 million impairment of
three Ohio products terminals held for sale and (iii) $2.0 million of
severance costs related to the exit of the East of Rockies refined products
business and corporate realignment.
(3) Consists of loans from Enron and crude oil repurchase agreements with a
financial institution.
(4) Subsequent to year-end 1998, Enron contributed the $21.9 million in
additional partnership interests to us in exchange for common units pursuant
to its commitment made in connection with the Support Agreement discussed in
note 12 to the audited consolidated financial statements included herein. In
May 1999, Enron provided additional common unit distribution support related
to the three months ended March 31, 1999 through the issuance by us of $2.5
million in additional partnership interests.
(footnotes continued on following page)
S-21
<PAGE> 24
(5) Includes $12.0 million in 1997 for the purchase of crude gathering and
pipeline assets from CITGO. Includes $258.1 million in 1998 for the purchase
of crude oil gathering and transportation assets from Koch. The six months
ended June 30, 1999 includes $33.0 million for the purchase of pipeline
assets from Texas-New Mexico PipeLine.
(6) In computing the ratio of earnings to fixed charges (i) earnings have been
based on income from continuing operations before fixed charges and (ii)
fixed charges consist of interest and the estimated interest portion of
rents. Earnings were insufficient to cover fixed charges by $3.0 million for
the six months ended June 30, 1998 and $4.1 million and $14.4 million for
the years ended December 31, 1998 and 1997, respectively.
(7) The pro forma fixed charge coverage ratio has been computed as if the notes
offering and concurrent common units offering had occurred on January 1,
1999.
S-22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the audited consolidated financial
statements and notes thereto and the unaudited condensed consolidated financial
statements and notes thereto included elsewhere in this prospectus.
OVERVIEW
Through our affiliated limited partnerships, EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, and EOTT Energy Pipeline
Limited Partnership, we purchase, gather, transport, store and resell crude oil
and other petroleum products. Statement of Financial Accounting Standards No.
131, "Reporting Disaggregated Information About a Business Enterprise," requires
that segment reporting for public companies be measured the same way management
identifies and evaluates information internally. We adopted this standard for
year end 1998 reporting and restated certain information into the following
business segments: North American Crude Oil -- East of Rockies, Pipeline
Operations and West Coast Operations (see note 19 to our audited consolidated
financial statements for certain financial information by business segment). In
late 1997, we decided to exit the East of Rockies refined products business. See
further discussion in note 5 to our audited consolidated financial statements.
Gathering and Marketing Operations
In general, as we purchase crude oil in our gathering and marketing
operations, we establish a margin by selling crude oil for physical delivery to
third party users, such as independent refiners or major oil companies, or by
entering into a future delivery obligation with respect to futures contracts on
the NYMEX, thereby minimizing or reducing exposure to price fluctuations.
Through these transactions, we seek to maintain positions that are substantially
balanced between crude oil purchases and sales or future delivery obligations.
As a result, changes in the absolute price level for crude oil do not
necessarily impact the margin from gathering and marketing.
Although we generally maintain a balanced position in terms of overall
volumes, some risks cannot be fully hedged, such as a portion of certain basis
risks. Basis risk arises when we acquire crude oil by purchase or exchange that
does not meet the specifications of the crude oil we are contractually obligated
to deliver, whether in terms of geographic location, grade or delivery schedule.
We seek to limit our price risk and maintain our margins through a combination
of physical sales, NYMEX hedging activities and exchanges of crude oil with
third parties. It is our policy not to acquire and hold crude oil, futures
contracts or other derivative products for the purpose of speculating on crude
oil price changes.
Our operating results are sensitive to a number of factors including:
grades or types of crude oil, individual refinery demand for specific grades of
crude oil, area market price structures for the different grades of crude oil,
location of customers, availability of transportation facilities, and timing and
costs (including storage) involved in delivering crude oil to the appropriate
customer.
Gross margin from gathering, marketing and pipeline operations varies from
period-to-period, depending to a significant extent upon changes in the supply
and demand of crude oil and the resulting changes in United States crude oil
inventory levels. The gross margin from gathering and marketing operations is
generated by the difference between the price of crude oil at the point of
purchase and the price of crude oil at the point of sale, minus the associated
costs of gathering and transportation. In addition to purchasing crude oil at
the wellhead, we purchase crude oil in bulk at major pipeline terminal points
and major marketing points and enter into exchange transactions with third
parties. These bulk and exchange transactions are characterized by large volumes
and narrow profit margins on purchase and sales transactions, and the absolute
price levels for crude oil do not necessarily bear a relationship to gross
margin, although such price levels significantly impact revenues and cost of
sales. Because period-to-period variations in revenues and cost of sales are not
generally meaningful in analyzing the variation in gross margin for gathering
and marketing operations such changes are not addressed in the following
discussion.
S-23
<PAGE> 26
We operate our business differently as market conditions change. During
periods when the demand for crude oil is weak, the market for crude oil is often
in contango, meaning that the price of crude oil in a given month is less than
the price of crude oil in a subsequent month. In a contango market, storing
crude oil is favorable, because storage owners at major trading locations can
simultaneously purchase production at low current prices for storage and sell at
higher prices for future delivery. When there is a higher demand than supply of
crude oil in the near term, the market is backwardated, meaning that the price
of crude oil in a given month exceeds the price of crude oil in a subsequent
month. A backwardated market has a positive impact on marketing margins because
crude oil gatherers can capture a premium for prompt deliveries.
Pipeline Operations
Pipeline revenues and gross margins are primarily a function of the level
of throughput and storage activity and are generated by the difference between
the regulated published tariff and the fixed and variable costs of operating the
pipeline. A majority of the pipeline revenues are generated by transporting
crude oil at published pipeline tariffs for the North American Crude Oil -- East
of Rockies business segment. Approximately 76% of the revenues of the Pipeline
Operations business segment for the three months ended June 30, 1999, were
generated from tariffs charged to the North American Crude Oil -- East of
Rockies business segment. Changes in revenues and pipeline operating costs,
therefore, are relevant to the analysis of financial results of our Pipeline
Operations business segment and are addressed in the following discussions of
our Pipeline Operations business segment.
RECENT DEVELOPMENTS
On May 1, 1999, we acquired crude oil transportation and storage assets in
key oil producing regions from Texas-New Mexico PipeLine Co. which included
approximately 1,800 miles of common carrier crude oil pipelines. We paid $33.0
million in cash and financed the acquisition using short-term borrowings from
Enron.
On December 1, 1998, we purchased crude oil gathering and transportation
assets in key oil producing regions from Koch. The transaction almost tripled
our pipeline mileage and nearly doubled crude oil lease barrels under contract.
The acquisition included approximately 3,900 miles of crude oil pipelines, crude
oil transport trucks, meter stations, vehicles, storage tanks and contracts for
approximately 180,000 lease barrels of crude oil per day from production in 11
central and western states including Texas, Oklahoma, Kansas and California. The
total purchase price was approximately $235.6 million and included consideration
given to Koch of $184.5 million in cash, 2,000,000 common units and 2,000,000
subordinated units. We financed the cash portion of the purchase price through
borrowings from Enron consisting of a $42.0 million bridge loan due December 31,
1999, a $135.7 million term loan due December 31, 1999, and $6.8 million from
our working capital facility with Enron. We also increased our existing credit
facility with Enron to $1.0 billion in order to provide additional working
capital for our expanded operations.
On February 12, 1999, we obtained approval of proposals presented at a
special meeting of unitholders. Approval of these proposals, among other things,
(a) authorized us to issue an additional 10,000,000 common units, (b) changed
the terms of the special units held by Enron so that they became convertible
into common units and (c) resulted in an increase in Enron's cash distribution
support to $29.0 million and an extension of that support through the fourth
quarter of 2001. As a result of the approval of the proposals, Enron contributed
the $21.9 million in additional partnership interests to us in exchange for
common units outstanding as discussed in note 12 to the audited consolidated
financial statements.
Consistent with our acquisition strategy, we are engaged in discussions
with a third party relating to a possible acquisition of contracts and
transportation assets, including trucks, crude oil pipelines and storage
facilities. We have entered into a confidentiality agreement that provides that
the owner of the assets will furnish us with confidential information for use in
our evaluation of the assets. We have the exclusive right to discuss this
possible purchase of the assets with the owner until November 1, 1999, or until
an earlier
S-24
<PAGE> 27
date on which one of the parties gives written notice to the other that
negotiations between the parties have terminated. We do not expect to discuss a
definitive agreement on the terms of the acquisition until such time as the due
diligence process is completed and we have fully evaluated the results of our
due diligence review. We have indicated to the potential seller that we believe
that the acquisition price for the assets would be in the range of $210 million
to $240 million, but we have not reached any agreement regarding the price for
the assets or any other terms of the transaction. If an agreement is reached
regarding this acquisition, we may finance the purchase price through the
issuance of additional common units, the issuance of public or private debt
securities or loans or some combination of the foregoing. We can give you no
assurance regarding when or whether we will reach agreement with the owner on
the terms of the acquisition or that, if we do reach agreement, the acquisition
will be completed.
RESULTS OF OPERATIONS
We reported net income of $6.5 million or $0.26 per diluted unit for the
six months ended June 30, 1999 compared to a net loss of $3.0 million or $0.16
per diluted unit for the six months ended June 30, 1998. The six months ended
June 30, 1999 reflect increased lease volumes and margins associated with the
1998 and 1999 asset acquisitions and the adoption of the conclusions reached by
the Emerging Issues Task Force in Issue No. 98-10 ("Issue 98-10"), "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities." Issue
98-10 requires energy trading contracts (as defined) to be recorded at fair
value on the balance sheet, with the change in fair value included in earnings.
The cumulative effect of adoption of Issue 98-10 in the first quarter of 1999
included a $1.7 million increase in net income as of January 1, 1999. We had
$3.1 million of net unrealized mark-to-market gains for the six months ended
June 30, 1999.
We reported a net loss of $4.1 million or $0.21 per diluted unit for 1998,
a net loss of $14.4 million or $0.75 per diluted unit for 1997, and net income
of $28.8 million or $1.50 per diluted unit for 1996. We reported a net loss of
$4.4 million or $0.23 per diluted unit in 1997 excluding non-recurring charges
of $10.0 million or $0.52 per unit, which consisted primarily of a $6.5 million
impairment of an information systems development project, a $1.5 million
impairment of three Ohio products terminals held for sale and a $2.0 million
severance charge associated with the realignment initiatives discussed further
in the notes to the audited consolidated financial statements.
S-25
<PAGE> 28
Selected financial data for our business segments are summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues:
North American Crude Oil -- East of
Rockies............................... $3,454.3 $2,123.0 $4,637.8 $6,072.6 $6,029.0
Pipeline Operations...................... 52.6 10.1 31.5 19.4 14.3
West Coast Operations.................... 273.8 355.0 590.1 811.2 770.9
Corporate and Other(1)................... -- 110.6 110.7 760.2 668.6
Intersegment eliminations................ (88.2) (27.4) (75.4) (17.3) (13.1)
-------- -------- -------- -------- --------
Total............................ $3,692.5 $2,571.3 $5,294.7 $7,646.1 $7,469.7
======== ======== ======== ======== ========
Gross margin:
North American Crude Oil -- East of
Rockies(2)............................ $ 42.0 $ 41.8 $ 92.0 $ 82.6 $ 117.2
Pipeline Operations...................... 52.0 9.9 30.9 19.5 13.9
West Coast Operations.................... 14.5 5.0 9.7 9.3 15.5
Corporate and Other(1)................... -- -- -- 1.6 2.9
-------- -------- -------- -------- --------
Total............................ $ 108.5 $ 56.7 $ 132.6 $ 113.0 $ 149.5
======== ======== ======== ======== ========
Operating Income (Loss):
North American Crude Oil -- East of
Rockies(2)............................ $ 1.0 $ 11.5 $ 28.0 $ 19.5 $ 47.1
Pipeline Operations...................... 24.3 0.8 4.3 1.8 1.8
West Coast Operations.................... 4.4 0.4 0.2 0.1 6.8
Corporate and Other(1)................... (12.5) (11.9) (25.3) (29.0) (23.8)
-------- -------- -------- -------- --------
Total............................ $ 17.2 $ 0.8 $ 7.2 $ (7.6) $ 31.9
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes East of Rockies refined products business in 1998, 1997 and 1996,
which we have now exited.
(2) Includes intersegment transportation costs charged by the Pipeline
Operations business segment for the transport of crude oil at published
pipeline tariffs. For the six months ended June 30, 1999 and 1998,
intersegment transportation costs charged by the Pipeline Operations
business segment represented $42.5 million and $6.8 million, respectively.
For 1998, 1997 and 1996, intersegment transportation costs charged by the
Pipeline Operations business segment represented $24.5 million, $13.7
million and $10.2 million, respectively.
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998
North American Crude Oil -- East of Rockies. Operating income for the North
American Crude Oil -- East of Rockies business segment was $1.0 million for the
first half of 1999, compared to $11.5 million for the same period in 1998. As a
result of the acquisition of assets from Koch, the North American Crude
Oil -- East of Rockies business segment is incurring increased transportation
costs charged by the Pipeline Operations business segment due to the significant
increase in the volume of crude oil transported at higher published tariff rates
as well as incurring additional operating costs associated with the asset
acquisitions. Gross margin increased approximately $200,000 to $42.0 million in
the first half of 1999 due primarily to increased margins related to the asset
acquisitions in the second half of 1998 and approximately $2.7 million of
unrealized mark-to-market gains being recorded in the first half of 1999 for
certain energy contracts. These increases were offset by the increase in
transportation costs charged by the Pipeline Operations business segment and by
approximately $3.1 million of higher cost of sales associated with covering
inventory variances in a period of rapidly rising crude oil prices. The
inventory variances, which are a result of actual lease volumes being less than
expected lease volumes, were largely due to the
S-26
<PAGE> 29
integration of the $235.6 million acquisition of assets from Koch, which nearly
doubled the amount of lease barrels under contract. Crude oil lease volumes
increased significantly from an average of 270,200 barrels per day for the six
months ended June 30, 1998 to an average of 412,900 barrels per day for the six
months ended June 30, 1999 due to the acquisitions of assets from Koch.
Operating expenses of $41.0 million for the first half of 1999 were $10.7
million higher than for the first half of 1998 due primarily to higher operating
costs and employee related costs associated with the acquisitions of assets from
Koch in December 1998.
Pipeline Operations. Pipeline Operations had operating income of $24.3
million for the first half of 1999 compared to operating income of approximately
$800,000 for the same period in 1998. Revenues, which include only two months of
activity related to the assets acquired from Texas-New Mexico PipeLine Co. in
1999, increased $42.5 million to $52.6 million in the first half of 1999 due
primarily to increased activity related to the pipelines acquired from Koch and
Texas-New Mexico PipeLine Co. Approximately $42.5 million and $6.8 million of
revenues for the six months ended June 30, 1999 and 1998, respectively, were
generated from tariffs charged to the North American Crude Oil -- East of
Rockies business segment. Pipeline volumes averaged 448,000 barrels per day for
the six months ended June 30, 1999 compared to 152,100 barrels per day for the
six months ended June 30, 1998. Operating expenses of $27.7 million for the
first half of 1999 were $18.6 million higher than in the first half of 1998 due
to higher employee related costs, operating costs and depreciation associated
with the acquisitions of assets from Koch and Texas-New Mexico PipeLine Co.
West Coast Operations. West Coast Operations had operating income of $4.4
million for the first half of 1999, compared to approximately $400,000 for the
same period in 1998 primarily due to increased margins associated with the crude
oil blending operations acquired from Koch and increased margins in refined
products marketing due to disruptions in supply and demand due to refinery
outages. Operating expenses of $10.1 million for the first half of 1999 were
$5.5 million higher than for the same period in 1998 due to higher employee
related costs, operating costs and depreciation associated with the acquisitions
of assets from Koch.
Corporate and Other. Corporate and Other costs were $12.5 million for the
first half of 1999 compared to $11.9 million in the first half of 1998. The
increase is due primarily to higher system operating costs and insurance costs
partially offset by lower severance costs. Other income (expense), net,
consisting primarily of gains (losses) on transactions denominated in foreign
currency and gains on sales of fixed assets, increased $1.3 million to income of
$1.0 million in the first half of 1999 compared to a loss of approximately
$300,000 in the same period in 1998 primarily due to gains on foreign currency
transactions and gains on sales of fixed assets. Interest and related charges in
the first half of 1999 were $13.8 million compared to $3.8 million for the same
period in 1998. The increase is due to higher average short-term debt in 1999
due to the financing of the acquisitions of assets from Koch and Texas-New
Mexico PipeLine Co.
Twelve Months Ended December 31, 1998 Compared with Twelve Months Ended
December 31, 1997
North American Crude Oil -- East of Rockies. Operating income for the North
American Crude Oil -- East of Rockies business segment was $28.0 million in 1998
compared to $19.5 million in 1997. Gross margin increased $9.4 million to $92.0
million due primarily to renegotiations of uneconomic lease contracts during
1997 and improved crude grade and basis differentials in 1998. North American
Crude Oil -- East of Rockies crude oil lease purchases were up slightly from an
annual average of 282,400 barrels per day for 1997 to an annual average of
285,600 barrels per day in 1998. Operating expenses of $64.0 million for 1998
were approximately $900,000 higher than 1997 due primarily to increased
depreciation and amortization related to the acquisitions of assets from Koch
partially offset by a reduction in employee related costs.
Pipeline Operations. Pipeline Operations had operating income of $4.3
million in 1998 compared to $1.8 million in 1997. Gross margin increased $11.4
million to $30.9 million due primarily to increased activity related to the
acquisition of pipelines from Koch. Pipeline volumes averaged 188,300 barrels
per
S-27
<PAGE> 30
day in 1998 compared to 142,300 barrels per day in 1997. Operating expenses of
$26.6 million in 1998 were $8.9 million higher than 1997 due primarily to
increased benefits and employee related costs, increased operating costs and
incremental depreciation and amortization associated with the acquisition of
pipelines from Koch.
West Coast Operations. West Coast Operations had operating income of
approximately $200,000 in 1998 compared to approximately $100,000 in 1997. Gross
margin increased approximately $400,000 to $9.7 million due primarily to the
acquisition of crude oil gathering and natural gas liquid assets from Koch
partially offset by a lower of cost or market adjustment of certain propane
inventories. Operating expenses of $9.5 million in 1998 were approximately
$300,000 higher than 1997 due primarily to higher benefits and other employee
related costs partially offset by reduced operating costs.
Corporate and Other. Corporate and other costs of $25.3 million for 1998
were $3.7 million lower compared to 1997 due primarily to a non-recurring $6.5
million non-cash impairment associated with the termination of an information
system development project and $1.5 million impairment of three Ohio products
terminals held for sale due to the decision in 1997 to exit the East of Rockies
refined products business partially offset by increased legal expenses, system
operating costs, casualty and liability insurance costs, a non-recurring
write-off of certain information system development costs and severance payments
made to a former officer of ours. Interest and related charges for 1998 were
$10.2 million compared to $6.7 million in 1997. The increase is due primarily to
higher average short-term debt required to meet working capital needs, primarily
related to higher crude inventories and debt used to finance the acquisition of
assets from Koch in the third and fourth quarters of 1998. Other income
(expense), net, consisting primarily of gains (losses) on transactions
denominated in foreign currency; gains (losses) on the sale of property, plant
and equipment; and litigation settlements, decreased $1.0 million to a loss of
$1.8 million in 1998 due to an increase in litigation settlements in 1998.
Twelve Months Ended December 31, 1997 Compared with Twelve Months Ended
December 31, 1996.
North American Crude Oil -- East of Rockies. Operating income for the North
American Crude Oil -- East of Rockies business segment was $19.5 million in 1997
compared to $47.1 million in 1996. Gross margin decreased $34.7 million to $82.6
million due primarily to the deterioration in grade and basis differentials in
1997 and 1996 had unusually favorable crude oil market conditions. North
American Crude Oil -- East of Rockies crude lease purchases were up slightly
from an annual average of 278,600 barrels per day for 1996 to an annual average
of 282,400 barrels per day in 1997. Operating expenses of $63.1 million for 1997
were $7.0 million lower than 1996 due to lower benefits and other employee
related costs, partially offset by severance costs associated with the
realignment initiatives discussed in the notes to our consolidated financial
statements.
Pipeline Operations. Pipeline Operations had operating income of $1.8
million in 1997 and in 1996. Gross margin increased $5.6 million to $19.5
million due primarily to increased activity related to the acquisition of
pipeline and related assets from CITGO. Pipeline volumes averaged 142,300
barrels per day in 1997 compared to 103,800 barrels per day in 1996. Operating
expenses of $17.7 million in 1997 were $5.6 million higher than 1996 due
primarily to increased operating costs and incremental depreciation and
amortization associated with the acquisition of pipeline and related assets from
CITGO.
West Coast Operations. West Coast Operations had operating income of
$100,000 in 1997 compared to $6.8 million in 1996. Gross margin decreased $6.2
million to $9.3 million due primarily to unusually favorable market conditions
in 1996. Operating expenses of $9.2 million in 1997 were approximately $500,000
higher than 1996 due primarily to higher operating costs partially offset by
lower benefits and other employee related costs.
Corporate and Other. Corporate and other costs of $29.0 million for 1997
were $5.2 million higher compared to 1996 due primarily to a $6.5 million
non-cash impairment associated with the termination of an information system
development project and a $1.5 million impairment of the Ohio terminals due to
the exit of the East of Rockies refined products business in 1997 partially
offset by lower benefits and other employee related costs, lower liability and
casualty insurance costs, lower systems operating costs and
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<PAGE> 31
severance charges associated with the realignment initiatives and the exiting of
the East of Rockies refined products business discussed further in the notes to
our consolidated financial statements. Interest and related charges for 1997
were $6.7 million compared to $3.7 million in 1996. The increase is due
primarily to higher average short-term debt required to meet working capital
needs, primarily related to higher crude inventories and debt used to finance
the acquisition of crude oil pipeline assets from CITGO in the first quarter of
1997. Other income (expense), net, consisting primarily of gains (losses) on
transactions denominated in foreign currency; gains (losses) on the sale of
property, plant and equipment; and litigation settlements, decreased
approximately $900,000 to a loss of approximately $800,000 in 1997 due primarily
to losses on foreign currency transactions.
LIQUIDITY AND CAPITAL RESOURCES
General
Management anticipates that short-term liquidity as well as sustaining
capital expenditures for the foreseeable future will be funded primarily by cash
generated from operations and, when necessary, accessing the $100.0 million
working capital line under the $1.0 billion Enron credit facility, described
below. To the extent we make future significant acquisitions, we may be required
to seek financing from other sources. No assurance can be given that this
financing will be available from Enron or another source.
Cash Flows From Operating Activities
Net cash provided by operating activities totaled $26.2 million for the
first half of 1999 compared to net cash used in operating activities of $41.1
million for the same period in 1998 primarily due to improved operating results
associated with acquisitions from Koch and Texas-New Mexico PipeLine Co.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $42.5 million for the first
half of 1999 compared to $2.6 million used during the same period in 1998. Cash
additions to property, plant, and equipment and acquisitions of $43.1 million in
1999 primarily include $33.0 million representing cash consideration for the
asset acquisition from Texas-New Mexico PipeLine Co., $5.4 million for other
pipeline connections and improvements, and $1.1 million for information systems
development. Proceeds from asset sales were $548,000 in the first half of 1999
compared to $640,000 in the first half of 1998. We estimate that capital
expenditures necessary to maintain the existing asset base at current operating
levels will be $10.0 to $11.0 million each year.
Cash Flows From Financing Activities
Net cash provided by financing activities totaled $17.0 million for the
first half of 1999 compared to net cash provided of $43.1 million for the same
period in 1998. The 1999 amount primarily represents increases in short-term
borrowings for working capital needs and acquisition financing offset by
distributions paid to all common and special unitholders for the period October
1, 1998 through March 31, 1999.
Working Capital and Credit Resources
In 1995, Enron Corp. entered into a credit facility with us to provide
credit support in the form of guarantees, letters of credit, loans and letters
of indemnity. The total amount of the credit support was $600.0 million, and as
amended December 19, 1996, had a maturity of March 31, 1999.
On December 1, 1998, Enron increased its existing credit facility with us
to provide additional credit support in the form of guarantees, letters of
credit and working capital loans through December 31, 2001. The total amount of
the new credit facility is $1.0 billion and contains sublimits on the
availability of credit support of $100.0 million for working capital loans and
$900.0 million for guarantees and letters of
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<PAGE> 32
credit. As of June 30, 1999, $50.2 million was outstanding under the $100.0
million working capital facility and $379.4 million of letters of credit and
guarantees were outstanding. Letter of credit fees are based on actual charges
by the banks which range from 0.20%-0.375% per annum. Interest on outstanding
loans is charged at LIBOR plus 2.50% per annum.
The Enron credit facility is subject to defined borrowing base limitations
relating to our activities and to the maintenance and protection of the
collateral. The credit facility permits distributions to unitholders subject to
certain limitations based on our earnings and other factors. These covenants and
restrictions are not expected to materially affect our ability to operate the
ongoing partnership business.
At June 30, 1999, we had $175.0 million of debt outstanding under a term
loan with Enron, which was used to fund a portion of the cash consideration paid
to Koch for the assets purchased in 1998 and to refinance indebtedness incurred
in prior acquisitions. The term loan matures on December 31, 1999. The interest
rate on the term loan is LIBOR plus 3.00%.
The Enron credit facility and the term loan are secured by a first priority
lien on and security interest in all of our receivables and inventory. The
borrowing base is the sum of cash and cash equivalents, specified percentages of
eligible receivables, inventory, and products contracted for or delivered but
not billed. The credit facility and the term loan are non-recourse to our
general partner and its assets. We are restricted from entering into additional
financing arrangements without the prior approval of Enron.
In addition, at June 30, 1999, we had $42.0 million of debt outstanding
with Enron under a $100.0 million bridge loan to finance the acquisition of
assets from Koch. The interest rate on the bridge loan is initially LIBOR plus
4.00%. At the end of each three-month period, the spread on the bridge loan will
increase by 0.25%. The bridge loan is unsecured and matures on December 31,
1999.
Our partnership agreement authorizes us to issue additional limited partner
interests, the proceeds from which could be used to provide additional funds for
acquisitions or other partnership needs. Concurrently with this offering, we are
offering 3,500,000 of our common units to the public. The proceeds from both
offerings will be used to repay the term loan, the bridge loan, the working
capital facility with Enron and for fees and expenses and general partnership
purposes. If we are not able to complete the offerings, we will seek other
sources of financing to repay or refinance the bridge loan and the term loan
prior to maturity.
We believe that the Enron credit facility will be sufficient to support our
crude oil purchasing activities and working capital requirements. No assurance,
however, can be given that we will not be required to reduce or restrict our
gathering and marketing activities because of limitations on our ability to
obtain credit support and financing for our working capital needs.
Our ability to obtain letters of credit to support our purchases of crude
oil or other petroleum products is fundamental to our gathering and marketing
activities. Additionally, we have a significant need for working capital due to
the large dollar volume of marketing transactions in which we engage. Any
significant decrease in our financial strength, regardless of the reason for
such decrease, may increase the number of transactions requiring letters of
credit or other financial support, make it more difficult for us to obtain such
letters of credit, and/or increase the cost of obtaining them. This could in
turn adversely affect our ability to maintain or increase the level of our
purchasing and marketing activities or otherwise adversely affect our
profitability and available cash.
Generally, we will distribute 100% of our available cash within 45 days
after the end of each quarter to unitholders of record and to our general
partner. Available cash is defined in our partnership agreement and consists
generally of all our cash receipts for the quarter adjusted for our cash
disbursements (such as payments of principal, premium and interest and capital
expenditures) and net changes to reserves. Our general partner may establish
reserves that it determines in its reasonable discretion are necessary or
appropriate to provide for the proper conduct of our business, to provide funds
for distributions with respect to units for any one or more of the next four
calendar quarters or because distribution of the funds would be prohibited by
applicable law or by any of our loan or other agreements or obligations.
Distributions of available cash to the subordinated unitholders are subject to
the prior rights of the
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<PAGE> 33
common unitholders to receive the minimum quarterly distribution for each
quarter during the subordination period, and to receive any arrearages in the
distribution of the minimum quarterly distribution on the common units for prior
quarters during the subordination period.
The minimum quarterly distribution is $0.475 per unit ($35.8 million per
year after giving effect to the concurrent common units offering). Enron has
committed to provide total cash distribution support in exchange for additional
partnership interests in an amount necessary to pay minimum quarterly
distributions, with respect to quarters ending on or before December 31, 2001,
in an amount up to an aggregate of $29 million ($26.5 million of which remains
available). We paid distributions for the second quarter of 1999 to our common
unitholders and our general partner on August 13, 1999 without any distribution
support from Enron.
In the normal course of business, we utilize crude oil repurchase
agreements with a financial institution for short-term liquidity needs. The
terms of these agreements are negotiated on an individual basis pursuant to a
master agreement. The crude oil repurchase agreements allow us to finance the
storage of crude oil. We sell crude oil to the financial institution on a spot
basis and agree to repurchase the crude oil at the same price plus a premium
which, in the past, has been approximately LIBOR plus 0.55%. We store the crude
oil we sell as an agent for the financial institution. Each repurchase agreement
is settled at the end of 30 days, and can be renewed monthly; however, either
party may terminate the repurchase agreement. While the repurchase agreements
have default, cross-default, and acceleration provisions, there are no
maintenance or financial covenants associated with the agreements. At December
31, 1998, we had outstanding forward commodity repurchase agreements of
approximately $83.0 million. Pursuant to the agreements, which had terms of
thirty days, we repurchased the crude oil inventory on January 20, 1999 for
approximately $83.4 million. At June 30, 1999, we had outstanding forward
commodity repurchase agreements of approximately $90.0 million. Pursuant to the
agreements, which had terms of 30 days, we repurchased the crude oil inventory
on July 20, 1999 for approximately $90.4 million.
OTHER INFORMATION
Our 1998 Annual Report on Form 10-K and the Quarterly Report on Form 10-Q
for the six months ended June 30, 1999 include additional information in
Management's Discussion and Analysis of Financial Condition and Results of
Operations concerning Year 2000 and certain recent accounting pronouncements.
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<PAGE> 34
BUSINESS
We are one of the largest independent crude oil gathering and marketing
companies in North America. We gather and market from over 40,000 oil wells in
18 states and Canada, averaging 431,300 barrels per day during the second
quarter of 1999. In addition, we are engaged in interstate and intrastate crude
oil transportation, crude oil terminalling and storage activities, and crude oil
blending. Most of the crude oil we purchase directly from the oil well ("lease
crude oil") is delivered to refiners and other customers nationwide. We
transport crude oil through pipelines, including approximately 8,300 miles of
our pipeline and gathering systems, and our trucking operations, a fleet of 386
owned or leased trucks. For the three months ended June 30, 1999, our gross
margin was $55.7 million and adjusted EBITDA (as defined in note 5 on page S-8)
was $19.1 million.
We engage in the following business activities:
- GATHERING AND MARKETING. We gather, store and transport crude oil in the
United States and Canada. This involves purchasing and gathering crude
oil from producers and other sellers for subsequent sale to refiners and
other customers. We gather crude oil from over 6,000 producers and
operators, of which approximately 89% of the volumes are from independent
producers and the remaining 11% are from major integrated oil companies.
We also provide certain accounting and administrative services to some
producers and operators. We believe that our ability to offer reliable
and reasonably priced services to producers and operators is a key factor
in maintaining lease volumes and in obtaining new lease volumes. Most of
these operations are included in our North American Crude Oil -- East of
Rockies business segment.
- PIPELINE OPERATIONS. Through our common carrier pipeline systems, we
transport crude oil for our gathering and marketing operations and for
third parties pursuant to published tariff rates regulated by the Federal
Energy Regulatory Commission and state regulatory authorities. We
transported 512,800 barrels per day in the second quarter of 1999, a
significant portion of which was transported for our own gathering and
marketing operations. We conduct these operations in our Pipeline
Operations business segment. Approximately 76% of the revenues of the
Pipeline Operations business segment for the three months ended June 30,
1999, were generated from tariffs charged to our North American Crude
Oil -- East of Rockies business segment.
- CRUDE OIL BLENDING AND NATURAL GAS LIQUIDS PROCESSING. We blend West
Coast sour crude with sweet crude oil and natural gas liquids to upgrade
heavy sour crude oil into a medium gravity Alaskan North Slope type of
crude oil, which we sell to Los Angeles Basin refineries. In addition, we
have a gas processing plant, a fractionation plant, and refrigerated
propane storage and related distribution facilities, which provide
natural gas liquids to our crude oil blending operation. We conduct these
operations in our West Coast Operations business segment.
We operate gathering systems in all major production areas in the lower 48
states. The 18 states in which we gather have represented, on average,
approximately 97% of the production in the lower 48 states from 1985 to 1997,
according to the most recent data available from the American Petroleum
Institute. These states have had a historical average annual oil production
decline rate of 2.6% over the same period; however, this may not necessarily
represent the decline rates in the particular fields from which we gather crude
oil.
BUSINESS STRATEGY
Our business objective is to maintain and enhance our position as a leading
independent purchaser, gatherer, transporter and marketer of crude oil in North
America, increase our cash flow and earnings and improve our results of
operations by pursuing the following strategies:
- OPTIMIZE OUR PROFITABILITY AND INCREASE THE UTILIZATION OF OUR EXISTING
ASSETS. We have reorganized our operations into eight discrete regional
business centers that will be responsible for operating our gathering and
marketing and pipeline operations as an integrated business. These
business centers will be accountable as separate profit centers and
employees will receive incentives based on
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<PAGE> 35
performance and profitability. The business centers are responsible for
implementing the following initiatives:
-- In Gathering: (i) review existing lease contracts to eliminate those
that are uneconomic; (ii) increase volumes on our common carrier
pipelines by, among other things, marketing excess capacity to third
parties; and (iii) expand customer services to producers and operators,
such as division order, storage and transportation services.
-- In Marketing: (i) improve our marketing systems, as well as implement
what we believe to be the first real-time inventory information system
for our industry; (ii) utilize market intelligence from our expanded
asset base to improve operating margins among transportation, storage
and delivery alternatives; and (iii) expand customer services to
refiners, such as assisting refineries in locating competitively priced
crude oil.
- REDUCE OPERATING COSTS. We have identified several operating areas where
cost savings can be achieved and are implementing the following
initiatives: (i) increase the efficiency of our trucking fleet through
the use of central dispatch and geographical routing systems that use
satellite-based global positioning technologies; (ii) reduce the cost of
our division order services by increasing the scale of operations and
improving our database system; and (iii) consolidate our existing
information systems into an integrated management, marketing and
inventory information system.
- GROW THROUGH ACQUISITIONS. As one of the largest independent gathering
and marketing companies in the lower 48 states, we believe we are well
positioned to be a leading consolidator among gathering and marketing
companies. We continually seek acquisition opportunities and regularly
examine acquisition targets. We believe that conditions in the crude oil
industry, primarily mergers among major integrated oil companies and
independent producers, will provide significant opportunities to acquire
additional assets at attractive values. We will continue to focus on
adding pipeline assets to improve our margins and the stability of our
cash flow.
COMPETITIVE STRENGTHS
We believe that the following competitive strengths will allow us to
successfully execute our business strategy:
- LARGE AND DIVERSE ASSET BASE. Our extensive asset base allows us to
select among several transportation, storage and delivery alternatives
for the crude oil that we gather and market. Depending on market
conditions, we may ship by pipeline, truck or barge, use our own storage
facilities or select alternate delivery destinations. We believe that our
asset base gives us significant flexibility in our efforts to maximize
destination prices and minimize transportation costs.
- PRESENCE IN ALL MAJOR SUPPLY AND TRADING AREAS IN THE LOWER 48
STATES. Because of our physical presence in all major markets, we have
substantial information on market conditions and are strategically
positioned to react to changes in supply and demand that may occur in a
particular region. In addition, we are less vulnerable to supply
shortages in any one producing area or operating difficulties with any
one producer.
- ESTABLISHED TRACK RECORD OF ACQUIRING AND INTEGRATING ASSETS. Since 1995,
we have made five asset acquisitions. As a result, our pipeline miles
have increased from approximately 1,700 miles in 1995 to 8,300 miles in
1999, and average lease barrels gathered per day have increased from
251,800 in 1995 to 431,300 in the second quarter of 1999. Primarily as a
result of recent acquisitions, gross margin increased to $55.7 million
from $29.2 million, and EBITDA increased to $17.1 million from $5.7
million, for the three months ended June 30, 1999 compared to the same
period in 1998.
- ENRON RELATIONSHIP. In addition to its 2% general partnership interest,
Enron owns 3,276,811 common units and indirectly owns 7,000,000
subordinated units, which represent a limited partnership interest of
approximately 37% after giving effect to the concurrent common units
offering. Enron also provides us with credit support through a $1.0
billion credit facility. We also
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<PAGE> 36
have the ability to consult with Enron on a variety of operational
matters, such as transportation and internal controls, and to receive
from Enron administrative support in areas such as legal and insurance.
If our general partner is no longer a member of the Enron group, there
will be a Change of Control for the purposes of the note covenants unless
there is no decline in the ratings of the notes during the following six
months.
- MANAGEMENT. Our senior management team has an average of more than 13
years of experience in the industry and an average of over nine years
with EOTT or its predecessors and affiliates. Our regional business
managers have an average of 22 years of industry experience.
BUSINESS SEGMENTS
NORTH AMERICAN CRUDE OIL -- EAST OF ROCKIES
General
Our crude oil gathering and marketing operations consist of purchasing and
gathering crude oil from producers and operators for subsequent sale to refiners
and other customers. Our gathering activities are conducted in 18 states which
represent approximately 97% of the crude oil production in the lower 48 states.
Gathering and marketing of crude oil consists of:
- purchasing lease crude oil from producers and operators at the oil well
and in bulk from aggregators at major pipeline interconnects and
marketing locations,
- transporting crude oil on our own proprietary or common carrier
pipelines, through our fleet of trucks or on assets owned and operated by
third parties,
- buying and selling crude oil or exchanging it for either another grade of
crude oil or for crude oil at a different geographic location in order to
increase margins or meet contract delivery requirements, and
- marketing crude oil to refiners, large integrated oil companies and other
customers.
As a gatherer and marketer, we seek to earn profits primarily by buying crude
oil at competitive prices, efficiently transporting and handling the purchased
crude oil and marketing the crude oil to refinery customers or other trade
partners. We purchase and sell crude oil primarily under contracts with 30-day
renewable terms, with some contracts having terms from two months to one year.
In addition, we have a 15 year supply contract at market-based prices with Koch
Oil Company for less than 25% of our lease volumes.
Crude Oil Gathering
In a typical producer's operation, crude oil flows from the oil well to a
separator where the petroleum gases are removed. After separation, the crude oil
is treated to remove water, sand and other contaminants and is then moved into
the producer's on-site storage tanks. When the tank is full, the producer
contacts our field personnel to purchase and transport the crude oil to market.
We utilize our pipelines and trucks to transport most of the crude oil we
purchase to market.
We engage in several types of purchases, sales and exchanges of crude oil.
Most transactions we enter into are at market responsive prices for a term or
duration of 90 days or less, with a large number of transactions on a 30-day
renewable basis. These purchases are automatically renewable on a month-to-
month basis until terminated by either party. The purchases are typically based
on our posted prices, or the price at which we are willing to pay producers in a
particular region, plus a bonus. The bonus is determined based on grade of oil,
transportation costs and competitive factors. Both the posted price and the
bonus change in response to market conditions. Posted prices can change daily,
and bonuses, in general, can change every 30 days as contracts renew. Conducting
business under these short-term contracts with multiple producers helps us
reduce the overall basis risk and variability in our crude oil gathering and
marketing business. See "Business -- Risk Management."
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The ten producer customers from which we gathered the most crude oil during
April of 1999 were: UPR Energy, Swift Energy, Continental Resources, Burlington
Resources, Unocal, Ocean Energy, Citation Crude, Sonat Exploration, Titan
Resources, and Pioneer Natural Resources.
The North American Crude Oil -- East of Rockies operation has recently been
reorganized into eight operating regions. Of the 431,300 barrels per day of
lease crude oil we purchased in the second quarter of 1999, approximately
412,200 barrels per day or 96% was gathered in the North American Crude Oil --
East of Rockies business segment. The remainder of the lease crude oil was
gathered in the West Coast region.
Crude Oil Marketing
The marketing of crude oil is complex and requires detailed knowledge of
the crude oil market and a familiarity with a number of factors including: types
of crude oil, individual refinery demand for specific grades of crude oil, area
market price structures for the different grades of crude oil, location of
customers, availability of transportation facilities and timing and costs
(including storage) involved in delivering crude oil to the appropriate
customer. We market crude oil through our extensive gathering and marketing
asset base which allows us to select among several transportation, storage and
delivery alternatives.
Generally, as we purchase lease crude oil, we enter into corresponding sale
transactions involving physical deliveries of crude oil to third party users,
such as independent refineries, or corresponding sales of futures contracts on
the NYMEX. This process enables us to hedge against price fluctuations until we
make physical delivery of the crude oil. After purchase of a lease barrel, we
may re-market that barrel both in the futures and physical markets in order to
maximize the value of our lease crude oil volumes. Throughout the process, we
seek to maintain a substantially balanced position at all times with respect to
lease volumes; however, we have certain risks which cannot be completely hedged
such as basis risks (the risk that price relationships between delivery points,
grades of crude oil or delivery periods will change) and the risk that
transportation costs will change. It is our policy not to hold any inventory for
the purpose of speculating on price changes.
The ten refinery customers to which we marketed the most crude oil during
April of 1999 were: Koch Petroleum, Conoco, Coastal States, Crown Central,
Williams, Ultramar Diamond Shamrock, Pennzoil-Quaker State, Mobil, Marathon
Ashland, and CITGO Petroleum.
Market conditions have a direct effect on our marketing strategy. During
periods when the demand for crude oil is weak, the market for crude oil is often
in contango, meaning that the price of crude oil in a given month is less than
the price of crude oil in a subsequent month. In a contango market, storing
crude oil is favorable, because storage owners at major trading locations can
simultaneously purchase production at low current prices for storage and sell at
higher prices for future delivery. When there is a higher demand than supply of
crude oil in the near term, the market is backwardated, meaning that the price
of crude oil in a given month exceeds the price of crude oil in a subsequent
month. A backwardated market has a positive impact on marketing margins because
crude oil gatherers can capture a premium for prompt deliveries.
Producer Services
Purchasing crude oil from producers and operators is done on the basis of
competitive pricing and reliable and responsive customer service. We believe our
ability to offer enhanced customer services to producers and operators is an
important factor in maintaining lease purchase volumes and in obtaining new
volumes. Services we offer include gathering capabilities, timely pickup of
crude oil from producers' tanks at the lease or production point, accurate
measurement of crude oil volumes delivered, avoidance of spills and certain
accounting and administrative services. Accounting and administrative services
include processing division orders (dividing payments among the several holders
of interests in a lease), providing statements of the crude oil purchased each
month, disbursing production proceeds to interest owners and calculation and
payment of severance and production taxes on behalf of interest owners. In order
to compete effectively, we must correctly handle title and division order issues
and payment and regulatory
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<PAGE> 38
reporting of all severance and production taxes. We must do this in a
professional and timely manner, thereby ensuring the prompt and correct
processing or payment of crude oil production proceeds and taxes.
These producer services will continue to be a key component in our strategy
as the smaller producers find it difficult to maintain these services
internally. Typically, lease crude oil purchased in conjunction with producer
services provide us with higher margins since we are able to charge the producer
a premium for these services.
PIPELINE OPERATIONS
Our pipeline operations provide the vital link between our crude oil
purchasing activities and our marketing activities. We own and operate
approximately 8,300 miles of crude oil gathering and transmission pipelines
covering thirteen states, including approximately 7,400 miles of regulated
intrastate and interstate common carrier pipeline systems. There are
approximately 15.1 million barrels of storage capacity associated with field
tanks. By state, our pipeline assets are as follows:
<TABLE>
<CAPTION>
EOTT COMMON CARRIER PIPELINE MILES BY STATE EOTT PROPRIETARY PIPELINE MILES BY STATE
- -------------------------------------------- -----------------------------------------
MILES MILES
-------- ------
<S> <C> <C> <C>
Alabama......................... 56 Alabama........................ 38
Arkansas........................ -- Arkansas....................... 2
California...................... 16 California..................... 159
Colorado........................ 332 Colorado....................... --
Kansas.......................... 795 Kansas......................... --
Louisiana....................... 412 Louisiana...................... 131
Mississippi..................... 293 Mississippi.................... 267
Montana......................... 118 Montana........................ --
Nebraska........................ 56 Nebraska....................... --
New Mexico...................... 1,174 New Mexico..................... 158
North Dakota.................... 489 North Dakota................... --
Oklahoma........................ 1,389 Oklahoma....................... 33
Texas........................... 2,256 Texas........................... 82
-------- -----
Total................. 7,386 Total........................... 870
======== =====
</TABLE>
Through these pipeline systems, we transport crude oil for our North
American Crude Oil -- East of Rockies and West Coast business segments and third
party customers pursuant to published tariff rates regulated by the Federal
Energy Regulatory Commission and state regulatory authorities. Accordingly, we
offer transportation services to any shipper of crude oil, provided that the
crude oil meets the conditions and specifications contained in the applicable
pipeline tariff. In the second quarter of 1999, our pipeline operations
transported approximately 512,800 barrels per day through our regulated pipeline
systems. Pipeline revenues are primarily a function of the level of crude oil
transported through the pipeline, known as throughput, and the applicable
pipeline tariffs. Approximately 76% of the revenues from the Pipeline Operations
business segment for the three months ended June 30, 1999, were generated from
tariffs charged to the North American Crude Oil -- East of Rockies business
segment. The operating income from our Pipeline Operations business segment is
generated by the difference between the published tariff and the fixed and
variable costs of operating the pipelines.
We believe that pipelines provide the lowest-cost method of transportation,
and accordingly, we have focused on increasing the percentage of barrels
transported on pipelines through acquisitions of pipeline assets. Our extensive
pipeline network allows us to be the low-cost operator in many of the regions in
which we operate. In addition, we have the opportunity to add incremental cash
flow at marginal additional cost given that our pipeline system operates at
approximately two-thirds of capacity.
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WEST COAST OPERATIONS
We conduct a number of business activities in the petroleum market on the
West Coast, including the following: (i) crude oil blending; (ii) lease crude
oil gathering and marketing; (iii) natural gas liquids marketing; and (iv)
refined petroleum products marketing. These business activities are operated as
an integrated business, with our lease crude oil and gas fractionation
operations being the primary components in our crude oil blending operations.
We acquired assets from Koch that improved the transportation economics of
our blending and marketing activities and greatly expanded our existing natural
gas liquids marketing business on the West Coast. These assets primarily
included a gas processing plant with 20 million cubic feet per day of gas
processing capacity, a fractionation plant with 8,000 barrels per day of
fractionation capacity and five million gallons of refrigerated propane storage
along with related distribution facilities.
The primary function of lease crude oil gathering on the West Coast is to
support the crude blending operation. We purchase crude oil from a number of
producers on the West Coast, ranging from small independents to major oil
companies. Our West Coast lease crude oil volumes are transported by a variety
of pipeline gathering systems as well as by truck, either owned by us or through
third parties.
Our acquisition of the fractionation plant from Koch has given us the
ability to produce natural gasoline, which is a valuable component of our crude
blending operation. The fractionator and the associated five million gallon
refrigerated storage facility has also turned us into a major participant in the
wholesale marketing of propane on the West Coast.
The bulk of our profitability in the West Coast market is derived from
crude oil blending. Our margins for the West Coast crude oil business are
primarily tied to our ability to upgrade heavy sour crude into a medium gravity,
Alaskan North Slope type of crude oil, called Line 63. To accomplish this, we
gather crude oil by truck and pipeline and deliver it to proprietary blend
stations strategically placed along our gathering system.
In addition, the West Coast Operations include a refined petroleum products
marketing business. This business specializes mostly in marketing distillate and
gasoline at terminals located between Seattle and San Diego.
RISK MANAGEMENT
We attempt to minimize our exposure to commodity prices. Generally, as we
purchase lease crude oil at prevailing market prices, we enter into
corresponding sale transactions involving physical deliveries of crude oil to
third party users, such as refiners or other trade partners, or a sale of
futures contracts on the NYMEX. This process gives us the opportunity to profit
on the transaction at the time of purchase and to effect a substantially
balanced position, thereby minimizing or reducing our exposure to price
fluctuations that may occur after the initial purchase.
Sophisticated price risk management strategies, including those involving
price hedges using NYMEX futures contracts, are very important in maintaining or
increasing our gross margins. Such hedging techniques require significant
resources dedicated to the management of futures positions and physical
inventories. Another important element of our hedging techniques is the accurate
estimation of lease crude oil volumes that will actually be purchased when we
pick them up from the producers. We effect transactions both in the futures and
physical markets in order to deliver the crude oil to its highest value location
or otherwise to maximize the value of the crude oil we control. Throughout the
process, we seek to maintain a substantially balanced position at all times. It
is our policy not to acquire and hold crude oil, other petroleum products,
futures contracts or other derivative products for the purpose of speculating on
price changes. Nevertheless, we do have certain risks that cannot be completely
hedged such as basis risks (the risk that price relationships between delivery
points, grades of crude oil or delivery periods will change) and the risk that
transportation costs will change, and from time to time we enter into
transactions providing for purchases and sales in future periods in which the
volumes of crude oil are balanced but where either the purchase or sale prices
are not fixed at the time the transactions are entered
S-37
<PAGE> 40
into. In such cases we are subject to the risk that prices may change or that
price changes will not occur as anticipated. Our ability to maintain or increase
our gross margins and to protect our company from adverse price changes is
dependent on the success of our marketing and price risk management strategies.
We can make no assurance that our marketing and price risk management strategies
will be successful in protecting us from risks or in maintaining our gross
margins at desirable levels.
CREDIT POLICIES
Credit review and analysis are also integral to our lease purchases.
Payment for all or substantially all of the monthly lease production gathered is
sometimes made to the operator of the lease. The operator, in turn, is
responsible for the correct payment and distribution of such production proceeds
to the proper parties. In these situations, we determine whether the operator
has sufficient financial resources to make such payments and distributions and
to indemnify and defend us in the event any third party should bring a protest,
action or complaint in connection with the ultimate distribution of production
proceeds by the operator.
When we market crude oil, we determine the amount, if any, of the line of
credit to be extended to any given customer. We use a proprietary credit rating
system that analyzes credit suitability and determines the amount of credit
extended. Since typical sales transactions can involve tens of thousands of
barrels of crude oil, the risk of non-payment and non-performance by customers
is a major consideration in our business. As a result, we reserve for bad debts;
however, beginning with our first full year of operations, 1995, our loss
experience has totaled less than $1.0 million per fiscal year. We believe our
sales are made to creditworthy entities or entities with adequate credit
support, of which approximately two-thirds have investment grade credit ratings.
COMPETITION
Competitive factors in the crude oil gathering and marketing business
include price, quality of service, transportation facilities, financial strength
and knowledge of products and markets. There are a number of major structural
and economic changes impacting all of our market segments that are driving new
customer needs, changing competitor dynamics and, consequently, creating new
challenges and opportunities for responsive market participants. The decline in
domestic crude oil production has made competition among gatherers and marketers
even more intense.
We compete with major oil companies, large independent crude gatherers and
a large number of small independent gatherers. Our principal competitors in the
purchase of leasehold crude oil production are Scurlock Permian Oil Corporation
(now owned by Plains All American), Equiva (formerly Texaco Trading &
Transportation Co., Inc.), Amoco Oil Company, Genesis Energy, L.P., Sun Refining
& Marketing and TEPPCO Partners, L.P.
EMPLOYEES
Our general partner employs approximately 1,400 people. None of these
employees is represented by a labor union, and our general partner believes that
its relationships with these employees are good.
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<PAGE> 41
MANAGEMENT
As is common with publicly traded limited partnerships, we do not employ
any of the persons responsible for managing or operating our business, but
instead we reimburse our general partner for their services. Set forth below is
certain information concerning the directors and executive officers of the
general partner. All directors of the general partner are elected annually by
and may be removed by Enron Liquids Holding Corp., a wholly owned subsidiary of
Enron Corp., as the sole shareholder of the general partner. All executive
officers serve at the discretion of the board of directors of the general
partner.
<TABLE>
<CAPTION>
YEARS EMPLOYED
BY ENRON OR
NAME AGE ITS SUBSIDIARIES POSITION
- ---- --- ---------------- --------
<S> <C> <C> <C>
Edward O. Gaylord................... 67 Director and Chairman of the Board
Michael D. Burke.................... Director, Chief Executive Officer
54 1 and
President
Dana R. Gibbs....................... 40 7 Executive Vice President
Mary Ellen Coombe................... 48 18 Vice President, Human Resources and
Administration
Stephen W. Duffy.................... 46 11 Vice President and General Counsel
Douglas P. Huth..................... 52 7 Vice President, Operations
Lori L. Maddox...................... 34 2 Controller
Susan C. Ralph...................... 49 8 Treasurer
John H. Duncan...................... 70 Director
Dee S. Osborne...................... 68 Director
Daniel P. Whitty.................... 67 Director
Kenneth L. Lay...................... 56 20 Director
Stanley C. Horton................... 48 25 Director
</TABLE>
Edward O. Gaylord has served as a member of the board of directors since
January 1993. Mr. Gaylord was elected Chairman of the Board of EOTT Energy Corp.
in February 1993. He was elected in December 1995 as a member of the Audit
Committee. Prior to joining EOTT Energy Corp., Mr. Gaylord owned and managed
Gaylord & Company, a private venture capital firm, and he has owned interests in
and managed various trucking, storage and manufacturing entities in his career
of more than 30 years. Mr. Gaylord serves on the board of directors of Imperial
Holly Corporation, Seneca Foods Corporation, Federal Reserve Bank of
Dallas -- Houston Branch, and the general partner of Kinder Morgan Energy
Partners, L.P.
Michael D. Burke joined EOTT Energy Corp. as President and Chief Executive
Officer in May 1998. He was also elected to the board of directors in May 1998.
Prior to joining EOTT Energy Corp., Mr. Burke was a management consultant and
served as President and CEO of M.D. Burke & Co. Mr. Burke was previously
associated with Tesoro Petroleum Corporation as President and CEO from 1992 to
1995, and he was President and CEO of TEPPCO Partners L.P. from 1990 to 1992.
Dana R. Gibbs joined EOTT Energy Corp. as Executive Vice
President -- Commercial in April 1999. Prior to joining EOTT Energy Corp., Mr.
Gibbs was Vice President -- Global Trading with Enron Capital & Trade Resources
responsible for worldwide crude oil, petroleum products, petrochemicals, natural
gas liquids, and plastics trading. Mr. Gibbs joined Enron Capital & Trade
Resources in 1992 and held several executive positions in the trading controls,
structuring, and controller departments. From 1990 to 1992, Mr. Gibbs was the
Vice President -- Finance of MG Natural Gas Corp. and from 1982 to 1990 was with
Arthur Andersen & Co.
Mary Ellen Coombe has served as Vice President, Human Resources and
Administration since December 1992. She served as Senior Vice President, Human
Resources and Administration for Enron Liquid Fuels (including EOTT Energy
Corp.) from January 1992 until December 1992.
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<PAGE> 42
Stephen W. Duffy has served as Vice President and General Counsel since
December 1992. He served as Assistant General Counsel for EOTT Energy Corp. from
December 1990 to December 1992 and as Senior Counsel from October 1988 to
December 1990.
Douglas P. Huth has served as Vice President, Operations of EOTT Energy
Corp. since December 1992. Mr. Huth serves as Vice Chairman on the board of
directors of the National Private Truck Council. From July 1992 to December
1992, Mr. Huth served as Senior Vice President and General Manager of Enron Gas
Processing Company's Western/Bushton Business Development and Operations Region.
Lori L. Maddox has served as Controller since October 1996. Prior to
joining EOTT Energy Corp., Ms. Maddox was associated with Arthur Andersen LLP
where she became a Senior Manager and served in the Energy Group from 1982 to
September 1996.
Susan C. Ralph joined EOTT Energy Corp. in 1991 and has served as Treasurer
since 1996. Prior to joining EOTT Energy Corp., Ms. Ralph served as Vice
President of Finance for TW Oil Houston, Inc. and Vice President and Director of
Gorges Foodservices, Inc. Prior to 1979, Ms. Ralph held various positions in the
commercial banking industry.
John H. Duncan was elected to the EOTT Energy Corp. board of directors in
January 1993 and appointed to the Compensation Committee in February 1993. Since
1990, Mr. Duncan's principal occupation has been investments. Mr. Duncan is also
a director of Enron Corp. and Chase of Texas, N. A.
Dee S. Osborne was elected to the EOTT Energy Corp. board of directors and
appointed to the Audit Committee and Compensation Committee in February 1993.
Mr. Osborne serves as President of Crest Investment Company, Chairman of Digital
and Wireless Communications, L.L.C. and Vice Chairman of Jacintoport Terminal
Company. He is a director of Ocean Energy, Inc. and Trustee of Scott & White
Memorial Hospital.
Daniel P. Whitty was elected to the EOTT Energy Corp. board of directors in
January 1993 and appointed to the Audit Committee and the Compensation Committee
in February 1993. Mr. Whitty is an independent financial consultant and serves
as the Chairman of the Audit Committee of Northern Border Partners, L.P. and as
a director of Enron Equity Corp. He has also served as a director of Methodist
Retirement Communities, Inc. and a Trustee of the Methodist Retirement Trust.
Until his retirement in 1988, Mr. Whitty served 35 years with Arthur Andersen
LLP and was elected to its worldwide partnership in 1962.
Kenneth L. Lay was elected to the EOTT Energy Corp. board of directors in
January 1993 and for over five years has served as Chairman of the Board and
Chief Executive Officer of Enron Corp. Mr. Lay is also a director of Enron
Corp., Trust Company of the West, Eli Lilly and Company, and Compaq Computer
Corporation.
Stanley C. Horton was elected to the EOTT Energy Corp. Board of Directors
in May 1998. Mr. Horton is the Chairman and Chief Executive Officer of Enron Gas
Pipeline Group and has held that position since January 1997. From February 1996
to January 1997, he was Co-Chairman and Chief Operating Officer of Enron
Operations Corp. From June 1993 to February 1996, he was President and Chief
Operating Officer of Enron Pipeline and Liquids Group. Mr. Horton was appointed
to the Partnership Policy Committee of Northern Border Partners, L.P. in
December 1998. Mr. Horton serves on the Board of Directors of the Interstate
Natural Gas Association. He also serves as Second Vice Chairman and Treasurer of
Gas Industry Standards Board and as Vice Chairman of Gas Research Institute.
S-40
<PAGE> 43
PRINCIPAL UNITHOLDERS
Our general partner knows of no person who beneficially owns in excess of
five percent of our common units except as set forth in the table below.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP PERCENT PRO FORMA
OF BENEFICIAL OWNER TITLE OF CLASS AS OF JUNE 30, 1999 OF CLASS PERCENT OF CLASS(1)
- ------------------- -------------- ----------------------- -------- -------------------
<S> <C> <C> <C> <C>
Enron Corp........................ Common Units 3,276,811 21.88% 17.74%
1400 Smith Street Subordinated Units(2) 7,000,000 77.78 77.78
Houston, Texas 77002 General Partner Interest(3) 1 100.0 100.0
Koch Pipeline Company............. Common Units 1,700,000 11.35 9.20
4111 East 37th Street N. Subordinated Units 2,000,000 22.22 22.22
Wichita, Kansas 67220
</TABLE>
- ---------------
(1) Pro forma percent of class represents the percent of class as of June 30,
1999 adjusted to give effect to the sale of 3,500,000 common units (assuming
the over-allotment option is not exercised).
(2) Held by our general partner, an indirect subsidiary of Enron Corp.
(3) The reporting of the general partner interest is not a concession that the
interest represents a security.
S-41
<PAGE> 44
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"issuers" refers only to EOTT and EOTT Finance and not to any of their
subsidiaries and any reference to "EOTT" or "EOTT Finance" does not include any
of their respective subsidiaries.
The issuers will issue the notes under an indenture dated as of October 1,
1999 among the issuers, The Bank of New York, as trustee, and the Subsidiary
Guarantors. In this description, the word "indenture" refers to the indenture as
supplemented by the first supplemental indenture. The terms of the notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture. It does not restate that agreement in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of these notes. Copies of the indenture are available upon request from
EOTT.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
The Notes
The notes are general unsecured obligations of the issuers and are
unconditionally guaranteed by the Subsidiary Guarantors.
The Guarantees
As of the date of the indenture, these notes will be guaranteed by all the
subsidiaries of EOTT (other than EOTT Finance, the co-issuer of the notes):
-- EOTT Energy Operating Limited Partnership
-- EOTT Energy Pipeline Limited Partnership
-- EOTT Energy Canada Limited Partnership
Each Guarantee by a Subsidiary Guarantor of the notes is a general
unsecured obligation and is equal in right of payment to all existing and future
Senior Debt of that Subsidiary Guarantor.
As of the date of the indenture, all of our Subsidiaries (other than EOTT
Finance) will be "Restricted Subsidiaries." Also, under the circumstances
described below under the subheading "-- Certain Covenants -- Designation of
Restricted and Unrestricted Subsidiaries," we will be permitted to designate
certain of our Subsidiaries as "Unrestricted Subsidiaries." Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants in the
indenture. Unrestricted Subsidiaries will not be required to guarantee the
notes. The rights of EOTT to receive assets from any Subsidiary that is not a
Subsidiary Guarantor that are attributable to EOTT's Equity Interests therein
(and thus the ability of the holders of the notes to benefit indirectly from
such assets) are subject to the claims of all existing and future third party
indebtedness and liabilities (including trade debt) of such Subsidiary.
PRINCIPAL, MATURITY AND INTEREST
The issuers will issue notes initially with a maximum aggregate principal
amount of $235 million. The issuers will issue notes in denominations of $1,000
and integral multiples of $1,000. The notes will mature on October 1, 2009.
Subject to our compliance with the covenant described under the subheading
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Equity", we are permitted to issue additional notes (the "Additional Notes")
under the indenture for a total (including this issue of notes) of up to $500
million in principal amount under the indenture. Any such Additional Notes that
are actually issued will be treated as issued and outstanding notes (and as the
same class as the
S-42
<PAGE> 45
initial notes) for all purposes of the indenture and this "Description of Notes"
unless the context indicates otherwise.
Interest on the notes will accrue at the rate of 11% per annum and will be
payable semi-annually in arrears on April 1 and October 1, commencing on April
1, 2000. The issuers will make each interest payment to the holders of record of
the notes on the immediately preceding March 15 and September 15.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder has given wire transfer instructions to the issuers, the
issuers will make all payments of principal of, premium, if any, and interest on
the notes in accordance with those instructions. All other payments on the notes
will be made at the office or agency of the Paying Agent and Registrar within
the City and State of New York unless the issuers elect to make interest
payments by check mailed to the holders at their addresses set forth in the
register of holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as Paying Agent and Registrar. The issuers
may change the Paying Agent or Registrar without prior notice to the holders of
the notes, and the issuers or any of their Subsidiaries may act as Paying Agent
or Registrar.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture.
The Registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the issuers may
require a holder to pay any taxes and fees required by law or permitted by the
indenture. The issuers are not required to transfer or exchange any note
selected for redemption or repurchase (except in the case of a note to be
redeemed or repurchased in part, the portion not to be redeemed or repurchased).
Also, the issuers are not required to transfer or exchange any note for a period
of 15 days before a selection of notes to be redeemed or between a record date
and the next succeeding interest payment date.
The registered holder of a note will be treated as the owner of it for all
purposes.
THE GUARANTEES
The Subsidiary Guarantors will jointly and severally guarantee the issuers'
obligations under the notes. The obligations of each Subsidiary Guarantor under
its Guarantee will be limited as necessary to prevent that Guarantee from
constituting a fraudulent conveyance under applicable law. See "Risk
Factors -- A court may use fraudulent conveyance considerations to avoid or
subordinate the subsidiary guarantees." beginning on page S-12.
A Subsidiary Guarantor may not consolidate with or merge with or into
(whether or not such Subsidiary Guarantor is the surviving Person), another
Person unless:
(1) immediately after giving effect to that transaction, no Default
exists; and
(2) the Person (if not otherwise a Subsidiary Guarantor) formed by or
surviving any such consolidation or merger assumes all the obligations of
that Subsidiary Guarantor pursuant to a supplemental indenture satisfactory
to the trustee, except as provided in the next paragraph.
Any Subsidiary Guarantor, however, may be merged or consolidated with or into
any one or more Wholly Owned Restricted Subsidiaries or EOTT.
S-43
<PAGE> 46
The Guarantee of a Subsidiary Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Subsidiary Guarantor (including by
way of merger, consolidation or otherwise), if EOTT applies the Net
Proceeds of that sale or other disposition in accordance with the
provisions of the indenture applicable to Asset Sales; or
(2) in connection with any sale or other disposition of all of the
Equity Interests of that Subsidiary Guarantor, if EOTT applies the Net
Proceeds of that sale in accordance with the provisions of the indenture
applicable to Asset Sales; or
(3) if EOTT designates that Subsidiary as an Unrestricted Subsidiary
in accordance with the applicable provisions of the indenture.
See "-- Repurchase at the Option of Holders -- Asset Sales" beginning on
page S-46.
OPTIONAL REDEMPTION
Prior to October 1, 2002, the issuers may on any one or more occasion
redeem up to 35% of the aggregate principal amount of notes issued under the
indenture at a redemption price of 111.0 % of the principal amount thereof, plus
accrued and unpaid interest to the redemption date, with the net cash proceeds
of one or more Equity Offerings. However, at least 65% of the aggregate
principal amount of notes (including any Additional Notes) originally issued
under the indenture must remain outstanding immediately after such redemption
(excluding notes held by EOTT, EOTT Finance and any Subsidiaries of EOTT). Any
redemption must occur within 90 days of the date of the closing of such Equity
Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at the issuers' option prior to October 1, 2004.
On or after October 1, 2004, the issuers may redeem all or a part of the
notes on not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest thereon, if any, to the applicable redemption date,
if redeemed during the 12-month period beginning on October 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004...................................................... 105.500%
2005...................................................... 103.667%
2006...................................................... 101.833%
2007 and thereafter....................................... 100.000%
</TABLE>
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
- if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed; or
- if the notes are not listed or there are no such requirements, on a pro
rata basis, by lot or by such method as the trustee shall deem fair and
appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the holder thereof upon
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<PAGE> 47
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption unless the issuers
default in making such redemption payment.
MANDATORY REDEMPTION
We are not required to make any mandatory redemption or sinking fund
payments with respect to the notes. However, under certain circumstances, we may
be required to offer to purchase the notes as described under the subheadings
"-- Repurchase at the Option of Holders -- Change of Control" and "-- Asset
Sales".
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs, each holder of notes will have the right to
require the issuers to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that holder's notes. Within 30 days following any
Change of Control, the issuers will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
(the "Change of Control Offer") to repurchase notes on the Change of Control
Payment Date specified in such notice for cash equal to 101% of the aggregate
principal amount of notes repurchased plus accrued and unpaid interest thereon,
if any, to the date of purchase (the "Change of Control Payment"), pursuant to
the procedures required by the indenture and described in such notice. The
issuers will comply with the requirements of Rule 14e-1 under the Securities
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control.
On the Change of Control Payment Date, the issuers will, to the extent
lawful:
- accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
- deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all notes or portions thereof so tendered; and
- deliver or cause to be delivered to the trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of notes or portions thereof being purchased by EOTT.
The Paying Agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for such notes, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each such new note will be in a principal
amount of $1,000 or an integral multiple thereof. The issuers will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The provisions described above that require the issuers to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holder of the notes to require that the
issuers repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
Any future credit agreements or other agreements to which EOTT becomes a
party may contain restrictions and provisions prohibiting EOTT from purchasing
any notes, and may also provide that certain change of control events with
respect to EOTT would constitute a default under those agreements. Moreover, the
exercise by the holders of their right to require the issuers to repurchase the
notes could cause a default under such agreements, even if the Change of Control
does not, due to the financial effect
S-45
<PAGE> 48
of such a repurchase on EOTT. If a Change of Control occurs at a time when EOTT
is prohibited from purchasing notes, EOTT could seek consent to the purchase of
notes or could attempt to refinance the borrowings that contain such
prohibition. If EOTT does not obtain a consent or repay such borrowings, EOTT
will remain prohibited from purchasing notes. In that case, EOTT's failure to
purchase tendered notes would constitute an Event of Default under the indenture
which would, in turn, in all likelihood constitute a default under such other
agreements. Finally, the issuers' ability to pay cash to the holders upon a
repurchase may be limited by EOTT's and its subsidiaries' then existing
financial resources. We cannot assure you that sufficient funds will be
available when necessary to make any required repurchases.
Notwithstanding the preceding paragraphs of this covenant, the issuers will
not be required to make a Change of Control Offer upon a Change of Control and a
holder will not have the right to require the issuers to repurchase any notes
pursuant to a Change of Control Offer if a third party makes an offer to
purchase the notes in the manner, at the times and otherwise in substantial
compliance with the requirements set forth in the indenture applicable to a
Change of Control Offer and purchases all notes validly tendered and not
withdrawn under such purchase offer.
The definition of Change of Control includes a phrase relating to the sale,
transfer, lease, conveyance or other disposition of "all or substantially all"
of the assets of EOTT and its Subsidiaries taken as a whole. Although there is a
limited body of case law interpreting the phrase "substantially all," there is
no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of notes to require EOTT to repurchase such
notes as a result of a sale, transfer, lease, conveyance or other disposition of
less than all of the assets of EOTT and its Restricted Subsidiaries taken as a
whole to another Person or group may be uncertain.
Asset Sales
The issuers will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless:
- EOTT (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
- such fair market value is determined by (a) an executive officer if the
value is less than $5.0 million, as evidenced by an Officers' Certificate
delivered to the trustee or (b) the Board of Directors of the General
Partner if the value is $5.0 million or more, as evidenced by a
resolution of such Board of Directors of the General Partner delivered to
the trustee; and
- at least 75% of the consideration therefor received by EOTT or the
Restricted Subsidiary is in the form of cash, Cash Equivalents, a
controlling interest in a Permitted Business, long-term assets used or
useful in a Permitted Business, or any combination thereof. For purposes
of this provision, each of the following shall be deemed to be cash:
-- any liabilities (as shown on EOTT's or the Restricted Subsidiary's most
recent balance sheet) of EOTT or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms
subordinated to the notes or any Guarantee) that are assumed by the
transferee of any such assets pursuant to a customary novation
agreement that releases EOTT or the Restricted Subsidiary from further
liability; and
-- any securities, notes or other obligations received by EOTT or the
Restricted Subsidiary from such transferee that are converted by such
issuer or EOTT or the Restricted Subsidiary into cash within 45 days
after the Asset Sale (subject to ordinary settlement periods) to the
extent of the cash received in that conversion.
S-46
<PAGE> 49
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
EOTT or a Restricted Subsidiary may apply such Net Proceeds at its option:
- to repay Senior Debt of EOTT and/or its Restricted Subsidiaries (or to
make an offer to repurchase or redeem Senior Debt, provided that such
repurchase or redemption closes within 45 days after the end of such
360-day period) with a permanent reduction in availability for any
revolving credit Indebtedness;
- to make a capital expenditure in a Permitted Business;
- to acquire other long-term assets that are used or useful in a Permitted
Business; or
- to acquire at least 51% of the Equity Interests in a Permitted Business.
Pending the final application of any such Net Proceeds, we may temporarily
reduce revolving credit borrowings or otherwise invest such Net Proceeds in any
manner that is not prohibited by the indenture and we will reserve the amount of
such Net Proceeds in calculating our Available Cash.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the second preceding paragraph will constitute Excess Proceeds. When
the aggregate amount of Excess Proceeds exceeds $10.0 million, the issuers will
make a pro rata offer (an "Asset Sale Offer") to all holders of notes and all
holders of other Indebtedness that is pari passu with the notes containing
provisions similar to those set forth in the indenture with respect to offers to
purchase or redeem with the proceeds of sales of assets to purchase the maximum
principal amount of notes and such other pari passu Indebtedness that may be
purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer
will be equal to 100% of principal amount plus accrued and unpaid interest, if
any, and premium, if any, to the date of purchase, and will be payable in cash.
If any Excess Proceeds remain after consummation of an Asset Sale Offer, EOTT
may use such Excess Proceeds for any purpose not otherwise prohibited by the
indenture. If the aggregate principal amount of notes and such other pari passu
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds allocated for repurchases of notes pursuant to the Asset Sale Offer for
notes, the trustee shall select the notes and such other pari passu Indebtedness
to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer,
the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The issuers will not, and will not permit any of their Restricted
Subsidiaries to, directly or indirectly:
- declare or pay any dividend or make any other payment or distribution on
account of EOTT's or any Restricted Subsidiary's Equity Interests
(including, without limitation, any payment in connection with any merger
or consolidation involving EOTT or any Restricted Subsidiary) or to the
direct or indirect holders of EOTT's or any Restricted Subsidiary's
Equity Interests in their capacity as such (other than distributions or
dividends payable in Equity Interests (other than Disqualified Equity) of
EOTT and other than distributions or dividends payable to EOTT or to a
Wholly Owned Restricted Subsidiary);
- purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving EOTT or EOTT Finance) any Equity Interests of EOTT or any of
its Restricted Subsidiaries or any Affiliate of EOTT (other than any such
Equity Interests owned by EOTT or by any of its Wholly Owned Restricted
Subsidiaries);
- make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value, any Indebtedness that is
subordinated to the notes or the Guarantees, except (a) a payment of
principal at the Stated Maturity thereof and (b) any such Indebtedness of
EOTT or a Restricted Subsidiary, which Indebtedness is owned by EOTT or a
Wholly Owned Restricted Subsidiary; or
- make any Investment other than a Permitted Investment
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(all such payments and other actions set forth in the clauses above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment, no Default shall have occurred
and be continuing or would occur as a consequence thereof and (unless amended as
provided in the proviso to the definition of "Change of Control"):
(I) if the Fixed Charge Coverage Ratio for EOTT's four most recent
fiscal quarters for which internal financial statements are available is at
least 2.0 to 1.0 if such Restricted Payment is made prior to December 31,
2001, or 2.25 to 1.0 if such Restricted Payment is made thereafter, such
Restricted Payment, together with the aggregate amount of all other
Restricted Payments declared or made by EOTT and its Restricted
Subsidiaries during the quarter in which such Restricted Payment is made,
is less than or equal to the sum, without duplication, of (a) Available
Cash constituting Cash from Operations for the immediately preceding
quarter and (b) the aggregate net cash proceeds of any (i) substantially
concurrent capital contribution to EOTT from any Person (other than a
Restricted Subsidiary of EOTT) made after the Issue Date, (ii)
substantially concurrent issuance and sale made after the Issue Date of
Equity Interests (other than Disqualified Equity) of EOTT, (iii) issuance
or sale made after the Issue Date of convertible or exchangeable
Disqualified Equity or convertible or exchangeable debt securities of EOTT
that have been converted into or exchanged for such Equity Interests
substantially concurrently with a Restricted Payment from such proceeds and
(iv) to the extent that any Restricted Investment that was made after the
Issue Date is sold for cash or Cash Equivalents or otherwise liquidated or
repaid for cash or Cash Equivalents, the lesser of the refund of capital or
similar payment made in cash or Cash Equivalents with respect to such
Restricted Investment (less the cost of such disposition, if any) and the
initial amount of such Restricted Investment (other than to a Restricted
Subsidiary of EOTT), to the extent that, in the case of (b), such amounts
have not been included in (or have been fully reserved in calculating)
Available Cash constituting Cash from Operations for any period commencing
on or after the Issue Date (item (b) being referred to as "Incremental
Funds"), less (c) the aggregate amount of Incremental Funds previously
expended pursuant to this clause or clause (II) below; or
(II) if the Fixed Charge Coverage Ratio for EOTT's four most recent
fiscal quarters for which internal financial statements are available is
less than 2.0 to 1.0 if such Restricted Payment is made prior to December
31, 2001, or 2.25 to 1.0 if such Restricted Payment is made thereafter, but
in each case greater than 1.25 to 1.0, such Restricted Payment, which for
this clause (II) shall consist only of a distribution in respect of EOTT's
common units (and a concurrent pro rata distribution to the General Partner
with respect to its general partnership interest), together with the
aggregate amount of all other distributions in respect of EOTT's common
units (and concurrent pro rata distributions to the General Partner) made
by EOTT during the quarter in which such distribution is made, is less than
the sum, without duplication, of (a) $36.0 million ($35.0 million in
respect of EOTT's common units and $1.0 million in respect of the General
Partner's general partnership interest) less the aggregate amount of all
Restricted Payments declared or made by EOTT pursuant to this clause (II)
during the period ending on the date of such Restricted Payment and
beginning on the Issue Date, plus (b) Incremental Funds to the extent not
previously expended pursuant to this clause or clause (I) above; or
(III) if the Fixed Charge Coverage Ratio for EOTT's four most recent
fiscal quarters for which internal financial statements are available is
not greater than 1.25 to 1.0, such Restricted Payments are distributions to
holders of EOTT's common units, but only to the extent of cash proceeds
received from Enron for APIs in the same quarter as such Restricted Payment
is made and provided that such cash proceeds shall not be counted as
Incremental Funds.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment by EOTT or any Restricted Subsidiary of any
distribution or dividend within 60 days after the declaration thereof, if
at said date of declaration such payment would have complied with the
provisions of the indenture;
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(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness of EOTT that is subordinated to the notes
or any Equity Interests of EOTT in exchange for, or out of the net cash
proceeds of, a substantially concurrent (a) capital contribution to EOTT or
such Restricted Subsidiary from any Person (other than EOTT or another
Restricted Subsidiary) or (b) sale (other than to a Restricted Subsidiary
of EOTT) of Equity Interests (other than Disqualified Equity) of EOTT;
provided, however, that the amount of any net cash proceeds that are
utilized for any such redemption, repurchase or other acquisition or
retirement shall be excluded or deducted from (or reserved in calculating)
the calculation of Available Cash and Incremental Funds;
(3) the defeasance, redemption, repurchase or other acquisition of
Indebtedness of EOTT that is subordinated to the notes with the net cash
proceeds from an Incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any distribution or dividend by a Restricted
Subsidiary to EOTT or to the holders of such Restricted Subsidiary's Equity
Interests (other than Disqualified Equity) so long as EOTT or any
Restricted Subsidiary holding such Equity Interests receives its pro rata
share of such dividend or distribution in accordance with its Equity
Interests; or
(5) the purchase, redemption or other acquisition or retirement for
value of any Equity Interests of EOTT or any Restricted Subsidiary of EOTT
held by any member of the General Partner's or EOTT's or any Restricted
Subsidiary's management pursuant to any management equity subscription
agreement or stock option agreement or to satisfy obligations under any
Equity Interests appreciation rights or option plan or similar arrangement;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $2.0 million in any
12-month period.
In computing the amount of Restricted Payments previously made for purposes of
the immediately preceding paragraph, Restricted Payments made under clauses (1)
(but only if the declaration of such dividend or other distribution has not been
counted in a prior period) and, to the extent of amounts paid to holders other
than EOTT or a Restricted Subsidiary, (4) and (5) shall be included, and
Restricted Payments made under clauses (2) and (3) and, except to the extent
noted above, (4) shall not be included. The amount of all Restricted Payments
(other than cash) shall be the fair market value on the date of the Restricted
Payment of the asset(s) or securities proposed to be transferred or issued by
EOTT or such Restricted Subsidiary, as the case may be, pursuant to the
Restricted Payment. The fair market value of any assets or securities that are
required to be valued by this covenant shall be determined by the Board of
Directors of the General Partner whose resolution with respect thereto shall be
delivered to the trustee; provided, however, that the fair market value of any
assets or securities that are required to be valued by this covenant involving
aggregate consideration in excess of $10.0 million shall be determined by a
written appraisal from a nationally recognized appraiser showing the assets have
a fair market value not less than the consideration to be paid (provided that if
the fair market value determined by such appraiser is a range of values or
otherwise inexact, the Board of Directors of the General Partner shall determine
the exact fair market value, provided that it shall be within the range so
determined by the appraiser). For the purpose of the two immediately preceding
paragraphs one transaction is "substantially concurrent" with another
transaction if the first transaction occurred on or after the 270th day
immediately preceding the last day of the fiscal quarter in which the second
transaction occurs.
Incurrence of Indebtedness and Issuance of Disqualified Equity
EOTT will not, and will not permit any of its Restricted Subsidiaries to,
Incur any Indebtedness (including Acquired Debt), and EOTT will not issue any
Disqualified Equity and will not permit any of its Restricted Subsidiaries to
issue any Disqualified Equity; provided, however, that EOTT or any Restricted
Subsidiary may Incur Indebtedness (including Acquired Debt), and EOTT or any
Restricted Subsidiaries may issue Disqualified Equity, if the Fixed Charge
Coverage Ratio for EOTT's four most recent fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is Incurred or such Disqualified Equity is issued would
have been at least 2.0
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to 1.0 if such Indebtedness is Incurred or such Disqualified Equity is issued
prior to December 31, 2001, or 2.25 to 1.0 if such Indebtedness is Incurred or
such Disqualified Equity is issued thereafter, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been Incurred, or the Disqualified Equity had been
issued, as the case may be, at the beginning of such four-quarter period.
So long as no Default shall have occurred and be continuing or would be
caused thereby, the first paragraph of this covenant will not prohibit the
Incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the Incurrence by EOTT and any Restricted Subsidiary of additional
Indebtedness under Credit Facilities and the guarantees thereof; provided
that the aggregate principal amount of all Indebtedness of EOTT and the
Restricted Subsidiaries Incurred under this clause outstanding under all
Credit Facilities after giving effect to such Incurrence does not exceed
the greater of (A) $275.0 million less the aggregate amount of all
repayments of Indebtedness under Credit Facilities that have been made by
EOTT and its Restricted Subsidiaries in respect of Asset Sales to the
extent such repayments constitute a permanent reduction of commitments
under such Credit Facilities and (B) the Consolidated Borrowing Base
Amount;
(2) the Incurrence by EOTT and its Restricted Subsidiaries of Existing
Indebtedness;
(3) the Incurrence by EOTT, and the Guarantees thereof by the
Subsidiary Guarantors, of $235.0 million in aggregate principal amount of
Indebtedness represented by the notes;
(4) the Incurrence by EOTT or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace, Indebtedness (other than
intercompany Indebtedness) Incurred pursuant to the first paragraph of this
covenant and clause (2) above;
(5) Indebtedness owed to and held by EOTT or a Restricted Subsidiary;
provided, however, that (A) any subsequent issuance or transfer of any
Equity Interests which results in any such Restricted Subsidiary ceasing to
be a Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to EOTT or a Restricted Subsidiary) shall be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the obligor
thereon and (B) if EOTT is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all obligations with respect to the notes;
(6) the Incurrence by EOTT or any of its Restricted Subsidiaries of
obligations under (a) Interest Rate Agreements that are Incurred for the
purpose of fixing or hedging interest rate risk with respect to any
floating rate Indebtedness that is permitted by the terms of the indenture
to be Incurred and (b) Currency Agreements that are Incurred for the
purpose of hedging currency exchange rate risks with respect to any
Indebtedness that is permitted by the terms of the indenture to be
Incurred, in either case that do not increase the Indebtedness of EOTT and
its Restricted Subsidiaries outstanding at any time other than as a result
of fluctuations in foreign currency exchange rates or interest rates or by
reason of fees, indemnities and compensation payable thereunder;
(7) the Incurrence by EOTT's Unrestricted Subsidiaries of Non-Recourse
Debt; provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed
to constitute an Incurrence of Indebtedness by a Restricted Subsidiary of
EOTT that was not permitted by this clause (7); or
(8) the Incurrence by EOTT or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding not to exceed $20.0 million.
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For purposes of determining compliance with this "-- Incurrence of
Indebtedness and Issuance of Disqualified Equity" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (8) above, or is
entitled to be Incurred pursuant to the first paragraph of this covenant, EOTT
will be permitted to classify (or later reclassify in whole or in part, in its
sole discretion) such item of Indebtedness in any manner that complies with this
covenant. An item of Indebtedness may be divided and classified (or later
reclassified in whole or in part, in EOTT's sole discretion) in one or more of
the types of Permitted Indebtedness.
Sale and Lease-Back Transactions
EOTT will not, and will not permit any of its Restricted Subsidiaries to,
enter into any Sale and Lease-Back Transaction; provided that EOTT or any
Restricted Subsidiary may enter into a Sale and Lease-Back Transaction if:
(1) EOTT or that Restricted Subsidiary, as applicable, could have (a)
Incurred Indebtedness in an amount equal to the Attributable Debt relating
to such Sale and Lease-Back Transaction under the Fixed Charge Coverage
Ratio test in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Disqualified Equity"
and (b) Incurred a Lien to secure such Indebtedness pursuant to the
covenant described below under the caption "-- Liens";
(2) the gross cash proceeds of that Sale and Lease-Back Transaction
are at least equal to the fair market value, as determined in good faith by
the Board of Directors of the General Partner as set forth in an Officers'
Certificate delivered to the trustee, of the property that is the subject
of such Sale and Lease-Back Transaction; and
(3) the transfer of assets in that Sale and Lease-Back Transaction is
permitted by, and EOTT applies the proceeds of such transaction in
compliance with, the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales."
Liens
EOTT will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, Incur, assume or suffer to exist any Lien of any
kind securing Indebtedness, Attributable Debt or trade payables on any asset now
owned or hereafter acquired (including Equity Interests of a Restricted
Subsidiary), except Permitted Liens, without making effective provision whereby
all Obligations due under the notes and indenture or any Guarantee, as
applicable, will be secured by a Lien equally and ratably with any and all
Obligations thereby secured for so long as any such Obligations shall be so
secured.
Dividend and Other Payment Restrictions Affecting Subsidiaries
EOTT will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Equity
Interests to EOTT or to any of EOTT's Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured by, its
profits, or pay any indebtedness owed to EOTT or any of the other
Restricted Subsidiaries;
(2) make loans or advances to or make other investments in EOTT or any
of its Restricted Subsidiaries; or
(3) transfer any of its properties or assets to EOTT or to any of the
other Restricted Subsidiaries (other than rights of first refusal granted
in the ordinary course of business).
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However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) any Credit Facility;
(2) any instrument governing Indebtedness or Equity Interests of a
Person acquired by EOTT or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness was
Incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than such Person, or the property
or assets of such Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the indenture
to be Incurred;
(3) customary non-assignment provisions in licenses, easements and
leases entered into in the ordinary course of business and consistent with
past practices;
(4) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (3) of the preceding paragraph;
(5) any agreement for the sale or other disposition of a Restricted
Subsidiary that contains any one or more of the restrictions described in
clauses (1) through (3) of the preceding paragraph by such Restricted
Subsidiary pending its sale or other disposition, provided that such sale
or disposition is consummated, or such restrictions are canceled or
terminated or lapse, within 90 days;
(6) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(7) Liens securing Indebtedness otherwise permitted to be issued
pursuant to the provisions of the covenant described above under the
caption "-- Liens" that limit the right of EOTT or any of its Restricted
Subsidiaries to dispose of the assets subject to such Lien;
(8) any agreement or instrument relating to any property or assets
acquired after the Issue Date, so long as such encumbrance or restriction
relates only to the property or assets so acquired and is not and was not
created in anticipation of such acquisitions; or
(9) any agreement or instrument relating to any Acquired Debt of any
Restricted Subsidiary at the date on which such Restricted Subsidiary was
acquired by EOTT or any of its Restricted Subsidiaries (other than
Indebtedness Incurred in anticipation of such acquisition and provided such
encumbrances or restrictions extend only to property of such acquired
Restricted Subsidiary).
Limitation on the Sale or Issuance of Equity Interests of Restricted
Subsidiaries
EOTT (1) will not, and will not permit any Restricted Subsidiary to, sell,
lease, transfer or otherwise dispose of any Equity Interest of any Restricted
Subsidiary to any Person (other than to EOTT or a Wholly Owned Restricted
Subsidiary or to the general partnership of such Restricted Subsidiary to
preserve such general partner's proportionate interest), and (2) will not permit
any Restricted Subsidiary to issue any of its Equity Interests (other than, if
necessary, shares of its Equity Interests constituting directors' or other
legally required qualifying shares) to any Person (other than to EOTT or a
Wholly Owned Restricted Subsidiary), unless (A) immediately after giving effect
to such issuance, sale or other disposition, neither EOTT nor any of its
Subsidiaries own any Equity Interest of such Restricted Subsidiary; or (B)
immediately after giving effect to such issuance, sale or other disposition,
such Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after giving effect thereto would
have been permitted to be made under the covenant described under "-- Restricted
Payments" if made on the date of such issuance, sale or other disposition.
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Merger, Consolidation or Sale of Assets
Neither of the issuers may, directly or indirectly: (1) consolidate or
merge with or into another Person (whether or not such issuer is the survivor);
or (2) sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(1) either: (a) such issuer is the surviving entity of such
transaction; or (b) the Person formed by or surviving any such
consolidation or merger (if other than such issuer) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have
been made is an entity organized or existing under the laws of the United
States, any state thereof or the District of Columbia, provided that EOTT
Finance may not consolidate or merge with or into any entity other than a
corporation satisfying such requirement for so long as EOTT remains a
partnership;
(2) the Person formed by or surviving any such consolidation or merger
(if other than such issuer) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
assumes all the obligations of such issuer under the notes and the
indenture pursuant to agreements reasonably satisfactory to the trustee;
(3) immediately after giving pro forma effect to such transaction, no
Default exists;
(4) immediately after giving pro forma effect to such transaction,
such issuer or the Person formed by or surviving any such consolidation or
merger (if other than such issuer), except in the case of such a
transaction involving EOTT Finance, will, on the date of such transaction
after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
four-quarter period, be permitted to Incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of Disqualified Equity;"
(5) such issuer has delivered to the trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and, if a supplemental indenture is required, such supplemental
indenture comply with the indenture and all conditions precedent therein
relating to such transaction have been satisfied.
Notwithstanding the foregoing paragraph, EOTT is permitted to reorganize as
any other form of entity in accordance with the procedures established in the
indenture; provided that
(1) the reorganization involves the conversion (by merger, sale,
contribution or exchange of assets or otherwise) of EOTT into a form of
entity other than a limited partnership formed under Delaware law;
(2) the entity so formed by or resulting from such reorganization is
an entity organized or existing under the laws of the United States, any
state thereof or the District of Columbia;
(3) the entity so formed by or resulting from such reorganization
assumes all the obligations of EOTT under the notes and the indenture
pursuant to agreements reasonably satisfactory to the trustee;
(4) immediately after such reorganization no Default exists;
(5) such reorganization is not materially adverse to the holders of
the notes (for purposes of this clause (5) a reorganization shall not be
considered materially adverse to the holders of the notes (a) solely
because the successor or survivor of such reorganization (i) is subject to
federal or state income taxation as an entity or (ii) is considered to be
an "includible corporation" of an affiliated group of corporations within
the meaning of Section 1504(b)(i) of the Code or any similar state or local
law or (b) because there is a Rating Decline due solely to factors other
than the reorganization); and
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(6) such issuer has delivered to the trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such reorganization and, if a
supplemental indenture is required, such supplemental indenture comply with
the indenture and all conditions precedent therein relating to such
transaction have been satisfied.
The "Merger, Consolidation or Sale of Assets" covenant described in the
first paragraph of this section will not apply to a merger or consolidation, or
any sale, assignment, transfer, lease, conveyance or other disposition of
assets, between or among EOTT and any of its Wholly Owned Restricted
Subsidiaries.
No Subsidiary Guarantor may consolidate with or merge with or into (whether
or not such Subsidiary Guarantor is the surviving Person) another Person,
whether or not affiliated with such Subsidiary Guarantor, other than EOTT or a
Wholly Owned Restricted Subsidiary, unless (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation or
merger (if other than such Subsidiary Guarantor) shall be an entity organized or
existing under the laws of the United States, any state thereof or the District
of Columbia or the laws of the jurisdiction under which such Subsidiary
Guarantor was organized and assumes all the obligations of such Subsidiary
Guarantor pursuant to the Subsidiary Guarantor's Guarantee of the notes and the
indenture pursuant to a supplemental indenture, (ii) immediately after giving
effect to such transaction, no Default exists and (iii) EOTT has delivered to
the trustee an Officers' Certificate and an Opinion of Counsel, each stating
such consolidation or merger and, if a supplemental indenture is required, such
supplemental indenture comply with the indenture and all conditions precedent
therein relating to such transaction have been satisfied.
In the event of a sale or other disposition of all the assets of any
Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or
other disposition of all the Equity Interests of any Subsidiary Guarantor, then
such Subsidiary Guarantor (in the event of a sale or other disposition, by way
of such a merger, consolidation or otherwise, of all of the Equity Interests of
such Subsidiary Guarantor) or the Person acquiring the property (in the event of
a sale or other disposition of all the assets of such Subsidiary Guarantor) will
be released and relieved of any obligations under its Guarantee; provided that
the transaction complies with the provisions set forth under "-- Repurchase at
the Option of Holders -- Asset Sales."
The Person formed by or surviving any such consolidation or merger of an
issuer or a Subsidiary Guarantor (if other than such issuer or Subsidiary
Guarantor, as the case may be) or to which any such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made, will succeed to,
and be substituted for, and may exercise every right and power of such issuer
under the indenture (or of such Subsidiary Guarantor under the Subsidiary
Guarantee, as the case may be), but the predecessor company in the case of:
(a) a sale, assignment, transfer, conveyance or other disposition
(unless such sale, assignment, transfer, conveyance or other disposition is
of all the assets of the issuer (or the Subsidiary Guarantor, as the case
may be) as an entirety), or
(b) a lease,
will not be released from any of the obligations or covenants under the
indenture (or the Subsidiary Guarantee, as the case may be), including with
respect to the payment of the notes.
Transactions with Affiliates
EOTT will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement,
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understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to EOTT or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable arm's length transaction by EOTT or such
Restricted Subsidiary with an unrelated Person; and
(2) EOTT delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, a resolution of the Board of Directors of the General
Partner set forth in the Officers' Certificate certifying that such
Affiliate Transaction complies with this covenant and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors of the General Partner;
and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions, involving aggregate consideration in excess of
$15.0 million, either (I) an opinion as to the fairness to EOTT of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing
recognized as an expert in rendering fairness opinions on transactions
such as those proposed, (II) with respect to assets classified, in
accordance with GAAP, as property, plant and equipment on EOTT's or such
Restricted Subsidiary's balance sheet, a written appraisal from a
nationally recognized appraiser showing that the assets have a fair
market value not less than the consideration to be paid (provided that
if the fair market value determined by such appraiser is a range of
values or otherwise inexact, the Board of Directors of the General
Partner shall determine the exact fair market value, provided that it
shall be within the range so determined by the appraiser) or (III) in
the case of gathering, transportation, marketing, hedging, production
handling, operating, construction, storage or other operational
contracts, any such contracts are entered into in the ordinary course of
business on terms substantially similar to those contained in similar
contracts entered into by EOTT or any Restricted Subsidiary and third
parties or, if none of EOTT or any Restricted Subsidiary has entered
into a similar contract with a third party, that the terms are no less
favorable than those available from third parties on an arm's-length
basis, as determined by the Board of Directors of the General Partner.
Even though a particular Affiliate Transaction or series of Affiliate
Transactions may be covered by more than one of clauses (I) through
(III) above, the compliance with any one of such applicable clauses
shall be satisfactory.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) transactions pursuant to the Enron Agreements as in effect on the
date hereof;
(2) other transactions with Enron in the ordinary course of business
of EOTT and its Restricted Subsidiaries, consistent with the past practice
of EOTT and its Restricted Subsidiaries and on terms no less favorable to
EOTT or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable arm's-length transaction by EOTT or such
Restricted Subsidiary with an unrelated Person;
(3) payment of principal of or interest on any Indebtedness of EOTT or
any of its Restricted Subsidiaries owed to and held by any Affiliate of
EOTT or any of its Restricted Subsidiaries;
(4) any employment, equity option or equity appreciation agreement or
plan entered into by EOTT or any of its Restricted Subsidiaries in the
ordinary course of business and, as applicable, consistent with the past
practice of EOTT or such Restricted Subsidiary;
(5) transactions between EOTT or a Restricted Subsidiary and another
Restricted Subsidiary;
(6) any Restricted Payment permitted to be made pursuant to the
covenant described under "-- Restricted Payments;"
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(7) customary compensation, indemnification and other benefits made
available to officers, directors or employees of EOTT or a Restricted
Subsidiary, including reimbursement or advancement of out-of-pocket
expenses and provision of officers' and directors' liability insurance; and
(8) loans to officers and employees made in the ordinary course of
business in an aggregate amount not to exceed $1 million at any one time
outstanding.
Additional Subsidiary Guarantees
If EOTT or any of its Restricted Subsidiaries acquires or creates another
Restricted Subsidiary after the date of the indenture, then that newly acquired
or created Restricted Subsidiary must become a Subsidiary Guarantor and execute
a supplemental indenture satisfactory to the trustee and deliver an Opinion of
Counsel to the trustee within 10 Business Days of the date on which it was
acquired or created.
Designation of Restricted and Unrestricted Subsidiaries
The General Partner may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. The
indenture also provides that each of the Operating Limited Partnership and EOTT
Finance will at all times continue to be direct Wholly Owned Subsidiaries of the
Partnership. In addition, the Operating Limited Partnership and EOTT Finance are
not to be permitted to be designated as Unrestricted Subsidiaries. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by EOTT and its Restricted Subsidiaries in the
Subsidiary so designated will be deemed to be an Investment made as of the time
of such designation and will reduce the amount available for Restricted Payments
under clause (I) of the covenant described above under the caption
"-- Restricted Payments," for Permitted Investments, as applicable. All such
outstanding Investments will be valued at their fair market value at the time of
such designation as determined by the Board of Directors of the General Partner
as set forth in an Officers' Certificate delivered to the trustee. That
designation will only be permitted if such Restricted Payment or Permitted
Investment would be permitted at that time and such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. All Subsidiaries
of an Unrestricted Subsidiary shall be also Unrestricted Subsidiaries. The Board
of Directors of the General Partner may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if a Default is not continuing, the redesignation
would not cause a Default, such Subsidiary becomes a Subsidiary Guarantor and
provided that, after giving effect to such designation, EOTT and its remaining
Restricted Subsidiaries could Incur at least $1.00 of additional Indebtedness
under the limitation on indebtedness included in the first paragraph under the
caption "-- Incurrence of Indebtedness and Issuance of Disqualified Equity"
above. A Subsidiary may not be designated as an Unrestricted Subsidiary unless
at the time of such designation, (x) it has no Indebtedness other than Non-
Recourse Debt; (y) no portion of the Indebtedness or any other obligation of
such Subsidiary (whether contingent or otherwise and whether pursuant to the
terms of such Indebtedness or the terms governing the organization and operation
of such Subsidiary or by law) (A) is guaranteed by EOTT or any other Restricted
Subsidiary, except as such Indebtedness is permitted by the covenants under
"-- Restricted Payments" and "-- Incurrence of Indebtedness and Issuance of
Disqualified Equity" above, (B) is recourse to or obligates EOTT or any
Restricted Subsidiary in any way (including any "claw-back", "keep-well" or
"make-well" agreements or other agreements, arrangements or understandings to
maintain the financial performance or results of operations of such Subsidiary,
except as such Indebtedness or Investment is permitted by the covenants
captioned "-- Incurrence of Indebtedness and Issuance of Disqualified Equity"
and "-- Restricted Payments") or (C) subjects any property or assets of EOTT or
any Restricted Subsidiary, directly or indirectly, contingently or otherwise, to
the satisfaction thereof; and (z) no Equity Interests of a Restricted Subsidiary
are held by such Subsidiary, directly or indirectly. Upon the designation of a
Restricted Subsidiary that is a Subsidiary Guarantor as an Unrestricted
Subsidiary, the Guarantee of such entity shall be released.
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Business Activities
EOTT will not, and will not permit any Restricted Subsidiary to, engage in
any business that is not a Permitted Business.
Restrictions on Nature of Indebtedness and Activities of EOTT Finance
In addition to the restrictions set forth under the "Incurrence of
Indebtedness and Issuance of Disqualified Equity" covenant above, the indenture
provides that EOTT Finance may not Incur any Indebtedness unless (a) EOTT is a
co-obligor or guarantor of such Indebtedness or (b) the net proceeds of such
Indebtedness are lent to EOTT, used to acquire outstanding debt securities
issued by EOTT or used directly or indirectly to refinance or discharge
Indebtedness permitted under the limitations of this paragraph. The indenture
also provides that EOTT Finance may not engage in any business not related
directly or indirectly to obtaining money or arranging financing for EOTT.
Payments for Consent
EOTT will not, and will not permit any of its Subsidiaries to, directly or
indirectly, pay or cause to be paid any consideration to or for the benefit of
any holder of notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the indenture or the notes unless such
consideration is offered to be paid and is paid to all holders of the notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or amendment.
Reports
Whether or not required by the SEC, so long as any notes are outstanding,
EOTT will file with the SEC (unless the SEC will not accept such a filing)
within the time periods specified in the SEC's rules and regulations, and EOTT
will furnish (without exhibits) to the trustee for delivery to the holders of
the notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K if
EOTT were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual financial
statements by EOTT's certified independent accountants; and
(2) current reports that would be required to be filed with the SEC on
Form 8-K if EOTT were required to file such reports.
If as of the end of any such quarterly or annual period EOTT has designated
any of its Subsidiaries as Unrestricted Subsidiaries, then EOTT shall include in
the information required by the preceding paragraph such additional information
regarding such Unrestricted Subsidiaries as is required by the SEC's rules and
regulations regardless of whether EOTT is required to file such reports with the
SEC.
In addition, if EOTT is not required to file such information with the SEC,
EOTT will make such information available to securities analysts, investors and
prospective investors as may be reasonably requested.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the
notes;
(2) default in payment when due of the principal of or premium, if
any, on the notes;
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(3) failure by EOTT or any of its Subsidiaries to comply with the
provisions described under the caption "-- Repurchase at the Option of
Holders -- Change of Control", "-- Asset Sales" or "--Certain
Covenants -- Merger, Consolidation or Sale of Assets";
(4) failure by EOTT or any of its Restricted Subsidiaries for 30 days
after notice to comply with the covenant under "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Equity";
(5) failure by EOTT or any of its Restricted Subsidiaries for 60 days
after notice to comply with any of the other agreements in the indenture;
(6) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by an issuer or by any of EOTT's Restricted
Subsidiaries (or the payment of which is guaranteed by EOTT or any of its
Restricted Subsidiaries), whether such Indebtedness or guarantee now exists
or is created after the date of the indenture, if that default:
(a) is caused by a failure to pay principal of or premium, if any,
or interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more;
(7) failure by an issuer or any of EOTT's Restricted Subsidiaries to
pay final judgments aggregating in excess of $10 million, which judgments
are not paid, discharged or stayed for a period of 60 days;
(8) except as permitted by the indenture, any Guarantee shall be held
in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in force and effect or any Subsidiary Guarantor, or
any Person acting on behalf of any Subsidiary Guarantor, shall deny or
disaffirm its obligations under its Guarantee; and
(9) certain events of bankruptcy or insolvency with respect to EOTT or
any of its Restricted Subsidiaries that is a Significant Subsidiary or any
group of Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the issuers, all outstanding notes
will become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the trustee or the holders of
at least 25% in principal amount of the then outstanding notes may declare all
the notes to be due and payable immediately.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of any issuer or
Subsidiary Guarantor with the intention of avoiding payment of the premium that
the issuers would have had to pay if the issuers then had elected to redeem the
notes pursuant to the optional redemption provisions of the indenture, an
equivalent premium will also become and be immediately due and payable to the
extent permitted by law upon the acceleration of the notes. If an Event of
Default occurs prior to October 1, 2004, by reason of avoiding the prohibition
on redemption of the notes prior to October 1, 2004, then the premium specified
in the indenture will also become immediately due and payable to the extent
permitted by law upon the acceleration of the notes.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes
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notice of any continuing Default (except a Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default and its consequences under the indenture except
a continuing Default in the payment of interest on, or the principal of, the
notes.
The issuers and the Subsidiary Guarantors are required to deliver to the
trustee annually a statement regarding compliance with the indenture. Upon any
officer of the General Partner or EOTT Finance becoming aware of any Default,
the issuers are required to deliver to the trustee a statement specifying such
Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, partner, employee,
incorporator, stockholder or member of the issuers, the General Partner, or any
Subsidiary Guarantor, as such, shall have any liability for any obligations of
the issuers or the Subsidiary Guarantors under the notes, the indenture, the
Guarantees or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The issuers may, at their option and at any time, elect to have all of the
issuers' obligations discharged with respect to the outstanding notes and all
obligations of the Subsidiary Guarantors discharged with respect to their
Guarantees ("Legal Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest on such notes
when such payments are due (but not the Change of Control Payment or the
payment pursuant to an Asset Sale Offer) from the list referred to below;
(2) the issuer's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and the issuers' obligations in connection therewith;
(4) the Legal Defeasance provisions of the indenture; and
(5) the issuers' rights of optional redemption.
In addition, EOTT may, at its option and at any time, elect to have the
obligations of the issuers and the Subsidiary Guarantors released with respect
to certain covenants that are described in the indenture ("Covenant Defeasance")
and thereafter any omission to comply with those covenants shall not constitute
a Default with respect to the notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the issuers must irrevocably deposit with the trustee, in trust,
for the benefit of the holders of the notes, in U.S. dollars, non-callable
U.S. Government Obligations, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding notes at the
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Stated Maturity thereof or on the applicable redemption date, as the case
may be, and EOTT must specify whether the notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, EOTT shall have delivered to the
trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that (a) EOTT has received from, or there has been published by,
the Internal Revenue Service a ruling or (b) since the date of the
indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such Opinion of
Counsel shall confirm that, the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, EOTT shall have delivered to
the trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that the holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default shall have occurred and be continuing either: (a) on
the date of such deposit (other than a Default resulting from the
Incurrence of Indebtedness all or a portion of the proceeds of which shall
be applied to such deposit); or (b) insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which EOTT or any of
its Restricted Subsidiaries is a party or by which EOTT or any of its
Restricted Subsidiaries is bound;
(6) EOTT must have delivered to the trustee an Opinion of Counsel to
the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(7) EOTT must deliver to the trustee an Officers' Certificate stating
that the deposit was not made by EOTT with the intent of preferring the
holders of the notes over the other creditors of EOTT with the intent of
defeating, hindering, delaying or defrauding other creditors of EOTT; and
(8) EOTT must deliver to the trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs, with the consent of the
holders of at least a majority in principal amount of the outstanding notes, we
and the trustee may add provisions to or change or eliminate any of the
provisions of the indenture or modify the rights of the holders and any existing
default or compliance with any provision of the indenture or the notes may be
waived.
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any notes held by a nonconsenting holder):
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter or waive the provisions with respect to the redemption of the
notes (other than provisions relating to the covenants described above
under the caption "-- Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on
any note;
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(4) waive a Default in the payment of principal of or premium, if any,
or interest on the notes (except a rescission of acceleration of the notes
by the holders of at least a majority in aggregate principal amount of the
notes and a waiver of the payment default that resulted from such
acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of notes to receive
payments of principal of or premium, if any, or interest on the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders");
(8) except as otherwise permitted in the indenture, release any
Subsidiary Guarantor from its obligations under its Guarantee or the
indenture or change any Guarantee in any manner that would adversely affect
the rights of holders; or
(9) make any change in the preceding amendment and waiver provisions
(except to increase any percentage set forth therein).
Notwithstanding the preceding, without the consent of any holder of notes,
the issuers, the Subsidiary Guarantors and the trustee may amend or supplement
the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of an issuer's or Subsidiary
Guarantor's obligations to holders of notes in the case of a merger or
consolidation or sale of all or substantially all of such issuer's assets;
(4) to add or release Subsidiary Guarantors pursuant to the terms of
the indenture;
(5) to make any change that would provide any additional rights or
benefits to the holders of notes or surrender any right or power conferred
upon the issuers or the Subsidiary Guarantors by the indenture that does
not adversely affect the rights under the indenture of any holder of the
Notes;
(6) to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust Indenture Act
of 1939;
(7) to evidence or provide for the acceptance of appointment under the
indenture of a successor trustee;
(8) to add any additional Events of Default; or
(9) to secure the notes and/or the Guarantees.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of an issuer or any Subsidiary Guarantor,
the indenture limits its right to obtain payment of claims in certain cases, or
to realize on certain property received in aspect of any such claim as security
or otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent person in the conduct of his
own affairs. Subject to such provisions, the trustee will be under no
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obligation to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless such holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability or
expense.
BOOK-ENTRY, DELIVERY AND FORM
The notes will be issued initially in the form of one global note held in
book-entry form. The global note will be deposited on the date of the closing of
the sale of the notes with The Depository Trust Company ("DTC") and registered
in the name of Cede & Co., as nominee of DTC.
Upon issuance of the notes, DTC will credit on its book-entry registration
and transfer system the respective interests in the notes owned by its
participants. All interests in the notes will be subject to the procedures and
requirements of DTC.
Direct ownership of book-entry interests in the notes will be limited to
persons who have accounts with DTC; however, you may own such interests
indirectly by maintaining an account with one of the organizations which
participates in DTC. Book-entry interests will not be held in definitive form
but will be credited to the participants' accounts held of record in the
book-entry registration and transfer system of DTC and in the accounts
maintained by the direct and indirect participants in DTC.
The laws of some countries and some states of the United States may require
that certain purchasers of securities take physical delivery of securities in
definitive form. These limitations may impair the ability of residents of those
states or countries to own, transfer or pledge book-entry interests in the
notes.
So long as DTC or its nominee is the registered owner of the global note,
it will be considered the sole holder of the notes for all purposes under the
indenture. Under the indenture, beneficial owners of notes evidenced by a global
note will not be considered the owners or holders of the notes for any purpose,
including giving any directions, instructions or approvals to the trustee or
receiving notices. Accordingly, each investor owning a book-entry interest in
the notes who seeks to exercise any rights and remedies of a holder under the
indenture must rely on (1) the procedures of DTC and (2) if the investor is not
a participant in DTC, the procedures of the direct or indirect participant in
DTC through which the investor owns its interest. Neither we nor the trustee
will have any responsibility or liability for any aspect of the records of DTC,
or any of its direct or indirect participants, or for the maintenance,
supervision or review of any records relating to the notes.
Unless and until the global note is exchanged for definitive notes, the
global note may not be transferred by DTC, except as a whole to its nominee or
successor. The global note will be exchangeable for one or more definitive notes
only if:
- DTC notifies us that it is unwilling or unable to continue as a
depositary for the global note and we have not appointed a successor
depository,
- DTC ceases to be a clearing agency registered under the Securities
Exchange Act of 1934 and we have not appointed a successor depository,
- we in our sole discretion determine that the global note should be
exchanged for definitive notes, or
- an Event of Default under the indenture has occurred and is continuing.
If the global note is exchangeable as described above, it will be exchanged
for certificates in definitive form representing notes in authorized
denominations and registered in whatever names DTC directs. Subject to the
foregoing, the global note is not exchangeable, except for a global note of like
denomination to be registered in the name of DTC or its nominee.
PAYMENTS ON NOTES
Payments of any amounts on the notes registered in the name of DTC on the
applicable record date will be made through the paying agent to or at the
direction of DTC in its capacity as the registered
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holder under the indenture. Under the terms of the indenture, we and the trustee
may treat the persons in whose names the notes, including the global note, are
registered as the owners of the notes for the purpose of receiving interest and
other payments. Consequently, neither we nor the trustee has or will have any
responsibility or liability for the payment of these amounts to beneficial
owners of the notes. We believe, however, that it is currently the policy of DTC
to immediately credit the accounts of the relevant participants with payments in
amounts proportionate to their respective holdings of beneficial interests in
the global note as shown on DTC's records. Payments by DTC's direct and indirect
participants to the beneficial owners of the notes will be governed by standing
instructions and customary practice and will be the responsibility of the direct
or indirect participants.
TRANSFERS
All transfers of book-entry interests are recorded in accordance with the
book-entry system maintained by DTC, pursuant to customary procedures
established by DTC and its participants. The amount of the book-entry interests
will be increased or decreased to reflect those transfers or exchanges. The
paying and transfer agent for the notes will make the appropriate adjustments to
the global note or exchange the global note for a new global note in an
appropriate amount to reflect any transfers or exchanges.
ACTION BY OWNERS OF BOOK-ENTRY INTERESTS
As soon as practicable after the trustee receives notice of any
solicitation of consents or request for a waiver or other action to be taken by
the holders of notes, the trustee will send to DTC a notice containing (a) the
same information as is contained in the notice received by the trustee, (b) a
statement that at the close of business on a specified record date DTC will be
entitled to instruct the trustee as to the consent, waiver or other action, if
any, pertaining to the notes and (c) a statement as to the manner in which the
instructions may be given. In addition, the trustee will forward to DTC or,
based upon instructions received from DTC, to owners of book-entry interests,
all materials pertaining to the solicitation, request, offer or other action.
Upon the written request of DTC, the trustee will attempt, if practicable, to
take the advised action. DTC may grant proxies or otherwise authorize its
participants, or persons owning book-entry interests through its participants,
to provide instructions to the trustee so that it may exercise any rights of a
holder or take any other actions which a holder is entitled to take under the
indenture. The trustee will not exercise any discretion in the granting of
consents or waivers or the taking of any other action relating to the indenture.
SAME-DAY SETTLEMENT AND PAYMENT
The notes will trade in DTC's Same-day Funds Settlement System. Settlement
for the notes will be made by the underwriters in immediately available funds.
We will make all payments of principal and interest in immediately available
funds or the equivalent, as long as the global note is held of record by DTC and
DTC continues to make the Same-day Funds Settlement System available to us. Any
secondary market trading activity in the book-entry interests is expected to
occur through the participants of DTC. Secondary market trading activity in the
notes will also be required by DTC to settle in immediately available funds.
INFORMATION CONCERNING DTC
DTC has advised us that it is a limited-purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934. DTC was created to hold securities for its participating
organizations, known as "participants," and to facilitate the clearance and
settlement of transactions in securities between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the need
for physical movement of securities certificates. Its direct participants
include securities brokers and
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dealers (including the underwriters), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities, know as "indirect participants," such as securities
brokers and dealers, banks and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Persons who are not participants may beneficially own securities held by or on
behalf of DTC only through DTC's participants or DTC's indirect participants.
The rules applicable to DTC and its participants are on file with the SEC.
Year 2000. DTC has advised us that its management is aware that some
computer applications, systems and the like for processing data that are
dependent upon calendar dates, including dates before, on and after January 1,
2000, may encounter Year 2000 problems. DTC has informed its participants and
other members of the financial community that it has developed and is
implementing a program so that its systems, as they relate to the timely payment
of distributions (including principal and interest payments) to security
holders, book-entry deliveries and settlements of trades within DTC, continue to
function appropriately. This program includes a technical assessment and
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform its services properly is also dependent upon
other parties, including issuers and their agents, as well as third party
vendors from whom DTC licenses software and hardware and third party vendors on
whom DTC relies for information or the provision of services, including
telecommunication and electrical utility service providers, among others. DTC
has informed its participants and other members of the financial community that
it is contacting (and will continue to contact) third party vendors which
provide services to DTC in order to:
- impress upon them the importance of such services being Year 2000
compliant; and
- determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services.
In addition, DTC is in the process of developing contingency plans as it deems
appropriate. According to DTC, the above information has been provided to its
participants and other members of the financial community for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
REPORTS
The trustee will immediately send to DTC a copy of any notices, reports and
other communications received relating to us, the notes or the book-entry
interests.
PAYING AGENT
The registrar, paying and transfer agent for the notes will be The Bank of
New York.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is Incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person, but excluding Indebtedness which is
extinguished, retired or repaid in connection with such Person merging with
or becoming a Subsidiary of such specific Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
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"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a specified Person shall be deemed to be control by the other
Person. For purposes of this definition, the terms "controlling," "controlled
by" and "under common control with" shall have correlative meanings.
Notwithstanding the foregoing, the term "Affiliate" shall not include a
Restricted Subsidiary of any specified Person.
"API" has the meaning attached to such term in the Partnership Agreement,
as in effect on the date of the indenture.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business
consistent with past practices and sales of accounts receivable to provide
working capital or other financing for EOTT's business; provided that the
sale, conveyance or other disposition of all or substantially all of the
assets of EOTT or EOTT and its Restricted Subsidiaries taken as a whole
will be governed by the provisions of the indenture described above under
the caption "-- Repurchase at the Option of Holders -- Change of Control,"
and/or the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation or Sale of Assets" and not by the
provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any Restricted Subsidiary or
the sale by EOTT or any Restricted Subsidiary of Equity Interests in any
Restricted Subsidiary;
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that: (a)
involves assets having a fair market value of less than $2.5 million; or
(b) results in net proceeds to EOTT and its Restricted Subsidiaries of less
than $2.5 million;
(2) a transfer of assets to EOTT or to a Restricted Subsidiary;
(3) an issuance of Equity Interests by a Restricted Subsidiary to EOTT
or to a Restricted Subsidiary;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments";
(5) any sale, transfer, exchange or other disposition of hydrocarbons
in the ordinary course of the business conducted by EOTT or any Restricted
Subsidiary;
(6) sales of Hedging Obligations and other financial instruments
entered into in the ordinary course of the business of EOTT and its
Restricted Subsidiaries; and
(7) any sale, transfer or other disposition of Cash Equivalents.
"Attributable Debt" in respect of a Sale and Lease-Back Transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
Sale and Lease-Back Transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Available Cash" has the meaning assigned to such term in the Partnership
Agreement, as in effect on the date of the indenture. (The following is a
summary of the definition of Available Cash in the Partnership Agreement:
Generally, for any quarter, all of our cash receipts during such quarter (other
than
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cash receipts that are attributable to our liquidation) plus net reductions to
reserves less all of our cash disbursements and net additions to reserves during
such quarter, including the value of cash received by us from additional
partnership interests purchased by Enron (or an affiliate) in order to provide
distribution support.)
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet of the lessee in
accordance with GAAP.
"Cash Equivalent" means:
(1) United States dollars or, in an amount up to the amount necessary
or appropriate to fund local operating expenses, other currencies;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged in
support thereof) having maturities of not more than one year from the date
of acquisition;
(3) certificates of deposit, time deposits and Eurodollar deposits
with maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding 365 days, demand and overnight
bank deposits and other similar types of investments routinely offered by
commercial banks, in each case, with any domestic commercial bank having
capital and surplus in excess of $500.0 million and a Thompson Bank Watch
Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having one of the two highest ratings obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Ratings Group and
in each case maturing within six months after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Cash from Operations" shall have the meaning assigned to such term in the
Partnership Agreement, as in effect on the date of the indenture. (The following
is a summary of the definition of Cash from Operations in the Partnership
Agreement: Cash from Operations, which is determined on a cumulative basis,
generally refers to all cash distributed to us as a result of the operations of
our business after June 30, 1995, after deducting all amounts contributed to us
and all cash expenditures, cash reserves, debt service and certain other items.)
"Change of Control" means the occurrence of any of the following:
(1) the sale, transfer, lease, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of EOTT and its
Restricted Subsidiaries taken as a whole to any "person" (as such term is
used in Section 13(d)(3) of the Exchange Act) other than Enron and within
six months of any such event there is a Rating Decline; and
(2) the adoption of a plan relating to the liquidation or dissolution
of EOTT or the General Partner; and
(3) such time as Enron ceases to own, directly or indirectly, the
general partner interests of EOTT or ceases to serve as the only general
partner of EOTT and within six months of any such event there is a Rating
Decline.
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Notwithstanding the foregoing, a conversion of EOTT from a limited
partnership to a corporation, limited liability company or other form of entity
or an exchange of all of the outstanding limited partnership interests for
capital stock in a corporation, for member interests in a limited liability
company or for Equity Interests in such other form of entity shall not
constitute a Change of Control, so long as following such conversion or exchange
Enron beneficially owns, directly or indirectly, a sufficient number of the
outstanding shares of Voting Stock of such entity to elect a majority of its
directors, managers, trustees or other persons serving in a similar capacity for
such entity, and if Enron owns less than 35% of the Voting Stock of such entity,
no other Person controls more than 35% of the Voting Stock of such entity;
provided that a Change of Control will not be deemed to occur if within six
months of any such event there has not been a Rating Decline. Upon such
conversion or exchange (a) this definition of "Change of Control" shall be
revised to replace clause (2) with the following: "the adoption of a plan
relating to the liquidation or dissolution of EOTT" and to add the following:
"(4) the first day on which a majority of the members of the board of directors
of EOTT are not Continuing Directors," and (b) the covenant described under the
subheading "-- Certain Covenants -- Restricted Payments" will be revised to
replace clauses (I) and (II) and the language immediately preceding clause (I)
with the following:
"(all such payments and other actions set forth in the clauses above being
collectively referred to as 'Restricted Payments'), unless, at the time of and
after giving effect to such Restricted Payment,
- no Default shall have occurred and be continuing or would occur as a
consequence thereof;
- EOTT is entitled to Incur an additional $1.00 of Indebtedness pursuant to
the first paragraph of the covenant described under "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Equity"; and
- such Restricted Payment, together with the aggregate amount of all other
Restricted Payments declared or made by EOTT and its Restricted
Subsidiaries since , [the date of the conversion or
exchange], is less than or equal to the sum, without duplication, of (a)
50% of the Consolidated Net Income accrued during the period (treated as
one accounting period) from the beginning of the fiscal quarter
immediately following the fiscal quarter in which such date occurs to the
end of the most recent fiscal quarter for which internal financial
statements are available immediately preceding the date of such
Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit), (b) the aggregate net cash proceeds
of any (i) capital contribution to EOTT from any Person (other than a
Restricted Subsidiary of EOTT) made after such date, (ii) issuance and
sale made after such date of Equity Interests (other than Disqualified
Equity) of EOTT, (iii) issuance or sale made after such date of
convertible or exchangeable Disqualified Equity or convertible or
exchangeable debt securities of EOTT that have been converted into or
exchanged for such Equity Interests and (iv) to the extent that any
Restricted Investment that was made after such date is sold for cash or
Cash Equivalents or otherwise liquidated or repaid for cash or Cash
Equivalents, the lesser of the refund of capital or similar payment made
in cash or Cash Equivalents with respect to such Restricted Investment
(less the cost of such disposition, if any) and the initial amount of
such Restricted Investment (other than to a Restricted Subsidiary of
EOTT), to the extent that, in the case of (b), such amounts have not been
included in Available Cash constituting Cash from Operations for any
period commencing on or after such date (item (b) being referred to as
"Incremental Funds"), less (c) the aggregate amount of Incremental Funds
previously expended pursuant to this clause."
In addition, upon such conversion or exchange, the following definition
will be added to the indenture:
" 'Continuing Director' means, as of any date of determination, any
member of the board of directors of EOTT who:
(1) was a member of such board of directors on , [the date
of the conversion or exchange]; or
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(2) was nominated for election or elected to such board of
directors with the approval of a majority of the Continuing Directors
who were members of such board of directors at the time of such
nomination or election."
"Commodity Hedging Agreement" means, with respect to any Person, any
commodity price swap agreement, commodity price collar agreement, commodity
price exchange agreement, currency hedge related to hydrocarbon sales, option or
futures contract or other similar agreement or arrangement or hydrocarbon hedge
contract or forward sale contract, in each case designed to protect such Person
against fluctuations in commodity prices.
"Consolidated Borrowing Base Amount" means an amount equal to the average
of the sums, at the end of each of EOTT's four most recent fiscal quarters for
which internal financial statements are available, of (i) 30% of the book value
of Eligible Accounts Receivable of EOTT and its Restricted Subsidiaries and (ii)
30% of the book value (calculated on a first in, first out basis) of the
consolidated Inventory of EOTT and its Restricted Subsidiaries, in each case as
determined in accordance with GAAP.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss of such Person and its
Restricted Subsidiaries plus any net loss realized by such Person and its
Restricted Subsidiaries in connection with an Asset Sale, to the extent
such losses were deducted in computing such Consolidated Net Income; plus
(2) the provision for taxes based on income or profits of such Person
and its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs, fees
and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts, and other fees
and charges Incurred in respect of letter of credit or bankers' acceptance
financings and net payments, if any, pursuant to Currency Agreements and
Interest Rate Agreements), to the extent that any such expense was deducted
in computing such Consolidated Net Income; plus
(4) depreciation, depletion and amortization (including amortization
of goodwill and other intangibles but excluding amortization of prepaid
cash expenses that were paid in a prior period) and other non-cash expenses
(excluding any such non-cash expense to the extent that it represents an
accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Restricted Subsidiaries for such period to the extent
that such depreciation, depletion, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income (excluding any such
expenses to the extent Incurred by a Person that is not a Restricted
Subsidiary); minus
(5) non-cash items (including non-cash gains resulting from "marking
to market" any Hedging Obligations) increasing such Consolidated Net Income
for such period, other than items that were accrued in the ordinary course
of business, in each case, on a consolidated basis and determined in
accordance with GAAP; plus
(6) any non-cash deductions resulting from "marking to market" any
Hedging Obligations.
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"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the aggregate Net Income (but not loss) of any Person that is not
a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends
or distributions paid in cash to the specified Person or a Restricted
Subsidiary;
(2) the aggregate Net Income (but not loss) of any Restricted
Subsidiary that is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions directly or indirectly
to such Person shall be included only to the extent of the amount of
dividends or distributions paid in cash to such Person with respect to such
period;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded; and
(4) the cumulative effect of a change in accounting principles shall
be excluded.
"Credit Facilities" means, with respect to the issuer or any Restricted
Subsidiary, one or more debt or commercial paper facilities (including the
Amended and Restated Credit Agreement dated December 1, 1998, as amended as of
March 17, 1999, between EOTT Energy Operating Limited Partnership, as borrower,
and Enron Corp., as lender and the Commodity Repurchase Agreement dated February
28, 1998 between EOTT Energy Operating Limited Partnership and Standard
Chartered Trade Services Corporation) providing for revolving credit loans, term
loans, receivables or inventory financing (including through the sale of
receivables or inventory to such lenders or to special purpose, bankruptcy
remote entities formed to borrow from such lenders against such receivables or
inventory) or letters of credit or guarantees, in each case together with any
extensions, revisions, refinancings or replacements thereof in whole or in part.
"Currency Agreement" means, with respect to any Person, any foreign
exchange contract, currency swap agreement, currency option or other similar
agreement or arrangement as to which such Person is a party or beneficiary and
which is designed to protect such Person against fluctuations in currency
exchange rates.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Equity" means any Equity Interest (other than an API) that,
by its terms (or by the terms of any security into which it is convertible, or
for which it is exchangeable, in each case at the option of the holder thereof),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the option
of the holder thereof, in whole or in part, on or prior to the date which is 91
days after the date on which the notes mature. Notwithstanding the preceding
sentence, any Equity Interest that would constitute Disqualified Equity solely
because the holders thereof have the right to require EOTT or a Restricted
Subsidiary to repurchase such Equity Interests upon the occurrence of a change
of control or an asset sale shall not constitute Disqualified Equity if the
terms of such Equity Interests provide that EOTT or Restricted Subsidiary may
not repurchase or redeem any such Equity Interests pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "-- Certain Covenants -- Restricted Payments"; and provided
further, that "Disqualified Equity" shall not include any Equity Interest that
is solely redeemable with or solely exchangeable for Equity Interests of such
Person that are not Disqualified Equity.
"Eligible Accounts Receivable" means consolidated accounts receivable of
EOTT and its Restricted Subsidiaries that are not more than 60 days past due
under their scheduled payment terms.
"Enron" means, Enron Corp., a Delaware corporation, and each Person that is
a direct or indirect Subsidiary of Enron Corp.
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"Enron Agreements" means:
(1) Amended and Restated Agreement of Limited Partnership of EOTT
Energy Partners, L.P. dated as of March 25, 1994, as amended by Amendment
No. 1 dated as of August 8, 1995, Amendment No. 2 dated as of July 16,
1996, Amendment No. 3 dated as of February 13, 1997, Amendment No. 4 dated
as of November 30, 1998, Amendment No. 5 dated as of December 7, 1998 and
Amendment No. 6 dated as of September 16, 1999;
(2) Ancillary Agreement dated as of March 25, 1994, by and among Enron
Corp., EOTT Energy Partners, L.P., EOTT Energy Operating Limited
Partnership, EOTT Energy Pipeline Limited Partnership, EOTT Canada Limited
Partnership, and EOTT Energy Corp.;
(3) Agreement to Increase and Extend Distribution Support dated August
8, 1995, amending the Ancillary Agreement dated as of August 8, 1995, and
as amended by Agreement to Extend Distribution Support dated November 5,
1997;
(4) Amended and Restated Agreement of Limited Partnership of EOTT
Operating Limited Partnership dated as of March 24, 1994, as amended by
Amendment No. 1 dated as of September 1, 1999;
(5) Amended and Restated Agreement of Limited Partnership of EOTT
Pipeline Limited Partnership dated as of March 24, 1994, as amended by
Amendment No. 1 dated as of September 1, 1999;
(6) Amended and Restated Agreement of Limited Partnership of EOTT
Canada Limited Partnership dated as of March 24, 1994, as amended by
Amendment No. 1 dated as of September 1, 1999;
(7) Support Agreement dated September 21, 1998 between EOTT Energy
Partners, L.P., EOTT Energy Operating Limited Partnership and Enron Corp.;
(8) Amended and Restated Credit Agreement as of December 1, 1998
between EOTT Energy Operating Limited Partnership, as Borrower, and Enron
Corp., as Lender, as amended by Amendment dated March 17, 1999; and
(9) Amended and Restated Term Credit Agreement as of December 1, 1998
between EOTT Energy Operating Limited Partnership, as Borrower, and Enron
Corp., as Lender, as amended by Amendment dated March 17, 1999.
"EOTT" means EOTT Energy Partners, L.P., a Delaware limited partnership.
"EOTT Energy Corp." means EOTT Energy Corp., a Delaware corporation, and
its successors.
"EOTT Finance" means EOTT Energy Finance Corp., a Delaware Corporation.
"Equity Interests" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited);
(3) in the case of an association or business entity, (other than a
corporation, partnership or limited liability company) any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person, and any rights (other than debt securities
convertible into capital stock) warrants or options exchangeable for or
convertible into such capital stock; and
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(5) all warrants, options or other rights to acquire any of the
interests described in clauses (1)-(4) above (but excluding any debt
security that is convertible into, or exchangeable for, any of the
interests described in clauses (1)-(4) above).
"Equity Offering" means any sale of Equity Interests of EOTT (excluding
sales made to any Restricted Subsidiary and excluding sales of Disqualified
Equity) (a) to the public pursuant to an effective registration statement under
the Securities Act of 1933 or (b) in a private placement of Equity Interests of
EOTT pursuant to an exemption from the registration requirements of the
Securities Act of 1933.
"Existing Indebtedness" means the aggregate principal amount of
Indebtedness of EOTT and its Restricted Subsidiaries in existence on the date of
the indenture.
"Fixed Charges" means, with respect to any Person for any period, without
duplication, (A) the sum of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization of debt issuance costs, fees
and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts, and other fees
and charges Incurred in respect of letter of credit or bankers' acceptance
financings and net payments, if any, pursuant to Currency Agreements and
Interest Rate Agreements; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such guarantee or Lien is called upon; plus
(4) the product of (a) all dividend payments, whether or not in cash,
on any series of Disqualified Equity of such Person or any of its
Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of EOTT (other than Disqualified Equity)
or to EOTT or a Restricted Subsidiary of EOTT, times (b) a fraction, the
numerator of which is one and the denominator of which is one minus the
then current combined federal, state and local statutory tax rate of such
Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP; less
(B) to the extent included in (A) above, amortization or write-off of deferred
financing costs of such Person and its Restricted Subsidiaries during such
period and any charge related to, or any premium or penalty paid in connection
with, Incurring any such Indebtedness of such Person and its Restricted
Subsidiaries prior to its Stated Maturity.
In the case of both (A) and (B), such amounts will be determined after
elimination of intercompany accounts among such Person and its Restricted
Subsidiaries and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person for
such period. In the event that the specified Person or any of its Restricted
Subsidiaries Incurs, assumes, guarantees, repays or redeems any Indebtedness
(other than revolving credit borrowings not constituting a permanent commitment
reduction) or issues or redeems Disqualified Equity subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation of
the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
Incurrence (and the application of the net proceeds thereof), assumption,
guarantee, repayment or redemption of Indebtedness, or such issuance or
redemption of Disqualified Equity, as if the same had occurred at the beginning
of the applicable four-quarter reference
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period (and if such Indebtedness is Incurred to finance the acquisition of
assets, there shall be included pro forma net income for such assets computed as
provided in clause (1) below, as if such assets had been acquired on the first
day of such period).
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions of businesses or assets (including, without
limitation, a single asset, a division or segment or an entire company)
that have been made by the specified Person or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall
be calculated without giving effect to clause (3) of the proviso set forth
in the definition of Consolidated Net Income; provided however, that the
Consolidated Cash Flow generated by acquired assets for which no historical
financial statements are available from the seller for the period prior to
its acquisition shall be determined (in the reasonable and customary
determination of the chief financial officer of EOTT and as submitted to
and approved by the Board of Directors of the General Partner and set forth
in an Officers' Certificate delivered to the trustee) (a) in the case of
the acquisition of lease barrel contracts, on the basis of the number of
annual (or annualized) lease barrels included in such assets times the
Consolidated Cash Flow per lease barrel of EOTT and its Restricted
Subsidiaries for the four-quarter reference period and (b) in the case of
the acquisition of common carrier pipelines to the extent not included in
clause (a), on the basis of (i) the then applicable tariff per barrel
established by the Federal Energy Regulatory Commission (FERC), or other
applicable governmental regulatory authority, as set forth in a schedule
provided by the seller, on such pipelines multiplied by the amount of the
volume transported for third parties over the four-quarter reference period
(or the annualized average of third party volumes available from the
seller, if volumes for the four-quarter reference period are not available
from the seller) on such pipelines, less (ii) the amount of the volume
transported for third parties over the four-quarter reference period (or
the annualized average of third party volumes available from the seller, if
volumes for the four-quarter reference period are not available from the
seller) on such pipelines multiplied by the average operating cost
(calculated on a basis consistent with EOTT's historical financial
statements) per barrel for common carrier pipelines of EOTT and its
Restricted Subsidiaries for the four-quarter reference period; provided
that in the case of an acquisition or series of related acquisitions
aggregating in excess of $55.0 million, such pro forma Consolidated Cash
Flow shall be determined in accordance with this paragraph in writing by an
accounting or investment banking firm of national standing;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded;
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted Subsidiaries
following the Calculation Date;
(4) interest on outstanding Indebtedness of the specified Person or
any of its Restricted Subsidiaries as of the last day of the four-quarter
reference period shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on such last
day after giving effect to any Interest Rate Agreements with respect
thereto then in effect; and
(5) if interest on any Indebtedness Incurred by the specified Person
or any of its Restricted Subsidiaries may optionally be determined at an
interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate or other rates, then the interest rate
in effect on the last day of the four-quarter reference period will be
deemed to have been in effect during such period.
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"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements, and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect as of the closing date of the
offering of the notes initially sold under the indenture.
"General Partner" shall mean EOTT Energy Corp., a Delaware corporation, and
its successors and assigns as general partner of EOTT.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets, or through letters of credit or reimbursement, "claw-back," "make-well,"
or "keep-well" agreements in respect thereof, of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the net
obligations (not the notional amount) of such Person under Commodity Hedging
Agreements, Currency Agreements and Interest Rate Agreements.
"Incur" means for any Person to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise. The term "Incurrence" when used as a noun shall have
a correlative meaning.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof), other than standby
and documentary letters of credit and performance and surety bonds issued
by such Person in the ordinary course of business, to the extent not drawn;
(3) banker's acceptances;
(4) Capital Lease Obligations;
(5) all Attributable Debt of such Person in respect of Sale and
Lease-Back Transactions not involving a Capital Lease Obligation;
(6) the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued expense or
trade payable Incurred in the ordinary course of business;
(7) Disqualified Equity; or
(8) any Hedging Obligations other than Commodity Hedging Agreements
entered into in the ordinary course of business and consistent with prior
practice to hedge risk exposure in the operations, ownership of assets or
the management of liabilities of EOTT and its Restricted Subsidiaries;
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the guarantee
by such Person of any indebtedness of any other Person, provided that a
guarantee otherwise permitted by the indenture to be Incurred by EOTT or a
Restricted Subsidiary of Indebtedness Incurred by EOTT or a Restricted
Subsidiary in compliance with the terms of the indenture shall not constitute a
separate Incurrence of Indebtedness.
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The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
For purposes of clause (7) of the preceding paragraph, Disqualified Equity shall
be valued at the maximum fixed redemption, repayment or repurchase price, which
shall be calculated in accordance with the terms of such Disqualified Equity as
if such Disqualified Equity were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the indenture; provided, however,
that if such Disqualified Equity is not then permitted by its terms to be
redeemed, repaid or repurchased, the redemption, repayment or repurchase price
shall be the book value of such Disqualified Equity. The amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability of any
guarantees at such date; provided that for purposes of calculating the amount of
any non-interest bearing or other discount security, such Indebtedness shall be
deemed to be the principal amount thereof that would be shown on the balance
sheet of the issuer thereof dated such date prepared in accordance with GAAP,
but that such security shall be deemed to have been Incurred only on the date of
the original issuance thereof. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement or arrangement designed to protect such Person
against fluctuations in interest rates.
"Inventory" means goods (including hydrocarbons) owned by a Person and held
by that Person for sale that would be shown as inventory on a balance sheet of
such Person prepared in accordance with GAAP and all documents of title covering
such inventory, and shall specifically include all "inventory" as such term is
defined in the Uniform Commercial Code.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances (other than advances to customers in the ordinary course of business
that are recorded as accounts receivable on the balance sheet of the lender and
commission, moving, travel and similar advances to officers and employees made
in the ordinary course of business) or capital contributions, purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. For purposes of
the definition of "Unrestricted Subsidiary," the definition of "Restricted
Payment" and the covenant described under the "Limitation on Restricted
Payments" covenant (i) "Investment" shall include the portion (proportionate to
EOTT's Equity Interest in such Subsidiary) of the fair market value of the net
assets of any Subsidiary of EOTT or any of its Restricted Subsidiaries at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, EOTT or such Restricted Subsidiary shall be deemed to continue to
have a permanent "Investment" in such Subsidiary at the time immediately before
the effectiveness of such redesignation less (y) the portion (proportionate to
EOTT's or such Restricted Subsidiary's Equity Interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation, and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors of
the General Partner. If EOTT or any Restricted Subsidiary of EOTT sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of EOTT such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of EOTT, EOTT
shall be deemed to have made an Investment on the
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date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Restricted Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien (statutory or
otherwise), pledge, charge, security interest, hypothecation, assignment for
security, claim, preference, priority or encumbrance of any kind in respect of
such asset, whether or not filed, recorded or otherwise perfected under
applicable law, including any conditional sale or other title retention
agreement or any lease in the nature thereof (including a Capital Lease
Obligation and any Sale and Lease-Back Transaction), any option or other
agreement to grant a security interest in and any filing of or agreement to give
any financing statement under the Uniform Commercial Code (or equivalent
statute) of any jurisdiction.
"Net Income" means, with respect to any Person, the consolidated net income
(loss) of such Person and its Restricted Subsidiaries, determined in accordance
with GAAP and before any reduction in respect of preferred stock dividends,
excluding, however:
(1) the aggregate gain (but not loss in excess of such aggregate
gain), together with any related provision for taxes on such gain, realized
in connection with:
(a) any Asset Sale; or
(b) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2) the aggregate extraordinary gain (but not loss in excess of such
aggregate extraordinary gain), together with any related provision for
taxes on such aggregate extraordinary gain (but not loss in excess of such
aggregate extraordinary gain).
"Net Proceeds" means, with respect to any Asset Sale or sale of Equity
Interests, the aggregate proceeds received by EOTT or any of its Restricted
Subsidiaries in cash or Cash Equivalents in respect of any Asset Sale or sale of
Equity Interests (including, without limitation, any cash received upon the sale
or other disposition of any non-cash consideration received in any such sale),
net of, without duplication, (i) the direct costs relating to such Asset Sale or
sale of Equity Interests, including, without limitation, brokerage commissions
and legal, accounting and investment banking fees, sales commissions, recording
fees, title transfer fees, and any relocation expenses Incurred as a result
thereof, (ii) taxes paid or payable as a result thereof, in each case after
taking into account any available tax credits or deductions and any tax sharing
arrangements and amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale or sale of Equity Interests, (iii) all distributions and payments required
to be made to minority interest holders in Restricted Subsidiaries as a result
of such Asset Sale and (iv) any amounts to be set aside in any reserve
established in accordance with GAAP or any amount placed in escrow, in either
case for adjustment in respect of the sale price of such asset or assets or for
liabilities associated with such Asset Sale or sale of Equity Interests and
retained by EOTT or any of its Restricted Subsidiaries until such time as such
reserve is reversed or such escrow arrangement is terminated, in which case Net
Proceeds shall include only the amount of the reserve so reversed or the amount
returned to EOTT or its Restricted Subsidiaries from such escrow arrangement, as
the case may be.
"Non-Recourse Debt" means Indebtedness as to which:
(1) neither EOTT nor any of its Restricted Subsidiaries (a) provides
credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (b) is directly or
indirectly liable as a guarantor or otherwise, or (c) constitutes the
lender of such Indebtedness;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the notes) of EOTT or any of its
Restricted
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Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity;
and
(3) the lenders have been notified in writing that they will not have
any recourse to the stock or assets of EOTT or any of its Restricted
Subsidiaries;
provided that in no event shall Indebtedness of any Person which is not a
Restricted Subsidiary fail to be Non-Recourse Debt solely as a result of any
default provisions contained in a guarantee thereof by EOTT or any of its
Restricted Subsidiaries provided that EOTT or such Restricted Subsidiary was
otherwise permitted to Incur such guarantee pursuant to the indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursement obligations, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Operating Limited Partnership" shall mean EOTT Operating Limited
Partnership, a Delaware limited partnership.
"Partnership Agreement" means the Amended and Restated Agreement of Limited
Partnership of EOTT Energy Partners, L.P., dated as of March 25, 1994, as such
may be amended, modified or supplemented from time to time.
"Permitted Business" means gathering, transporting (by barge, pipeline,
ship, truck or other modes of hydrocarbon transportation), terminalling,
storing, processing, blending, marketing, dehydrating and otherwise handling
hydrocarbons, including, without limitation, constructing, owning and operating
pipeline, dehydration, processing and other energy-related facilities, financing
the production of hydrocarbons for sale to EOTT or one of its Restricted
Subsidiaries and activities or services reasonably related or ancillary thereto,
including entering into Hedging Obligations to support these businesses.
"Permitted Investments" means:
(1) any Investment in, or that results in the creation of, any
Restricted Subsidiary of EOTT;
(2) any Investment in EOTT or in a Restricted Subsidiary of EOTT
(excluding redemptions, purchases, acquisitions or other retirements of
Equity Interests in EOTT);
(3) any Investment in cash or Cash Equivalents;
(4) any Investment by EOTT or any of its Restricted Subsidiaries in a
Person if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of EOTT; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, EOTT or a Restricted Subsidiary of EOTT;
(5) any Investment made as a result of the receipt of consideration
consisting of other than cash or Cash Equivalents from an Asset Sale that
was made pursuant to and in compliance with the covenant described above
under the caption "-- Repurchase at the Option of Holders -- Asset Sales;"
(6) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Equity) of EOTT;
(7) payroll advances in the ordinary course of business and other
advances and loans to officers and employees of EOTT or any of its
Restricted Subsidiaries, so long as the aggregate principal amount of such
advances and loans does not exceed $2.0 million at any one time
outstanding;
(8) Investments in stock, obligations or securities received in
settlement of debts owing to EOTT or any of its Restricted Subsidiaries as
a result of bankruptcy or insolvency proceedings or upon the foreclosure,
perfection or enforcement of any Lien in favor of EOTT or any such
Restricted
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Subsidiary, in each case as to debt owing to EOTT or any of its Restricted
Subsidiaries that arose in the ordinary course of business of EOTT or any
such Restricted Subsidiary;
(9) any Investment in Hedging Obligations;
(10) any Investments in prepaid expenses, negotiable instruments held
for collection and lease, utility, workers' compensation and performance
and other similar deposits and prepaid expenses made in the ordinary course
of business;
(11) any Investments required to be made pursuant to any agreement or
obligation of EOTT or any Restricted Subsidiary in effect on the date of
the Indenture and listed on a schedule to the indenture; and
(12) other Investments in any Person engaged in a Permitted Business
(other than an Investment in an Unrestricted Subsidiary) having an
aggregate fair market value (measured on the date each such Investment was
made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (12) since
the date of the indenture and existing at the time the Investment, which is
the subject of the determination, was made, not to exceed $15.0 million.
"Permitted Liens" means:
(1) Liens securing the Indebtedness permitted to be Incurred under
Credit Facilities;
(2) easements, rights-of-way, restrictions, minor defects and
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the business of EOTT or its
Restricted Subsidiaries;
(3) Liens securing reimbursement obligations of EOTT or a Restricted
Subsidiary with respect to letters of credit and guarantees by other
persons encumbering only documents and other property relating to such
letters of credit and the products and proceeds thereof;
(4) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements (other than
debt) of EOTT and its Restricted Subsidiaries;
(5) Liens in favor of EOTT or any Restricted Subsidiary;
(6) any interest or title of a lessor in the property subject to a
Capital Lease Obligation permitted to be Incurred by the covenant described
above under "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Disqualified Equity;"
(7) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with EOTT or any Restricted Subsidiary
of EOTT, provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with EOTT
or such Restricted Subsidiary;
(8) Liens on property existing at the time of acquisition thereof by
EOTT or any Restricted Subsidiary of EOTT, provided that such Liens were in
existence prior to the contemplation of such acquisition and relate solely
to such property, accessions thereto and the proceeds thereof;
(9) Liens to secure the performance of tenders, bids, leases,
statutory obligations, surety or appeal bonds, government contracts,
performance bonds or other obligations of a like nature Incurred in the
ordinary course of business;
(10) Liens on any property or asset acquired, constructed or improved
by EOTT or any Restricted Subsidiary (a "Purchase Money Lien"), which (A)
are in favor of the seller of such property or assets, in favor of the
Person constructing or improving such asset or property, or in favor of the
Person that provided the funding for the acquisition, construction or
improvement of such asset or property, (B) are created within 360 days
after the date of acquisition, construction or improvement, (C) secure the
purchase price or construction or improvement cost, as the case may be,
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of such asset or property in an amount up to 100% of the fair market value
(as determined by the Board of Directors of the General Partner) of such
acquisition, construction or improvement of such asset or property, and (D)
are limited to the asset or property so acquired, constructed or improved
(and proceeds thereof, accessions thereto and upgrades thereof);
(11) Liens to secure performance of Hedging Obligations of EOTT or a
Restricted Subsidiary;
(12) Liens existing on the date of the indenture and Liens to secure
any extension, refinancing, renewal, replacement or defeasance of any
Indebtedness or other obligations secured thereby; provided, however, that
(A) such new Lien shall be limited to all or part of the same property that
secured the original Indebtedness or obligation (plus improvements on such
property); and (B) the Indebtedness or other obligation secured by such
Lien at such time is not increased to any amount greater than the sum of:
(i) the outstanding principal amount or, if greater, committed amount of
the Indebtedness or other obligation extended, refinanced, renewed,
replaced or defeased at the time the original Lien became a Permitted Lien;
and (ii) an amount necessary to pay any fees and expenses, including
premiums, related to such extension, refinancing, renewal, replacement or
defeasance;
(13) Liens on and pledges of the Equity Interests of any Unrestricted
Subsidiary owned by EOTT or any Restricted Subsidiary to the extent
securing Non-Recourse Debt or Indebtedness (other than Permitted Debt)
otherwise permitted by the first paragraph under "-- Certain Covenants
-- Incurrence of Indebtedness and Issuance of Disqualified Equity;"
(14) statutory and contractual Liens of landlords and warehousemen's,
producer's, carriers', mechanics', suppliers', materialman's, repairmen's,
or other like Liens arising in the ordinary course of business and with
respect to amounts not yet delinquent or being contested in good faith by
appropriate proceedings, if a reserve or appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made therefor;
(15) Liens Incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other similar types of social security, old age pension or public
liability obligations;
(16) Liens on pipelines or pipeline facilities that arise by operation
of law;
(17) Liens arising under operating agreements, joint venture
agreements, partnership agreements, oil and gas leases, farm out
agreements, division orders, contracts for sale, transportation or exchange
of oil and natural gas, unitization and pooling declarations and
agreements, area of mutual interest agreements and other agreements arising
in the ordinary course of EOTT's or any Restricted Subsidiary's business
that are customary in the Permitted Business;
(18) judgment and attachment Liens not giving rise to a Default;
(19) Liens securing the Obligations of the issuers under the notes and
the indenture and of the Subsidiary Guarantors under the Guarantees;
(20) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(21) Liens arising from protective filings made in the appropriate
office(s) for the filing of a financing statement in the applicable
jurisdiction(s) in connection with any lease, consignment or similar
transaction otherwise permitted hereby, which filings are made for the
purpose of perfecting the interest of the secured party in the relevant
items, if the transaction were subsequently classified as a sale secured
lending arrangement;
(22) Liens arising out of consignment or similar arrangements for sale
of goods;
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(23) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods; and
(24) Liens Incurred in the ordinary course of business of EOTT or any
Restricted Subsidiary of EOTT with respect to obligations that do not
exceed $5.0 million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of EOTT or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of EOTT or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of necessary fees and expenses Incurred in
connection therewith and any premiums paid on the Indebtedness refinanced);
(2) such Permitted Refinancing Indebtedness has a final maturity date
no earlier than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes or
the Guarantees, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the notes or the Guarantees, as the case may be, on
terms at least as favorable to the holders of notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and
(4) such Indebtedness is Incurred either by EOTT or by the Restricted
Subsidiary that is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Rating Category" means:
(1) with respect to Standard & Poor's Ratings Group, any of the
following categories: AAA, AA, A, BBB, BB, B, CCC, CC, C and D (or
equivalent successor categories) and
(2) with respect to Moody's Investors Service, Inc., any of the
following categories: Aaa, Aa, A, Baa, Ba,, B, Caa, Ca, C and D (or
equivalent successor categories).
"Rating Decline" means a decrease in the rating of the notes by either
Moody's Investors Service, Inc. or Standard & Poor's Ratings Group by one or
more gradations (including gradations within Rating Categories as well as
between Rating Categories). In determining whether the rating of the notes has
decreased by one or more gradations, gradations within Rating Categories, namely
+ and - for Standard & Poor's Ratings Group, and 1, 2 and 3 for Moody's
Investors Service, Inc., will be taken into account; for example, in the case of
Standard & Poor's Ratings Group, a rating decline either from BB+ to BB or BB-
to B+ will constitute a decrease of one gradation.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of EOTT that is not an
Unrestricted Subsidiary. Notwithstanding anything in the indenture to the
contrary, EOTT Finance shall be designated as a Restricted Subsidiary of EOTT.
"Sale and Lease-Back Transaction" means an arrangement relating to property
owned by EOTT or a Restricted Subsidiary on the Issue Date or thereafter
acquired by EOTT or a Restricted Subsidiary whereby EOTT or a Restricted
Subsidiary transfers such property to a Person and EOTT or a Restricted
Subsidiary leases it from such Person.
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"Senior Debt" means:
(1) all Indebtedness outstanding under Credit Facilities and all
Currency Agreements and Interest Rate Agreements with respect thereto;
(2) any other Indebtedness permitted to be Incurred by EOTT and the
Restricted Subsidiaries under the terms of the indenture unless the
instrument under which such Indebtedness is Incurred expressly provides
that it is subordinated in right of payment to the notes; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will not
include:
(1) any Indebtedness that is expressly subordinate or junior in right
of payment to any Indebtedness of EOTT or any Subsidiary Guarantor;
(2) any liability for federal, state, local or other taxes owed or
owing by EOTT or any Subsidiary Guarantor;
(3) any Indebtedness of EOTT or any of its Subsidiaries to any of its
Subsidiaries or other Affiliates; or
(4) any Indebtedness that is Incurred in violation of the indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act and the Exchange Act, as such Regulation is in
effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity (other than
a partnership) of which more than 50% of the Voting Stock is at the time
owned or controlled, directly or indirectly, by such Person or one or more
of the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership where (i) more than 50% of the Equity Interests
(considering all partners' Equity Interests as a single class), is at the
time owned or controlled, directly or indirectly, by such Person, one or
more other Subsidiaries of such Person or a combination thereof and (ii)
more than 50% of the general partner interests is at the time owned or
controlled, directly or indirectly, by such Person, one or more other
Subsidiaries of such Person, the general partner of such Person, or an
Affiliate of the General Partner or a combination thereof.
"Subsidiary Guarantors" means each of:
(1) the Restricted Subsidiaries;
(2) any other Subsidiary that executes a Guarantee in accordance with
the provisions of the indenture; and
(3) their respective successors and assigns.
Notwithstanding anything in the indenture to the contrary, EOTT Finance shall
not be a Subsidiary Guarantor.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged; (ii) obligations of a Person
S-80
<PAGE> 83
controlled or supervised by and acting as an agency or instrumentality of the
United States of America the payment of which is unconditionally guaranteed as a
full faith and credit obligation by the United States of America, which, in
either case under clauses (i) or (ii) above, are not callable or redeemable at
the option of the issuers thereof; or (iii) depository receipts issued by a bank
or trust company as custodian with respect to any such U.S. Government
Obligations or a specific payment of interest on or principal of any such U.S.
Government Obligation held by such custodian for the account of the holder of a
depository receipt, provided that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the U.S. Government Obligation evidenced by such depository receipt.
"Unrestricted Subsidiary" means any Subsidiary of EOTT (other than EOTT
Finance) that is designated by the Board of Directors of the General Partner as
an Unrestricted Subsidiary pursuant to a Board Resolution, provided that, at the
time of such designation, (x) no portion of the Indebtedness or other
obligations of such Subsidiary (whether contingent or otherwise and whether
pursuant to the terms of such Indebtedness or the terms governing the
organization of such Subsidiary or by law) (A) is guaranteed by EOTT or any
other Restricted Subsidiary, (B) is recourse to or obligates EOTT or any
Restricted Subsidiary in any way (including any "claw-back," "keep-well,"
"make-well" or other agreements, arrangements or understandings to maintain the
financial performance or results of operations of such Subsidiary or to
otherwise infuse or contribute cash to such Subsidiary) or (C) subjects any
property or assets of EOTT or any Restricted Subsidiary, directly or indirectly,
contingently or otherwise, to the satisfaction of such Indebtedness, unless such
Investment or Indebtedness is permitted by the provisions of the indenture
described above under the captions "-- Certain Covenants -- Restricted Payments"
and "-- Incurrence of Indebtedness and Issuance of Disqualified Equity," (y) no
Equity Interests of a Restricted Subsidiary are held by such Subsidiary,
directly or indirectly, and (z) the amount of EOTT's Investment, as determined
at the time of such designation, in such Subsidiary from the date of the
indenture to the date of such designation is treated as of the date of such
designation as a Restricted Investment or Permitted Investment, as applicable.
Any designation of a Subsidiary of EOTT as an Unrestricted Subsidiary shall
be evidenced to the trustee by filing with the trustee a certified copy of the
resolutions of the Board of Directors of the General Partner giving effect to
such designation and an Officers' Certificate certifying that such designation
compiled with the preceding conditions and was permitted by the covenant
described above under the caption "-- Certain Covenants -- Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the preceding
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the indenture and any Indebtedness of
such Subsidiary shall be deemed to be Incurred by a Restricted Subsidiary of
EOTT as of such date and, if such Indebtedness is not permitted to be Incurred
as of such date under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Equity,"
EOTT shall be in default of such covenant. The Board of Directors of the General
Partner may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an Incurrence
or Indebtedness by a Restricted Subsidiary of EOTT of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (1) such Indebtedness is permitted under the covenant described
under the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Disqualified Equity," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period;
(2) no Default would be in existence following such designation; and (3) such
Subsidiary signs a Subsidiary Guarantee.
"Voting Stock" of any Person as of any date means the Equity Interests of
such Person pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers, general partners or trustees of any Person (irrespective of
whether or not, at the time, Equity Interests of any other class or classes
shall have, or might have, voting power by reason of the occurrence of any
contingency) or, with respect to a partnership (whether general or limited), any
general partner interest in such partnership.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all of the outstanding Equity Interests (other than directors' qualifying
shares, if any, or other ownership interests required by applicable law to be
held by third parties) shall at the time be owned by EOTT and its Restricted
Subsidiaries; provided that up to 1.1% of the Equity Interests of such Person
may be owned by the General Partner or an Affiliate of the General Partner.
S-82
<PAGE> 85
DESCRIPTION OF OTHER INDEBTEDNESS
On December 1, 1998, we increased our existing credit facility with Enron
to provide us with additional credit support in the form of guarantees, letters
of credit and working capital loans through December 31, 2001. The total amount
of the Enron credit facility is $1.0 billion and contains sublimits on the
availability of credit support of $100.0 million for working capital loans and
$900.0 million for guarantees and letters of credit. Letter of credit fees are
based on actual charges by the banks which range from 0.20% - 0.375% per annum.
Interest on outstanding loans is charged at LIBOR plus 2.50% per annum.
The Enron credit facility is subject to defined borrowing base limitations
relating to our activities and to the maintenance and protection of the
collateral. The borrowing base is the sum of cash and cash equivalents,
specified percentages of eligible receivables, inventory, and products
contracted for or delivered but not billed. The Enron credit facility permits
distributions to unitholders subject to certain limitations based on our
earnings and other factors. These covenants and restrictions are not expected to
materially affect our ability to operate the ongoing partnership business.
The Enron credit facility is secured by a first priority lien on and
security interest in all of our receivables and inventory. The Enron credit
facility is non-recourse to our general partner and its assets. We are
restricted from entering into additional financing arrangements without the
prior approval of Enron. Enron has approved the issuance of the notes offered
hereby.
At June 30, 1999, we had $89.9 million in letters of credit, $289.5 million
in guarantees provided by Enron, and $267.2 million in loans outstanding from
Enron at an average annual interest rate of approximately 8.14%.
At June 30, 1999, we had outstanding forward commodity repurchase
agreements of approximately $90.0 million. Under these agreements, the purchaser
only has title to the crude oil used as security under the repurchase
agreements. There are no rights to any of our other assets. Pursuant to the
agreements, which had terms of thirty days, we repurchased the crude oil
inventory on July 20, 1999 for approximately $90.4 million. The crude oil
repurchase agreements are used for short-term liquidity needs and allow us to
finance the storage of crude oil. We sell crude oil to the financial institution
on a spot basis and agree to repurchase the crude oil at the same price plus a
premium which, in the past, has been approximately LIBOR plus 0.55%. We store
the crude oil we sell as an agent for the financial institution. Each repurchase
agreement is settled at the end of 30 days, and can be renewed monthly; however,
either party may terminate the repurchase agreement. While the repurchase
agreements have default, cross-default, and acceleration provisions, there are
no maintenance or financial covenants associated with the agreements.
S-83
<PAGE> 86
CERTAIN UNITED STATES INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences of the acquisition, ownership and disposition of notes.
The following discussion does not discuss all of the aspects of federal income
taxation that may be relevant to a prospective holder of the notes in light of
the holder's particular circumstances or to certain types of holders who are
subject to special treatment under the federal income tax laws (including
persons who hold the notes as part of a conversion, straddle or hedge, dealers
in securities, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers and S corporations). Further, this discussion
pertains only to U.S. Holders and Non-U.S. Holders that purchase notes in the
initial offering at the public offering price and that will hold the notes as
capital assets within the meaning of section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). A "U.S. Holder" is a beneficial owner of notes
that is (i) an individual who is a citizen or resident of the United States,
(ii) a corporation or other entity that is taxable as a corporation created or
organized in the United States or under the laws of the United States or of any
State thereof (including the District of Columbia), (iii) an estate the income
of which is subject to U.S. federal income tax regardless of its source or (iv)
a trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust. A "Non-U.S. Holder"
is any beneficial owner of notes other than a U.S. Holder. If a partnership
holds notes, the tax treatment of a partner will generally depend upon the
status of the partner and upon the activities of the partnership. Partners of
partnerships that hold notes should consult their tax advisors as to the
particular tax consequences to them.
This discussion is based upon provisions of the Code, Treasury Regulations
(the "Regulations"), rulings and pronouncements issued by the Internal Revenue
Service ("IRS") and judicial decisions now in effect, all of which are subject
to change at any time by legislative, judicial or administrative action. Any
such changes may be applied retroactively in a manner that could adversely
affect U.S. Holders and Non-U.S. Holders. We have not sought and will not seek
any rulings from the IRS or opinions from counsel with respect to the matters
discussed below. There can be no assurance that the IRS will not take positions
concerning the tax consequences of the purchase, ownership or disposition of the
notes which are different from those discussed herein. ALL PROSPECTIVE INVESTORS
ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE FEDERAL, STATE AND LOCAL,
AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF OWNING AND DISPOSING OF THE
NOTES.
U.S. HOLDERS
Payments of Interest
Stated interest paid on each note held by a U.S. Holder will generally be
taxable in accordance with the U.S. Holder's regular method of accounting for
U.S. federal income tax purposes. The notes are not expected to be issued with
"original issue discount" for United States federal income tax purposes.
Sale, Redemption or Other Taxable Disposition of the Notes
The sale, redemption or other taxable disposition of a note will result in
the recognition of gain or loss to the U.S. Holder in an amount equal to the
difference, if any, between (i) the amount realized upon the disposition or
redemption and (ii) the U.S. Holder's adjusted tax basis in such note. A U.S.
Holder's tax basis for determining gain or loss on the disposition or redemption
of a note generally will be the cost of such note to such U.S. Holder, subject
to certain adjustments. Such gain or loss will be capital gain or loss (except
to the extent the sale proceeds represents interest that has accrued on the note
but has not yet been paid or included in income by the U.S. Holder, to which
extent such proceeds would be treated as ordinary interest income). In the case
of an individual U.S. Holder, such capital gain generally will be long term
capital gain or loss and generally will be subject to a maximum U.S. federal
income tax rate of 20% if the individual has held the note for more than one
year and otherwise will be short-term capital gain or loss. The deductibility of
capital losses is subject to certain limitations. Prospective investors should
consult their own tax advisors in this regard.
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<PAGE> 87
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to any payments
on the notes made to U.S. Holders other than certain exempt recipients (such as
corporations) and to proceeds realized by such holders on the sale or other
disposition of the notes. A 31% backup withholding tax will apply to such
amounts only if the U.S. Holder: (i) fails to furnish its social security or
other taxpayer identification number ("TIN") within a reasonable time after
request therefor, (ii) furnishes an incorrect TIN, (iii) fails to report
properly interest or dividend income, or (iv) fails under certain circumstances,
to provide a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that it is not subject to backup withholding.
Any amount withheld from a payment to a U.S. Holder under the backup withholding
rules is allowable as a refund or as a credit against such holder's federal
income tax liability, provided that the required information is furnished to the
IRS. Certain penalties may be imposed by the IRS on a U.S. Holder who is
required to supply information but who does not do so in the proper manner. U.S.
Holders of the notes should consult their tax advisors as to their qualification
for exemption from backup withholding and the procedure for obtaining such an
exemption.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Withholding Taxes
Generally, payments of principal and interest on the notes to a Non-U.S.
Holder will not be subject to U.S. withholding taxes. This exemption does not
apply to a Non-U.S. Holder of notes that (i) owns 10% or more of the units in
the partnership, (ii) is a "controlled foreign corporation" related to the
partnership, or (iii) is a bank making a loan in the ordinary course of its
business.
In addition, for the exemption from withholding taxes to apply, a Non-U.S.
Holder must (i) provide its name, address, and a signed statement that it is the
beneficial owner of the note and is not a U.S. Holder, (ii) claim an exemption
from withholding tax under an applicable tax treaty or (iii) claim an exemption
from withholding tax on the ground that the income is effectively connected with
the conduct by the Non-U.S. Holder of a trade or business in the U.S. In order
to satisfy one of these requirements, the Non-U.S. Holder, or in certain cases,
the Non-U.S. Holder's agent, must file an IRS Form W-8, Form W-8BEN, Form
W-8ECI, Form 1001 or Form 4224 (or successor forms), as applicable.
Non-U.S. Holders should consult their tax advisors about the specific
methods for satisfying these requirements. These procedures will change on
January 1, 2001. In addition, a claim for exemption will not be valid if the
person receiving the applicable form has actual knowledge that the statements on
the form are false.
Sale or Retirement of Notes
Non-U.S. holders will not be subject to federal income tax upon the sale or
other disposition of a note unless (i) the gain is effectively connected with
the conduct by the Non-U.S. holder of a trade or business in the U.S., (ii) the
Non-U.S. Holder is an individual, is present in the U.S. for at least 183 days
during the year in which it disposes of the note, and certain other conditions
are satisfied or (iii) the gain represents accrued interest, in which case the
rules for interest would apply.
U.S. Trade or Business
If a Non-U.S. Holder holds a note in connection with the conduct of a trade
or business in the U.S., any interest on the note, and any gain from disposing
of the note, generally will be subject to income tax under the rules applicable
to a U.S. Holder. In addition, a Non-U.S. Holder that is a corporation may,
under certain circumstances, be subject to the "branch profits tax" on its
earnings that are connected with its U.S. trade or business, including earnings
from the note. This tax is 30%, but may be reduced or eliminated by an
applicable income tax treaty.
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<PAGE> 88
Estate Taxes
Individual Non-U.S. Holders will not be subject to U.S. estate tax with
respect to notes beneficially owned by them at the time of their death. However,
this rule only applies if, at the time of such Non-U.S. Holder's death, payments
on the notes were not connected to a trade or business in the U.S.
Information Reporting and Backup Withholding
U.S. rules concerning information reporting and backup withholding are
described above. These rules apply to Non-U.S. Holders as follows:
- Principal and interest payments received by a Non-U.S. Holder will be
automatically exempt from the usual rules if the holder provides the tax
certifications needed to avoid withholding tax on interest, as described
above. The exemption does not apply if the recipient of the applicable
form knows that the form is false. In addition, interest payments made to
Non-U.S. Holders will be reported to the IRS on form 1042-S.
- Sale proceeds received on a sale of notes through a broker may be subject
to information reporting and/or backup withholding if the Non-U.S. Holder
is not eligible for an exemption. In particular, information reporting
and backup withholding may apply if the sale is effected through the U.S.
office of a broker, and information reporting (but not backup
withholding) may apply if the sale is effected through the foreign office
of a broker that has certain connections to the U.S. Non-U.S. Holders
should consult their tax advisors concerning information reporting and
backup withholding on a sale.
S-86
<PAGE> 89
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to such underwriter, the principal amount
of notes set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME OF NOTES
- ---- ----------------
<S> <C>
ING Barings LLC............................................. $ 99,875,000
Lehman Brothers Inc......................................... 99,875,000
PaineWebber Incorporated.................................... 35,250,000
------------
Total............................................. $235,000,000
============
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the notes included in the offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the notes if they purchase any of
the notes.
The underwriters propose to offer the notes inside the United States
directly and outside the United States through their selling agents.
The underwriters propose to offer some of the notes directly to the public
at the public offering price set forth on the cover page of this prospectus
supplement and some of the notes to certain dealers at the public offering price
less a concession not in excess of 0.250% of the principal amount of the notes.
The underwriters may allow, and such dealers may reallow, a concession not in
excess of 0.125% of the principal amount of the notes on sales to certain other
dealers. After the initial offering of the notes to the public, the public
offering price and concessions may be changed by the underwriters.
Each of the Partnership, EOTT Energy Corp., and the Partnership's
subsidiaries has agreed not to, directly or indirectly, sell, offer to sell,
grant any option for the sale of, or otherwise dispose of, or announce the
offering of, any debt securities issued or guaranteed by any of them or enter
into any agreement which contemplates any of the foregoing for a period of 30
days from the closing date without the prior written consent of ING Barings LLC.
In connection with the offering, the underwriters may purchase and sell
notes in the open market. These transactions may include over-allotment,
syndicate covering transactions and stabilizing transactions. Over-allotment
involves syndicate sales of the notes in excess of the principal amount of notes
to be purchased by the underwriters in the offering, which creates a syndicate
short position. Syndicate covering transactions involve purchases of the notes
in the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of notes made for the purpose of preventing or retarding a decline in
the market price of the notes while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when ING
Barings LLC, in covering syndicate short positions or making stabilizing
purchases, repurchases notes originally sold by that syndicate member.
Any of these activities may cause the price of the notes to be higher than
the price that otherwise would exist in the open market in the absence of such
transactions. These transactions may be effected in the over-the-counter market
or otherwise and, if commenced, may be discontinued at any time.
The underwriters have performed certain investment banking and advisory
services for us and for our affiliates from time to time for which they have
received customary fees and expenses. The underwriters may, from time to time,
engage in transactions with and perform services for us and for our affiliates
in the ordinary course of their business.
S-87
<PAGE> 90
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
LEGAL MATTERS
Vinson & Elkins L.L.P., will pass upon the validity of the notes offered in
this prospectus supplement. The underwriters are represented by Cravath, Swaine
& Moore.
EXPERTS
The audited consolidated financial statements and schedule of EOTT Energy
Partners, L.P. as of December 31, 1998 and 1997, and for the three years in the
period ended December 31, 1998, incorporated by reference in this prospectus
supplement and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
With respect to the unaudited interim financial information for the three
and six month periods ended June 30, 1999 and 1998, Arthur Andersen LLP has
applied limited procedures in accordance with professional standards for a
review of that information. However, their separate report thereon states that
they did not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their report on that
information should be restricted in light of the limited nature of the review
procedures applied. In addition, the accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited interim financial information because that report is not
a "report" or a "part" of the registration statement prepared or certified by
the accountants within the meaning of Sections 7 and 11 of the Act.
S-88
<PAGE> 91
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Financial Statements
Report of Independent Public Accountants.................. F-2
Condensed Consolidated Statements of Operations
(unaudited) --
Three Months Ended June 30, 1999 and 1998 and Six
Months Ended June 30, 1999 and 1998.................... F-3
Condensed Consolidated Balance Sheets (unaudited) --
June 30, 1999 and December 31, 1998.................... F-4
Condensed Consolidated Statements of Cash Flows
(unaudited) --
Six Months Ended June 30, 1999 and 1998................ F-5
Condensed Consolidated Statement of Partners' Capital
(unaudited) --
Six Months Ended June 30, 1999......................... F-6
Notes to Condensed Consolidated Financial Statements...... F-7
Audited Financial Statements
Report of Independent Public Accountants.................. F-17
Consolidated Statements of Operations --
Years Ended December 31, 1998, 1997 and 1996........... F-18
Consolidated Balance Sheets --
December 31, 1998 and 1997............................. F-19
Consolidated Statements of Cash Flows --
Years Ended December 31, 1998, 1997 and 1996........... F-20
Consolidated Statements of Partners' Capital --
Years Ended December 31, 1998, 1997 and 1996........... F-21
Notes to Consolidated Financial Statements................ F-22
Supplemental Schedule
Schedule II -- Valuation and Qualifying Accounts and
Reserves............................................... A-1
</TABLE>
F-1
<PAGE> 92
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EOTT Energy Partners, L.P.,
We have reviewed the accompanying condensed consolidated balance sheet of
EOTT Energy Partners, L.P., a Delaware limited partnership, as of June 30, 1999,
and the related condensed consolidated statements of operations for the
three-month and six-month periods ended June 30, 1999 and 1998, and the
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 1999 and 1998. These financial statements are the responsibility of the
Partnership's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of EOTT Energy Partners, L.P. as of
December 31, 1998, and, in our report dated February 15, 1999, we expressed an
unqualified opinion on that statement. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1998, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Houston, Texas
August 13, 1999
F-2
<PAGE> 93
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue...................................... $2,259,303 $1,231,875 $3,692,460 $2,571,279
Cost of Sales................................ 2,203,606 1,202,719 3,583,967 2,514,576
---------- ---------- ---------- ----------
Gross Margin................................. 55,697 29,156 108,493 56,703
Expenses
Operating expenses......................... 38,632 23,435 74,815 46,825
Depreciation and amortization.............. 8,350 4,564 16,490 9,078
---------- ---------- ---------- ----------
Total.............................. 46,982 27,999 91,305 55,903
---------- ---------- ---------- ----------
Operating Income............................. 8,715 1,157 17,188 800
Other Income (Expense)
Interest income............................ 145 171 320 342
Interest and related charges............... (7,318) (2,033) (13,820) (3,823)
Other, net................................. 640 (569) 1,028 (316)
---------- ---------- ---------- ----------
Total.............................. (6,533) (2,431) (12,472) (3,797)
---------- ---------- ---------- ----------
Net Income (Loss) Before Cumulative Effect of
Accounting Change.......................... 2,182 (1,274) 4,716 (2,997)
Cumulative Effect of Accounting Change (Note
9)......................................... -- -- 1,747 --
---------- ---------- ---------- ----------
Net Income (Loss)............................ $ 2,182 $ (1,274) $ 6,463 $ (2,997)
========== ========== ========== ==========
Basic Net Income (Loss) Per Unit (Note 4)
Common..................................... $ 0.09 $ (0.06) $ 0.24 $ (0.15)
========== ========== ========== ==========
Subordinated............................... $ 0.09 $ (0.07) $ 0.31 $ (0.16)
========== ========== ========== ==========
Diluted Net Income (Loss) Per Unit (Note
4)......................................... $ 0.09 $ (0.07) $ 0.26 $ (0.16)
========== ========== ========== ==========
Number of Units Outstanding for Diluted
Computation................................ 23,976 18,830 23,976 18,830
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
F-3
<PAGE> 94
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 3,652 $ 3,033
Trade and other receivables, net of allowance for doubtful
accounts of $1,732 and $1,860 respectively............. 649,824 403,335
Inventories............................................... 102,580 137,545
Other..................................................... 62,837 30,328
---------- --------
Total current assets.............................. 818,893 574,241
---------- --------
Property, Plant & Equipment, at cost........................ 543,040 497,807
Less: Accumulated depreciation............................ 126,431 112,568
---------- --------
Net property, plant & equipment................... 416,609 385,239
---------- --------
Other Assets, net of amortization........................... 5,533 6,340
---------- --------
Total Assets...................................... $1,241,035 $965,820
========== ========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable.................................... $ 768,342 $524,822
Accrued taxes payable..................................... 8,761 5,192
Short-term borrowings -- affiliate........................ 50,200 28,297
Bridge loan -- affiliate.................................. 42,000 42,000
Term loan -- affiliate.................................... 175,000 175,000
Repurchase agreements..................................... 89,998 83,016
Other..................................................... 14,229 9,983
---------- --------
Total current liabilities......................... 1,148,530 868,310
---------- --------
Long-Term Liabilities....................................... 153 --
---------- --------
Commitments and Contingencies (Note 8)
Additional Partnership Interests (Note 6)................... 2,547 21,928
---------- --------
Partners' Capital
Common Unitholders........................................ 41,123 14,472
Special Unitholders....................................... -- 21,092
Subordinated Unitholders.................................. 41,064 38,315
General Partner........................................... 7,618 1,703
---------- --------
Total Partners' Capital........................... 89,805 75,582
---------- --------
Total Liabilities and Partners' Capital........... $1,241,035 $965,820
========== ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
F-4
<PAGE> 95
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income (loss) to net cash provided
by (used in) operating activities --
Net income (loss)......................................... $ 6,463 $ (2,997)
Depreciation.............................................. 15,456 8,063
Amortization of intangible assets......................... 1,034 1,015
Gains on disposal of assets............................... (436) (77)
Changes in components of working capital --
Receivables............................................ (246,489) 65,824
Inventories............................................ 34,965 28,020
Other current assets................................... (32,509) (2,906)
Trade accounts payable................................. 243,520 (141,397)
Accrued taxes payable.................................. 3,569 (514)
Other current liabilities.............................. 527 3,436
Other assets and liabilities.............................. 52 397
--------- ---------
Net Cash Provided By (Used In) Operating Activities......... 26,152 (41,136)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment....... 548 640
Acquisitions.............................................. (33,000) --
Additions to property, plant and equipment................ (10,064) (3,268)
Other, net................................................ -- 24
--------- ---------
Net Cash Used In Investing Activities....................... (42,516) (2,604)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term
borrowings -- affiliate................................ 21,903 (41,400)
Increase in repurchase agreements......................... 6,982 89,540
Distributions to Unitholders.............................. (14,168) (11,400)
Issuance of Additional Partnership Interests.............. 2,547 6,677
Other, net................................................ (281) (319)
--------- ---------
Net Cash Provided By Financing Activities................... 16,983 43,098
--------- ---------
Increase (Decrease) In Cash and Cash Equivalents............ 619 (642)
Cash and Cash Equivalents, Beginning of Period.............. 3,033 3,737
--------- ---------
Cash and Cash Equivalents, End of Period.................... $ 3,652 $ 3,095
========= =========
Supplemental Cash Flow Information:
Interest paid............................................. $ 13,464 $ 3,944
========= =========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
F-5
<PAGE> 96
EOTT ENERGY PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON SPECIAL SUBORDINATED GENERAL
UNITHOLDERS UNITHOLDERS UNITHOLDERS PARTNER
----------- ----------- ------------ -------
<S> <C> <C> <C> <C>
Partners' Capital at December 31, 1998............ $ 14,472 $ 21,092 $38,315 $1,703
Net income........................................ 2,947 618 2,749 149
Cash distributions................................ (12,495) (1,416) -- (257)
Contribution of Additional Partnership
Interests....................................... 15,905 -- -- 6,023
Conversion of Special Units....................... 20,294 (20,294) -- --
-------- -------- ------- ------
Partners' Capital at June 30, 1999................ $ 41,123 $ -- $41,064 $7,618
======== ======== ======= ======
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
F-6
<PAGE> 97
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In connection with a reorganization of the business conducted by EOTT
Energy Corp., an indirect wholly-owned subsidiary of Enron Corp. ("Enron"), into
limited partnership form and a concurrent initial public offering of Common
Units of EOTT Energy Partners, L.P. ("EOTT" or the "Partnership") effective
March 24, 1994, the net assets of EOTT Energy Corp., its wholly-owned foreign
subsidiary, EOTT Energy Ltd., and Enron Products Marketing Company ("EPMC") were
acquired by three operating limited partnerships in which the Partnership is
directly or indirectly the 99% limited partner. EOTT Energy Corp., a Delaware
corporation, serves as the General Partner of the Partnership and its related
operating limited partnerships. The accompanying condensed consolidated
financial statements and related notes present the financial position as of June
30, 1999 and December 31, 1998, the results of operations for the three and six
months ended June 30, 1999 and 1998, cash flows for the six months ended June
30, 1999 and 1998 and changes in partners' capital for the six months ended June
30, 1999. For the three and six months ended June 30, 1999 and 1998, traditional
net income (loss) and comprehensive income (loss) are the same.
On March 24, 1994, the General Partner completed an initial public offering
of 10 million Common Units at $20.00 per unit, representing limited partner
interests in the Partnership. In addition to its aggregate approximate 2%
general partner interest in the Partnership, the General Partner owns an
approximate 29% subordinated limited partner interest. Enron, through its
ownership of EOTT Common Units, directly holds an approximate 14% interest in
the Partnership.
The financial statements included herein have been prepared by the
Partnership without audit pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they reflect all
adjustments (which consist solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
results for interim periods. Certain information and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. However, the Partnership believes that the disclosures are adequate
to make the information presented not misleading. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1998 filed with the SEC.
Certain reclassifications have been made to prior period amounts to conform
with the current period presentation.
2. ACQUISITION OF ASSETS
On July 1, 1998, the Partnership acquired crude oil gathering and
transportation assets in West Texas and New Mexico from Koch Pipeline Company,
L.P., a subsidiary of Koch Industries, Inc., and Koch Oil Company, a division of
Koch Industries, Inc. (collectively "Koch"). The purchase price was
approximately $28.5 million and was financed with short-term borrowings from
Enron.
On December 1, 1998, the Partnership acquired certain additional crude oil
gathering and transportation assets (the "Assets"), in key oil producing regions
from Koch. The total purchase price of the Assets was $235.6 million, which
included consideration of $184.5 million in cash, 2,000,000 Common Units,
2,000,000 Subordinated Units and $11.4 million in transaction costs. EOTT
financed the majority of the purchase price through short-term borrowings from
Enron. See additional discussion regarding Enron financing in Note 3.
On May 1, 1999, EOTT acquired crude oil transportation and storage assets
in West Texas and New Mexico from Texas-New Mexico Pipeline Company which
included approximately 1,800 miles of common
F-7
<PAGE> 98
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carrier crude oil pipelines. EOTT paid $33 million in cash and financed the
acquisition using short-term borrowings from Enron.
3. CREDIT RESOURCES AND LIQUIDITY
In 1995, Enron agreed to provide credit support to the Partnership in the
form of guarantees, letters of credit, loans and letters of indemnity. The total
amount of the credit support was $600 million, as amended December 19, 1996, had
a maturity of March 31, 1999 and was replaced with a new facility on December 1,
1998 as discussed below. As amended, the agreement contained sublimits of $100
million for working capital loans and $200 million for letters of credit. Letter
of credit fees were based on actual charges by the banks, which ranged from
.20% -- .375% per annum. Interest on outstanding loans was charged at the London
Interbank Offering Rate ("LIBOR") plus 25 basis points per annum. At December
31, 1997, EOTT had a note payable of $39.3 million with Enron under a financing
arrangement for acquisitions and other capital projects. This financing was
provided at a rate of LIBOR plus 30 basis points per annum. The maturity date of
the note was March 31, 1999, and the note was redeemed and reissued under the
term loan discussed below.
On December 1, 1998, Enron increased its existing credit facility with the
Partnership to provide additional credit support in the form of guarantees,
letters of credit and working capital loans through December 31, 2001. The total
amount of the Enron facility is $1.0 billion, and it contains sublimits of $100
million for working capital loans and $900 million for guarantees and letters of
credit. Letter of credit fees are based on actual charges by the banks which
range from .20% -- .375% per annum. Interest on outstanding loans is charged at
LIBOR plus 250 basis points per annum.
The Enron facility is subject to defined borrowing base limitations
relating to the Partnership's activities and to the maintenance and protection
of the collateral. The Enron facility permits distributions to Unitholders
subject to certain limitations based on the Partnership's earnings and other
factors. These covenants and restrictions are not expected to materially affect
the Partnership's ability to operate its ongoing business.
At June 30, 1999 and December 31, 1998, EOTT had a term loan of $175
million outstanding with Enron under a financing arrangement to fund a portion
of the cash consideration paid to Koch for the assets purchased in 1998 and to
refinance indebtedness incurred in prior acquisitions. The term loan matures on
December 31, 1999. The interest rate on the term loan is LIBOR plus 300 basis
points.
The Enron facility and term loan are secured by a first priority lien on
and security interest in all receivables and inventory of the Partnership. The
borrowing base is the sum of cash and cash equivalents, specified percentages of
eligible receivables, inventory, and products contracted for or delivered but
not billed. The Enron facility and term loan are non-recourse to the General
Partner and the General Partner's assets. The Partnership is restricted from
entering into additional financing arrangements without the prior approval of
Enron.
In addition, at June 30, 1999 and December 31, 1998, EOTT had $42.0 million
of debt outstanding with Enron under a $100 million bridge loan to finance a
portion of the cash consideration for the acquisition of assets from Koch. The
interest rate on the bridge loan is initially LIBOR plus 400 basis points. At
the end of each three-month period, the spread on the bridge loan will increase
by 25 basis points. The bridge loan is unsecured and matures on December 31,
1999.
As discussed above, the interim bridge loan ($42 million) and term loan
($175 million) provided by Enron are due December 31, 1999. The General Partner
intends to access the debt and/or equity markets later this year to refinance
the bridge loan and term loan.
F-8
<PAGE> 99
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The General Partner believes that the Enron facility, bridge loan, term
loan and subsequent refinancing discussed previously will be sufficient to
support the Partnership's crude oil purchasing activities and working capital
and liquidity requirements. No assurance, however, can be given that the General
Partner will not be required to reduce or restrict the Partnership's gathering
and marketing activities because of limitations on its ability to obtain credit
support and financing for its working capital needs.
The Partnership's ability to obtain letters of credit to support its
purchases of crude oil or other petroleum products is fundamental to the
Partnership's gathering and marketing activities. Additionally, EOTT has a
significant need for working capital due to the large dollar volume of marketing
transactions in which it engages. Any significant decrease in the Partnership's
financial strength, regardless of the reason for such decrease, may increase the
number of transactions requiring letters of credit or other financial support,
may make it more difficult for the Partnership to obtain such letters of credit,
and/or may increase the cost of obtaining them. This could in turn adversely
affect the Partnership's ability to maintain or increase the level of its
purchasing and marketing activities or otherwise adversely affect the
Partnership's profitability and Available Cash as defined in the Partnership
Agreement and amendments thereto.
At December 31, 1998, EOTT had outstanding forward commodity repurchase
agreements of approximately $83.0 million. Pursuant to the agreements, which had
terms of thirty days, EOTT repurchased the crude oil inventory on January 20,
1999 for approximately $83.4 million. At June 30, 1999, EOTT had outstanding
forward commodity repurchase agreements of approximately $90.0 million. Pursuant
to the agreements, which had terms of thirty days, EOTT repurchased the crude
oil inventory on July 20, 1999 for approximately $90.4 million.
Generally, the Partnership will distribute 100% of its Available Cash
within 45 days after the end of each quarter to Unitholders of record and to the
General Partner. Available Cash consists generally of all of the cash receipts
of the Partnership adjusted for its cash distributions and net changes to
reserves. The full definition of Available Cash is set forth in the Partnership
Agreement and amendments thereto, forms of which have been filed as exhibits to
the Annual Report on Form 10-K. Distributions of Available Cash to the
Subordinated Unitholders are subject to the prior rights of the Common
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the Subordination Period, and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
Subordination Period.
MQD is $0.475 per Unit ($1.90 annualized). Enron has committed to provide
total cash distribution support in exchange for Additional Partnership Interests
("APIs") in an amount necessary to pay MQDs, with respect to quarters ending on
or before December 31, 2001, in an amount up to an aggregate of $29 million
($26.5 million of which remains available).
The Partnership Agreement authorizes EOTT to cause the Partnership to issue
additional limited partner interests, the proceeds from which could be used to
provide additional funds for acquisitions or other Partnership needs.
F-9
<PAGE> 100
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. EARNINGS PER UNIT
Net income (loss) shown in the tables below excludes the approximate two
percent interest of the General Partner. Earnings (loss) per unit are calculated
as follows (in millions, except per unit amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------
1999 1998
------------------------ --------------------------
NET WTD. NET WTD.
INCOME AVERAGE PER INCOME AVERAGE PER
(LOSS) UNITS UNIT (LOSS) UNITS UNIT
------ ------- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic(1)
Common............................... $1,336 14,976 $0.09 $ (760) 11,830 $(0.06)
Subordinated......................... $ 803 9,000 $0.09 $ (488) 7,000 $(0.07)
Diluted(2)............................. $2,139 23,976 $0.09 $(1,248) 18,830 $(0.07)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------
1999 1998
------------------------ --------------------------
NET WTD. NET WTD.
INCOME AVERAGE PER INCOME AVERAGE PER
(LOSS) UNITS UNIT (LOSS) UNITS UNIT
------ ------- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic(1)
Common............................... $3,565 14,976 $0.24 $(1,821) 11,830 $(0.15)
Subordinated......................... $2,749 9,000 $0.31 $(1,116) 7,000 $(0.16)
Diluted(2)............................. $6,314 23,976 $0.26 $(2,937) 18,830 $(0.16)
</TABLE>
- ---------------
(1) Net income (loss), excluding the two percent General Partner interest, has
been apportioned to each class of Unitholder based on the ownership of total
Units outstanding which is also reflected on the Statement of Partners'
Capital, and Special Units are considered Common Units during the periods in
which they are outstanding. Due to a negative capital account balance for
the Common Unitholders during the second and third quarters of 1998, the
loss allocated to the Common Unitholders attributable to these periods was
reallocated to the remaining Unitholders based on their ownership
percentage. The allocated loss was fully recouped by the Unitholders
allocated the additional losses in the first quarter of 1999.
(2) The diluted earnings (loss) per unit calculation assumes the conversion of
Subordinated Units into Common Units.
Per unit information related to the net income before cumulative effect of
accounting change and cumulative effect of the change in accounting principle
for the six months ended June 30, 1999 is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-------------------------------
BASIC
---------------------
COMMON SUBORDINATED DILUTED
------ ------------ -------
<S> <C> <C> <C>
Net Income Before Cumulative Effect of Accounting
Change............................................... $0.17 $0.24 $0.19
Cumulative Effect of Accounting Change................. 0.07 0.07 0.07
----- ----- -----
Net Income............................................. $0.24 $0.31 $0.26
===== ===== =====
</TABLE>
F-10
<PAGE> 101
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PARTNERS' CAPITAL
The following is a reconciliation of Units outstanding for the six months
ended June 30, 1999.
<TABLE>
<CAPTION>
COMMON SPECIAL SUBORDINATED
UNITS UNITS UNITS
---------- ---------- ------------
<S> <C> <C> <C>
Units Outstanding at December 31, 1998.............. 11,996,000 2,980,011 9,000,000
Conversion of Special Units into Common Units....... 2,980,011 (2,980,011) --
---------- ---------- ---------
Units Outstanding at June 30, 1999.................. 14,976,011 -- 9,000,000
========== ========== =========
</TABLE>
On February 12, 1999, the Partnership obtained approval of proposals
presented at a Special Meeting of Unitholders. Approval of these proposals,
among other things, (a) authorized the Partnership to issue an additional 10
million Common Units to raise cash to reduce indebtedness, for acquisitions and
other Partnership purposes, (b) changed the terms of the Special Units so that
they became convertible into Common Units and (c) resulted in an increase in
Enron's distribution support to $29 million and an extension of the support
through the fourth quarter of 2001. As a result of the approval of the
proposals, Enron contributed the $21.9 million in APIs outstanding pursuant to
its commitment made in connection with the Support Agreement discussed in Note
6.
6. TRANSACTIONS WITH ENRON AND RELATED PARTIES
Revenue and Cost of Sales. A summary of revenue and cost of sales with
Enron and its affiliates are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1999 1998 1999 1998
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales to affiliates........................... $ 4,449 $3,284 $ 5,004 $ 9,994
Purchases from affiliates..................... 260,513 7,419 262,761 14,830
</TABLE>
Revenue in 1999 and 1998 consists primarily of crude oil sales to Enron
Reserve Acquisition Corp. and natural gas liquids sales to Enron Gas Liquids,
Inc. Cost of sales consists primarily of crude oil and condensate purchases from
Enron Oil & Gas Company, Enron Capital & Trade Resources, and Enron Reserve
Acquisition Corp. and natural gas liquids purchases from Enron Gas Liquids, Inc.
These transactions, in the opinion of management, are no less favorable than can
be obtained from unaffiliated third parties.
Related party receivables at June 30, 1999 and December 31, 1998 were $1.1
million and $0.2 million, respectively, and are classified as trade and other
receivables. Related party payables at June 30, 1999 and December 31, 1998 were
$1.8 million and $1.6 million, respectively, and are classified as trade
accounts payable.
Support Agreement. Pursuant to a Support Agreement dated September 21, 1998
(a) Enron agreed to make loans to the Partnership to fund the cash portion of
the consideration paid to Koch for the Assets at closing as discussed in Note 2
and to refinance indebtedness incurred in a prior acquisition of assets from
Koch on July 1, 1998, (b) Enron agreed to increase and extend the Partnership's
credit facility with Enron to $1 billion through December 31, 2001, (c) the
Partnership agreed to issue 1,150,000 Special Units to Enron, (d) Enron agreed
to contribute $21.9 million in APIs to the Partnership on the earlier of the
date certain proposals, discussed further in Note 5, are approved by the
Unitholders at a special meeting of Unitholders or May 17, 1999, (e) Enron
agreed that if certain proposals are approved by the Unitholders it will extend
its cash distribution support through the fourth quarter of 2001, and (f) the
Partnership agreed that, if any additional APIs are issued prior to approval of
certain proposals by the
F-11
<PAGE> 102
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unitholders, it will issue additional Common Units at $19.00 per share in
exchange for such additional APIs. As discussed further in Note 5, the
Partnership obtained Unitholder approval of these proposals on February 12,
1999. Pursuant to the Support Agreement, EOTT borrowed from Enron a $42 million
bridge loan and $175 million term loan and entered into a $1 billion credit
facility with Enron, to replace its existing $600 million credit facility.
Special Units. Effective July 16, 1996, EOTT created a new class of limited
partner interest designated as Special Units. The Special Units ranked pari
passu with the Common Units in all distributions and upon liquidation and was
voted as a class with the Common Units. In connection with the Support
Agreement, the Partnership issued 1,150,000 Special Units to Enron in December
1998 and, as discussed further below, Enron contributed $21.9 million APIs to
the Partnership in February 1999. The Special Units were converted into Common
Units in March 1999 on a one-for-one basis pursuant to the Support Agreement
following the favorable vote of Unitholders in February 1999.
Additional Partnership Interests. As of December 31, 1998, Enron had paid
$21.9 million in distribution support. In exchange for the distribution support,
Enron received APIs in the Partnership. APIs have no voting rights and are
non-distribution bearing; however, APIs will be entitled to be redeemed if, with
respect to any quarter, the MQD and any Common Unit Arrearages have been paid,
but only to the extent that Available Cash with respect to such quarter exceeds
the amount necessary to pay the MQD on all Units and any Common Unit Arrearages.
As discussed in Note 5, certain Unitholder approvals were obtained on February
12, 1999 and as a result, Enron increased its cash distribution support to $29
million and extended it through the fourth quarter of 2001 and contributed the
$21.9 million in APIs outstanding pursuant to its commitment made in connection
with the Support Agreement. On May 14, 1999, Enron paid $2.5 million in support
of EOTT's first quarter 1999 distributions to its Common Unitholders and General
Partner.
7. OTHER INCOME (EXPENSE), NET
The components of other income (expense), net are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1999 1998 1999 1998
------ ------- ------ -----
<S> <C> <C> <C> <C>
Gain (loss) on foreign currency transactions... $205 $(470) $ 326 $(491)
Gain (loss) on disposal of fixed assets........ 270 (53) 436 77
Other, net..................................... 165 (46) 266 98
---- ----- ------ -----
Total................................ $640 $(569) $1,028 $(316)
==== ===== ====== =====
</TABLE>
8. LITIGATION AND OTHER CONTINGENCIES
EOTT is, in the ordinary course of business, a defendant in various
lawsuits, some of which are covered in whole or in part by insurance. The
Partnership is responsible for all litigation and other claims relating to the
business acquired from EOTT Energy Corp., although the Partnership will be
entitled to the benefit of certain insurance maintained by Enron covering
occurrences prior to the closing of the offering. The Partnership believes that
the ultimate resolution of litigation, individually and in the aggregate, will
not have a materially adverse impact on the Partnership's financial position or
results of operations. Various legal actions have arisen in the ordinary course
of business, the most significant of which are discussed in "Part I, Item 3.
Legal Proceedings" of EOTT's Annual Report filed on Form 10-K for the year ended
December 31, 1998.
The Texas Federal Anti-Trust Suit, the Mississippi Federal Anti-Trust Suit,
and the Louisiana Federal Anti-Trust Suit, along with several other suits to
which EOTT was not a party, were consolidated
F-12
<PAGE> 103
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for settlement purposes and transferred to the Southern District of Texas in
Corpus Christi by Transfer Order dated January 14, 1998. EOTT and the General
Partner, along with a majority of the other named defendants, entered into a
Settlement Agreement in December 1998, whereby the Settling Defendants agreed to
settle their claims with the Plaintiffs. Adequate reserves have been recorded
for EOTT's portion of the settlement. The settlement was verbally approved by
the Honorable Judge Janis Jack on April 7, 1999. A final judgement was entered
on August 11, 1999. If no appeal to the final judgment is filed, the cases
referenced above will be dismissed.
The State of Texas, et al. vs. Amerada Hess Corporation, et al., Cause No.
97-12040; In the 53rd Judicial District Court of Travis County, Texas. EOTT and
several other defendants entered into a Settlement Agreement in this matter on
August 5, 1999. Even though this Settlement Agreement disposed of any claims the
State of Texas may have had in the State of Texas Royalty Suit, a similar action
filed in Lee County, Texas in 1995, it did not dismiss the State of Texas
Royalty Suit.
The Partnership believes that it has obtained or has applied for all of the
necessary permits required by federal, state, and local environmental agencies
for the operation of its business. Further, the Partnership believes that there
are no outstanding liabilities or claims relating to environmental matters
individually, and in the aggregate, which would have a material adverse impact
on the Partnership's financial position or results of operations.
9. CHANGE IN ACCOUNTING PRINCIPLE
In December 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." Issue 98-10 is effective for fiscal years
beginning after December 15, 1998, and requires energy trading contracts (as
defined) to be recorded at fair value on the balance sheet, with the change in
fair value included in earnings. The consensus requires the effect of initial
application of Issue 98-10 to be recorded as a cumulative effect of a change in
accounting principle effective January 1, 1999, for calendar year companies. The
cumulative effect of adopting Issue 98-10 effective January 1, 1999 was $1.7
million and is reflected as an increase in net income in the Condensed
Consolidated Statement of Operations. For the three and six months ended June
30, 1999, EOTT had a net mark-to-market gain of $1.0 million and $3.1 million,
respectively.
10. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000. The standard cannot be applied
retroactively, but early adoption is permitted. EOTT has not yet determined the
impact of adopting SFAS No. 133; however, this standard could increase
volatility in earnings and partners' capital, through other comprehensive
income.
F-13
<PAGE> 104
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. BUSINESS SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
standard requires that companies report certain information about operating
segments in complete sets of financial statements and in condensed financial
statements of interim periods for fiscal years beginning after December 15,
1997. EOTT adopted this statement for the fiscal year ending December 31, 1998
and restated prior year information.
EOTT has three reportable segments, which management believes are necessary
to make decisions about resources to be allocated and assess its performance:
North American Crude Oil -- East of Rockies, Pipeline Operations and West Coast
Operations. The North American Crude Oil -- East of Rockies segment primarily
purchases, gathers, transports and markets crude oil. The Pipeline Operations
segment operates approximately 7,400 active miles of common carrier pipelines
operated in 12 states. The West Coast Operations include crude oil gathering and
marketing, refined products marketing and a natural gas liquids business.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as discussed in Note 2 included
in the Partnership's Annual Report on Form 10-K for the year ended December 31,
1998. EOTT evaluates performance based on operating income (loss).
EOTT accounts for intersegment revenue and transfers between North American
Crude Oil -- East of Rockies and West Coast Operations as if the sales or
transfers were to third parties, that is, at current market prices. Intersegment
revenues for Pipeline Operations are based on published pipeline tariffs.
F-14
<PAGE> 105
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INFORMATION BY BUSINESS SEGMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
NORTH
AMERICAN WEST CORPORATE
CRUDE OIL -- PIPELINE COAST AND
EOR OPERATIONS OPERATIONS OTHER(B) CONSOLIDATED
------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Revenue from external customers........... $2,107,679 $ 6,928 $144,710 $ (14) $2,259,303
Intersegment revenue(a)................... 18,273 22,178 8,779 (49,230) --
---------- -------- -------- -------- ----------
Total revenue................... 2,125,952 29,106 153,489 (49,244) 2,259,303
---------- -------- -------- -------- ----------
Gross margin.............................. 19,886 28,443 7,416 (48) 55,697
---------- -------- -------- -------- ----------
Operating income (loss)................... (637) 13,564 2,017 (6,229) 8,715
Other expense............................. -- -- -- (6,533) (6,533)
---------- -------- -------- -------- ----------
Net income (loss)......................... (637) 13,564 2,017 (12,762) 2,182
---------- -------- -------- -------- ----------
Depreciation and amortization............. (2,349) (5,078) (497) (426) (8,350)
---------- -------- -------- -------- ----------
THREE MONTHS ENDED JUNE 30, 1998
Revenue from external customers........... $1,024,687 $ 1,686 $180,998 $ 24,504 $1,231,875
Intersegment revenue(a)................... 12,377 3,415 -- (15,792) --
---------- -------- -------- -------- ----------
Total revenue................... 1,037,064 5,101 180,998 8,712 1,231,875
---------- -------- -------- -------- ----------
Gross margin.............................. 22,170 4,983 2,719 (716) 29,156
---------- -------- -------- -------- ----------
Operating income (loss)................... 7,356 441 492 (7,132) 1,157
Other expense............................. -- -- -- (2,431) (2,431)
---------- -------- -------- -------- ----------
Net income (loss)......................... 7,356 441 492 (9,563) (1,274)
---------- -------- -------- -------- ----------
Depreciation and amortization............. (2,314) (1,683) (133) (434) (4,564)
---------- -------- -------- -------- ----------
SIX MONTHS ENDED JUNE 30, 1999
Revenue from external customers........... $3,422,926 $ 10,070 $259,478 $ (14) $3,692,460
Intersegment revenue(a)................... 31,395 42,472 14,333 (88,200) --
---------- -------- -------- -------- ----------
Total revenue................... 3,454,321 52,542 273,811 (88,214) 3,692,460
---------- -------- -------- -------- ----------
Gross margin.............................. 41,978 52,007 14,556 (48) 108,493
---------- -------- -------- -------- ----------
Operating income (loss)................... 932 24,325 4,402 (12,471) 17,188
Other expense............................. -- -- -- (12,472) (12,472)
---------- -------- -------- -------- ----------
Net income (loss) before cumulative effect
of accounting change.................... 932 24,325 4,402 (24,943) 4,716
---------- -------- -------- -------- ----------
Depreciation and amortization............. (4,746) (9,884) (991) (869) (16,490)
---------- -------- -------- -------- ----------
</TABLE>
F-15
<PAGE> 106
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NORTH
AMERICAN WEST CORPORATE
CRUDE OIL -- PIPELINE COAST AND
EOR OPERATIONS OPERATIONS OTHER(B) CONSOLIDATED
------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Revenue from external customers........... $2,102,518 $ 3,270 $354,883 $110,608 $2,571,279
Intersegment revenue(a)................... 20,471 6,833 123 (27,427) --
---------- -------- -------- -------- ----------
Total revenue................... 2,122,989 10,103 355,006 83,181 2,571,279
---------- -------- -------- -------- ----------
Gross margin.............................. 41,782 9,940 5,013 (32) 56,703
---------- -------- -------- -------- ----------
Operating income (loss)................... 11,500 809 430 (11,939) 800
Other expense............................. -- -- -- (3,797) (3,797)
---------- -------- -------- -------- ----------
Net income (loss) before cumulative effect
of accounting change.................... 11,500 809 430 (15,736) (2,997)
---------- -------- -------- -------- ----------
Depreciation and amortization............. (4,668) (3,323) (242) (845) (9,078)
---------- -------- -------- -------- ----------
TOTAL ASSETS AT JUNE 30, 1999............. $ 822,386 $317,636 $ 83,863 $ 17,150 $1,241,035
---------- -------- -------- -------- ----------
TOTAL ASSETS AT DECEMBER 31, 1998......... 608,655 279,315 60,677 17,173 965,820
---------- -------- -------- -------- ----------
</TABLE>
- ---------------
(a) Intersegment revenue for North American Crude Oil -- EOR and West Coast
Operations is made at prices comparable to those received from external
customers. Intersegment revenue for Pipeline Operations is transportation
costs charged to North American Crude Oil -- EOR for the transport of crude
oil at published pipeline tariffs.
(b) Corporate and Other also includes the East of Rockies refined products
business in 1998 and intersegment eliminations.
12. REALIGNMENT INITIATIVES
In late 1997, EOTT decided to exit the marginal East of Rockies refined
products business and streamlined business processes throughout the organization
and realigned reporting responsibilities to improve the Partnership's overall
cost structure. The realignment initiatives have been completed and the reserves
were adequate to complete the initiatives.
13. SUBSEQUENT EVENTS
On July 20, 1999, the Board of Directors of EOTT Energy Corp., as General
Partner, declared the Partnership's regular quarterly cash distribution of $.475
for all Common Units for the period April 1, 1999 through June 30, 1999. The
second quarter distribution of $7.3 million was paid on August 13, 1999 to the
General Partner and all Common Unitholders of record as of July 30, 1999. The
distribution was paid utilizing Available Cash from the Partnership.
F-16
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EOTT Energy Partners, L.P.:
We have audited the accompanying consolidated balance sheets of EOTT Energy
Partners, L.P. (a Delaware limited partnership) as of December 31, 1998 and
1997, and the related consolidated statements of operations, cash flows and
partners' capital for each of the three years in the period ended December 31,
1998. These financial statements and the schedule referred to below are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EOTT Energy Partners, L.P.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in the index to financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 15, 1999
F-17
<PAGE> 108
EOTT ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue.................................................. $5,294,697 $7,646,099 $7,469,730
Cost of Sales............................................ 5,162,092 7,533,054 7,320,203
---------- ---------- ----------
Gross Margin............................................. 132,605 113,045 149,527
Expenses
Operating expenses..................................... 104,425 96,158 101,945
Depreciation and amortization.......................... 20,951 16,518 15,720
Impairment of assets................................... -- 7,961 --
---------- ---------- ----------
125,376 120,637 117,665
---------- ---------- ----------
Operating Income (Loss).................................. 7,229 (7,592) 31,862
Other Income (Expense)
Interest income........................................ 674 620 448
Interest and related charges........................... (10,165) (6,661) (3,659)
Other, net............................................. (1,805) (766) 158
---------- ---------- ----------
(11,296) (6,807) (3,053)
---------- ---------- ----------
Net Income (Loss)........................................ $ (4,067) $ (14,399) $ 28,809
========== ========== ==========
Basic Net Income (Loss) Per Unit (Note 4)
Common................................................. $ (0.17) $ (0.75) $ 1.50
========== ========== ==========
Subordinated........................................... $ (0.26) $ (0.75) $ 1.50
========== ========== ==========
Diluted Net Income (Loss) Per Unit (Note 4).............. $ (0.21) $ (0.75) $ 1.50
========== ========== ==========
Distributions Per Common Unit............................ $ 1.90 $ 1.90 $ 1.90
========== ========== ==========
Average Units Outstanding for Diluted Computation........ 19,267 18,830 18,830
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-18
<PAGE> 109
EOTT ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents................................. $ 3,033 $ 3,737
Trade and other receivables, net of allowance for doubtful
accounts of $1,860 and $1,660, respectively............ 403,335 463,983
Inventories............................................... 137,545 139,265
Other..................................................... 30,328 23,059
-------- --------
Total current assets.............................. 574,241 630,044
-------- --------
Property, Plant and Equipment, at cost...................... 497,807 243,444
Less: Accumulated depreciation............................ 112,568 97,224
-------- --------
Net property, plant and equipment................. 385,239 146,220
-------- --------
Other Assets, net of amortization........................... 6,340 6,657
-------- --------
Total Assets................................................ $965,820 $782,921
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Trade accounts payable.................................... $524,822 $586,897
Accrued taxes payable..................................... 5,192 5,462
Note payable -- affiliate................................. -- 39,300
Short-term borrowings -- affiliate........................ 28,297 70,000
Bridge loan -- affiliate.................................. 42,000 --
Term loan -- affiliate.................................... 175,000 --
Repurchase agreements..................................... 83,016 --
Other..................................................... 9,983 6,113
-------- --------
Total current liabilities......................... 868,310 707,772
-------- --------
Long-Term Liabilities....................................... -- 281
-------- --------
Commitments and Contingencies (Notes 14 and 15)
Additional Partnership Interests (Note 12).................. 21,928 12,775
Partners' Capital
Common Unitholders........................................ 14,472 7,490
Special Unitholders....................................... 21,092 25,060
Subordinated Unitholders.................................. 38,315 28,169
General Partner........................................... 1,703 1,374
-------- --------
Total Partners' Capital..................................... 75,582 62,093
-------- --------
Total Liabilities and Partners' Capital..................... $965,820 $782,921
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-19
<PAGE> 110
EOTT ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income (loss) to net cash provided
by (used in) operating activities
Net income (loss).................................... $ (4,067) $ (14,399) $ 28,809
Depreciation......................................... 18,806 14,487 13,690
Impairment of assets................................. -- 7,961 --
Amortization of intangible assets.................... 2,145 2,031 2,030
(Gains) losses on disposal of assets................. 66 (503) 80
Changes in components of working capital --
Receivables........................................ 60,648 240,801 (265,165)
Inventories........................................ 1,720 (4,339) (67,922)
Other current assets............................... (3,737) 1,893 (5,619)
Trade accounts payable............................. (61,578) (231,776) 311,909
Accrued taxes payable.............................. (270) (3,003) 3,170
Other current liabilities.......................... 4,238 (14,057) 14,668
Discontinued operations.............................. -- -- 3,460
Other assets and liabilities......................... 616 886 195
--------- --------- ---------
Net Cash Provided by (Used In) Operating Activities..... 18,587 (18) 39,305
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment..... 7,330 1,243 880
Acquisitions............................................ (224,397) (12,000) --
Additions to property, plant and equipment.............. (8,492) (10,837) (6,723)
Other, net.............................................. 866 129 (1,991)
--------- --------- ---------
Net Cash Used In Investing Activities................... (224,693) (21,465) (7,834)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in note payable................................ -- -- (85,000)
Increase (decrease) in note payable -- affiliate........ (39,300) 15,072 24,228
Increase (decrease) in short-term
borrowings -- affiliate.............................. (41,703) 31,500 36,300
Increase in bridge loan -- affiliate.................... 42,000 -- --
Increase in term loan -- affiliate...................... 175,000 -- --
Increase in repurchase agreements....................... 83,016 -- --
Acquisition of treasury units........................... (66) -- --
Issuance of Common Units................................ -- -- 29,772
Contribution from General Partner....................... 793 -- 604
Distributions to Unitholders............................ (22,842) (29,681) (28,831)
Issuance of Additional Partnership Interests............ 9,153 3,684 --
Other, net.............................................. (649) (616) (5,559)
--------- --------- ---------
Net Cash Provided by (Used In) Financing Activities..... 205,402 19,959 (28,486)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents.......... (704) (1,524) 2,985
Cash and Cash Equivalents Beginning of Period............. 3,737 5,261 2,276
--------- --------- ---------
Cash and Cash Equivalents End of Period................... $ 3,033 $ 3,737 $ 5,261
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-20
<PAGE> 111
EOTT ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON SPECIAL SUBORDINATED GENERAL
UNITHOLDERS UNITHOLDERS UNITHOLDERS PARTNER
----------- ----------- ------------ -------
<S> <C> <C> <C> <C>
Partners' Capital at December 31, 1995............ $ 37,992 $ -- $36,219 $1,608
Net income........................................ 16,353 1,382 10,496 578
Cash distributions................................ (20,738) (869) (6,650) (574)
Issuance of Common Units.......................... 29,772 -- -- --
Exchange of Common Units for Special Units (Note
12)............................................. (29,395) 29,395 -- --
Contribution from General Partner................. -- -- -- 604
-------- -------- ------- ------
Partners' Capital at December 31, 1996............ 33,984 29,908 40,065 2,216
======== ======== ======= ======
Net loss.......................................... (7,494) (1,371) (5,246) (288)
Cash distributions................................ (19,000) (3,477) (6,650) (554)
-------- -------- ------- ------
Partners' Capital at December 31, 1997............ 7,490 25,060 28,169 1,374
======== ======== ======= ======
Net loss.......................................... (1,623) (490) (1,854) (100)
Cash distributions................................ (19,000) (3,478) -- (364)
Acquisition of Common Units for Treasury.......... (66) -- -- --
Issuance of Common Units.......................... 27,671 -- -- --
Issuance of Special Units......................... -- 15,905 -- --
Contribution receivable from Enron................ -- (15,905) -- --
Issuance of Subordinated Units.................... -- -- 12,000 --
Contribution from General Partner................. -- -- -- 793
-------- -------- ------- ------
Partners' Capital at December 31, 1998............ $ 14,472 $ 21,092 $38,315 $1,703
======== ======== ======= ======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-21
<PAGE> 112
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In connection with a reorganization of the business conducted by EOTT
Energy Corp., an indirect wholly-owned subsidiary of Enron Corp. (Enron or the
Parent), into limited partnership form and a concurrent initial public offering
of Common Units of EOTT Energy Partners, L.P. (EOTT or the Partnership)
effective March 24, 1994, the net assets of EOTT Energy Corp. and its
wholly-owned foreign subsidiary, EOTT Energy Ltd., and Enron Products Marketing
Company (EPMC) (collectively referred to as the Predecessor) were acquired by
several operating limited partnerships in which the Partnership is directly or
indirectly the 99% limited partner. EOTT Energy Corp. serves as the General
Partner of the Partnership and its related operating limited partnerships.
On March 24, 1994, the General Partner completed an initial public offering
of 10 million Common Units at $20.00 per Unit, representing limited partner
interests in the Partnership of approximately 58%. At December 31, 1998 the
General Partner owned an approximate 2% general partner interest in the
Partnership and an approximate 29% subordinated limited partner interest. Enron,
through its ownership of EOTT Common Units, holds an approximate 14% interest in
the Partnership.
The accompanying consolidated financial statements and related notes
present the financial position as of December 31, 1998 and 1997 for the
Partnership, and the results of its operations, cash flows and changes in
partners' capital for the years ended December 31, 1998, 1997 and 1996.
Certain reclassifications have been made to prior period amounts to conform
with the current period presentation.
Unless the context otherwise requires, the term EOTT hereafter refers to
the Partnership and its affiliated limited partnerships.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The Partnership owns and operates its assets
through operating limited partnerships. The accompanying financial statements
reflect the combined accounts of the Partnership and the operating partnerships
after elimination of intercompany transactions.
Nature of Operations. Through its affiliated limited partnerships, EOTT
Energy Operating Limited Partnership, EOTT Energy Canada Limited Partnership,
and EOTT Energy Pipeline Limited Partnership, EOTT is engaged in the purchasing,
gathering, transporting, trading, storage and resale of crude oil and refined
petroleum products and related activities. As discussed further in Note 19, EOTT
has changed the composition of its reportable segments and restated segment
information for previous periods. EOTT's principal business segments are its
North American Crude Oil -- East of Rockies gathering and marketing operations,
Pipeline Operations and West Coast Operations. In late 1997, EOTT exited the
East of Rockies refined products business which is discussed further in Note 5.
Cash Equivalents. EOTT records as cash equivalents all highly liquid
short-term investments having original maturities of three months or less.
Inventories. In the second quarter of 1996, the Partnership changed its
method of accounting for inventories from the last-in, first-out ("LIFO") method
to the average cost method. The change did not have a significant effect on the
results of operations for 1996. The change was made to conform the inventory
costing method used for financial reporting purposes to that used by the
Partnership to manage its commercial operations.
Depreciation and Amortization. Depreciation is provided by applying the
straight-line method to the cost basis of property, plant and equipment, less
estimated salvage value, over the estimated useful lives of the assets. Asset
lives are 15 to 20 years for pipeline and gathering facilities, 5 to 10 years
for
F-22
<PAGE> 113
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transportation equipment, 15 to 20 years for barge and terminalling facilities
and 3 to 20 years for other facilities and equipment.
Goodwill and non-compete agreements are amortized over a period of 3 to 15
years, and are recorded net of their accumulated amortization in Other Assets.
Accumulated amortization of goodwill and non-compete agreements at December 31,
1998 and 1997 was $27.9 million and $25.7 million, respectively.
Foreign Currency Transactions. Canadian operations represent all of the
foreign activities of EOTT. The U.S. dollar is the functional currency. Foreign
currency transactions are initially translated into U.S. dollars. Gains and
losses resulting therefrom are included in the determination of net income
(loss) in the period in which the exchange rate changes.
Hedging Activities/Revenue Recognition. EOTT enters primarily into futures
and over-the-counter transactions in an effort to minimize the impact of market
fluctuations on inventories and other contractual commitments. Realized and
unrealized changes in the market value of these transactions, which are entered
into and accordingly designated as hedges, are deferred until the gain or loss
on the hedged transaction is recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 80. Any cash flow recognition
resulting from hedging activities is treated in the same manner as the
underlying transaction. Based on the historical correlations between the New
York Mercantile Exchange ("NYMEX") price for West Texas Intermediate crude at
Cushing, Oklahoma and the various trading hubs at which EOTT trades, EOTT
management believes the hedging program has been effective in minimizing the
overall price risk. EOTT continuously monitors the basis differentials between
its various trading hubs and Cushing, Oklahoma to further manage its basis
exposure.
It is EOTT's policy to seek to maintain at all times purchase and sale
positions that are substantially balanced in order to minimize exposure to price
fluctuations and to lock in margins, although certain risks cannot be fully
hedged. EOTT has certain basis risks (the risk that price relationships between
delivery points, classes of products or delivery periods will change) which
cannot be completely hedged.
Periodically, EOTT enters into agreements to sell United States dollars for
Canadian dollars to hedge commitments to sell petroleum in the United States
that is purchased in Canada. Any gains or losses resulting from these
commitments are recorded with the purchase and sale of crude oil and are
included in the determination of net income (loss).
EOTT recognizes revenue on the accrual method based on the right to receive
payment for goods and services delivered to third parties.
Derivatives. In addition to hedging its lease barrel purchases, EOTT
provided price risk management products to its energy customer base. Activities
for trading purposes were accounted for using the mark-to-market method of
accounting and the gain or loss recorded to cost of sales in the period of
change in the market. Trading activities were immaterial to EOTT's financial
position and results of operations for 1998, 1997 and 1996. Activities for
non-trading purposes consist of transactions entered into to hedge the impact of
market fluctuations on assets, liabilities, or contractual commitments. Changes
in the market value of these transactions are deferred until the gain or loss on
the hedged item is recognized. See Note 17 for further discussion of EOTT's
price risk management activities. In connection with the realignment initiatives
discussed in Note 5, EOTT is no longer providing price risk management products
to customers.
Use of Estimates. The preparation of these financial statements required
the use of certain estimates by management in determining the entity's assets,
liabilities, revenue and expenses. Actual results may differ from these
estimates.
F-23
<PAGE> 114
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITION OF ASSETS
On February 1, 1997, the Partnership acquired over 400 miles of intrastate
and interstate common carrier pipelines in Louisiana and Texas from CITGO
Pipeline Company. Shipped volumes associated with these assets amount to
approximately 48,000 barrels per day from leases in certain regions of Arkansas,
Louisiana and Texas. Storage associated with the pipeline systems totals
approximately 0.5 million barrels. The purchase price was approximately $12
million and was financed with a note payable from Enron.
On July 1, 1998, the Partnership acquired crude oil gathering and
transportation assets in West Texas and New Mexico from Koch Pipeline Company,
L.P., a subsidiary of Koch Industries, Inc., and Koch Oil Company, a division of
Koch Industries, Inc. (collectively "Koch"). The asset purchase included
approximately 300 miles of common carrier pipelines, associated storage
facilities for approximately 500,000 barrels and lease purchase contracts for up
to 40,000 lease barrels of crude oil per day. The purchase price was
approximately $28.5 million and was financed with short-term borrowings from
Enron.
On December 1, 1998, the Partnership acquired certain additional crude oil
gathering and transportation assets in key oil producing regions from Koch. The
asset purchase included approximately 3,900 miles of active crude oil pipelines,
crude oil transport trucks, meter stations, vehicles, storage tanks and lease
purchase contracts for approximately 180,000 lease barrels of crude oil per day
from production in 11 central and western states including Texas, Oklahoma,
Kansas and California (the "Assets"). The transaction almost tripled EOTT's
pipeline mileage and almost doubled crude oil lease barrels under contract. The
total purchase price of the Assets was $235.6 million, which includes
consideration of $184.5 million in cash, 2,000,000 Common Units, 2,000,000
Subordinated Units and $11.4 million in transaction costs. EOTT financed the
majority of the purchase price through borrowings from Enron, consisting of a
$42 million bridge loan due December 31, 1999, $135.7 million of term debt, due
December 31, 1999, and $6.8 million from the Partnership's existing credit
facility with Enron. EOTT also increased its existing credit facility with Enron
to $1 billion in order to provide increased credit support for the Partnership
because of its increased size following the Koch acquisitions. See additional
discussion regarding Enron financing in Note 7.
Since the Assets were historically used to support Koch's integrated
revenue producing activities, EOTT does not believe that the historical
operational results of the Assets provide a meaningful basis for evaluating the
results of operations that the Assets acquired would have realized had they been
part of EOTT. Therefore, summarized pro forma results of the Partnership as
though the acquisition of Assets had occurred at January 1, 1998 have not been
provided.
4. EARNINGS PER UNIT
In the fourth quarter of 1997, EOTT adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128
requires the presentation of "Basic" and "Diluted" earnings per unit in lieu of
"Primary" and "Fully Diluted" earnings per unit and requires restatement of
prior years' net income (loss) per unit to conform to the new computation and
presentation guidelines. Basic earnings per unit differs from primary earnings
per unit in that it only includes the weighted average impact of outstanding
units of EOTT (i.e., it excludes unit equivalents). Diluted earnings per unit
considers the impact of all potentially dilutive securities. The impact of the
restatement for all years under SFAS No. 128 was to have two classes of Units
(Common Units, with Special Units considered Common Units, and Subordinated
Units) in the basic earnings per unit calculation and diluted earnings per unit
is calculated assuming the Subordinated Units converted into Common Units.
F-24
<PAGE> 115
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net income (loss) shown in the table below excludes the approximate two
percent interest of the General Partner. Earnings (loss) per unit are calculated
as follows (in millions, except per unit amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- --------------------------- -------------------------
WTD. WTD. WTD.
NET AVERAGE PER NET AVERAGE PER NET AVERAGE PER
LOSS UNITS UNIT LOSS UNITS UNIT INCOME UNITS UNIT
------- ------- ------ -------- ------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic: (1)
Common......................... $(2,113) 12,097 $(0.17) $ (8,865) 11,830 $(0.75) $17,735 11,830 $1.50
Subordinated................... $(1,854) 7,170 $(0.26) $ (5,246) 7,000 $(0.75) $10,496 7,000 $1.50
Diluted(2)....................... $(3,967) 19,267 $(0.21) $(14,111) 18,830 $(0.75) $28,231 18,830 $1.50
</TABLE>
- ---------------
(1) Net income (loss), excluding the two percent General Partner interest, has
been apportioned to each class of Unitholder based on the ownership of total
Units outstanding in accordance with the Partnership Agreement, which is
also reflected on the Statement of Partners' Capital, and Special Units are
considered Common Units. Due to a negative capital account balance for the
Common Unitholders during the second and third quarters of 1998, the loss
allocated to the Common Unitholders attributable to these periods was
reallocated to the remaining Unitholders based on their ownership
percentage. The allocated loss will be recouped by the Unitholders allocated
the additional losses through future income.
(2) The diluted earnings (loss) per unit calculation assumes the conversion of
Subordinated Units into Common Units.
5. REALIGNMENT INITIATIVES
In late 1997, EOTT decided to refocus on the core crude business, which
provides substantially all of the gross margin for the Partnership, as well as
improve overall operating efficiencies. As a result, EOTT announced the
following two initiatives. The decision was made to exit the marginal East of
Rockies refined products business in order to focus on business development
opportunities in the crude business, where management believes there is more
potential for growth. The Partnership re-deployed the working capital associated
with the East of Rockies refined products business and intends to sell its three
products terminals in Ohio. In connection with this decision, non-recurring
charges were recorded at December 31, 1997, which included severance costs of
$0.9 million and a $1.5 million impairment of the Ohio products terminals.
In addition, EOTT streamlined business processes throughout the
organization and realigned reporting responsibilities to improve the
Partnership's overall cost structure. As a result, marketing and administrative
personnel were reduced by approximately 20 percent and an additional
non-recurring severance charge of $1.1 million was recorded at December 31, 1997
pursuant to the existing EOTT Energy Corp. Severance Plan.
6. IMPAIRMENT OF ASSETS
As a result of the decision to exit the East of Rockies refined products
business discussed in Note 5, the Partnership's three Ohio products terminals
are being held for sale. At December 31, 1997, a $1.5 million impairment charge
was recorded.
During the fourth quarter of 1997, EOTT terminated an information system
development project due to the lack of third party vendor support and
foreseeable operating platform obsolescence. As a result, the Partnership
recorded a $6.5 million impairment charge.
F-25
<PAGE> 116
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CREDIT RESOURCES AND LIQUIDITY
In 1995, Enron Corp. agreed to provide credit support (the "Credit
Facility") to the Partnership in the form of guarantees, letters of credit,
loans and letters of indemnity. The total amount of the credit support was $600
million, as amended December 19, 1996, had a maturity of March 31, 1999 and was
replaced with a new facility on December 1, 1998 as discussed below. As amended,
the agreement contained sublimits on the availability of the Credit Facility of
$100 million for working capital loans and $200 million for letters of credit.
Letter of credit fees were based on actual charges by the banks which range from
.20% -- .375% per annum. Interest on outstanding loans was charged at the London
Interbank Offering Rate ("LIBOR") plus 25 basis points per annum. At December
31, 1997, EOTT had a note payable of $39.3 million with Enron under a financing
arrangement for acquisitions and other capital projects (the "Note Payable").
This financing was provided at a rate of LIBOR plus 30 basis points per annum.
The maturity date of the Note Payable was March 31, 1999 and was redeemed and
reissued under the term loan discussed below.
On December 1, 1998, Enron increased its existing credit facility with the
Partnership to provide additional credit support (the "Enron Facility") in the
form of guarantees, letters of credit and working capital loans through December
31, 2001. The total amount of the Enron Facility is $1.0 billion and contains
sublimits on the availability of the Enron Facility of $100 million for working
capital loans and $900 million for guarantees and letters of credit. Letter of
credit fees are based on actual charges by the banks which range from
.20% -- .375% per annum. Interest on outstanding loans is charged at LIBOR plus
250 basis points per annum.
The Enron Facility is subject to defined borrowing base limitations
relating to the Partnership's activities and to the maintenance and protection
of the collateral. The Enron Facility permits distributions to Unitholders
subject to certain limitations based on the Partnership's earnings and other
factors. These covenants and restrictions are not expected to materially affect
EOTT's ability to operate the ongoing Partnership business.
At December 31, 1998, EOTT had an additional $175 million of debt (the
"Term Loan") outstanding with Enron under a financing arrangement to fund a
portion of the cash consideration paid to Koch for the assets purchased in 1998
and to refinance indebtedness incurred in prior acquisitions. The Term Loan
matures on December 31, 1999. The interest rate on the Term Loan is LIBOR plus
300 basis points.
The Enron Facility and Term Loan are secured by a first priority lien on
and security interest in all receivables and inventory of the Partnership. The
borrowing base is the sum of cash and cash equivalents, specified percentages of
eligible receivables, inventory, and products contracted for or delivered but
not billed. The Enron Facility and Term Loan are non-recourse to the General
Partner and the General Partner's assets. The Partnership is restricted from
entering into additional financing arrangements without the prior approval of
Enron.
In addition, at December 31, 1998, EOTT had $42.0 million of debt
outstanding with Enron under a $100 million bridge loan (the "Bridge Loan") to
finance a portion of the cash consideration for the acquisition of assets from
Koch. The interest rate on the Bridge Loan is initially LIBOR plus 400 basis
points. At the end of each three-month period, the spread on the Bridge Loan
will increase by 25 basis points. The Bridge Loan is unsecured and matures on
December 31, 1999.
As discussed above, the interim Bridge Loan ($42 million) and Term Loan
($175 million) provided by Enron are due December 31, 1999. The General Partner
intends to refinance the Bridge Loan and Term Loan on a long-term basis before
maturity. The General Partner anticipates that the debt will be refinanced using
a combination of financing alternatives including (a) third party bank debt, (b)
private placement of debt, (c) an offering of high yield debt and/or (d) an
equity offering utilizing some portion
F-26
<PAGE> 117
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the additional 10 million Common Units which were authorized to be issued
subsequent to year end (See Note 20).
At December 31, 1998, EOTT had $44.4 million in letters of credit and $28.3
million in loans outstanding under the Enron Facility at an average annual
interest rate of approximately 6.1%. The amount outstanding at December 31, 1998
under the Term Loan was $175.0 million with an average annual interest rate of
8.5% and under the Bridge Loan was $42.0 million with an average annual interest
rate of 9.5%. The actual interest rate may vary based on the length of the
borrowings. In addition, guarantees outstanding totaled $366.4 million of which
$290.9 million were used.
At December 31, 1997, EOTT had $92.5 million in letters of credit and $70.0
million in loans outstanding under the Credit Facility at an average annual
interest rate of approximately 5.8%. The amount outstanding under the Note
Payable at December 31, 1997 was $39.3 million with an average annual interest
rate of 6.0%. The actual interest rate may vary based on the length of the
borrowings. In addition, guarantees outstanding totaled $402.5 million of which
$292.3 million were used.
At December 31, 1997, EOTT was in technical violation of the negative
covenants relating to the Tangible Net Worth, Leverage Ratio and Working Capital
Ratio in the Credit Facility and Note Payable due principally to the operating
loss associated with the deterioration of grade and basis differentials in the
crude oil markets. EOTT received a waiver for these violations from Enron.
The General Partner believes that the Enron Facility, Bridge Loan, Term
Loan and subsequent refinancing discussed above will be sufficient to support
the Partnership's crude oil purchasing activities and working capital and
liquidity requirements. No assurance, however, can be given that the General
Partner will not be required to reduce or restrict the Partnership's gathering
and marketing activities because of limitations on its ability to obtain credit
support and financing for its working capital needs.
The Partnership's ability to obtain letters of credit to support its
purchases of crude oil or other petroleum products is fundamental to the
Partnership's gathering and marketing activities. Additionally, EOTT has a
significant need for working capital due to the large dollar volume of marketing
transactions in which it engages. Any significant decrease in the Partnership's
financial strength, regardless of the reason for such decrease, may increase the
number of transactions requiring letters of credit or other financial support,
make it more difficult for the Partnership to obtain such letters of credit,
and/or increase the cost of obtaining them. This could in turn adversely affect
the Partnership's ability to maintain or increase the level of its purchasing
and marketing activities or otherwise adversely affect the Partnership's
profitability and Available Cash as defined in EOTT's Partnership Agreement and
amendments thereto.
Generally, the Partnership will distribute 100% of its Available Cash
within 45 days after the end of each quarter to Unitholders of record and to the
General Partner. Available Cash consists generally of all of the cash receipts
of the Partnership adjusted for its cash distributions and net changes to
reserves. The full definition of Available Cash is set forth in the Partnership
Agreement and amendments thereto, a form of which is filed or has been
previously filed as an exhibit to this Annual Report on Form 10-K. Distributions
of Available Cash to the Subordinated Unitholders are subject to the prior
rights of the Common and Special Unitholders to receive the Minimum Quarterly
Distribution ("MQD") for each quarter during the Subordination Period, and to
receive any arrearages in the distribution of the MQD on the Common Units for
prior quarters during the Subordination Period.
MQD is $0.475 per Unit. As discussed in Note 20, Enron has committed to
provide total cash distribution support in an amount necessary to pay MQDs, with
respect to quarters ending on or before December 31, 2001, in an amount up to an
aggregate of $29 million in exchange for Additional Partnership Interests
("APIs"). See further discussion in Note 12 regarding the contribution of $21.9
million in APIs subsequent to year-end.
F-27
<PAGE> 118
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership Agreement authorizes EOTT to cause the Partnership to issue
additional limited partner interests, the proceeds from which could be used to
provide additional funds for acquisitions or other Partnership needs.
At December 31, 1998, EOTT has outstanding forward commodity repurchase
agreements of approximately $83.0 million. Pursuant to the agreements, which had
terms of thirty days, EOTT repurchased the crude oil inventory on January 20,
1999 for approximately $83.4 million.
8. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Crude oil................................................... $135,872 $128,347
Refined products............................................ 1,673 10,918
-------- --------
Total............................................. $137,545 $139,265
======== ========
</TABLE>
9. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Property, Plant and Equipment ("PP&E"), at cost
Land...................................................... $ 3,278 $ 3,717
Buildings................................................. 7,505 6,294
Tractors and trailers..................................... 20,492 15,285
Office PP&E, including furniture and fixtures............. 34,023 32,539
Operating PP&E, including pipelines, storage tanks, etc... 432,509 185,609
-------- --------
Total PP&E, at cost............................... $497,807 $243,444
======== ========
</TABLE>
Certain assets included in PP&E, primarily pipelines, are affected by
factors, which could affect future cash flows, such as competition,
consolidation in the industry, refinery demand for specific grades of crude oil,
area market price structures and continued development drilling in certain areas
of the United States. EOTT continuously monitors these factors and pursues
alternative strategies to maintain or enhance cash flows associated with these
assets; however, no assurances can be given that EOTT can mitigate the effects,
if any, on future cash flows related to any changes in these factors.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $8.9 million, $6.2 million and $3.4
million for the years ended December 31, 1998, 1997 and 1996, respectively.
On January 5, 1996, EOTT repaid the outstanding balance of the financing in
connection with the information systems development. As discussed further in
Note 12, 1,830,011 Common Units issued to Enron in connection with the Amerada
Hess Acquisition were exchanged for Special Units.
On December 1, 1998, EOTT issued 2,000,000 Common Units and 2,000,000
Subordinated Units to Koch Pipeline as a portion of the consideration paid for
the Assets. See further discussion of the acquisition of Assets in Note 3.
F-28
<PAGE> 119
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PARTNERS' CAPITAL
The following is a reconciliation of Units outstanding for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
COMMON SPECIAL SUBORDINATED
UNITS UNITS UNITS
---------- --------- ------------
<S> <C> <C> <C>
Units Outstanding at December 31, 1995............ 10,000,000 -- 7,000,000
Issuance of Common Units.......................... 1,830,011 -- --
Exchange of Common Units for Special Units........ (1,830,011) 1,830,011 --
---------- --------- ---------
Units Outstanding at December 31, 1996............ 10,000,000 1,830,011 7,000,000
========== ========= =========
Units Outstanding at December 31, 1997............ 10,000,000 1,830,011 7,000,000
========== ========= =========
Acquisition of Common Units for Treasury.......... (4,000) -- --
Issuance of Common Units to Koch.................. 2,000,000 -- --
Issuance of Special Units to Enron................ -- 1,150,000 --
Issuance of Subordinated Units to Koch............ -- -- 2,000,000
---------- --------- ---------
Units Outstanding at December 31, 1998............ 11,996,000 2,980,011 9,000,000
========== ========= =========
</TABLE>
As discussed further in Note 3, the Partnership issued 2,000,000 Common
Units and 2,000,000 Subordinated Units to Koch in connection with the
acquisition of Assets. In addition, subsequent to year-end as discussed in Note
20, the Partnership obtained approval to issue an additional 10 million Common
Units to raise cash to reduce indebtedness, for acquisitions and for other
Partnership purposes.
Pursuant to a Support Agreement, discussed in Note 12, the Partnership
issued 1,150,000 Special Units to Enron in exchange for Enron's commitment to
contribute $21.9 million in APIs outstanding at December 31, 1998 on the earlier
of the date certain proposals were approved by the Unitholders or May 17, 1999.
At December 1, 1998, the Partnership issued 1,150,000 Special Units for a value
of approximately $15.9 million and recorded a contribution receivable from
Enron. As discussed in Note 20, subsequent to year-end, Enron contributed the
$21.9 million in APIs outstanding pursuant to its commitment made in connection
with the Support Agreement. In addition, the Special Units were converted into
Common Units in February 1999.
12. TRANSACTIONS WITH ENRON AND RELATED PARTIES
Revenue and Cost of Sales. A summary of revenue and cost of sales with
Enron and its affiliates follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Sales to affiliates................................... $ 10,648 $44,025 $ 41,865
Purchases from affiliates............................. $232,486 $71,895 $100,143
</TABLE>
Revenue in 1998, 1997 and 1996 consists primarily of sales of crude oil to
Enron Reserve Acquisition Corp. and natural gas liquids to Enron Gas Liquids,
Inc. Cost of sales consists primarily of crude oil and condensate purchases from
Enron Oil & Gas Company and Enron Reserve Acquisition Corp. and natural gas
liquids purchases from Enron Gas Liquids, Inc. These transactions in the opinion
of management are no more or less favorable than can be obtained from
unaffiliated third parties.
Other related party balances related to purchases and sales of goods and
services have been classified as trade and other receivables or trade accounts
payable. Related party receivables at December 31, 1998
F-29
<PAGE> 120
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1997 were $0.2 million and $2.8 million, respectively. Related party
payables at December 31, 1998 and 1997 were $1.6 million and $3.6 million,
respectively. The payables primarily represent amounts owed by EOTT on the
purchase of crude oil and other products from Enron affiliates.
General and Administrative. As is commonly the case with publicly traded
partnerships, EOTT does not directly employ any persons responsible for managing
or operating the Partnership or for providing services relating to day-to-day
business affairs. The General Partner, under a corporate services agreement,
provides services to the Partnership including liability and casualty insurance
and certain data processing services. The General Partner is reimbursed by the
Partnership for these direct and indirect costs. Those costs were $3.3 million,
$3.6 million and $5.0 million for the years ended December 31, 1998, 1997 and
1996, respectively. Management believes that the charges were reasonable.
Purchase of Common Units. On March 10, 1995, Enron authorized the purchase
of up to $15 million of EOTT units on the open market. As of February 15, 1998,
Enron had purchased 296,800 EOTT Common Units under the purchase program,
excluding the 3.0 million units discussed below.
Financing of Acquisitions. In February 1997, the Partnership acquired
intrastate and interstate common carrier pipelines from CITGO Pipeline Company
for approximately $12 million which was financed with a note payable from Enron.
As discussed further in Note 3, on July 1, 1998 and December 1, 1998, the
Partnership acquired crude oil gathering and transportation assets from Koch
which was financed primarily with borrowings from Enron.
Support Agreement. Pursuant to a Support Agreement dated September 21, 1998
(a) Enron agreed to make loans to the Partnership to fund the cash portion of
the consideration to be paid to Koch for the Assets at closing as discussed in
Note 3 and to refinance indebtedness incurred in a prior acquisition of assets
from Koch on July 1, 1998, (b) Enron agreed to increase and extend the
Partnership's credit facility with Enron to $1 billion through December 31,
2001, (c) the Partnership agreed to issue 1,150,000 Special Units to Enron, (d)
Enron agreed to contribute $21.9 million in APIs to the Partnership on the
earlier of the date certain proposals, discussed further below, are approved by
the Unitholders at a special meeting of Unitholders or May 17, 1999, (e) Enron
agreed that if certain proposals are approved by the Unitholders it will extend
its cash distribution support through the fourth quarter of 2001, and (f) the
Partnership agreed that, if any additional APIs are issued prior to approval of
certain proposals by the Unitholders, it will issue additional Common Units at
$19.00 per share in exchange for such additional APIs. As discussed further in
Note 20, the Partnership obtained Unitholder approval of these proposals
subsequent to year-end. Pursuant to the Support Agreement, EOTT borrowed from
Enron a $42 million Bridge Loan and $175 million Term Loan and entered into a $1
billion credit facility with Enron, to replace its existing $600 million credit
facility.
Special Units. Effective July 16, 1996, EOTT created a new class of limited
partner interest designated as Special Units and exchanged the Special Units on
a one-for-one basis for the 1,830,011 Common Units issued January 3, 1996 to
Enron in connection with the financing of a previous acquisition. The Special
Units ranked pari passu with the Common Units in all distributions and upon
liquidation and will vote as a class with the Common Units. The exchange
permitted EOTT to avoid the cost of New York Stock Exchange listing of the
Common Units issued to Enron in connection with the financing of the
acquisition, including the cost associated with seeking Unitholder approval for
the listing. In connection with the Support Agreement, the Partnership issued
1,150,000 Special Units to Enron and as discussed further below Enron
contributed $21.9 million APIs to the Partnership subsequent to year end. The
Special Units became convertible into Common Units on a one-for-one basis and
were converted into Common Units during the first quarter of 1999. The Special
Units are considered Common Units for earnings per unit purposes, and the
exchange had no adverse impact on EOTT or on income or distributions per Common
Unit.
F-30
<PAGE> 121
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional Partnership Interests. On November 14, 1997, February 13, 1998,
May 15, 1998 and August 14, 1998, Enron paid $3.7 million, $3.8 million, $2.8
million and $2.5 million, respectively, in support of EOTT's third and fourth
quarter 1997 and first and second quarter 1998 distributions to its Common and
Special Unitholders and the General Partner. In exchange for the distribution
support, Enron received APIs in the Partnership. APIs have no voting rights and
are non-distribution bearing; however, APIs will be entitled to be redeemed if,
with respect to any quarter, the MQD and any Common Unit Arrearages have been
paid, but only to the extent that Available Cash with respect to such quarter
exceeds the amount necessary to pay the MQD on all Units and any Common Unit
Arrearages. In February 1997, the General Partner amended the Partnership
Agreement to provide that a holder of APIs may, at its option, waive its right
to receive distributions of Available Cash to which it would otherwise be
entitled and to provide that in such case the Partnership may retain such cash
for later distribution to partners or for use in the Partnership's business in
subsequent periods. The Partnership's Available Cash for the fourth quarter of
1996 was substantially in excess of the amount necessary to distribute the MQD
on all outstanding Units, and upon adoption of the amendment, Enron, the holder
of APIs, waived its right to receive such excess cash in redemption of APIs. The
February 1997 amendments to the Partnership Agreement also provided that after
the end of the Subordination Period a holder of Subordinated Units may convert
such Units into Common Units either in whole or in part from time to time. The
amendments also provided that any unconverted Units will be renamed "Class B
Units" after the end of the Subordination Period. Prior to the amendments, the
Partnership Agreement provided that conversion would occur only on an all or
none basis. Enron had committed to support payment of EOTT Common and Special
Unit distributions through March 1999, as necessary (of which $7.1 million was
still available to be advanced at December 31, 1998). As discussed in Note 20,
certain Unitholder approvals were obtained subsequent to year end and as a
result, Enron increased its cash distribution support to $29 million and
extended it through the fourth quarter of 2001 and contributed the $21.9 million
in APIs currently outstanding pursuant to its commitment made in connection with
the Support Agreement.
13. EMPLOYEE BENEFIT AND RETIREMENT PLANS
Employees of the General Partner are covered by various retirement, stock
purchase and other benefit plans of Enron. In April 1993, the General Partner
adopted non-qualified benefit plans providing medical, dental, life, accidental
death and dismemberment and long-term disability coverage to employees, with all
related premiums and costs being incurred by the General Partner. Total benefit
costs for 1998 were $6.4 million, including $3.9 million in costs attributable
to health and welfare benefit plans. Total benefit costs for 1997 were $4.2
million including $3.3 million in costs attributable to health and welfare
benefit plans. Total benefit costs for 1996 were $6.3 million including $3.1
million in costs attributable to health and welfare benefit plans and $1.8
million in costs attributable to a profit sharing contribution to the Enron
Corp. Savings Plan based on 1996 financial results.
Additionally, the General Partner maintains a variable pay plan based on
earnings before interest, income taxes, depreciation and amortization of which
none was recognized in 1998 and 1997, and $8.9 million in 1996.
The General Partner's employees continue benefit accrual under the Enron
Cash Balance Plan. All accrued benefits under the Enron Cash Balance Plan will
be preserved in the Enron Cash Balance Plan until the General Partner adopts
separate plans or participating employees are eligible for distribution under
the plan. The General Partner's employees continue to participate in the Enron
Employee Stock Ownership Plan and continue to be eligible for participation in
the Enron Corp. Savings Plan.
As of September 30, 1998, the most recent valuation date, the plan net
assets, including contributions to the trust during the fourth quarter of 1998,
of the Enron noncontributory defined benefit plan, in which the employees of the
General Partner participate, were less than the actuarial present value of
projected
F-31
<PAGE> 122
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan benefit obligations by approximately $25.0 million. As of September 30,
1997, the plan assets, including contributions to the trust during the fourth
quarter of 1997, of the Enron noncontributory defined benefit plan, in which the
employees of the General Partner participate, were less than the actuarial
present value of projected plan benefit obligations by approximately $6.5
million. The assumed discount rate, rate of return on plan assets and rate of
increases in wages used in determining the actuarial present value of projected
benefits were 6.75%, 10.5%, and 4.0% in 1998, respectively, and 7.25%, 10.5%,
and 4.0% in 1997 respectively.
The General Partner provides certain postretirement medical, life insurance
and dental benefits to eligible employees who retire after January 1, 1994.
Benefits are provided under the provisions of contributory defined dollar
benefit plans for eligible employees and their dependents. EOTT accrues these
postretirement benefit costs over the service lives of employees expected to be
eligible to receive such benefits. Enron retains liability for former employees
of the General Partner who retired prior to January 1, 1994. The accumulated
postretirement benefit obligation ("APBO") existing at December 31, 1998 and
1997 totaled $1.1 million and $0.7 million, respectively. The measurement of the
APBO assumes a 6.75% and 7.25% discount rate in 1998 and 1997, respectively.
EOTT does not currently intend to prefund its obligations under the Enron
postretirement benefit plan.
EOTT adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," in 1998. This statement changed the disclosure
requirements, but not the method of measurement or recognition of these
obligations. Prior year disclosures have been restated to conform with the new
disclosure guidelines under SFAS No. 132. The following table sets forth
information related to changes in the benefit obligations, changes in plan
assets, a reconciliation of the funded status of the plans and components of the
expense recognized related to postretirement benefits provided by EOTT (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1........................... $ 745 $ 776
Service cost.............................................. 114 76
Interest cost............................................. 73 51
Plan amendments........................................... 147 (161)
Actuarial loss............................................ 82 21
Benefits paid............................................. (52) (18)
------- -----
Benefit obligation at December 31................. $ 1,109 $ 745
======= =====
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1.................... $ -- $ --
Company contributions..................................... 53 18
Plan participants' contributions.......................... -- --
Benefits paid............................................. (53) (18)
------- -----
Fair value of plan assets at December 31.......... $ -- $ --
======= =====
RECONCILIATION OF FUNDED STATUS TO BALANCE SHEET
Funded status at December 31.............................. $(1,109) $(745)
Unrecognized prior service cost........................... 469 358
Unrecognized actuarial gain............................... (364) (468)
------- -----
Accrued benefit cost at December 31............... $(1,004) $(855)
======= =====
</TABLE>
F-32
<PAGE> 123
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.............................................. $114 $ 76 $107
Interest cost............................................. 73 51 55
Amortization of prior service cost........................ 36 27 39
Recognized net actuarial gain............................. (22) (14) (17)
---- ---- ----
Total net periodic postretirement benefit cost.... $201 $140 $184
==== ==== ====
</TABLE>
The General Partner provides unemployment, severance and disability-related
benefits or continuation of benefits such as health care and life insurance and
other postemployment benefits. SFAS No. 112 requires the cost of those benefits
to be accrued over the service lives of the employees expected to receive such
benefits. At December 31, 1998 and 1997, the liability accrued was $0.7 million
and $0.5 million, respectively.
EOTT Energy Corp. Unit Option Plan. In February 1994, the Board of
Directors of the General Partner adopted the 1994 EOTT Energy Corp. Unit Option
Plan (the "Unit Option Plan"), which is a variable compensatory plan. To date,
no compensation expense has been recognized under the Unit Option Plan. Under
the Unit Option Plan, selected employees of the General Partner may be granted
options to purchase Subordinated Units at a price of $15.00 per Unit as
determined by the Compensation Committee of the Board of Directors of the
General Partner. Options granted under the Unit Option Plan vest to the
employees over a five-year service period and will expire on the tenth
anniversary of the date of grant. No options are vested or exercisable prior to
the third anniversary of the grant.
The following table sets forth the Unit Option Plan transactions for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
NUMBER OF UNIT OPTIONS
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at January 1............................ 1,155,000 1,155,000 1,175,000
Granted........................................... 400,000 -- 160,000
Exercised......................................... -- -- --
Forfeited......................................... 525,000 -- 180,000
--------- --------- ---------
Outstanding at December 31.......................... 1,030,000 1,155,000 1,155,000
========= ========= =========
Available for grant at December 31.................. -- -- 395,000
========= ========= =========
</TABLE>
In February 1997, the Board of Directors of the General Partner decided
that it would not grant any additional options under the Unit Option Plan. In
May 1998, options forfeited by a former officer were approved for reissuance by
the Board of Directors to the current President and Chief Executive Officer. In
addition, in February 1997, the Unit Option Plan was amended to provide that, if
the General Partner and the option holder agree, any option may be exercised on
a "net" basis with no cash payment (other than for withholding taxes), so that
upon exercise the holder will receive a number of Units with a fair market value
equal to the difference between the fair market value of the Units covered by
the option and the exercise price of the option. As a result, the General
Partner anticipates that the actual number of Units to be issued on exercise of
options will be substantially less than the number of Units covered by
outstanding options.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." This standard establishes a fair
value based method of accounting for stock based compensation plans awarded
after December 31, 1995 and encourages companies to adopt the fair
F-33
<PAGE> 124
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value based method in SFAS No. 123 in place of the existing accounting method
which requires expense recognition only in situations where stock based
compensation plans award intrinsic value to recipients at the date of grant.
Companies that do not follow SFAS No. 123 for accounting purposes must make
annual pro forma disclosure of its effects. EOTT elected not to adopt the fair
value method for accounting purposes. If EOTT had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net income (loss) and net income (loss) per
diluted Unit would have been reduced to the following pro forma amounts (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Net Income (Loss) -- as reported....................... $(4,067) $(14,399) $28,809
Net Income (Loss) -- pro forma......................... $(4,140) $(14,491) $28,717
Diluted Net Income (Loss) per Unit -- as reported...... $ (0.21) $ (0.75) $ 1.50
Diluted Net Income (Loss) per Unit -- pro forma........ $ (0.21) $ (0.75) $ 1.50
</TABLE>
The fair value of each option grant for 1998 is estimated on the date of
grant using the Cox-Ross-Rubenstein binomial method with the following
assumptions: (1) dividend of $1.90 per Common Unit, (2) expected unit price
volatility of 21.86%, (3) risk-free interest rate of 5.97% and (4) expected life
of option of 2 years. The fair value of each option grant for 1996 is estimated
on the date of grant using the Cox-Ross-Rubenstein binomial method with the
following assumptions: (1) dividend of $1.90 per Common Unit, (2) expected unit
price volatility of 24.03%, (3) risk-free interest rate of 6.40% and (4)
expected life of option of 3 years. The weighted average fair value of options
granted during 1998 was $2.119 per unit and during 1996 was $2.065 per unit.
EOTT Energy Corp. Long-Term Incentive Plan. In October 1997, the Board of
Directors adopted the EOTT Energy Corp. Long Term Incentive Plan ("Plan"), which
is a variable compensatory plan. Under the Plan, selected key employees are
awarded Phantom Appreciation Rights ("PAR"). Each PAR is a right to receive cash
based on the performance of the Partnership prior to the time the PAR is
redeemed. Performance of the Partnership is measured primarily by calculating
the change in the average of Earnings Before Interest on Debt, related to
acquisitions, Depreciation and Amortization ("EBIDA"), for each of the three
consecutive fiscal years immediately preceding the grant date of the PAR and the
exercise date of the PAR. The Plan has a five-year term beginning January 1,
1997, and PAR awards vest in 25% increments in the four-year period following
the grant year.
The following table sets forth the Long-Term Incentive Plan transactions
for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
NUMBER OF PAR
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Outstanding at January 1.................................... 358,600 --
Granted................................................... 467,828 376,600
Exercised................................................. -- --
Forfeited................................................. 188,500 18,000
--------- ---------
Outstanding at December 31.................................. 637,928 358,600
========= =========
Available for grant at December 31.......................... 1,245,072 1,524,400
========= =========
</TABLE>
14. LITIGATION AND OTHER CONTINGENCIES
EOTT is, in the ordinary course of business, a defendant in various
lawsuits, some of which are covered in whole or in part by insurance. The
Partnership is responsible for all litigation and other claims relating to the
business acquired from the Predecessor, although the Partnership will be
entitled to the
F-34
<PAGE> 125
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
benefit of certain insurance maintained by Enron covering occurrences prior to
the closing of the offering. The Partnership believes that the ultimate
resolution of litigation, individually and in the aggregate, will not have a
materially adverse impact on the Partnership's financial position or results of
operations. Various legal actions have arisen in the ordinary course of
business, the most significant of which are discussed below.
Wyoming Refining Company Matter. EOTT had a possible loss exposure of
approximately $1.47 million as a result of a dispute between Wyoming Refining
Company ("WRC") and the U.S. Minerals Management Service ("MMS"). MMS was
claiming that it was underpaid by WRC for certain Montana crude oil which was
delivered to WRC over a several-year period prior to 1993. On December 14, 1998,
EOTT received a letter from WRC stating that the MMS had withdrawn its claim and
no price adjustments would be necessary.
State of Texas Royalty Suit. EOTT was served on November 9, 1995 with a
petition styled The State of Texas, et al. vs. Amerada Hess Corporation, et al.
The matter was filed in District Court in Lee County, Texas and involves several
major and independent oil companies and marketers as defendants. The plaintiffs
are attempting to put together a class action lawsuit alleging that the
defendants acted in concert to buy oil owned by members of the plaintiff class
in Lee County, Texas, and elsewhere in Texas, at "posted" prices, which the
plaintiffs allege were lower than true market prices. There is not sufficient
information in the petition to fully quantify the allegations set forth in the
petition, but the General Partner believes that any such claims against the
Partnership will prove to be without merit.
The State of Texas, et al. vs. Amerada Hess Corporation, et al., Cause No.
97-12040; In the 53rd Judicial District Court of Travis County, Texas. This case
was filed on October 23, 1997 in Austin by the Texas Attorney General's office
and involves several major and independent oil companies and marketers as
defendants. EOTT was served on November 18, 1997. The petition states that the
State of Texas brought this action in its sovereign capacity to collect
statutory penalties recoverable under the Texas Common Purchaser Act, arising
from Defendants' alleged willful breach of statutory duties owed to royalty,
overriding royalty and working interest owners of crude oil sold to Defendants,
as well as alleged breach of Defendants' common law and contractual duties. The
Plaintiffs also allege that the Defendants have engaged in discriminatory
pricing of crude oil. This case appears to be similar to the Lee County, Texas
case filed by the State of Texas on November 9, 1995 and disclosed previously.
EOTT and several of the defendants have engaged in settlement negotiations with
the State of Texas, which, if consummated, would result in a dismissal of the
claims of the State.
McMahon Foundation and J. Tom Poyner vs. Amerada Hess Corporation, et al.
(Including EOTT Energy Operating Limited Partnership), Civil Action No.
H-96-1155; United States District Court, Southern District of Texas, Houston
Division (Texas Federal Anti-Trust Suit). This suit was filed on April 10, 1996
as a class action complaint for violation of the federal antitrust laws and
involves several major and independent oil companies and marketers as
defendants. The relevant area is the entire continental United States, except
for Alaska, New York, Ohio, Pennsylvania, West Virginia and the Wilmington Field
at Long Beach, California. The plaintiffs claim that there is a combination and
conspiracy among the defendant oil companies to fix, depress, stabilize and
maintain at artificially low levels the price paid for the first purchase of
lease production oil sold from leases in which the class members own interests.
This was allegedly accomplished by agreement of the defendants to routinely pay
for first purchases at posted prices rather than competitive market prices and
maintain them in a range below competitive market prices through an undisclosed
scheme of using posted prices in buy/sell transactions among themselves to
create the illusion that posted prices are genuine market prices. The plaintiffs
allege violations from October of 1986 forward. No money amounts were claimed,
and it is not possible to determine any potential exposure until further
discovery is done.
F-35
<PAGE> 126
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Randolph Energy, Inc., et al. vs. Amerada Hess Corporation, et al., Civil
Action No. 2:97CV273PG; In the United States District Court for the Southern
District of Mississippi, Jackson Division (Mississippi Federal Anti-Trust
Suit). EOTT received the summons in this matter on August 18, 1997. The case was
filed on August 5, 1997 and is a class action complaint for alleged violation of
the federal antitrust laws which involves several major and independent oil
companies and marketers as defendants. The plaintiffs claim that this litigation
arises out of a combination and conspiracy of the defendant oil companies to
fix, depress, stabilize and maintain at artificially low levels the prices paid
for the first purchase of lease production oil sold from leases in which the
class members own interests. The issues appear to be a duplication of the issues
in the Texas Federal Anti-Trust Suit previously discussed. No money amounts were
claimed, and it is not possible to determine any potential exposure until
further discovery is done.
Cameron Parish School Board, et al. vs. Texaco, Inc., et al.; Civil Action
No. C-98-111; In the United States District Court for the Western District of
Louisiana, Lake Charles Division (Louisiana Federal Anti-Trust Suit). This case
was originally filed as a state law claim in Louisiana. When the case was
removed to federal court, the anti-trust claims were added, similar to the
claims made in the Texas Federal Anti-Trust Suit and the Mississippi Federal
Anti-Trust Suit. The plaintiffs claim that this litigation arises out of a
combination and conspiracy of the defendant oil companies to fix, depress,
stabilize and maintain at artificially low levels the prices paid for the first
purchase of lease production oil sold from leases in which the class members own
interests. The issues appear to be a duplication of the issues in the Texas
Federal Anti-Trust Suit and the Mississippi Federal Anti-Trust Suit, both
previously discussed. On October 22, 1998, the judge granted the Plaintiffs'
motion to amend the petition and add additional defendants. The Partnership and
the General Partner were added to the case as defendants at that time. No money
amounts were claimed and it is not possible to determine any potential exposure
until further discovery is done.
The Texas Federal Anti-Trust Suit, the Mississippi Federal Anti-Trust Suit
and the Louisiana Anti-Trust Suit, along with several other suits to which EOTT
is not a party, were consolidated and transferred to the Southern District of
Texas by Transfer Order dated January 14, 1998. The Judicial Panel on
Multidistrict Litigation made this recommendation due to similarity of issues in
the cases. EOTT and the General Partner, along with a number of other
defendants, have entered into a class-wide settlement with the defendants which
has been preliminarily approved by the Court. A final approval hearing on the
class-wide settlement is scheduled for April 5, 1999.
Mobil Oil Corporation vs. EOTT Energy Operating Limited Partnership and
EOTT Energy Corporation, Cause No. CV98-04881, M-298th Judicial District Court,
Dallas County, Texas (Mobil Suit). This suit was filed on June 25, 1998 against
both EOTT and the General Partner. Mobil alleged that it overpaid EOTT in
connection with a crude oil contract between the parties. EOTT claimed that it
was entitled to offsets to the overpayment alleged by Mobil and tendered the
amount EOTT believed it owed. The case was settled in November of 1998, with
EOTT tendering cash and services to resolve the matter.
Assessment for Crude Oil Production Tax from the Comptroller of Public
Accounts, State of Texas. The Partnership received a letter from the
Comptroller's Office dated October 9, 1998 assessing the Partnership for
severance taxes the Comptroller's Office alleges are due on a difference the
Comptroller's Office believes exists between the market value of crude oil and
the value reported on the Partnership's crude oil tax report for the period of
September 1, 1994 through December 31, 1997. The letter states that the action,
based on a desk audit of the Partnership's crude oil production reports, is
partly to preserve the statute of limitations where crude oil severance tax may
not have been paid on the true market price of the crude oil. The letter further
states that the Comptroller's position is similar to claims made in several
lawsuits, including the Texas Federal Anti-Trust Suit, in which the Partnership
is a defendant. The amount of the assessment, including penalty and interest, is
approximately $1.1 million. While the claim is
F-36
<PAGE> 127
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
still being reviewed, the General Partner believes the Partnership should be
without liability in this or related matters.
General Matters. EOTT believes that it has obtained or has applied for all
of the necessary permits required by federal, state, and local environmental
agencies for the operation of its business. Further, the Partnership believes
that there are no outstanding liabilities or claims relating to environmental
matters, individually and in the aggregate, which would have a material adverse
impact on the Partnership's financial position or results of operations.
15. COMMITMENTS
Operating Leases. EOTT leases certain real property, equipment, and
operating facilities under various operating leases. Future non-cancelable
commitments related to these items at December 31, 1998, are summarized below
(in thousands):
<TABLE>
<S> <C>
1999........................................................ $6,805
2000........................................................ 4,617
2001........................................................ 3,171
2002........................................................ 2,426
2003........................................................ 718
Later years................................................. 580
</TABLE>
Total lease expense incurred was $10.9 million, $10.3 million and $10.3
million for the years ended December 31, 1998, 1997 and 1996, respectively.
16. OTHER INCOME (EXPENSE), NET
The components of other income (expense), net, are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------- ------- ----
<S> <C> <C> <C>
Loss on foreign currency transactions...................... $(1,055) $(1,488) $(83)
Gain (loss) on disposal of fixed assets.................... (66) 503 (80)
Rental income.............................................. 60 90 69
Litigation settlements and reserves........................ (969) 130 203
Other...................................................... 225 (1) 49
------- ------- ----
Total............................................ $(1,805) $ (766) $158
======= ======= ====
</TABLE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures on the estimated fair value of financial
instruments are presented in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments" and SFAS No. 119,
"Disclosures About Derivative Financial Instruments and Fair Value of Financial
Instruments." Fair value as defined in SFAS No. 107 represents the amount at
which the instrument could be exchanged in a current transaction between willing
parties. The estimated fair value amounts have been determined by EOTT using
available market data and valuation methodologies. Judgment is required in
interpreting market data and the use of different market assumptions or
estimation methodologies may affect the estimated fair value amounts.
Credit Risk. In the normal course of business, EOTT extends credit to
various companies in the energy industry. Within this industry, certain elements
of credit risk exist and may, to varying degrees, exceed amounts recognized in
the accompanying consolidated financial statements, which may be affected
F-37
<PAGE> 128
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by changes in economic or other external conditions and may accordingly impact
EOTT's overall exposure to credit risk. EOTT's exposure to credit loss in the
event of nonperformance is limited to the book value of the trade commitments
included in the accompanying Consolidated Balance Sheets. EOTT manages its
exposure to credit risk through credit analysis, credit approvals, credit limits
and monitoring procedures. Further, the General Partner believes that its
portfolio of receivables is well diversified and that the allowance for doubtful
accounts is adequate to absorb any potential losses. EOTT requires collateral in
the form of letters of credit for certain of its receivables.
Market Risk. EOTT trading and non-trading transactions give rise to market
risk, which represents the potential loss that can be caused by a change in the
market value of a particular commitment. EOTT closely monitors and manages its
exposure to market risk to ensure compliance with EOTT's stated risk management
policies which are regularly assessed to ensure their appropriateness given
EOTT's objectives, strategies and current market conditions.
The following table presents the carrying amounts and estimated fair values
of the Partnership's financial instruments at December 31, 1998 and 1997 (in
millions):
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents........................ $ 3.0 $ 3.0 $ 3.7 $ 3.7
Foreign currency contracts....................... -- 12.2 -- 22.9
Financial liabilities
Short-term borrowings............................ $ 28.3 $ 28.3 $70.6 $70.6
Bridge loan...................................... 42.0 42.0 -- --
Term loan........................................ 175.0 175.0 -- --
Repurchase agreements............................ 83.0 83.0 -- --
Note payable..................................... -- -- 39.3 39.3
Foreign currency contracts....................... -- 12.2 -- 22.9
Long-term liabilities............................ -- -- 0.3 0.3
</TABLE>
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Cash and cash equivalents, short-term borrowings, note payable, bridge
loan, term loan and repurchase agreements. Fair value for these current assets
and liabilities was considered to be the same as the carrying amounts because of
their liquidity and market-based interest where applicable.
Foreign currency contracts. Quoted market prices are used in determining
the fair value of financial instruments held or issued. If quoted prices are not
available, fair values are estimated on the basis of pricing models or quoted
prices for financial instruments with similar characteristics.
Long-term liabilities. These liabilities represent long-term borrowings on
which the carrying amounts approximate fair value because the effective annual
interest rates of these instruments reflect interest rates at December 31, 1997.
Other Than Trading Activities
EOTT enters into forwards, futures an other contracts to hedge the impact
of market fluctuations on assets, lease purchases or other contractual
commitments. However, EOTT does not consider its commodity futures and forward
contracts to be financial instruments since these contracts require or permit
settlement by the delivery of the underlying commodity, and thus are not subject
to the provisions of SFAS No. 119. Changes in the market value of these
transactions are deferred until the gain or loss is
F-38
<PAGE> 129
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized on the hedged transaction at which time such gains and losses are
recognized through cost of sales.
EOTT routinely enters into foreign currency futures contracts to hedge
foreign currency exposure from commercial transactions relating to current month
crude purchases and sales as well as fixed price swaps. These contracts
generally mature in one year or less. At December 31, 1998 and 1997, foreign
currency contracts with a notional principal amount of $11.7 million and $22.9
million, respectively, were outstanding, having exchange rates which
approximated current market exchange rates.
Trading Activities
Prior to 1998, EOTT offered limited price risk management products to the
energy sector which were not material to EOTT's financial position or results of
operations. These products include swap agreements which require payments to (or
receipt of payments from) counterparties based on the differential between a
fixed and variable price for the commodities specified, options and other
contractual arrangements. EOTT accounted for these activities using the
mark-to-market method of accounting and recorded the gain or loss as a cost of
sales in the period of the change in the market with an offsetting entry to
trade accounts receivable or payable as appropriate. In connection with the
realignment initiatives discussed in Note 5, EOTT ceased providing price risk
management products to its customers.
18. NEW ACCOUNTING STANDARDS
SFAS No. 130, "Comprehensive Income" requires the presentation of
comprehensive income which is traditional net income (loss) adjusted for certain
items that previously were only reflected as direct charges or credits to
equity. EOTT adopted SFAS No. 130 in the first quarter of 1998. For the years
ended December 31, 1998, 1997 and 1996 traditional net income (loss) and
comprehensive income (loss) are the same.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires that segment reporting for public companies be measured
the same way management identifies and evaluates information internally. EOTT
adopted SFAS No. 131 for year end 1998 reporting and restated prior year
information based on the following reportable business segments -- North
American Crude Oil -- East of Rockies, Pipeline Operations and West Coast
Operations. See Note 19.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use", which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. The statement requires companies to
capitalize certain costs that are incurred in developing or designing computer
software. This statement is effective for financial statements beginning after
December 15, 1998. The impact of this new standard will not have a significant
effect on EOTT's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The standard cannot be applied retroactively but early adoption
is permitted. EOTT has not yet
F-39
<PAGE> 130
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined the impact of adopting SFAS No. 133; however, this standard could
increase volatility in earnings and partners' capital, through other
comprehensive income.
In December 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." The Issue 98-10 is effective for fiscal years
beginning after December 15, 1998, and requires energy trading contracts (as
defined) to be recorded at fair value on the balance sheet, with the change in
fair value included in earnings. The consensus requires the effect of initial
application of Issue 98-10 to be recorded as a cumulative effect of a change in
accounting principle effective January 1, 1999, for calendar year companies.
Management has determined that the cumulative effect of the adoption of the new
accounting standard will be an increase in net income which will not be in
excess of $2.0 million.
19. BUSINESS SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
standard requires that companies report certain information about operating
segments in complete sets of financial statements and in condensed financial
statements of interim periods for fiscal years beginning after December 15,
1997. EOTT adopted this statement for the fiscal year ending December 31, 1998.
EOTT has changed the composition of its reportable segments and has
restated the corresponding items of segment information for earlier periods.
EOTT has three reportable segments, which management believes are necessary to
make decisions about resources to be allocated and assess its performance: North
American Crude Oil -- East of Rockies, Pipeline Operations and West Coast
Operations. The North American Crude Oil -- East of Rockies segment primarily
purchases, gathers, transports and markets crude oil. The Pipeline Operations
segment operates approximately 5,300 active miles of common carrier pipelines
operated in 15 states. The West Coast Operations include crude oil gathering and
marketing, refined products marketing and a natural gas liquids business.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as discussed in Note 2. EOTT
evaluates performance based on operating income (loss).
EOTT accounts for intersegment revenue and transfers between North American
Crude Oil -- East of Rockies and West Coast Operations as if the sales or
transfers were to third parties, that is, at current market prices. Intersegment
revenues for Pipeline Operations are based on published pipeline tariffs.
F-40
<PAGE> 131
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INFORMATION BY BUSINESS SEGMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
NORTH
AMERICAN WEST CORPORATE
CRUDE OIL PIPELINE COAST AND
-- EOR OPERATIONS OPERATIONS OTHER(B) CONSOLIDATED
---------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenue from external customers.............. $4,590,810 $ 7,036 $586,169 $110,682 $5,294,697
Intersegment revenue (a)..................... 47,008 24,516 3,900 (75,424) --
---------- -------- -------- -------- ----------
Total revenue....................... 4,637,818 31,552 590,069 35,258 5,294,697
---------- -------- -------- -------- ----------
Gross margin................................. 92,071 30,856 9,698 (20) 132,605
---------- -------- -------- -------- ----------
Operating income (loss)...................... 28,050 4,285 199 (25,305) 7,229
Other expense................................ -- -- -- (11,296) (11,296)
---------- -------- -------- -------- ----------
Net income (loss)............................ 28,050 4,285 199 (36,601) (4,067)
---------- -------- -------- -------- ----------
Long-lived assets............................ 83,866 270,739 25,335 5,299 385,239
---------- -------- -------- -------- ----------
Total assets................................. 608,655 279,315 60,677 17,173 965,820
---------- -------- -------- -------- ----------
Additions to long-lived assets............... 18,398 222,121 23,275 2,775 266,569
---------- -------- -------- -------- ----------
Depreciation and amortization................ 9,263 9,287 470 1,931 20,951
---------- -------- -------- -------- ----------
YEAR ENDED DECEMBER 31, 1997
Revenue from external customers.............. $6,070,799 $ 5,687 $809,466 $760,147 $7,646,099
Intersegment revenue (a)..................... 1,795 13,717 1,783 (17,295) --
---------- -------- -------- -------- ----------
Total revenue....................... 6,072,594 19,404 811,249 742,852 7,646,099
---------- -------- -------- -------- ----------
Gross margin................................. 82,562 19,539 9,342 1,602 113,045
---------- -------- -------- -------- ----------
Operating income (loss)...................... 19,506 1,821 58 (28,977) (7,592)
Other expense................................ -- -- -- (6,807) (6,807)
---------- -------- -------- -------- ----------
Net income (loss)............................ 19,506 1,821 58 (35,784) (14,399)
---------- -------- -------- -------- ----------
Long-lived assets............................ 61,032 76,276 2,486 6,426 146,220
---------- -------- -------- -------- ----------
Total assets................................. 604,663 80,528 63,279 34,451 782,921
---------- -------- -------- -------- ----------
Additions to long-lived assets............... 4,923 13,349 234 4,331 22,837
---------- -------- -------- -------- ----------
Depreciation and amortization................ 7,807 6,030 500 2,181 16,518
---------- -------- -------- -------- ----------
YEAR ENDED DECEMBER 31, 1996
Revenue from external customers.............. $6,027,578 $ 4,137 $769,416 $668,599 $7,469,730
Intersegment revenue (a)..................... 1,451 10,187 1,471 (13,109) --
---------- -------- -------- -------- ----------
Total revenue....................... 6,029,029 14,324 770,887 655,490 7,469,730
---------- -------- -------- -------- ----------
Gross margin................................. 117,255 13,916 15,523 2,833 149,527
---------- -------- -------- -------- ----------
Operating income (loss)...................... 47,066 1,778 6,835 (23,817) 31,862
Other expense................................ -- -- -- (3,053) (3,053)
---------- -------- -------- -------- ----------
Net income (loss)............................ 47,066 1,778 6,835 (26,870) 28,809
---------- -------- -------- -------- ----------
Long-lived assets............................ 54,256 72,200 2,919 17,324 146,699
---------- -------- -------- -------- ----------
Total assets................................. 786,933 85,123 82,447 71,694 1,026,197
---------- -------- -------- -------- ----------
Additions to long-lived assets............... 3,094 1,147 243 2,239 6,723
---------- -------- -------- -------- ----------
Depreciation and amortization................ 8,884 5,133 520 1,183 15,720
---------- -------- -------- -------- ----------
</TABLE>
- ---------------
(a) Intersegment sales for North American Crude Oil -- EOR and West Coast
Operations are made at prices comparable to those received from external
customers. Intersegment sales for Pipeline Operations are based on
published pipeline tariffs.
(b) Corporate and Other also includes the East of Rockies refined products
business and intersegment eliminations.
F-41
<PAGE> 132
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SUBSEQUENT EVENTS
On January 19, 1999, the Board of Directors of EOTT Energy Corp., as
General Partner, declared the Partnership's regular quarterly cash distribution
of $0.475 per Unit for the period October 1, 1998 through December 31, 1998. The
total distribution of approximately $6.9 million was paid on February 12, 1999
to the General Partner and all Common and Special Unitholders of record as of
the close of business on January 29, 1999. The fourth quarter distribution was
paid without using distribution support from Enron.
On February 12, 1999, the Partnership obtained approval of proposals
presented at a Special Meeting of Unitholders. Approval of these proposals,
among other things, (a) authorized the Partnership to issue an additional 10
million Common Units to raise cash to reduce indebtedness, for acquisitions and
other Partnership purposes, (b) changed the terms of the Special Units so that
they became convertible into Common Units and (c) resulted in an increase in
Enron's distribution support to $29 million and an extension of that support
through the fourth quarter of 2001. As a result of the approval of the
proposals, Enron contributed the $21.9 million in APIs outstanding pursuant to
its commitment made in connection with the Support Agreement discussed in Note
12.
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(1) TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998
Revenues....................... $1,339,404 $1,231,875 $1,295,652 $1,427,766 $5,294,697
Gross margin................... 27,547 29,156 33,736 42,166 132,605
Operating income
(loss)...................... (357) 1,157 1,153 5,276 7,229
Net income (loss).............. (1,723) (1,274) (1,806) 736 (4,067)
Basic net income (loss) per
Unit
Common...................... (0.09) (0.06) (0.03) 0.01 (0.17)
Subordinated................ (0.09) (0.07) (0.20) 0.08 (0.26)
Diluted net income (loss) per
Unit........................ (0.09) (0.07) (0.09) 0.03 (0.21)
Cash distributions per Common
Unit(2)..................... 0.475 0.475 0.475 0.475 1.90
1997
Revenues....................... $2,279,168 $1,933,011 $1,774,230 $1,659,690 $7,646,099
Gross margin................... 34,918 23,236 26,788 28,103 113,045
Operating income (loss)(3)..... 5,343 (4,681) (370) (7,884) (7,592)
Net income (loss).............. 3,914 (6,191) (1,911) (10,211) (14,399)
Basic net income (loss) per
Unit
Common...................... 0.20 (0.32) (0.10) (0.53) (0.75)
Subordinated................ 0.20 (0.32) (0.10) (0.53) (0.75)
Diluted net income (loss) per
Unit........................ 0.20 (0.32) (0.10) (0.53) (0.75)
Cash distributions per Common
Unit(2)..................... 0.475 0.475 0.475 0.475 1.90
</TABLE>
- ---------------
(1) Fourth quarter 1998 amounts include the acquisition of the Assets from Koch
on December 1, 1998. See Note 3 to the Consolidated Financial Statements.
(2) Cash distributions are shown in the quarter paid and are based on the prior
quarter's earnings.
F-42
<PAGE> 133
EOTT ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) Fourth quarter 1997 operating income (loss) includes non-recurring charges
of (i) $6.5 million for the impairment of an information system development
project, (ii) $1.5 million impairment of three Ohio products terminals held
for sale and (iii) $2.0 million of severance costs related to the exit of
the East of Rockies refined products business and corporate realignment. See
additional discussion in Notes 5 and 6 to the Consolidated Financial
Statements.
F-43
<PAGE> 134
SCHEDULE II
EOTT ENERGY PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
OF PERIOD EXPENSES AND OTHER OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for Doubtful Accounts................... $2,397 $ 700 $ (831) $2,266
Year ended December 31, 1997
Allowance for Doubtful Accounts................... $2,266 $ -- $ (606) $1,660
Year ended December 31, 1998
Allowance for Doubtful Accounts................... $1,660 $ 700 $ (500) $1,860
Litigation Reserves............................... $ -- $1,400 $ -- $1,400
Safety and Environmental.......................... $ -- $ -- $1,000 $1,000
</TABLE>
A-1
<PAGE> 135
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.
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-82269
REGISTRATION NO. 333-82269-01
REGISTRATION NO. 333-82269-02
REGISTRATION NO. 333-82269-03
REGISTRATION NO. 333-82269-04
PROSPECTUS
$500,000,000
---------------------
COMMON UNITS
DEBT SECURITIES
EOTT ENERGY PARTNERS, L.P.
EOTT ENERGY FINANCE CORP.
---------------------
We are EOTT Energy Partners, L.P., a publicly traded limited partnership
engaged in the purchasing, gathering, transporting, storage and resale of crude
oil, refined petroleum products and natural gas liquids and in related
activities. We are the issuer of the common units and debt securities offered by
means of this prospectus. EOTT Energy Finance Corp. may act as co-issuer of debt
securities.
We currently have 14,976,011 common units outstanding. Our common units are
traded on the New York Stock Exchange under the symbol "EOT."
---------------------
WE WILL PROVIDE SPECIFIC TERMS OF OFFERINGS OF OUR SECURITIES IN PROSPECTUS
SUPPLEMENTS. YOU SHOULD READ THIS PROSPECTUS AND ANY SUPPLEMENT TO THIS
PROSPECTUS CAREFULLY BEFORE YOU INVEST. YOU SHOULD ALSO READ THE DOCUMENTS WE
HAVE REFERRED YOU TO IN THE "WHERE YOU CAN FIND MORE INFORMATION" SECTION OF
THIS PROSPECTUS FOR INFORMATION ON US AND FOR OUR FINANCIAL STATEMENTS. TOGETHER
THESE DOCUMENTS WILL PROVIDE YOU WITH THE SPECIFIC TERMS OF THE OFFERINGS. THIS
PROSPECTUS MAY NOT BE USED TO SELL OUR SECURITIES UNLESS IT IS ACCOMPANIED BY A
PROSPECTUS SUPPLEMENT.
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION. PURCHASERS OF OUR SECURITIES SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "RISK FACTORS," ON PAGE 2, IN EVALUATING AN INVESTMENT IN US.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF OUR SECURITIES. THIS MEANS THAT NEITHER THE SEC NOR ANY STATE
SECURITIES COMMISSION HAS PASSED UPON THE ACCURACY, ADEQUACY OR COMPLETENESS OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 2, 1999.
<PAGE> 136
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
ABOUT THIS PROSPECTUS....................................... ii
WHERE YOU CAN FIND MORE INFORMATION......................... ii
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS... iii
WHO WE ARE.................................................. 1
RISK FACTORS................................................ 2
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 7
USE OF PROCEEDS............................................. 8
DESCRIPTION OF THE DEBT SECURITIES.......................... 8
RATIO OF EARNINGS TO FIXED CHARGES.......................... 13
DESCRIPTION OF OUR COMMON UNITS............................. 13
CASH DISTRIBUTION POLICY.................................... 15
DESCRIPTION OF OUR PARTNERSHIP AGREEMENT.................... 16
TAX CONSIDERATIONS.......................................... 19
PLAN OF DISTRIBUTION........................................ 34
LEGAL MATTERS............................................... 35
EXPERTS..................................................... 35
</TABLE>
i
<PAGE> 137
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process. Under this shelf process, we may offer
from time to time up to $500,000,000 of our securities. Each time we offer our
securities, we will provide you with a prospectus supplement that will describe,
among other things, the specific amounts and prices of the securities being
offered and the terms of the offering including, in the case of debt securities,
the specific terms of the securities. The prospectus supplement may also add,
update or change information contained in this prospectus. Therefore, before you
invest in our securities, you should read this prospectus, any prospectus
supplements and all additional information referenced in the next section.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other information with
the SEC. You may read and copy any document we file at the SEC's public
reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's public reference rooms in New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. In addition, the SEC maintains a web
site that contains reports, information statements and other information
regarding issuers that file electronically. Our SEC filings are also available
on this web site at http://www.sec.gov. You can also obtain information about us
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York, 10005.
The SEC allows us to incorporate by reference information we file with it
into this prospectus. This procedure means that we can disclose important
information to you by referring you to documents on file or to be filed with the
SEC. The information we incorporate by reference is part of this prospectus and
later information that we file with the SEC will automatically update and
supersede this information. Therefore, before you decide to invest in a
particular offering under this shelf registration, you should always check for
SEC reports we may have filed after the date of this prospectus. We incorporate
by reference the documents listed below and any future filings made with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until all offerings under this shelf registration are completed:
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999 and
June 30, 1999; and
- the description of our common units contained in our Form 8-A/A dated
March 14, 1994.
You may request a copy of these filings at no cost by making written or
telephone requests for copies to:
EOTT Energy Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Shareholder Relations
Telephone: (713) 853-6161
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with any information. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of each document.
ii
<PAGE> 138
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains statements that constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934. In general, any statement other than
a statement of historical fact is a forward looking statement. We caution that
our actual results may differ materially from those anticipated or projected
forward looking statements. Any differences could result from a variety of
factors, including the following:
- our ability to maintain existing volumes of crude oil purchased at the
lease and to obtain additional volumes of crude oil;
- our success in hedging our positions;
- industry conditions;
- prices and demand for crude oil;
- economic, political and administrative developments that impact federal,
state and local departments and agencies that regulate the oil industry;
- the effect of competition;
- conditions of the capital markets;
- our ability to successfully acquire and efficiently integrate new assets;
and
- our ability to successfully implement our Year 2000 readiness program.
The information we set forth under the heading "Risk Factors" details these
and other facts that could affect our operating results. You should carefully
consider all this information before you invest.
iii
<PAGE> 139
WHO WE ARE
We are EOTT Energy Partners, L.P., and we purchase, gather, transport,
store and resell crude oil, refined petroleum products and natural gas liquids.
As an intermediary, we seek to earn profits primarily by buying crude oil at
competitive prices, efficiently transporting and handling the purchased crude
oil and marketing the crude oil to refinery customers or other trade partners
who can most benefit from the particular crude oil type. Through our crude oil
gathering and marketing operations, we purchase crude oil produced from
approximately 40,000 leases owned by many of the largest integrated and
independent crude oil producers in the United States and Canada. We purchase
approximately 87% of our lease crude oil from independent oil producers and
approximately 13% from major integrated oil companies. We market the crude oil
to major oil companies and independent refiners throughout the United States and
Canada. In addition to our gathering and marketing operations, we have pipeline
operations in which we transport crude oil on our intrastate and interstate
pipelines based on regulated published tariffs.
On December 1, 1998, we purchased crude oil gathering and transportation
assets in key oil producing regions in a transaction that almost tripled our
pipeline mileage and almost doubled our crude oil lease barrels under contract.
The acquisition included approximately 3,900 miles of crude oil pipelines, crude
oil transport trucks, meter stations, vehicles, storage tanks and contracts for
approximately 180,000 lease barrels of crude oil per day from production in 11
central and western states including Texas, Oklahoma, Kansas and California. On
May 3, 1999, we purchased crude oil transportation and storage assets that
included approximately 2,000 miles of common carrier crude oil pipelines in
Southeast New Mexico and West Texas, bringing our crude oil pipeline mileage to
a total of approximately 8,200 miles.
We are a Delaware limited partnership. EOTT Energy Corp., a Delaware
corporation and an indirect wholly-owned subsidiary of Enron Corp. ("Enron"),
serves as our sole general partner. Our operations are conducted through, and
the operating assets are owned by, EOTT Energy Operating Limited Partnership,
EOTT Energy Canada Limited Partnership and EOTT Energy Pipeline Limited
Partnership, each of which is a Delaware limited partnership. Our general
partner is also the general partner of our operating partnerships. EOTT Energy
Finance Corp., a Delaware corporation, is a wholly-owned subsidiary of EOTT
Energy Partners, L.P. and has been organized for the sole purpose of co-issuing
debt securities.
1
<PAGE> 140
RISK FACTORS
In addition to the other information in, or incorporated by reference in
this prospectus and any accompanying prospectus supplement, you should carefully
consider and evaluate all of the information relating to the risk factors set
forth below.
RISKS RELATED TO OUR BUSINESS
ECONOMIC AND INDUSTRY FACTORS BEYOND OUR CONTROL, INCLUDING PRODUCTION
LEVELS OF CRUDE OIL, CAN ADVERSELY AFFECT OUR GROSS MARGIN.
Our ability to pay cash distributions and service our debt obligations
depends primarily on our gross margin, which is the difference between the sales
price of crude oil and the cost of crude oil purchased, including costs paid to
third parties for transportation and handling charges. Historically, our
business has been very competitive with thin and volatile profit margins. Our
gross margin is affected by many factors beyond our control, including:
- the performance of the U.S. and world economies;
- volumes of crude oil produced in the areas we serve;
- demand for oil by refineries and other customers;
- prices for crude oil at various lease locations;
- prices for crude oil futures contracts on the New York Mercantile
Exchange;
- the competitive position of alternative energy sources; and
- the availability of pipeline and other transportation facilities that may
make crude oil production from other producing areas competitive with
crude oil production that we purchase at the lease.
The absolute price levels for crude oil do not necessarily bear a direct
relationship to our gross margins per barrel, and our gross margins per barrel
cannot be projected with any level of certainty. Due to the volatility of crude
oil prices and the decline in crude oil production, crude oil gathering margins
have suffered industry wide over the last few years. Although there has been
improvement in crude oil margins since 1997, margins have not returned to
historical levels.
IF WE CANNOT MAINTAIN OUR VOLUMES OF CRUDE OIL PURCHASED AT THE LEASE, OUR
ABILITY TO PAY CASH DISTRIBUTIONS AND SERVICE OUR DEBT OBLIGATIONS WILL BE
ADVERSELY AFFECTED.
Our profitability depends in part on our ability to offset volumes lost
because of natural declines in crude oil production from depleting wells or
volumes lost to competitors. This is particularly difficult in an environment of
reduced drilling activity and discontinued production operations. The amount of
drilling and production will depend in large part on crude oil prices. To the
extent that low crude oil prices result in lower volumes of lease crude oil
available for purchase, we may experience lower per barrel margins, as
competition for available lease crude oil on the basis of price intensifies. It
is possible that domestic crude oil producers may further reduce or discontinue
drilling and production operations. In addition, a sustained depression in crude
oil prices could result in the bankruptcy of some producers.
Because producers experience inconveniences in switching lease crude oil
purchasers, producers typically do not change purchasers on the basis of minor
variations in price. Thus, we may experience difficulty acquiring lease crude
oil in areas where there are existing relationships between producers and other
gatherers and purchasers of crude oil. Furthermore, we cannot assure you that we
will be successful in obtaining production made available by major oil companies
or that we will be successful in acquiring other gatherers or marketers.
2
<PAGE> 141
OUR PERFORMANCE DEPENDS ON OUR ABILITY TO MINIMIZE BAD DEBTS AND LEGAL
LIABILITY WHEN EXTENDING CREDIT TO OPERATORS AND CUSTOMERS.
When we purchase crude oil at the lease, we often make payment to an
operator who is responsible for the correct payment and distribution of the
proceeds to other parties. If the operator does not have sufficient resources to
indemnify and defend us in case of a protest, action or complaint by those other
parties, our costs could rise. In addition, because we may extend credit to some
customers in large amounts, it is important that our credit review, evaluation
and control mechanisms work properly. Even if our mechanisms work properly, we
cannot assure you that our customers will not experience losses in dealings with
other parties, in which case we could be adversely affected.
A REDUCTION IN OUR CREDIT STANDING OR ABILITY TO ACCESS CAPITAL WOULD
ADVERSELY AFFECT OUR BASIC PURCHASING AND MARKETING ACTIVITIES.
Our financial resources are a major consideration for parties that enter
into transactions with us, and because of the large dollar volume of the
marketing transactions in which we engage, we have a significant need for
working capital. While we believe that our revolving credit facility will be
sufficient to support our working capital needs, any significant decrease in our
financial strength, regardless of the reason for the decrease, may:
- increase the number of transactions requiring letters of credit or other
financial support;
- make it more difficult for us to obtain letters of credit upon expiration
of our revolving credit facility;
- make it more difficult to renew our revolving credit facility upon its
expiration; or
- increase the cost of obtaining letters of credit.
If we do experience a decrease in financial strength, or if our general partner
is unsuccessful in managing our working capital position, we may be unable to
maintain or increase the level of our purchasing and marketing activities. We
cannot assure you that our revolving credit facility will be adequate or that we
will not be required to reduce our market activities because of limitations on
our ability to obtain financing for our working capital needs.
OUR ABILITY TO MAINTAIN OR INCREASE OUR GROSS MARGINS IS DEPENDENT ON THE
SUCCESS OF OUR PRICE RISK MANAGEMENT STRATEGIES.
Sophisticated price risk management strategies, including those involving
price hedges using New York Mercantile Exchange futures contracts, are very
important in maintaining or increasing our gross margins. Hedging techniques
require significant resources dedicated to the management of futures positions
and physical inventories. We cannot assure you that our price risk management
strategies will be successful in protecting us from risks or in maintaining our
gross margins at desirable levels. Furthermore, we have certain basis risks (the
risk that price relationships between delivery points, grades of crude oil or
delivery periods will change) that cannot be completely hedged, and from time to
time we enter into transactions providing for purchases and sales in future
periods in which the volumes of crude oil are balanced but where either the
purchase or the sale prices are not fixed at the time the transactions are
entered into. In these cases we are subject to the risk that prices may change
or that price changes will not occur as anticipated.
Our ability to increase our profitability and cash flow will depend to a
large extent on our success in making wise decisions regarding sources of supply
and demand for crude oil, our skill in handling the transportation and storage
of crude oil and our ability to respond to changes in the markets. The marketing
of crude oil is complex and requires detailed current knowledge of crude oil
sources and outlets and a familiarity with a number of factors including:
- types of crude oil;
- individual refinery demand for specific grades of crude oil;
3
<PAGE> 142
- area market price structures for the different grades of crude oil;
- location of customers;
- availability of transportation facilities; and
- timing and costs (including storage) involved in delivering crude oil to
the appropriate customer.
TECHNICAL AND STRUCTURAL IMPROVEMENTS IN THE MARKETS FOR CRUDE OIL MAY HAVE
AN ADVERSE EFFECT ON OUR PERFORMANCE.
We realize margins because of our ability to take advantage of our
gathering, storage and transportation assets and our ability to effect
transactions at many different delivery points. Developments in the markets for
crude oil or petroleum products, such as the development of more accurate price
reporting mechanisms or the introduction of additional futures contracts
involving new delivery locations and products, may adversely affect our margins.
ENVIRONMENTAL AND OTHER REGULATORY COSTS AND LIABILITIES COULD AFFECT OUR
CASH FLOW.
Our business is heavily regulated by federal, state and local agencies with
respect to environmental, safety and other regulatory matters. This regulation
increases our cost of doing business. We may be subject to substantial penalties
if we fail to comply with any regulation. We cannot assure you that regulatory
changes enacted by regulatory agencies that have jurisdiction over us will not
increase our cost of conducting business or otherwise negatively impact our
profitability, cash flow and financial condition.
We are subject to numerous laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. If an accidental leak or spill occurs in one of our pipelines or at
a storage facility, we may have to pay a significant amount to clean up the leak
or spill. The resulting costs and liabilities could negatively affect the level
of cash available to pay amounts due on our debt and for distributions to
unitholders. Although we believe that we are in compliance in all material
respects with all applicable environmental laws and regulations, we could be
adversely affected by environmental costs and liabilities that may be incurred
or increased costs resulting from failure to obtain all required regulatory
consents and approvals. Proper maintenance of pipelines is important for the
avoidance of accidental leaks and spills. The average age of our pipelines is
approximately 40 years, and we have acquired approximately 80% of our pipelines
in the past four years. While we believe we have adequately maintained our
pipelines during our ownership, we cannot assure you that these pipelines have
received proper maintenance at all times prior to our ownership. As to all of
our properties, we cannot assure you that past operating practices, including
those that were state of the art at the time employed, will not result in
significant future environmental liabilities. In addition, we cannot assure you
that in the future regulatory agencies with jurisdiction over us will not enact
additional environmental regulations that will negatively affect our
profitability, cash flow and financial condition.
Our pipelines are subject to rate regulation as well as laws relating to
safety and the environment. Federal and state agencies could change the tariffs
we may charge for common carrier pipeline transportation or impose additional
safety or environmental requirements, any of which could affect our
profitability, cash flow and financial condition.
In connection with our recent asset acquisitions from Koch and Texas-New
Mexico PipeLine Co., the parties agreed to allocate responsibilities for
environmental liabilities associated with the pipelines and other assets
included in these transactions. In the Koch transactions, we agreed to be
responsible for certain environmental matters. For the cleanup of pre-closing
contamination which was unknown on the closing date, we agreed to pay up to
$250,000 for each incident, subject to an overall cap of $13 million on all such
incidents in the aggregate. In the Texas-New Mexico PipeLine transaction, we
generally agreed to assume responsibility for the seller's existing cleanup
obligations. In order to minimize our exposure for remediation costs in the
Texas-New Mexico PipeLine transaction, we obtained $20 million in special
insurance coverage for known and unknown cleanup liabilities. In connection with
that insurance coverage, we, as between ourself and our insurance carrier,
remain responsible for all claims in excess of the
4
<PAGE> 143
$20 million, subject to certain deductibles, including a $4 million EOTT
retained liability and a $5 million cap on insurance coverage for known
contamination. Although we believe that we have adequately identified the
anticipated environmental liabilities associated with the Koch and Texas-New
Mexico PipeLine acquisitions, we cannot assure you that there will not be any
material liabilities identified at some future time or that we would be
successful in making indemnity claims, if any. Any claims submitted by us under
any environmental insurance policy will be subject to standard claims review by
the applicable insurance carrier. Should an insurance carrier or an indemnifying
party refuse to honor any claim, or be unable to pay any claim, we would remain
liable for payment.
WE ARE SUBJECT TO RISKS IN PREPARING FOR THE YEAR 2000 PROBLEM.
We estimate that our critical systems will be Year 2000-ready substantially
before January 1, 2000. However, we cannot assure you that our plan to be ready
for the Year 2000 will succeed in accomplishing its purpose or that unforeseen
circumstances will not arise during the implementation of the plan that would
materially adversely affect us.
We are taking reasonable steps to identify, assess, and, where appropriate,
to replace devices that contain embedded chips. Despite these reasonable
efforts, we anticipate that we will not be able to find and remediate all
embedded chips in our systems. Further, we anticipate that third parties on whom
we depend also will not be able to find and remediate all embedded chips in
their systems. Some of the embedded chips that fail to operate or that produce
anomalous results may create system disruptions or failures. Some of these
disruptions or failures may spread from the systems in which they are located to
other systems in a cascade. These cascading failures may have adverse effects
upon our ability to maintain safe operations, and may also have adverse effects
upon our ability to serve our customers and otherwise to fulfill certain
contractual and other legal obligations. The embedded chip problem is widely
recognized as one of the more difficult aspects of the Year 2000 problem across
industries and throughout the world.
Our operations are regulated in part by governmental authorities. We expect
to satisfy these regulatory authorities' requirements for achieving Year 2000
readiness. If our reasonable expectations in this regard are in error, and if a
regulatory authority should order the temporary cessation of our operations in
one or more of these areas, the adverse effect could be material. Other
companies with whom we transact business could face similar problems that
materially adversely affect us.
We cannot assure you that suppliers upon which we depend for essential
goods and services will convert and test their mission-critical systems and
processes in a timely manner. Failure or delay by all or some of these entities,
including the U.S. and state or local governments and foreign governments, could
create substantial disruptions having a material adverse affect on our business.
OUR RAPID GROWTH MAY CAUSE DIFFICULTIES INTEGRATING NEW OPERATIONS.
Part of our business strategy includes acquiring additional assets that
will allow us to increase distributions to unitholders. In the last few years,
we have made several acquisitions that significantly increased our asset base.
Unexpected costs or challenges may arise whenever assets with different
operations are combined. Successful acquisitions require management and other
personnel to devote significant amounts of time to integrating the acquired
assets with existing operations. These efforts may temporarily distract their
attention from day-to-day business, the development or acquisition of new
properties and other business opportunities.
RISKS RELATED TO OUR PARTNERSHIP STRUCTURE
CASH DISTRIBUTIONS TO OUR UNITHOLDERS ARE NOT GUARANTEED AND MAY FLUCTUATE;
ENRON'S COMMITMENT TO SUPPORT CASH DISTRIBUTIONS ON COMMON UNITS WILL EXPIRE
AFTER 2001.
Our cash distributions are not guaranteed and may fluctuate with our
performance. Enron has a commitment to contribute to us up to $29 million ($26.5
million of which is available) if necessary to support our ability to pay the
minimum quarterly distribution of $0.475 per unit ($1.90 annualized). In
addition to the current commitment, Enron has previously contributed $21.9
million to help us pay the
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minimum quarterly distribution. However, Enron's commitment to support the
minimum quarterly distribution extends only to quarters through December 31,
2001.
OUR UNITHOLDERS WILL HAVE LIMITED VOTING RIGHTS AND WILL NOT CONTROL OUR
GENERAL PARTNER.
We are a limited partnership, operated under the direction of our general
partner. This structure affects our common unitholders in various ways
including:
- the voting rights of common unitholders are more limited than those of
holders of capital stock in a corporation;
- our common unitholders have no right to participate in our management and
have no right to elect our general partner or members of its board of
directors;
- our partnership agreement contains provisions making it difficult to
replace our general partner; and
- our general partner and its affiliates may have conflicts of interest
with our common unitholders and with us.
WE DO NOT HAVE THE SAME FLEXIBILITY AS CORPORATIONS TO ACCUMULATE CASH AND
EQUITY TO PROTECT AGAINST ILLIQUIDITY IN THE FUTURE.
Unlike a corporation, our partnership agreement requires us to make
quarterly distributions to our partners of all available cash, consisting of all
cash receipts less disbursements and any amounts reserved for commitments and
contingencies, including capital and operating costs and debt covenants. The
value of our common units is likely to decrease if the amount we distribute per
unit decreases. Accordingly, if we experience a liquidity problem in the future
and are required to reduce distributions on our common units, we may not be able
to issue equity on favorable terms.
OUR PARTNERSHIP AGREEMENT MODIFIES THE FIDUCIARY DUTIES OF OUR GENERAL
PARTNER UNDER DELAWARE LAW.
Our partnership agreement modifies fiduciary duties of our general partner
to the limited partners under Delaware law. These modifications of state law
standards of fiduciary duty may limit the ability of unitholders to challenge
successfully the actions of the general partner as being a breach of what would
otherwise have been a fiduciary duty.
UNITHOLDERS MAY HAVE NEGATIVE TAX CONSEQUENCES IF WE DEFAULT ON OUR DEBT OR
SELL ASSETS.
If we default on any of our debt, the lenders will have the right to sue us
for non-payment. Such an action could cause an investment loss and cause
negative tax consequences for unitholders through the realization of taxable
income by unitholders without a corresponding cash distribution. Likewise, if we
were to dispose of assets and realize a taxable gain while there is substantial
debt outstanding and proceeds of the sale were applied to the debt, unitholders
could have increased taxable income without a corresponding cash distribution.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT.
If at any time our general partner and its affiliates own 80% or more of
the issued and outstanding limited partner interests of any class, our general
partner will have the right to purchase all, but not less than all, of the
outstanding limited partner interests of that class that are held by
non-affiliated persons.
RISKS RELATED TO OUR CAPITAL STRUCTURE
FURTHER ISSUANCES OF UNITS BY US COULD RESULT IN DILUTION FOR UNITHOLDERS
OR HINDER ANY OF OUR FUTURE FINANCINGS.
The market price of our common units could drop as a result of sales of a
large number of common units in the market or the perception that sales of
common units could occur. These factors could also make it more difficult for us
to raise funds through future offerings of common units. In this respect you
should consider several factors.
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First, on February 12, 1999, our unitholders approved a proposal that
authorized us to issue an additional 10 million common units for any business
purpose. These units may be issued on terms and conditions established by our
general partner in its sole discretion without further approval of any limited
partners. Our partnership agreement also authorizes us to issue other limited
partner interests and other equity under the conditions specified in our
partnership agreement.
Second, our general partner has the right, which it may from time to time
assign in whole or in part to any of its affiliates, to purchase common units,
subordinated units or other equity securities from us whenever, and on the same
terms that, we issue securities to persons other than our general partner and
its affiliates, to the extent necessary to maintain the percentage interest of
our general partner and its affiliates in us that existed immediately prior to
each issuance.
Third, if some or all of our outstanding subordinated units are converted
into common units, the amount of available cash necessary to pay the minimum
quarterly distribution with respect to all of our common units would be
increased proportionately, thereby resulting in a dilution of the interest of
existing common unitholders in our cash distributions.
Fourth, if we issue more units, Enron's commitment to support our minimum
quarterly distributions will not increase, thereby resulting in a dilution of
the support obligation per unit.
Finally, a holder of 1,700,000 outstanding common units is entitled to
certain registration rights that allow it to cause us to register its units for
future sale. This unitholder has agreed for our benefit that it will not
exercise its registration rights until the earlier of March 1, 2000 and 180 days
following an underwritten offering of common units pursuant to this prospectus.
OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Of our total debt, at June 30, 1999, we had approximately $217 million
payable to Enron by December 31, 1999. We must repay or refinance this debt to
avoid a material adverse effect on our financial condition.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
We have extensive ongoing relationships with Enron and its affiliates.
Enron's wholly owned subsidiary, EOTT Energy Corp., serves as our general
partner. Our general partner's employees participate in some employee benefit
plans administered by Enron. Our general partner owns, in addition to its
approximately 2% general partner interest, subordinated units representing
approximately a 29% interest in us, and Enron owns common units representing
approximately a 14% interest in us. The members of the board of directors of our
general partner are elected by a wholly-owned subsidiary of Enron. Our interests
could conflict with the interests of Enron and its affiliates, including our
general partner, and in such case our general partner will generally have a
fiduciary duty to resolve the conflicts in a manner that is in our best
interest.
Unless otherwise provided for in a partnership agreement, the laws of
Delaware and Texas generally require a general partner of a partnership to
adhere to fiduciary duty standards, under which it owes its partners the highest
duties of good faith, fairness and loyalty. Because of the competing interests
identified above, our partnership agreement contains provisions that modify some
of these fiduciary duties. For example, our partnership agreement states that
our general partner, its affiliates and its officers and directors will not be
liable for monetary damages to us, our limited partners or their assignees for
errors of judgment or for any acts or omissions if our general partner and they
acted in good faith. Our partnership agreement allows our general partner and
its board of directors to take into account the interests of parties in addition
to ours in resolving conflicts of interest. Our partnership agreement provides
that our general partner will not be in breach of its obligations under our
partnership agreement or its duties to us or our unitholders if the resolution
of a conflict is fair and reasonable to us. The latitude given in our
partnership agreement in connection with resolving conflicts of interest may
significantly limit the ability of a unitholder to challenge what might
otherwise be a breach of fiduciary duty. Our partnership agreement provides that
a purchaser of common units is deemed to have consented to conflicts of interest
and actions of our general partner and its affiliates that might otherwise be
prohibited and to have agreed that the
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conflicts of interest and actions do not constitute a breach by our general
partner of any duty stated or implied by law or equity. Our audit committee
(which is composed of persons who are not officers or employees of our general
partner or any of its affiliates) will, at the request of our general partner,
review conflicts of interest that may arise between our general partner and its
affiliates, on the one hand, and our unitholders or us, on the other. Any
resolution of a conflict approved by our audit committee is conclusively deemed
fair and reasonable to us. We are required to indemnify our general partner, its
affiliates and their respective officers, directors, employees, agents and
trustees to the fullest extent permitted by law against liabilities, costs and
expenses incurred by any of them who acted in good faith and in a manner
reasonably believed to be in or (in the case of a person other than our general
partner) not opposed to, our best interests and, with respect to any criminal
proceedings, had no reasonable cause to believe the conduct was unlawful.
Our extensive ongoing relationships with Enron include:
- an Ancillary Agreement pursuant to which Enron has committed to
contribute to us up to $29 million ($26.5 million of which remains
available) if necessary to support our ability to pay the minimum
quarterly distribution on our common units with respect to quarters
ending on or prior to December 31, 2001;
- a Corporate Services Agreement pursuant to which Enron has agreed to
provide corporate staff and support services to us;
- agreements with Enron affiliates regarding the gathering and purchase by
us of volumes of crude oil and condensate; and
- a $1 billion credit facility provided by Enron to us and approximately
$217 million, at June 30, 1999, in other indebtedness to Enron for
borrowed money.
Under our partnership agreement, with some limited exceptions, affiliates
of our general partner are not restricted from engaging in any business
activities, including those in competition with us. As a result, other conflicts
of interest may arise between affiliates of our general partner and us. Our
partnership agreement provides that, subject to limited exceptions, it shall not
constitute a breach of our general partner's fiduciary duties to our unitholders
or to us for any affiliate of our general partner to engage in direct
competition with us including, without limitation, the gathering, transportation
and marketing of crude oil and refined petroleum products.
USE OF PROCEEDS
Unless otherwise indicated to the contrary in an accompanying prospectus
supplement, we will use the net proceeds from the sale of securities covered by
this shelf registration for general corporate purposes, which may include
repayment of indebtedness, the acquisition of businesses and other capital
expenditures and additions to working capital.
DESCRIPTION OF THE DEBT SECURITIES
DESCRIPTION OF DEBT SECURITIES
The following are the general terms and conditions that could apply to debt
securities we may issue under this shelf registration statement. If and when we
offer debt securities, a prospectus supplement will state the particular terms
and conditions that actually apply to the debt securities included under the
prospectus supplement. The debt securities will be our unsecured general
obligations and either senior debt securities or subordinated debt securities.
EOTT Energy Finance Corp. may be co-issuer of any series of debt
securities. The co-issuer was incorporated under the laws of the State of
Delaware on July 1, 1999 and is wholly-owned by us. The
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co-issuer has no material assets or any liabilities other than as co-issuer of
debt securities. The co-issuer's activities will be limited to co-issuing debt
securities and engaging in other activities incidental thereto.
If we offer senior debt securities or subordinated debt securities, we will
issue them under an indenture that we refer to in this prospectus as an
"indenture". We will enter into the indentures with a trustee that is qualified
to act under the Trust Indenture Act of 1939 (together with any other trustee(s)
chosen by us and appointed in a supplemental indenture with respect to a
particular series of debt securities, the "Trustee"). We will identify the
Trustee for each series of debt securities in the applicable prospectus
supplement. These filings will be available for inspection at the corporate
trust office of the Trustee, or as described above under "Where You Can Find
More Information." The indenture will be subject to, and governed by, the Trust
Indenture Act.
SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT
A prospectus supplement relating to any series of debt securities we offer
will describe the specific terms of those debt securities. These terms will
include some or all of the following:
- the designation, aggregate principal amount and authorized denominations;
- whether the debt securities are senior debt securities or subordinated
debt securities;
- the maturity date;
- the interest rate, if any, and the method for calculating the interest
rate;
- the interest payment dates and the record dates for the interest
payments;
- the portion of the principal amount that will be payable if the maturity
of the debt securities is accelerated;
- any guaranties of the debt securities by any of our affiliated limited
partnerships or others, or other forms of credit support for the debt
securities;
- any mandatory or optional redemption terms or prepayment, conversion,
sinking fund or exchangeability or convertibility provisions;
- the place where principal and interest will be payable;
- if other than denominations of $1,000 or multiples of $1,000, the
denominations the debt securities will be issued in;
- whether the debt securities will be issued in the form of global
securities or certificates;
- the currency or currencies, if other than the currency of the United
States, in which principal and interest will be payable;
- whether the debt securities will be issuable in registered form or bearer
form or both and, if bearer securities are issuable, any restrictions
applicable to the exchange of one form for another and the offer, sale
and delivery of bearer securities;
- the dates on which premium, if any, will be payable;
- our right, if any, to defer payment of interest and the maximum length of
the deferral period;
- any listing on a securities exchange;
- the initial public offering price; and
- other specific terms, including events of default and covenants provided
for with respect to the debt securities.
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Any particular series of debt securities may contain covenants limiting:
- the incurrence of additional debt (including guarantees) by us and our
affiliated limited partnerships;
- the making of certain payments by us and our affiliated limited
partnerships;
- our business activities and those of our affiliated limited partnerships;
- the issuance of other securities by our affiliated limited partnerships;
- asset dispositions;
- transactions with our affiliated limited partnerships and other
affiliates;
- a change of control;
- the incurrence of liens; and
- certain mergers and consolidations involving us and our affiliated
limited partnerships.
PROVISIONS RELATING ONLY TO THE SENIOR DEBT SECURITIES
The senior debt securities will rank equally in right of payment with all
of our other senior and unsubordinated debt and senior in right of payment to
any of our subordinated debt (including the subordinated debt securities). The
senior debt securities will be effectively subordinated to all of our secured
debt. We will disclose the amount of our secured debt in the prospectus
supplement
PROVISIONS RELATING ONLY TO THE SUBORDINATED DEBT SECURITIES
SUBORDINATION TO SENIOR DEBT
The subordinated debt securities will rank junior in right of payment to
all of our senior debt. "Senior debt" will be defined to include all notes or
other evidences of debt, including our guarantees for money we borrowed, not
expressed to be subordinate or junior in right of payment to any other of our
debt.
PAYMENT BLOCKAGES
The indenture may provide that no cash payment of principal, interest and
any premium on the subordinated debt securities may be made:
- if we fail to pay when due any amounts on any senior debt;
- if our property or we are involved in any voluntary or involuntary
liquidation or bankruptcy; and
- in other instances specified in the indenture.
MODIFICATION OF INDENTURE
Under the indenture, generally we and the Trustee will be able to modify
our rights and obligations and the rights of the holders with the consent of the
holders of a specified percentage of the outstanding holders of each series of
debt affected by the modification. No modification of the principal or interest
payment terms, and no modification reducing the percentage required for
modifications, will be effective against any holder without its consent. In
addition, we and the Trustee will be able to amend the indenture without the
consent of any holder of the debt securities to make technical changes.
NO PERSONAL LIABILITY OF OUR GENERAL PARTNER
Our general partner and its directors, officers, employees and shareholders
will not have any liability for our obligations under the indenture or the debt
securities. By accepting a debt security, you waive and release these parties
from this liability. Your waiver and release are part of the consideration for
the issuance of the debt securities.
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PAYMENT AND TRANSFER
Principal, interest and any premium on fully registered securities will be
paid at the office of the paying agent that we may designate. We will make
payment by check mailed to persons in whose names the debt securities are
registered on days specified in the indentures or any prospectus supplement.
Debt security payments in other forms will be paid at a place designated by us
and specified in a prospectus supplement.
Fully registered securities may be transferred or exchanged at the
corporate trust office of the trustee or at any other office or agency
maintained by us for these purposes, without payment of any service charge,
except for any tax or governmental charge.
DISCHARGING OUR OBLIGATIONS
Except as may otherwise be set forth in any prospectus supplement, we may
choose to either discharge our obligations on the debt securities of any series
in a legal defeasance or release ourselves from our covenant restrictions on the
debt securities of any series in a covenant defeasance. We may do so at any time
prior to the stated maturity or redemption of the debt securities of the series
if, among other conditions,
- we deposit with the trustee sufficient cash or U.S. government securities
to pay the principal, interest, any premium and any other sums due to the
stated maturity date or redemption date of the debt securities of the
series; and
- we provide an opinion of our counsel that holders of the debt securities
will not be affected for U.S. federal income tax purposes by the
defeasance.
If we choose the legal defeasance option, holders of the debt securities of
that series will not be entitled to the benefits of the indenture except for
registration of transfer and exchange of debt securities, replacement of lost,
stolen or mutilated debt securities, any required conversion or exchange of debt
securities, any required sinking fund payments and receipt of principal and
interest on the original stated due dates or specified redemption dates.
REGISTRATION OF DEBT SECURITIES; GLOBAL SECURITIES
We may issue debt securities of a series in whole or part in registered,
bearer, coupon or global form. A global security is a security, typically held
by a depository, that represents the beneficial interest of a number of
purchasers of the security.
BOOK ENTRY, DELIVERY AND FORM
Unless otherwise stated in any prospectus supplement, The Depository Trust
Company, New York, New York ("DTC") will act as depositary. Book-entry debt
securities of a series will be issued in the form of a global debt security that
will be deposited with DTC. This means that we will not issue certificates to
each holder. One global debt security will be issued to DTC who will keep a
computerized record of its participants (for example, your broker) whose clients
have purchased the debt securities. The participant will then keep a record of
its clients who purchased the debt securities. Unless it is exchanged in whole
or in part for a certificate debt security, a global debt security may not be
transferred; except that DTC, its nominees and their successors may transfer a
global debt security as a whole to one another.
Beneficial interests in global debt securities will be shown on, and
transfers of global debt securities will be made only through, records
maintained by DTC and its participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the United States
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
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provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Direct Participants") deposit with DTC. DTC
also records the settlement among Direct Participants of securities
transactions, such as transfers and pledges, in deposited securities through
computerized records for Direct Participant's accounts. This eliminates the need
to exchange certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and some other
organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on file
with the SEC.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global debt securities for
all purposes. Accordingly, we, the Trustee and any paying agent will have no
direct responsibility or liability to pay amounts due on the global debt
securities to owners of beneficial interests in the global debt securities.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit Direct Participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global debt
securities as shown on DTC's records. In addition, it is DTC's current practice
to assign any consenting or voting rights to Direct Participants whose accounts
are credited with debt securities on a record date, by using an omnibus proxy.
Payments by participants to owners of beneficial interests in the global debt
securities, and voting by participants, will be governed by the customary
practices between the participants and owners of beneficial interests, as is the
case with debt securities held for the account of customers registered in
"street name." However, payments will be the responsibility of the participants
and not of DTC, the Trustee or us.
Debt securities represented by a global debt security will be exchangeable
for certificated debt securities with the same terms in authorized denominations
only if:
- DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
- We determine not to require all of the debt securities of a series to be
represented by a global debt security and notify the Trustee of our
decision.
THE TRUSTEE
The indenture will govern the duties, responsibilities and rights of the
trustee, including the following:
RESIGNATION OR REMOVAL OF TRUSTEE
Under provisions of the indenture and the Trust Indenture Act governing
trustee conflicts of interest, any uncured event of default under any series of
senior debt securities will force the trustee to resign as trustee for either
the subordinated debt securities or the senior debt securities. Also, any
uncured event of default under any series of subordinated debt securities will
force the trustee to resign as trustee for either the senior debt securities or
the subordinated debt securities. Any resignation of the trustee will require
the appointment of a successor trustee for the applicable debt securities in
accordance with the terms and conditions of the indenture.
The trustee may resign or be removed by us for one or more series of debt
securities and a successor trustee be appointed to act for that series. The
holders of a majority in aggregate principal amount of a series of debt
securities may remove the trustee for that series.
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LIMITATIONS ON TRUSTEE IF IT IS OUR CREDITOR
If the trustee becomes our creditor, the indenture will limit the trustee's
right to obtain payment of claims in some circumstances, or to realize on
certain property received in respect of those claims as security or otherwise.
ANNUAL TRUSTEE REPORT TO HOLDERS OF DEBT SECURITIES
The indenture will require the trustee to submit an annual report to the
holders of the debt securities regarding, among other things, the trustee's
eligibility to serve, the priority of the trustee's claims regarding advances
made by it and any action taken by the trustee materially affecting those debt
securities.
CERTIFICATE AND OPINIONS TO BE FURNISHED TO TRUSTEE
The indenture will provide that every application by us for action by the
trustee requires an officers' certificate and an opinion of counsel stating
that, in the opinion of the signers, we have complied with all conditions
precedent to the action.
GOVERNING LAW
The indenture and the debt securities will be governed by and construed in
accordance with the laws of the State of New York.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------- ----------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges........................... 1.30 n/a(1) n/a(1) n/a(1) 5.06 1.88 3.52
</TABLE>
- ---------------
(1) Earnings are insufficient to cover fixed charges for the six months ended
June 30, 1998 by $2,997,000 and for the years ended December 31, 1998 and
1997 by $4,067,000 and $14,399,000, respectively.
These computations include us, EOTT Energy Operating Limited Partnership, EOTT
Energy Canada Limited Partnership and EOTT Energy Pipeline Limited Partnership,
on a consolidated basis. For these ratios, "earnings" is the amount resulting
from adding the following items:
- income from continuing operations; and
- fixed charges.
The term "fixed charges" means the sum of the following:
- interest expense; and
- an estimate of the interest within rental expenses.
DESCRIPTION OF OUR COMMON UNITS
Generally, our common units represent limited partner interests that
entitle the holders to participate in our cash distributions and to exercise the
rights or privileges available to limited partners under our partnership
agreement. For a description of the relative rights and preferences of holders
of common units, holders of subordinated units and our general partner in and to
cash distributions, together with a description of the circumstances under which
subordinated units convert into common units, see "Cash Distribution Policy."
Our limited partners are the holders of the 14,976,011 common units and the
holders of the 9,000,000 subordinated units.
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Our outstanding common units are listed on the NYSE under the symbol "EOT."
Any additional common units we issue will also be listed on the NYSE.
The transfer agent and registrar for our common units is the First Chicago
Trust Company of New York.
MEETINGS/VOTING
Each holder of common units is entitled to one vote for each common unit on
all matters submitted to a vote of the unitholders.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described below under "-- Limited Liability," the common units
will be fully paid, and unitholders will not be required to make additional
capital contributions to us.
Each purchaser of common units offered by this prospectus must execute a
Transfer Application (the form of which is attached as Appendix I to this
prospectus) whereby the purchaser requests admission as a substituted limited
partner and makes representations and agrees to provisions stated in the
Transfer Application. If this action is not taken, a purchaser will not be
registered as a record holder of common units on the books of our transfer agent
or issued a common unit certificate. Purchasers may hold common units in nominee
accounts.
An assignee, pending its admission as a substituted limited partner, is
entitled to an interest in us equivalent to that of a limited partner with
respect to the right to share in allocations and distributions, including
liquidating distributions. Our general partner will vote and exercise other
powers attributable to common units owned by an assignee who has not become a
substituted limited partner at the written direction of the assignee.
Transferees who do not execute and deliver transfer applications will be treated
neither as assignees nor as record holders of common units and will not receive
cash distributions, federal income tax allocations or reports furnished to
record holders of common units. The only right the transferees will have is the
right to admission as a substituted limited partner in respect of the
transferred common units upon execution of a transfer application in respect of
the common units. A nominee or broker who has executed a transfer application
with respect to common units held in street name or nominee accounts will
receive distributions and reports pertaining to its common units.
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of our
business within the meaning of the Delaware Revised Uniform Limited Partnership
Act (the "Delaware Act") and that he otherwise acts in conformity with the
provisions of our partnership agreement, his liability under the Delaware Act
will be limited, subject to some possible exceptions, generally to the amount of
capital he is obligated to contribute to us in respect of his units plus his
share of any undistributed profits and assets.
Under the Delaware Act, a limited partnership may not make a distribution
to a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership. For the purposes of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of the
property subject to liability of which recourse of creditors is limited shall be
included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and knew at the time
of the distribution that the distribution was in violation of the Delaware Act
is liable to the limited partnership for the amount of the distribution, for
three years from the date of the distribution.
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REPORTS AND RECORDS
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, our general partner will furnish each unitholder of record
(as of a record date selected by our general partner) an annual report
containing our audited financial statements for the past fiscal year. These
financial statements will be prepared in accordance with generally accepted
accounting principles. In addition, no later than 90 days after the close of
each quarter, (except the fourth quarter) our general partner will furnish each
unitholder of record (as of a record date selected by our general partner) a
report containing our unaudited financial statements and any other information
required by law.
Our general partner will use all reasonable efforts to furnish each
unitholder of record information reasonably required for tax reporting purposes
within 90 days after the close of each fiscal year. Our general partner's
ability to furnish this summary tax information will depend on the cooperation
of unitholders in supplying information to our general partner. Each unitholder
will receive information to assist him in determining his U.S. federal and state
and Canadian federal and provincial tax liability and filing his U.S. federal
and state and Canadian federal and provincial income tax returns.
A limited partner can, for a purpose reasonably related to the limited
partner's interest as a limited partner, upon reasonable demand and at his own
expense, have furnished to him:
- a current list of the name and last known address of each partner;
- a copy of our tax returns;
- information as to the amount of cash and a description and statement of
the agreed value of any other property or services, contributed or to be
contributed by each partner and the date on which each became a partner;
- copies of our partnership agreement, our certificate of limited
partnership, amendments to either of them and powers of attorney which
have been executed under our partnership agreement;
- information regarding the status of our business and financial condition;
and
- any other information regarding our affairs as is just and reasonable.
Our general partner may, and intends to, keep confidential from the limited
partners trade secrets or other information the disclosure of which our general
partner believes in good faith is not in our best interest or which we are
required by law or by agreements with third parties to keep confidential.
CASH DISTRIBUTION POLICY
One of our principal objectives is to generate cash from our operations and
to distribute cash to our partners each quarter. We are required to distribute
to our partners 100% of our available cash each quarter. Our available cash is
defined in our partnership agreement and is generally the sum of the cash we
receive in a quarter less cash disbursements, adjusted for net changes in
reserves.
During a subordination period the holders of our common units are entitled
to receive each quarter a minimum quarterly distribution of $0.475 per unit
($1.90 annualized) prior to any distribution of available cash to holders of our
subordinated units. The subordination period is defined generally as the period
that will end if we have distributed at least the minimum quarterly distribution
on all outstanding units each quarter for four consecutive quarters and our
adjusted available cash constituting cash from operations, as defined in our
partnership agreement, for such four quarter period in the aggregate and each of
the last two quarters of such four quarter period was at least 110% of the
amount that would have been sufficient to enable us to distribute the minimum
quarterly distribution on all outstanding units on a fully diluted basis.
During the subordination period, our cash is distributed first 98% to the
holders of common units and 2% to our general partner until there has been
distributed to the holders of common units an amount equal
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to the minimum quarterly distribution and any arrearages. Any additional cash is
distributed 98% to the holders of subordinated units and 2% to our general
partner until there has been distributed to the holders of subordinated units an
amount equal to the minimum quarterly distribution. If the subordination period
ends, the rights of the holders of subordinated units will no longer be
subordinated to the rights of the holders of common units and such units may be
converted into common units.
Our general partner is entitled to incentive distributions if the amount we
distribute with respect to any quarter exceeds levels specified in our
partnership agreement. Under the quarterly, incentive distribution provisions,
generally our general partner is entitled to 15% of amounts we distribute in
excess of $0.525 per common unit, 25% of amounts we distribute in excess of
$0.625 per common unit and 50% of amounts we distribute in excess of $0.725 per
common unit.
The minimum quarterly distribution and the amounts that trigger incentive
distributions at various levels are subject to adjustment, as described in our
partnership agreement. Our partnership agreement characterizes cash
distributions as either distributions of cash from operations or distributions
of cash from interim capital transactions. Generally, cash from operations
refers to cash generated by the operation of our business after deducting
related cash expenditures, reserves, debt service and other items specified in
our partnership agreement, and cash from interim capital transactions refers to
cash generated from borrowings, sales of debt and equity securities and sales or
other dispositions of assets for cash, with some exceptions. To avoid the
difficulty of trying to determine whether available cash distributed is cash
from operations or cash from interim capital transactions, our partnership
agreement provides that all cash distributed will be considered cash from
operations unless the amount distributed exceeds the cash generated from our
operations since June 30, 1995. Any excess will be considered cash from interim
capital transactions. We do not anticipate that we will distribute significant
amounts of cash from interim capital transactions, but if we do distribute cash
from interim capital transactions the distribution will be treated as a return
of capital, and the minimum quarterly distribution amount and the amounts that
trigger incentive distributions will be adjusted downward. In that case the
adjusted minimum quarterly distribution will be $0.475 multiplied by a fraction,
the numerator of which is $20 less the total per unit cash from interim capital
transactions distributed and the denominator of which is $20. The amounts that
trigger incentive distributions at various levels will also be adjusted to the
levels described above multiplied by the same fraction.
Enron has committed to contribute to us up to $29 million ($26.5 million of
which remains available) if necessary to support our ability to pay the minimum
quarterly distribution on our common units with respect to quarters ending on or
prior to December 31, 2001. In exchange for contributions under Enron's support
obligation, we will issue additional partnership interests that are not entitled
to cash distributions or voting rights. These additional partnership interests
must be redeemed by us, at Enron's option, with any available cash in excess of
the amount needed to pay the minimum quarterly distribution on all units plus
any arrearages in the minimum quarterly distribution on common units during the
subordination period. After Enron's obligation to provide distribution support
expires, actual quarterly distributions of available cash will depend solely on
our performance.
DESCRIPTION OF OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. Our partnership agreement and all amendments thereto have been filed
as exhibits to our Form 10-K, which is incorporated by reference in this
prospectus. The following provisions of our partnership agreement are summarized
elsewhere in this prospectus:
- distributions of our available cash are described under "Cash
Distribution Policy;"
- allocations of taxable income and other tax matters are described under
"Tax Considerations;" and
- rights of holders of common units, are described under "Description of
Our Common Units."
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PURPOSE
Our purpose under our partnership agreement is limited to serving as the
limited partner of our operating partnerships and engaging in any business
activities that may be engaged in by our operating partnership or that is
approved by our general partner. The partnership agreements of our operating
partnerships provide that they may engage in any activity that was engaged in by
our predecessors at the time of our initial public offering or reasonably
related thereto and any other activity approved by our general partner.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to our general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for our qualification, continuance or
dissolution. The power of attorney also grants the authority for the amendment
of, and to make consents and waivers under, our partnership agreement.
CAPITAL CONTRIBUTIONS
Unitholders are not obligated to make additional capital contributions,
except as described below under "Description of Our Common Units -- Limited
Liability."
REIMBURSEMENT OF OUR GENERAL PARTNER
Our general partner does not receive any compensation for its services as
our general partner. It is, however, entitled to be reimbursed for all of its
costs incurred in managing and operating our business. Our partnership agreement
provides that our general partner will determine the expenses that are allocable
to us in any reasonable manner determined by our general partner in its sole
discretion.
ISSUANCE OF ADDITIONAL SECURITIES
Our partnership agreement authorizes us to issue an unlimited number of
additional limited partner interests and other equity securities that are equal
in rank with or junior to our common units on terms and conditions established
by our general partner in its sole discretion without the approval of any
limited partners. During the subordination period, however, except as set forth
in the following paragraph, we may not issue an aggregate of more than
approximately 10 million additional common units or an equivalent number of
units that are equal in rank with our common units, in each case, without the
approval of the holders of at least two-thirds of our outstanding common units.
During the subordination period, we may issue an unlimited number of common
units to finance an acquisition or a capital improvement that would have
resulted, on a pro forma basis, in an increase in per unit adjusted available
cash constituting cash from operations, as provided in our partnership
agreement.
In no event may we issue partnership interests that are senior to our
common units without the approval of the holders of at least two-thirds of our
outstanding common units.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our cash distributions. In addition, the issuance of
additional partnership interests may dilute the value of the interests of the
then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership interests that, in the sole
discretion of our general partner, may have special voting rights to which
common units are not entitled.
Our general partner has the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase common units,
subordinated units or other equity securities whenever, and on the
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same terms that, we issue those securities to persons other than our general
partner and its affiliates, to the extent necessary to maintain their percentage
interests in us that existed immediately prior to the issuance. The holders of
common units will not have preemptive rights to acquire additional common units
or other partnership interests in us.
AMENDMENTS TO OUR PARTNERSHIP AGREEMENT
Amendments to our partnership agreement may be proposed only by our general
partner. In general, proposed amendments must be approved by holders of at least
two-thirds of our outstanding units. However, in some limited circumstances,
more particularly described in our partnership agreement, our general partner
may make amendments to our partnership agreement without the approval of our
limited partners or assignees.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of limited partner interests in relation to
other types of classes of limited partner interest or our general partner
interest will require the approval of at least a majority of the type or class
of limited partner interest so affected (excluding any limited partner interests
held by our general partner or its affiliates).
WITHDRAWAL OR REMOVAL OF OUR GENERAL PARTNER
Except as described below, our general partner has agreed not to withdraw
voluntarily as our general partner prior to April 1, 2004 without obtaining the
approval of the holders of at least two-thirds of our outstanding units,
excluding those held by our general partner and its affiliates, and furnishing
an opinion of counsel regarding limited liability and tax matters. On or after
April 1, 2004, our general partner may withdraw as general partner without first
obtaining approval of any unitholder by giving 90 days' written notice, and that
withdrawal will not constitute a violation of our partnership agreement. In
addition, our general partner may withdraw without unitholder approval upon 90
days' notice to our limited partners if at least 50% of our outstanding common
units are held or controlled by one person and its affiliates other than our
general partner and its affiliates. In addition, our partnership agreement
permits our general partner in some limited instances to sell or otherwise
transfer all of its general partner interest without the approval of our
unitholders. There are no restrictions on Enron's ability to sell the capital
stock of our general partner.
Upon the withdrawal of our general partner under any circumstances, the
holders of a majority of our outstanding units (other than those owned by the
withdrawing general partner), 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 our outstanding units agree in writing
to continue our business and to appoint a successor general partner.
Our general partner may not be removed unless that removal is approved by
the vote of the holders of not less than two-thirds of our outstanding units,
excluding units held by our general partner and its affiliates, and we receive
an opinion of counsel regarding limited liability and tax matters. Any removal
of this kind is also subject to the approval of a successor general partner by
the vote of the holders of a majority of our outstanding units, excluding those
held by our withdrawing general partner and its affiliates.
Our partnership agreement also provides that if our general partner is
removed under circumstances where cause does not exist, the subordination period
will end, any outstanding additional partnership interests will be redeemable at
Enron's option and Enron's obligation to support distributions on common units
will terminate.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the person authorized to wind up our affairs (the
liquidator) will, acting with all the powers of our general
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partner that the liquidator deems necessary or desirable in its good faith
judgment, liquidate our assets. The proceeds of the liquidation will be applied
as follows: (i) first, towards the payment of all of our creditors and the
creation of a reserve for contingent liabilities and (ii) then, to all partners
in accordance with the positive balance in the respective capital accounts.
Under some circumstances and subject to some limitations, the liquidator may
defer liquidation or distribution of our assets for a reasonable period of time.
If the liquidator determines that a sale would be impractical or would cause
loss to the partners, our general partner may distribute assets to partners in
kind.
CHANGE OF MANAGEMENT PROVISIONS
Our partnership agreement contains specific provisions that are intended to
discourage a person or group from attempting to remove our general partner or
otherwise change management.
LIMITED CALL RIGHT
If at any time our general partner and its affiliates own 80% or more of
the issued and outstanding limited partner interests of any class, our general
partner will have the right to purchase all, but not less than all, of the
outstanding limited partner interests of that class that are held by
non-affiliated persons. The record date for determining ownership of the limited
partner interests would be selected by our general partner on at least 10 but
not more than 60 days' notice. The purchase price in the event of a purchase
under these provisions would be the greater of (i) the current market price (as
defined in our partnership agreement) of the limited partner interests of the
class as of the date five days prior to the mailing of written notice of its
election to purchase the units and (ii) the highest cash price paid by our
general partner or any of its affiliates for any limited partner interest of the
class purchased within the 90 days preceding the date our general partner mails
notice of its election to purchase the units.
INDEMNIFICATION
Under our partnership agreement, in most circumstances, we will indemnify
our general partner, its affiliates and their officers and directors to the
fullest extent permitted by law, from and against all losses, claims or damages
any of them may suffer by reason of their status as general partner, officer or
director, as long as the person seeking indemnity acted in good faith and in a
manner believed to be in or not opposed to our best interest. Any
indemnification under these provisions will only be out of our assets. Our
general partner shall not be personally liable for, or have any obligation to
contribute or loan funds or assets to us to enable us to effectuate
indemnification. We are authorized to purchase insurance against liabilities
asserted against and expenses incurred by persons for our activities, regardless
of whether we would have the power to indemnify the person against liabilities
under our partnership agreement.
REGISTRATION RIGHTS
Under our partnership agreement, we have agreed to register for resale
under the Securities Act and applicable state securities laws any common units,
subordinated units or other partnership securities proposed to be sold by our
general partner or any of its affiliates or their assignees if an exemption from
the registration requirements is not otherwise available. We are obligated to
pay all expenses incidental to the registration, excluding underwriting
discounts and commissions.
TAX CONSIDERATIONS
This section is a summary of all of the material federal income tax
considerations that may be relevant to you and, to the extent set forth below
under "-- Legal Opinions and Advice," represents the opinion of our counsel
Vinson & Elkins L.L.P. ("Counsel"), insofar as it relates to matters of United
States federal income tax law and legal conclusions. This section is based upon
current provisions of the Internal Revenue Code of 1986 (the "Code"), existing
and proposed regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Subsequent changes may cause the
tax consequences to vary substantially from the consequences described below.
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We have made no attempt in the following discussion to comment on all
federal income tax matters affecting our unitholders or us. Moreover, the
discussion focuses on our unitholders who are individual citizens or residents
of the United States and has only limited application to corporations, estates,
trusts or non-resident aliens. Accordingly, you should consult, and should
depend on, your own tax advisor in analyzing the federal, state, local and
foreign tax consequences to you of the ownership or disposition of common units.
LEGAL OPINIONS AND ADVICE
Counsel has expressed its opinion that, based on the accuracy of
representations and subject to the qualifications set forth in the detailed
discussion that follows, for federal income tax purposes: we and our operating
limited partnerships will each be treated as a partnership; and owners of common
units (with some exceptions, as described in "-- Limited Partner Status" below)
will be treated as our partners (but not partners of the operating limited
partnerships). In addition, all statements as to matters of law and legal
conclusions contained in this section, unless otherwise noted, reflect the
opinion of Counsel. Counsel has also advised us that, based on current law, the
following general description of the principal federal income tax consequences
that should arise from the ownership and disposition of common units, insofar as
it relates to matters of law and legal conclusions, addresses all material tax
consequences to our unitholders who are individual citizens or residents of the
United States.
We have not requested any ruling from the Internal Revenue Service (the
"IRS") with respect to the foregoing issues or any other matter affecting our
unitholders or us. An opinion of counsel represents only counsel's best legal
judgment and does not bind the IRS or the courts. Thus, we cannot assure you
that the opinions and statements set forth in this prospectus would be sustained
by a court if contested by the IRS. The costs of any contest with the IRS will
be borne directly or indirectly by our unitholders and our general partner.
Furthermore, we cannot assure you that our treatment or an investment in us will
not be significantly modified by future legislative or administrative changes or
court decisions. Any modification may or may not be retroactively applied.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of our income, gain, loss, deduction and credit in computing his
federal income tax liability, regardless of whether cash distributions are made.
Distributions by us to a unitholder are generally not taxable unless the amount
of any cash distributed is in excess of his adjusted basis in his partnership
interest.
Pursuant to certain Treasury Regulations effective January 1, 1997 (the
"Check-the-Box Regulations"), an entity in existence on January 1, 1997, will
generally retain its current classification for federal income tax purposes. As
of January 1, 1997, each of our operating limited partnerships and we were
classified and taxed as a partnership. Pursuant to the Check-the-Box
Regulations, this prior classification will be respected for all periods prior
to January 1, 1997, if:
- the entity had a reasonable basis for the claimed classification;
- the entity recognized the federal tax consequences of any change in
classification within five years prior to January 1, 1997; and
- the entity was not notified prior to May 8, 1996 that the entity
classification was under examination.
Based on these regulations and the applicable federal income tax law, Counsel
has opined that we and each of our operating limited partnerships have been and
will be classified as a partnership for federal income tax purposes. In
rendering its opinion, Counsel has relied on factual representations and
covenants made by our general partner and us:
- neither we nor any of our operating limited partnerships have elected or
will elect to be treated as an association taxable as a corporation;
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- except as otherwise required by Section 704 of the Code and regulations
promulgated thereunder, our general partner has had and will have, in the
aggregate, an interest in each material item of our income, gain, loss,
deduction or credit equal to at least 1% at all times during our
existence;
- a representation and covenant of our general partner that our general
partner has and will maintain, in the aggregate, a minimum capital
account balance in us equal to 1% of our total positive capital account
balances;
- for each taxable year, less than 10% of our gross income has been and
will be derived from sources other than (i) the exploration, development,
mining or production, processing, refining, transportation or marketing
of any mineral or natural resource, including oil, gas or products
thereof and naturally occurring carbon dioxide or (ii) other items of
income as to which Counsel has opined or will opine will be "qualifying
income" within the meaning of Section 7704(d) of the Code; and
- we and each of our operating limited partnerships are organized and will
be operated in accordance with (i) all applicable partnership statutes,
(ii) its or our respective partnership agreement and (iii) its or our
description in this Registration Statement.
Counsel's opinion as to our partnership classification in the event of a change
in our general partner is based upon the assumption that the new general partner
will satisfy the foregoing representations and covenants.
Section 7704 of the Code provides that publicly-traded partnerships will,
as a general rule, be taxed as corporations. However, an exception (the "Natural
Resource Exception") exists with respect to publicly-traded partnerships 90% or
more of the gross income of which for every taxable year consists of "qualifying
income." Qualifying income includes income and gains derived from the
transportation and trading of oil and petroleum products and natural gas
processing as conducted by us. Other types of qualifying income include interest
(from other than a financial business), dividends, gains from the sale of real
property and gains from the sale or other disposition of capital assets held for
the production of income that otherwise constitutes qualifying income. We
estimate that less than 5% of our gross income is not qualifying income under
this test; however, this estimate could change from time to time. Based upon and
subject to that estimate, the factual representations made by us and the general
partner and a review of the applicable legal authorities, Counsel is of the
opinion that at least 95% of our gross income constitutes qualifying income.
If we fail to meet the Natural Resource Exception (other than a failure
determined by the IRS to be inadvertent that is cured within a reasonable time
after discovery), we will be treated as if we had transferred all of our assets
(subject to liabilities) to a newly-formed corporation (on the first day we fail
to meet the Natural Resource Exception) in return for stock in the corporation,
and then distributed the stock to our unitholders in liquidation of their
interests in us. This contribution and liquidation should be tax-free to our
unitholders and us, so long as we, at such time, do not have liabilities in
excess of the basis of our assets. Thereafter, we would be treated as a
corporation for federal income tax purposes.
If we were treated as an association or otherwise taxable as a corporation
in any taxable year, as a result of a failure to meet the Natural Resource
Exception or otherwise, our items of income, gain, loss, deduction and credit
would be reflected only on our tax return rather than being passed through to
our unitholders, and our net income would be taxed at the entity level at
corporate rates. In addition, any distribution made to our unitholders would be
treated as either taxable dividend income (to the extent of our current or
accumulated earnings and profits), in the absence of earnings and profits as a
nontaxable return of capital (to the extent of his basis in his common units) or
taxable capital gain (after his basis in the common units is reduced to zero).
Accordingly, our treatment as an association taxable as a corporation would
result in a material reduction in a unitholder's cash flow and after-tax return.
The discussion below is based on the assumption that we will be classified
as a partnership for federal income tax purposes.
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LIMITED PARTNER STATUS
Our unitholders who have become limited partners will be treated as
partners for federal income tax purposes. Moreover, the IRS has ruled that
assignees of partnership interests who have not been admitted to a partnership
as partners, but who have the capacity to exercise substantial dominion and
control over the assigned partnership interests, will be treated as partners for
federal income tax purposes. On the basis of this ruling, except as otherwise
described herein, Counsel is of the opinion that (a) assignees who have executed
and delivered Transfer Applications and are awaiting admission as limited
partners and (b) our 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 for federal income tax purposes. As this ruling does not
extend, on its facts, to assignees of common units who are entitled to execute
and deliver Transfer Applications and thereby become entitled to direct the
exercise of attendant rights, but who fail to execute and deliver Transfer
Applications, Counsel's opinion does not extend to these persons. Income, gain,
deductions, losses or credits would not appear to be reportable by these
unitholders, and any cash distributions received by these unitholders would
therefore be fully taxable as ordinary income. These holders should consult
their own tax advisors with respect to their status as partners for federal
income tax purposes. A purchaser or other transferee of common units who does
not execute and deliver a Transfer Application may not receive federal income
tax information or reports furnished to record holders of common units unless
the common units are held in a nominee or street name account and the nominee or
broker has executed and delivered a Transfer Application with respect to the
common units.
A beneficial owner of common units whose common units have been transferred
to a short seller to complete a short sale would appear to lose his status as a
partner for federal income tax purposes with respect to the common units sold
short. See "-- Tax Treatment of Our Operations -- Treatment of Short Sales."
TAX CONSEQUENCES OF COMMON UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
We will pay no federal income tax. Instead, each of our unitholders will be
required to report on his income tax return his allocable share of our income,
gains, losses and deductions without regard to whether corresponding cash
distributions are received by him. Consequently, we may allocate income to our
unitholders although they have not received a cash distribution in respect of
that income.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Our distributions to any of our unitholders will not be taxable for federal
income tax purposes to the extent of his basis in his common units immediately
before the distribution. Cash distributions in excess of a common unitholder's
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 "-- Tax
Consequences of Common Unit Ownership -- Disposition of Common Units." Any
reduction in a common unitholder's share of our liabilities for which no
partner, including our general partner, bears the economic risk of loss
("nonrecourse liabilities") will be treated as a distribution of cash to that
unitholder.
BASIS OF COMMON UNITS
A unitholder's initial tax basis for his common units will be the amount
paid for the common unit plus his share of our nonrecourse liabilities. The
initial tax basis for a common unit will be increased by the unitholder's share
of our income and by any increase in the unitholder's share of our nonrecourse
liabilities. The basis for a common unit will be decreased (but not below zero)
by our distributions, including any decrease in the unitholder's share of our
nonrecourse liabilities, by the unitholder's share of our losses and by the
unitholder's share of our expenditures that are not deductible in computing his
taxable income and are not required to be capitalized. A unitholder's share of
our nonrecourse liabilities will be generally based on the unitholder's share of
our profits.
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LIMITATIONS ON DEDUCTIBILITY OF OUR LOSSES
To the extent we incur losses, a unitholder's share of deductions for the
losses will be limited to the tax basis of the unitholder's common units or, in
the case of an individual unitholder or a corporate unitholder if more than 50%
of the value of his stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations, to the amount that the unitholder
is considered to be "at risk" with respect to our activities, if that is less
than the unitholder's basis. A unitholder must recapture losses deducted in
previous years to the extent that our distributions cause the unitholder's at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that the unitholder's basis or
at risk amount (whichever is the limiting factor) is increased.
In general, a unitholder will be at risk to the extent of the purchase
price of his common units, but this will be less than the unitholder's basis for
his common units by the amount of the unitholder's share of any of our
nonrecourse liabilities. A unitholder's at risk amount will increase or decrease
as the basis of the unitholder's common units increases or decreases except that
changes in our nonrecourse liabilities will not increase or decrease the at risk
amount.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely held corporations and personal service corporations can
only deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) that are not in excess of the
taxpayer's income from passive activities or investments. The passive loss
limitations are applied separately with respect to each publicly-traded
partnership. Consequently, any losses generated by us will only be available to
offset future income that we generate and will not be available to offset income
from other passive activities or investments (including other publicly-traded
partnerships) or salary or active business income. Passive losses that are not
deductible because they exceed the unitholder's income that we generate may be
deducted in full when the unitholder disposes of his entire investment in us in
a fully taxable transaction to an unrelated party. The passive activity loss
rules are applied after other applicable limitations on deductions such as the
at risk rules and the basis limitation.
A unitholder's share of our net income may be offset by any of our
suspended passive losses, but it may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly-traded partnerships. The IRS has announced that Treasury
Regulations will be issued that characterize net passive income from a
publicly-traded partnership as investment income for purposes of the limitations
on the deductibility of investment interest.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of the taxpayer's "net investment
income." As noted, a unitholder's share of our net passive income will be
treated as investment income for this purpose. In addition, the unitholder's
share of our portfolio income will be treated as investment income. Investment
interest expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- our interest expense attributed to portfolio income; and
- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a common unit to the extent attributable to his portfolio
income. Net investment income includes gross income from property held for
investment, gain attributable to the disposition of property held for investment
and amounts treated as portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected with the production
of investment income.
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ALLOCATION OF OUR INCOME, GAIN, LOSS AND DEDUCTION
Our partnership agreement provides that a capital account be maintained for
each partner, that the capital accounts generally be maintained in accordance
with the applicable tax accounting principles set forth in applicable Treasury
Regulations and that all allocations to a partner be reflected by an appropriate
increase or decrease in his capital account. Distributions upon our liquidation
are generally to be made in accordance with positive capital account balances.
In general, if we have a net profit, items of income, gain, loss and
deduction will be allocated among our general partner and our unitholders in
accordance with their respective percentage interests in us. A class of our
unitholders that receives more cash than another class, on a per unit basis,
with respect to a year, will be allocated additional income equal to that
excess. If we have a net loss, items of income, gain, loss and deduction will
generally be allocated for both book and tax purposes (1) first, to our general
partner and our unitholders in accordance with their respective percentage
interests to the extent of their positive capital accounts and (2) second, to
our general partner.
Notwithstanding the above, as required by Section 704(c) of the Code, some
items of our income, deduction, gain and loss will be specially allocated to
account for the difference between the tax basis and fair market value of
property contributed to us ("Contributed Property") or owned by us at the time
new units are sold by us ("Adjusted Property"). In addition, some items of
recapture income will be allocated to the extent possible to the partner
allocated the deduction giving rise to the treatment of the gain as recapture
income in order to minimize the recognition of ordinary income by some of our
unitholders. Although we believe that these allocations will be respected under
recently adopted Treasury Regulation, if they are not respected, the amount of
the income or gain allocated to a unitholder will not change, but instead a
change in the character of the income allocated to a unitholder would result.
Finally, although we do not expect that our operations will result in the
creation of negative capital accounts, if negative capital accounts nevertheless
result, items of our income and gain will be allocated in an amount and manner
sufficient to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of our income, gain, loss,
deduction or credit, other than an allocation required by Section 704(c) of the
Code to eliminate the disparity between a partner's "book" capital account
(credited with the fair market value of Contributed Property and credited or
debited with any gain or loss attributable to an Adjusted Property) and "tax"
capital account (credited with the tax basis of Contributed Property) (the
"Book-Tax Disparity"), will generally be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction only if the allocation has substantial economic effect.
In any other case, a partner's distributive share of an item will be determined
on the basis of the partner's interest in us, which will be determined by taking
into account all the facts and circumstances, including the partner's relative
contributions to us, the interests of the partners in economic profits and
losses, the interests of the partners in cash flow and other non-liquidating
distributions and rights of the partners to distributions of capital upon
liquidation.
Under the Code, the partners in a partnership cannot be allocated more
depreciation, gain or loss than the total amount of the item recognized by that
partnership in a particular taxable period. This rule, often referred to as the
"ceiling limitation," is not expected to have significant application to
allocations with respect to Contributed Properties or Adjusted Properties and
thus, is not expected to prevent our unitholders from receiving allocations of
depreciation, gain or loss from our properties equal to that which they would
have received had our properties actually had a basis equal to fair market value
at the outset or at the time new units are issued by us. However, to the extent
the ceiling limitation is or becomes applicable, our partnership agreement
requires that some items of income and deduction be allocated in a way designed
to effectively "cure" this problem and eliminate the impact of the ceiling
limitations. These allocations will not have substantial economic effect because
they will not be reflected in the capital accounts of our unitholders.
The legislative history of Section 704(c) states that Congress anticipated
that Treasury Regulations would permit partners to agree to a more rapid
elimination of Book-Tax Disparities than required provided there is no tax
avoidance potential. Further, under Treasury Regulations under Section 704(c),
allocations
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similar to the curative allocations would be allowed. However, since the final
Treasury Regulations are not applicable to us, Counsel is unable to opine on the
validity of the curative allocations.
Counsel is of the opinion that, with the exception of curative allocations
and the allocation of recapture income discussed above and the deduction for
amortizable goodwill discussed below (see "-- Tax Treatment of Our
Operations -- Initial Tax Basis, Depreciation and Amortization"), allocations
under our partnership agreement will be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction. There are, however, uncertainties in the Treasury
Regulations relating to allocations of partnership income, and investors should
be aware that some of the allocations in our partnership agreement may be
successfully challenged by the IRS.
TAX TREATMENT OF OUR OPERATIONS
Accounting Method and Taxable Year
We use the calendar year as our taxable year and adopt the accrual method
of accounting for federal income tax purposes.
Initial Tax Basis, Depreciation and Amortization
The tax basis established for our various assets will be used for purposes
of computing depreciation and cost recovery deductions and, ultimately, gain or
loss on the disposition of those assets. Our assets initially had an aggregate
tax basis equal to the sum of each unitholder's tax basis in his common units or
subordinated units and the tax basis of our general partner in its general
partner interest.
The IRS may challenge the method adopted by us to allocate this aggregate
tax basis among our assets and our treatment of certain amortizable intangible
assets. The IRS may (i) challenge either the fair market values or the useful
lives assigned to our assets or (ii) seek to characterize intangible assets as
non-amortizable goodwill. If the challenge or characterization were successful,
the deductions allocated to a common unitholder in respect of our assets would
be reduced, and a unitholder's share of taxable income received from us would be
increased accordingly. Any increase could be material.
To the extent allowable, our general partner may elect to use the
depreciation and cost recovery methods that will result in the largest
depreciation deductions in our early years. Property that we subsequently
acquire or construct may be depreciated using accelerated methods permitted by
the Code.
If we dispose of depreciable property by sale, foreclosure or otherwise,
all or a portion of any gain (determined by reference to the amount of
depreciation previously deducted and the nature of the property) may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property owned by us may be required to recapture deductions upon a
sale of his interest. See "-- Tax Consequences of Common Unit
Ownership -- Allocation of Our Income, Gain, Loss and Deduction" and "-- Tax
Consequences of Common Unit Ownership -- Disposition of Common
Units -- Recognition of Gain or Loss."
Costs we incurred in organizing may be amortized over any period we select
not shorter than 60 months. The costs incurred in promoting the issuance of
units must be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, that may be amortized, and as syndication expenses which
may not be amortized.
Section 754 Election
We previously made the election permitted by Section 754 of the Code. This
election is irrevocable without the consent of the IRS. The election generally
permits a purchaser of common units to adjust his share of the basis in our
properties ("inside basis") pursuant to Section 743(b) of the Code to fair
market value (as reflected by his common unit price). See "Tax
Considerations -- Allocation of Our Income,
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Gain, Loss and Deduction." The Section 743(b) adjustment is attributed solely to
a purchaser of units and is not added to the basis of our assets associated with
all of our unitholders. (For purposes of this discussion, a partner's inside
basis in our assets will be considered to have two components: (1) his share of
our actual basis in our assets (the "Common Basis"); and (2) his Section 743(b)
adjustment allocated to each of our assets.)
Proposed Treasury Regulation Section 1.197-2(g)(3) generally requires that
the 743(b) adjustment attributable to amortizable intangible assets under
Section 197 should be treated as a newly-acquired asset placed in service on the
date when the transfer occurs. Under Treasury Regulation Section 1.167(c)-
1(a)(6), a Section 743(b) adjustment attributable to property subject to
depreciation under Section 167 of the Code rather than cost recovery deductions
under Section 168 is generally required to be depreciated using either the
straight-line method or the 150% declining balance method. We intend to utilize
the 150% declining balance method on our property subject to depreciation under
Section 167. Although the proposed regulations under Section 743 will likely
eliminate many of the problems if finalized in their current form, the
depreciation method and useful lives associated with the Section 743(b)
adjustment may differ from the method and useful lives generally used to
depreciate the Common Basis in our properties. Pursuant to our partnership
agreement, our general partner is authorized to adopt a convention to preserve
the uniformity of common units even if that convention is not consistent with
Treasury Regulation Section 1.167(c)-1(a)(6) or 1.197-2(g)(3). See "-- Tax
Consequences of Common Unit Ownership -- Uniformity of Common Units."
Although Counsel is unable to opine as to the validity of this approach, we
intend to depreciate the portion of a Section 743(b) adjustment attributable to
unrealized appreciation in the value of Contributed Property or Adjusted
Property (to the extent of any unamortized Book-Tax Disparity) using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the Common Basis of our property. This method
is consistent with the proposed regulations under Section 743 but is arguably
inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6) or Proposed
Treasury Regulation Section 1.197-2(g)(3). To the extent that the Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized
Book-Tax Disparity, we will apply the rules described in the Treasury
Regulations and legislative history. If we determine that this position cannot
reasonably be taken, we may adopt a depreciation or amortization convention
under which all purchasers acquiring common units in the same month would
receive depreciation or amortization, whether attributable to the Common Basis
or the Section 743(b) basis, based upon the same applicable rate as if they had
purchased a direct interest in our property. This aggregate approach may result
in lower annual depreciation or amortization deductions than would otherwise be
allowable to some of our unitholders. See "-- Tax Consequences of Common Unit
Ownership -- Uniformity of Common Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of Section 1060 of the Code. Based on these principles, the
IRS may seek to reallocate some or all of any Section 743(b) adjustment not so
allocated by us to goodwill. Alternatively, it is possible that the IRS may seek
to treat the portion of the Section 743(b) adjustment attributable to the
Underwriter's discount as if allocable to a non-deductible syndication cost.
A Section 754 election is advantageous if the transferee's basis in his
common units is higher than his common units' share of the aggregate basis of
our assets immediately prior to the transfer. In that case, pursuant to the
election, the transferee would take a new and higher basis in his share of our
assets for purposes of calculating, among other items, his depreciation
deductions and his share of any gain or loss on a sale of our assets.
Conversely, a Section 754 election is disadvantageous if the transferee's basis
in his common units is lower than his common units' share of the aggregate basis
of our assets immediately prior to the transfer. Thus, the amount that a
unitholder will be able to obtain upon the sale of his common units may be
affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and we
will make them on the basis of some assumptions as to the value of our assets
and other matters. There is no assurance that the determinations we make will
not be successfully challenged by the IRS and that the deductions
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attributable to them will not be disallowed or reduced. Should the IRS require a
different basis adjustment to be made, and should, in our general partner's
opinion, the expense of compliance exceed the benefit of the election, our
general partner may seek permission from the IRS to revoke our Section 754
election. If permission is granted, a purchaser of common units subsequent to
the revocation probably will incur increased tax liability.
Alternative Minimum Tax
Each unitholder will be required to take into account his distributive
share of any items of our income, gain or loss for purposes of the alternative
minimum tax. A portion of our depreciation deductions may be treated as an item
of tax preference for this purpose.
A unitholder's alternative minimum taxable income derived from us may be
higher than his share of our net income because we may use more accelerated
methods of depreciation for purposes of computing federal taxable income or
loss. The minimum tax rate for individuals is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption amount and to 28%
on any additional alternative minimum taxable income. You should consult with
your tax advisors as to the impact of an investment in common units on your
liability under the alternative minimum tax.
Valuation of Our Property
The federal income tax consequences of the ownership and disposition of
common units will depend in part on our estimates of the relative fair market
values, and determinations of the initial tax basis, of our assets. Although we
may from time to time consult with professional appraisers with respect to
valuation matters, many of the relative fair market value estimates will be made
solely by us. These estimates are subject to challenge and will not be binding
on the IRS or the courts. In the event the determinations of fair market value
are subsequently found to be incorrect, the character and amount of items of
income, gain, loss, deductions or credits previously reported by our unitholders
might change, and our unitholders might be required to amend their previously
filed tax returns or to file claims for refunds.
Treatment of Short Sales
A unitholder who engages in a short sale (or a transaction having the same
effect) with respect to common units will be required to recognize the gain (but
not the loss) inherent in the common units that are sold short. See "-- Tax
Consequences of Common Unit Ownership -- Disposition of Common Units." In
addition, it would appear that a unitholder whose common units are loaned to a
"short seller" to cover a short sale of common units would be considered as
having transferred beneficial ownership of those common units and would, thus,
no longer be a partner with respect to those common units during the period of
the loan. As a result, during this period, any of our income, gain, deduction,
loss or credit with respect to those common units would appear not to be
reportable by the unitholder, any cash distributions received by the unitholder
with respect to those common units would be fully taxable and all of those
distributions would appear to be treated as ordinary income. The IRS may also
contend that a loan of common units to a "short seller" constitutes a taxable
exchange. If the IRS successfully made this contention, the lending unitholder
may be required to recognize gain or loss. Unitholders desiring to assure their
status as partners should modify any of their brokerage account agreements to
prohibit their brokers from borrowing their common units.
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of common units equal to the
difference between the amount realized and the unitholder's tax basis for the
common units sold. A unitholder's amount realized will be measured by the sum of
the cash or the fair market value of other property received plus his share of
our nonrecourse liabilities. Since the amount realized includes a unitholder's
share of our nonrecourse
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liabilities, the gain recognized on the sale of common units may result in a tax
liability in excess of any cash received from the sale.
Gain or loss recognized by a unitholder (other than a "dealer" in common
units) on the sale or exchange of a common unit held for more than twelve months
will generally be taxable as long-term capital gain or loss. A substantial
portion of this gain or loss, however, will be separately computed and taxed as
ordinary income or loss under section 751 of the Code to the extent attributable
to assets giving rise to depreciation recapture or other "unrealized
receivables" or to inventory we own. The term "unrealized receivables" includes
potential recapture items, including depreciation recapture. Ordinary income
attributable to unrealized receivables, inventory and deprecation recapture may
exceed net taxable gain realized upon the sale of the common unit and may be
recognized even if there is a net taxable loss realized upon the sale of the
common unit. Any loss recognized on the sale of common units will generally be a
capital loss. Thus, a unitholder may recognize both ordinary income and a
capital loss upon a disposition of common units. Net capital loss may offset no
more than $3,000 of ordinary income in the case of individuals and may only be
used to offset capital gain in the case of a corporation.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions at different prices must maintain an aggregate adjusted
tax basis in a single partnership interest and that, upon sale or other
disposition of some of the interests, a portion of the aggregate tax basis must
be allocated to the interests sold on the basis of some equitable apportionment
method. This ruling is unclear as to how the holding period is affected by this
aggregation concept. If this ruling is applicable to you, the aggregation of
your tax basis effectively prohibits you from choosing among common units with
varying amounts of unrealized gain or loss as would be possible in a stock
transaction. Thus, the ruling may result in an acceleration of gain or deferral
of loss on a sale of a portion of your common units. It is not clear whether the
ruling applies to publicly-traded partnerships, such as us, the interests in
which are evidenced by separate interests, and accordingly Counsel is unable to
opine as to the effect this ruling will have on you. If you are considering the
purchase of additional common units or a sale of common units purchased at
differing prices, you should consult your tax advisor as to the possible
consequences of this ruling.
Allocations Between Transferors and Transferees
In general, our taxable income and losses will be determined annually and
will be prorated on a monthly basis and subsequently apportioned among our
unitholders in proportion to the number of common units they owned as of the
close of business on the last day of the preceding month. However, gain or loss
realized on a sale or other disposition of our assets other than in the ordinary
course of business will be allocated among our unitholders of record as of the
opening of the New York Stock Exchange on the first business day of the month in
which the gain or loss is recognized. As a result of this allocation procedure,
a unitholder transferring common units in the open market may be allocated
income, gain, loss, deduction, and credit accrued after the transfer.
The use of the allocation procedure discussed above may not be permitted by
existing Treasury Regulations and, accordingly, Counsel is unable to opine on
the validity of the method of allocating income and deductions between the
transferors and the transferees of common units. If an allocation procedure is
not allowed by the Treasury Regulations (or only applies to transfers of less
than all of a unitholder's interest), our taxable income or losses might be
reallocated among our unitholders. We are authorized to revise our method of
allocation between transferors and transferees (as well as among partners whose
interests otherwise vary during a taxable period) to conform to a method
permitted by future Treasury Regulations.
A unitholder who owns common units at any time during a quarter and who
disposes of his common units prior to the record date set for a distribution
with respect to that quarter will be allocated items of our income and gain
attributable to the quarter during which his common units were owned but will
not be entitled to receive cash distributions with respect to that quarter.
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Notification Requirements
A unitholder who sells or exchanges common units is required to notify us
in writing of the sale or exchange within 30 days of the sale or exchange and,
in any event, no later than January 15 of the year following the calendar year
that the sale or exchange occurred. We are required to notify the IRS of the
transaction and to furnish specific information to the transferor and
transferee. However, these reporting requirements do not apply with respect to a
sale by an individual who is a citizen of the United States and who effects the
sale through a broker. Additionally, a transferor and a transferee of a common
unit will be required to furnish statements to the IRS, filed with their income
tax returns for the taxable year in which the sale or exchange occurred, that
set forth the amount of the consideration received for the common 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 be terminated if there is a sale or exchange of
50% or more of the total interests in partnership capital and profits within a
12-month period. A constructive termination results in the closing of a
partnership's taxable year for all partners. A termination could result in the
non-uniformity of common units for federal income tax purposes. Our constructive
termination will cause a termination of our operating limited partnerships. A
termination could also result in penalties or loss of basis adjustments under
the Code if we were unable to determine that the termination had occurred.
In the case of a unitholder reporting on a fiscal year other than a
calendar year, the closing of our tax year may result in more than 12 months of
our taxable income or loss being includable in our taxable income for the year
of termination. In addition, each unitholder will realize taxable gain to the
extent that any money constructively distributed to him (including any net
reduction in his share of partnership nonrecourse liabilities) exceeds the
adjusted basis on his common units. New tax elections we are required to make,
including a new election under Section 754 of the Code, must be made subsequent
to the constructive termination. A constructive termination would also result in
a deferral of our deductions for depreciation. In addition, a termination might
either accelerate the application of or subject us to any tax legislation
enacted with effective dates after the closing of the offering made hereby.
ENTITY LEVEL COLLECTIONS
If we are required under applicable law to pay any federal, state or local
income tax on behalf of any unitholder, our general partner or any former
unitholder, we are authorized to pay those taxes from our funds. The payments,
if made, will be deemed current distributions of cash to our unitholders and our
general partner. Our general partner is authorized to amend our partnership
agreement in the manner necessary to maintain uniformity of intrinsic tax
characteristics of common units and to adjust subsequent distributions so that
after giving effect to the deemed distributions, the priority and
characterization of distributions otherwise applicable under our partnership
agreement is maintained as nearly as is practicable. These payments could give
rise to an overpayment of tax on behalf of an individual partner in which event
the partner could file a claim for credit or refund.
UNIFORMITY OF COMMON UNITS
Since we cannot match transferors and transferees of common units,
uniformity of the economic and tax characteristics of the common units to a
purchaser of common units must be maintained. In the absence of uniformity,
compliance with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6) or
Proposed Treasury Regulation Section 1.197-2(g)(3) and from the application of
the "ceiling limitation" on our ability to make allocations to eliminate Book-
Tax Disparities attributable to Contributed Properties and Adjusted Properties.
Any non-uniformity could have a negative impact on the value of a unitholder's
interest in us.
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We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property or
Adjusted Property (to the extent of any unamortized Book-Tax Disparity) using
the rate of depreciation derived from the depreciation method and useful life
applied to the Common Basis of our property, consistent with the proposed
regulations under Section 743, but despite its inconsistency with Treasury
Regulation Section 1.167(c)-1(a)(6) or Proposed Treasury Regulation Section
1.197-2(g)(3). See "-- Tax Consequences of Common Stock Ownership -- Tax
Treatment of Operations -- 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 Regulation and legislative history. If we determine that this position
cannot reasonably be taken, we may adopt depreciation and amortization
conventions under which all purchasers acquiring common units in the same month
would receive depreciation and amortization deductions, whether attributable to
the Common Basis or the Section 743(b) basis, based upon the same applicable
rate as if they had purchased a direct interest in our property. If this
aggregate approach is adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to some of our
unitholders and risk the loss of depreciation and amortization deductions not
taken in the year that the deductions are otherwise allowable. We will not adopt
this convention if we determine that the loss of depreciation and amortization
deductions will have a material adverse effect on our unitholders. If we choose
not to utilize this aggregate method, we may use any other reasonable
depreciation and amortization convention to preserve the uniformity of the
intrinsic tax characteristics of any common units that would not have a material
adverse effect on our unitholders. The IRS may challenge any method of
depreciating or amortizing the Section 743(b) adjustment described in this
paragraph. If this challenge were sustained, the uniformity of common units
might be affected.
Items of income and deduction will be specially allocated in a manner that
is intended to preserve the uniformity of intrinsic tax characteristics among
all common units, despite the application of the "ceiling limitation" to
Contributed Properties and Adjusted Properties. These special allocations will
be made solely for federal income tax purposes. See "-- Tax Consequences of
Common Unit Ownership" and "-- Tax Consequences of Common Unit
Ownership -- Allocation of Our Income, Gain, Loss and Deduction."
TAX-EXEMPT ORGANIZATIONS AND SOME OTHER INVESTORS
Ownership of common 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 these persons and, as
described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including individual retirement accounts and other retirement plans)
are subject to federal income tax on unrelated business taxable income.
Virtually all of the taxable income derived by these organizations from the
ownership of common units will be unrelated business taxable income, and thus
will be taxable to these unitholders.
Regulated investment companies are required to derive 90% or more of their
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or some related sources. It is not anticipated
that any significant amount of our gross income will qualify as income from
these sources.
Non-resident aliens and foreign corporations, trusts or estates that
acquire common units will be considered to be engaged in business in the United
States on account of their ownership of common units, and as a consequence they
will be required to file federal tax returns in respect of their distributive
shares of our income, gain, loss deduction or credit and pay federal income tax
at regular rates on our income. Generally, a partnership is required to pay a
withholding tax on the portion of the Partnership's income that is effectively
connected with the conduct of a United States trade or business and which is
allocable to the foreign partners, regardless of whether any actual
distributions have been made to our partners. However, under rules applicable to
publicly-traded partnerships, we will withhold at the rate of 39.6% on
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actual cash distributions made quarterly to foreign unitholders. Each foreign
unitholder must obtain a taxpayer identification number from the IRS and submit
that number to our Transfer Agent on a Form W-8 in order to obtain credit for
the taxes withheld. Subsequent adoption of Treasury Regulations or the issuance
of other administrative pronouncements may require us to change these
procedures.
Because a foreign corporation that owns common units will be treated as
engaged in a United States trade or business, it may be subject to United States
branch profits tax at a rate of 30%, in addition to regular federal income tax,
on its allocable share of our earnings and profits (as adjusted for changes in
the foreign corporation's "U.S. net equity") that are effectively connected with
the conduct of a United States trade or business. This tax may be reduced or
eliminated by an income tax treaty between the United States and the country
with respect to which the foreign corporate unitholder is a "qualified
resident."
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a common unit will be subject to federal income tax on any gain
realized on the disposition of his common unit to the extent that the gain is
effectively connected with a United States trade or business of the foreign
unitholder. Apart from the ruling, a foreign unitholder will not be taxed upon
the disposition of a common unit if that foreign unitholder has held less than
5% in value of the common units during the five-year period ending on the date
of the disposition and if the common units are regularly traded on an
established securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
Our Information Returns and Audit Procedures
We intend to furnish to each of our unitholders, within 90 days after the
close of each taxable year, tax information, including a Schedule K-1, that sets
forth each of our unitholders' allocable shares of our income, gain, loss,
deduction and credit. In preparing this information that will generally not be
reviewed by Counsel, we will use various accounting and reporting conventions,
some of which have been mentioned in the previous discussion, to determine the
respective unitholders' allocable share of income, gain, loss, deduction and
credits. There is no assurance that any of these conventions will yield a result
that conforms to the requirements of the Code, regulations or administrative
interpretations of the IRS. We cannot assure prospective unitholders that the
IRS will not successfully contend in court that these accounting and reporting
conventions are impermissible.
The federal income tax information returns we filed may be audited by the
IRS. Adjustments resulting from any IRS audit may require some or all of our
unitholders to file amended tax returns, and possibly may result in an audit of
unitholders' own returns. Any audit of a unitholder's return could result in
adjustments of non-partnership as well as partnership items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss, deduction and credit are determined at the partnership level in a
unified partnership proceeding rather than in separate proceedings with the
partners. The Code provides for one partner to be designated as the "Tax Matters
Partner" for these purposes. Our partnership agreement appoints our general
partner as the Tax Matters Partner.
The Tax Matters Partner will make elections on our behalf and our
unitholders' behalf and can extend the statute of limitations for assessment of
tax deficiencies against our unitholders with respect to our items. The Tax
Matters Partner may bind a unitholder with less than a 1% profits interest in us
to a settlement with the IRS unless the 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 (to which all of our unitholders are
bound) of a final partnership administrative adjustment and, if the Tax Matters
Partner fails to seek judicial review, the review may be sought by any of our
unitholders having at least 1% interest in our profits and by our unitholders
having in the aggregate at least a 5% profits interest. However, only one action
for judicial review will go forward, and each unitholder with an interest in the
outcome may participate.
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A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return to avoid the requirement that all items be
treated consistently on both returns. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
Nominee Reporting
Persons who hold an interest in us as a nominee for another person are
required to furnish to us:
- the name, address and taxpayer identification number of the beneficial
owners and the nominee;
- whether the beneficial owner is (i) a person that is not a United States
person, (ii) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing or
(iii) a tax-exempt entity;
- the amount and description of common units held, acquired or transferred
for the beneficial owner; and
- other information including the dates of acquisitions and transfers,
means of acquisitions and transfers and acquisition cost for purchases,
as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and information on
common units they acquire, hold or transfer for their own account. A penalty of
$50 per failure (up to a maximum of $100,000 per calendar year) is imposed by
the Code for failure to report this information to us. The nominee is required
to supply the beneficial owner of the common units with the information
furnished to us.
Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that we
are not subject to the registration requirement on the basis that (i) we do not
constitute a tax shelter or (ii) we constitute a projected income investment
exempt from registration. However, we have registered as a tax shelter with the
IRS because of the absence of assurance that we will not be subject to tax
shelter registration and in light of the substantial penalties that might be
imposed if registration is required and not undertaken. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN US OR THE CLAIMED
TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. Our tax
shelter registration number is 94130000154. A unitholder who sells or otherwise
transfers a common unit in a subsequent transaction must furnish the
registration number to the transferee. The penalty for failure of the transferor
of a common 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, credit or other benefit we generate is claimed or income received from us
is included. A unitholder who fails to disclose the tax shelter registration
number on his return, without reasonable cause for the failure, will be subject
to a $50 penalty for each failure. Any penalties discussed herein are not
deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax that is attributable to one or more of the listed causes,
including substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Code. No penalty will be imposed, however, with
respect to any portion of an underpayment if it is shown that there was a
reasonable cause for that portion and that the taxpayer acted in good faith with
respect to that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty
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generally is reduced if any portion is attributable to a position adopted on the
return (i) with respect to which there is or was, "substantial authority" or
(ii) as to which there is a reasonable basis and the pertinent facts of the
position are disclosed on the return. More stringent rules apply to "tax
shelters," a term that does not appear to include us. If any item of our income,
gain, loss, deduction or credit included in the distributive shares of our
unitholders might result in 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 our unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property
(or the adjusted basis of any property) claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you may be subject to other taxes,
such as state and local and Canadian federal and provincial taxes,
unincorporated business taxes, and estate, inheritance or intangible taxes that
may be imposed by the various jurisdictions in which the we do business or own
property. 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 own property or conduct business in Canada and in most
states of the United States. A unitholder may be required to file Canadian
federal income tax returns and to pay Canadian federal and provincial income
taxes and to file state income tax returns and to pay taxes in various states
and may be subject to penalties for failure to comply with such requirements. We
anticipate that most of our U.S. income will be generated in approximately
thirteen (13) states: Alabama, California, Illinois, Indiana, Kansas, Louisiana,
Mississippi, Montana, New Mexico, North Dakota, Oklahoma, Texas and Wyoming.
Based on EOTT's income apportionment for 1998 state income tax purposes, our
general partner estimates that no other state will account for more than 1% of
our income. Of the thirteen states in which our general partner anticipates that
most of our U.S. income will be generated, Texas and Wyoming do not currently
impose personal income tax. In certain states, tax losses may not produce a tax
benefit in the year incurred (if, for example, we have no income from sources
within that state) and also may not be available to offset income in subsequent
taxable years. Some of the states may require us 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 which may be greater or less than a
particular unitholder's income tax liability to the state, generally does not
relieve the non-resident unitholder from the obligation to file an income tax
return. Amounts withheld will be treated as if distributed to unitholders for
purposes of determining the amount distributed by us. Based on current law and
our estimate of 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, localities, Canadian
provinces and Canada, 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 Canadian, Canadian province, state and local, as well as
federal, tax returns that may be required of him. Counsel has not rendered an
opinion on the Canadian federal, Canadian provincial, state or local tax
consequences of an investment in us.
TAX CONSEQUENCES OF OWNERSHIP OF DEBT SECURITIES
A description of the material federal income tax consequences of the
acquisition, ownership and disposition of debt securities will be set forth in
the prospectus supplement relating to the offering of debt securities.
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PLAN OF DISTRIBUTION
Under this prospectus, we intend to offer our securities to the public:
- through one or more broker-dealers;
- through underwriters; or
- directly to investors.
We will fix a price or prices, and we may change the price of the
securities offered from time to time:
- at market prices prevailing at the time of any sale under this
registration statement;
- prices related to market prices; or
- negotiated prices.
We will pay or allow distributors' or sellers' commissions that will not
exceed those customary in the types of transactions involved. Broker-dealers may
act as agent or may purchase securities as principal and thereafter resell the
securities from time to time:
- in or through one or more transactions (which may involve crosses and
block transactions) or distributions;
- on the New York Stock Exchange;
- in the over-the-counter market; or
- in private transactions.
Broker-dealers or underwriters may receive compensation in the form of
underwriting discounts or commissions and may receive commissions from
purchasers of the securities for whom they may act as agents. If any
broker-dealer purchases the securities as principal, it may effect resales of
the securities from time to time to or through other broker-dealers, and other
broker-dealers may receive compensation in the form of concessions or
commissions from the purchasers of securities for whom they may act as agents.
To the extent required, the names of the specific managing underwriter or
underwriters, if any, as well as other important information, will be set forth
in prospectus supplements. In that event, the discounts and commissions we will
allow or pay to the underwriters, if any, and the discounts and commissions the
underwriters may allow or pay to dealers or agents, if any, will be set forth
in, or may be calculated from, the prospectus supplements.
Any underwriters, brokers, dealers and agents who participate in any sale
of the securities may also engage in transactions with, or perform services for,
us or our affiliates in the ordinary course of their businesses.
In connection with offerings under this shelf registration and in
compliance with applicable law, underwriters, brokers or dealers may engage in
transactions which stabilize or maintain the market price of the securities at
levels above those which might otherwise prevail in the open market.
Specifically, underwriters, brokers or dealers may over-allot in connection with
offerings, creating a short position in the securities for their own accounts.
For the purposes of covering a syndicate short position or stabilizing the price
of the securities, the underwriters, brokers or dealers may place bids for the
securities or effect purchases of the securities in the open market. Finally,
the underwriters may impose a penalty bid whereby selling concessions allowed to
syndicate members or other brokers or dealers for distribution the securities in
offerings may be reclaimed by the syndicate if the syndicate repurchases
previously distributed securities in transactions to cover short positions, in
stabilization transactions or otherwise. These activities may stabilize,
maintain or otherwise affect the market price of the securities, which may be
higher than the price that might otherwise prevail in the open market, and, if
commenced, may be discontinued at any time.
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LEGAL MATTERS
Vinson & Elkins L.L.P., will pass upon the validity of the securities
offered in this prospectus. The underwriters' own legal counsel will advise them
about other issues relating to any offering.
EXPERTS
The audited consolidated financial statements and schedule of EOTT Energy
Partners, L.P. as of December 31, 1998 and 1997, and for the three years in the
period ended December 31, 1998 incorporated by reference in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
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$235,000,000
EOTT ENERGY PARTNERS, L.P.
EOTT ENERGY FINANCE CORP.
11% SENIOR NOTES
DUE 2009
---------------------
PROSPECTUS
September 2, 1999
and
PROSPECTUS SUPPLEMENT
September 28, 1999
---------------------
ING BARINGS
LEHMAN BROTHERS
---------------------
PAINEWEBBER INCORPORATED
