<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2002
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
DYNEGY ENERGY PARTNERS L.P.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 4610 APPLIED FOR
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
1000 LOUISIANA, SUITE 5800
HOUSTON, TEXAS 77002
(713) 507-6400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
TERRY D. JONES
DYNEGY ENERGY PARTNERS L.P.
1000 LOUISIANA, SUITE 5800
HOUSTON, TEXAS 77002
(713) 507-6400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
<Table>
DAVID P. OELMAN JOSHUA DAVIDSON
MELISSA M. BALDWIN BAKER BOTTS L.L.P.
VINSON & ELKINS L.L.P. ONE SHELL PLAZA
1001 FANNIN, SUITE 2300 910 LOUISIANA
HOUSTON, TEXAS 77002-6760 HOUSTON, TEXAS 77002
(713) 758-2222 (713) 229-1234
</Table>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
Common units representing limited partnership interests... $183,750,000 $16,905
</Table>
(1) Includes common units issuable upon exercise of the underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
SUBJECT TO COMPLETION, DATED FEBRUARY 22, 2002
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.
<Page>
PROSPECTUS
[LOGO]
8,750,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
- --------------------------------------------------------------------------------
Dynegy Energy Partners L.P. is a partnership recently formed by Dynegy Inc. This
is the initial public offering of our common units. We expect the initial public
offering price to be between $ and $ per unit. Common units are entitled to
receive distributions of available cash of $0.4375 per quarter, or $1.75 on an
annualized basis, before any distributions are paid on our subordinated units.
We have applied to list the common units on The New York Stock Exchange under
the symbol "DEP."
INVESTING IN THE COMMON UNITS INVOLVES RISK. RISK FACTORS BEGIN ON PAGE 13.
These risks include the following:
- We may not have sufficient cash to enable us to pay the minimum quarterly
distribution each quarter.
- Our profitability depends on demand for the services we provide, the
prices for mixed NGLs and NGL products and the availability of a supply of
mixed NGLs.
- We depend upon Dynegy Inc. and a limited number of third parties for a
majority of the mixed NGLs fractionated at the Cedar Bayou fractionator
and the NGL products for which we provide distribution and marketing
services.
- If the credit support provided to us by an affiliate of Dynegy Inc. is
terminated or diminished, our cost of doing business may increase
significantly.
- Cost reimbursements and fees due our general partner may be substantial
and will reduce our cash available for distribution to you.
- Dynegy Inc. and its affiliates have conflicts of interest and limited
fiduciary responsibilities, which may permit them to favor their own
interests to the detriment of our unitholders.
- Unitholders have less power to elect or remove management than holders of
common stock in a corporation.
- You will experience immediate and substantial dilution of $5.90 per common
unit.
- You may be required to pay taxes on income from us even if you do not
receive any cash distributions.
<Table>
<Caption>
PER COMMON UNIT TOTAL
---------------- --------------
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Dynegy Energy Partners........ $ $
</Table>
The 8,750,000 common units offered hereby include 7,650,000 common units offered
to the public and 1,100,000 common units that are subject to a 30-day option
granted to the underwriters to cover over-allotments, if any. To the extent the
underwriters do not exercise this option, an affiliate of our general partner
will purchase these common units at the initial public offering price. Assuming
all 1,100,000 common units are purchased by the underwriters, the proceeds to us
will increase by $ and the underwriting discount will increase by $ .
Assuming all 1,100,000 common units are purchased by an affiliate of our general
partner, we will receive additional proceeds of $ and the underwriting
discount will be unchanged.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the common
units on or about , 2002.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
, 2002
<Page>
[MAP DEPICTING LOCATION OF PARTNERSHIP'S ASSETS AND OPERATIONS;
PHOTOGRAPHS OF OPERATING ASSETS OF PARTNERSHIP]
<Page>
TABLE OF CONTENTS
<Table>
PROSPECTUS SUMMARY.......................................... 1
Dynegy Energy Partners L.P................................ 1
Partnership Structure and Management...................... 5
The Offering.............................................. 7
Summary Historical and Pro Forma Financial and Operating
Data.................................................... 10
Summary of Conflicts of Interest and Fiduciary
Responsibilities........................................ 12
RISK FACTORS................................................ 13
Risks Inherent in Our Business............................ 13
WE MAY NOT HAVE SUFFICIENT CASH TO ENABLE US TO PAY THE
MINIMUM QUARTERLY DISTRIBUTION EACH QUARTER............ 13
OUR PROFITABILITY DEPENDS UPON DEMAND FOR THE SERVICES
WE PROVIDE AND THE PRICES FOR MIXED NGLS AND NGL
PRODUCTS............................................... 13
OUR PROFITABILITY DEPENDS UPON THE AVAILABILITY OF A
SUPPLY OF MIXED NGLS................................... 14
WE MAY SUFFER LOSSES AS A RESULT OF CHANGES IN MARKET
PRICES FOR MIXED NGLS AND NGL PRODUCTS................. 15
WE DEPEND UPON DYNEGY INC. AND A LIMITED NUMBER OF THIRD
PARTIES FOR A MAJORITY OF THE MIXED NGLS FRACTIONATED
AT THE CEDAR BAYOU FRACTIONATOR AND THE NGL PRODUCTS WE
DISTRIBUTE AND MARKET.................................. 15
IF THE CREDIT SUPPORT PROVIDED BY DYNEGY HOLDINGS IS
TERMINATED OR DIMINISHED, OUR COST OF DOING BUSINESS
MAY INCREASE IF OUR CUSTOMERS REQUIRE US TO PROVIDE
ADDITIONAL OR DIFFERENT CREDIT SUPPORT................. 15
AN ADVERSE RESULT IN DYNEGY INC.'S AND ITS AFFILIATES'
LEGAL PROCEEDINGS RELATING TO ENRON COULD HAVE A
MATERIAL ADVERSE EFFECT ON US.......................... 16
RESTRICTIONS IN DEBT AGREEMENTS MAY PREVENT US FROM
ENGAGING IN SOME BENEFICIAL TRANSACTIONS AND FROM
PAYING DISTRIBUTIONS................................... 16
UNAUTHORIZED PURCHASES OR SALES OF MIXED NGLS OR NGL
PRODUCTS BY OUR EMPLOYEES COULD RESULT IN SIGNIFICANT
LOSSES................................................. 17
OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF SERVICE AT
OUR FACILITIES OR TRANSPORTATION OF MIXED NGLS AND NGL
PRODUCTS WERE INTERRUPTED.............................. 17
OUR MARKET IS HIGHLY COMPETITIVE........................ 17
OUR BUSINESS IS SEASONAL................................ 17
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED ON
SEPTEMBER 11, 2001, HAVE RESULTED IN INCREASED COSTS,
AND FUTURE WAR OR RISK OF WAR MAY ADVERSELY IMPACT OUR
RESULTS OF OPERATIONS.................................. 18
OUR OWNERSHIP INTEREST IN THE CEDAR BAYOU FRACTIONATOR
MAY BE REDUCED UPON EXERCISE OF PURCHASE OPTIONS HELD
BY OTHER PARTIES THAT, IF EXERCISED, COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS....................... 18
WE MAY BE PROHIBITED FROM ACQUIRING OR OPERATING
FRACTIONATION FACILITIES NEAR MONT BELVIEU, TEXAS,
OTHER THAN THE CEDAR BAYOU FRACTIONATOR................ 19
POTENTIAL FUTURE ACQUISITIONS AND EXPANSIONS, IF ANY,
MAY AFFECT OUR BUSINESS BY SUBSTANTIALLY INCREASING THE
LEVEL OF OUR INDEBTEDNESS AND CONTINGENT LIABILITIES
AND CREATING INTEGRATION DIFFICULTIES.................. 19
WE ARE SUBJECT TO OPERATING AND LITIGATION RISKS THAT
MAY NOT BE COVERED BY INSURANCE........................ 19
OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION WITH
RESPECT TO ENVIRONMENTAL, SAFETY AND OTHER REGULATORY
MATTERS................................................ 19
THE LOSS OF KEY PERSONNEL WOULD NEGATIVELY IMPACT OUR
BUSINESS............................................... 20
Risks Inherent in an Investment in the Common Units....... 20
COST REIMBURSEMENTS AND FEES DUE OUR GENERAL PARTNER MAY
BE SUBSTANTIAL AND WILL REDUCE OUR CASH AVAILABLE FOR
DISTRIBUTION TO YOU.................................... 20
</Table>
i
<Page>
<Table>
DYNEGY INC. AND ITS AFFILIATES HAVE CONFLICTS OF
INTEREST AND LIMITED FIDUCIARY RESPONSIBILITIES, WHICH
MAY PERMIT THEM TO FAVOR THEIR OWN INTERESTS TO THE
DETRIMENT OF OUR UNITHOLDERS........................... 20
UNITHOLDERS HAVE LESS POWER TO ELECT OR REMOVE
MANAGEMENT THAN HOLDERS OF COMMON STOCK IN A
CORPORATION............................................ 21
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
OF $5.90 PER COMMON UNIT............................... 22
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT YOUR
APPROVAL, WHICH WOULD DILUTE YOUR OWNERSHIP INTEREST... 22
THE CONTROL OF OUR GENERAL PARTNER MAY BE TRANSFERRED TO
A THIRD PARTY WITHOUT UNITHOLDER
CONSENT............................................... 23
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY
REQUIRE YOU TO SELL YOUR COMMON UNITS AT AN UNDESIRABLE
TIME OR PRICE.......................................... 23
YOU MAY NOT HAVE LIMITED LIABILITY IF A COURT FINDS THAT
WE HAVE NOT COMPLIED WITH THE APPLICABLE STATUTES OR
THAT UNITHOLDER ACTION CONSTITUTES CONTROL OF OUR
BUSINESS............................................... 23
Tax Risks................................................. 23
THE IRS COULD TREAT US AS A CORPORATION FOR TAX
PURPOSES, WHICH WOULD SUBSTANTIALLY REDUCE THE CASH
AVAILABLE FOR DISTRIBUTION TO YOU...................... 24
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX
POSITIONS WE TAKE MAY ADVERSELY AFFECT THE MARKET FOR
OUR COMMON UNITS AND THE COSTS OF ANY CONTEST WILL BE
BORNE BY OUR UNITHOLDERS AND OUR GENERAL PARTNER....... 24
YOU MAY BE REQUIRED TO PAY TAXES ON INCOME FROM US EVEN
IF YOU DO NOT RECEIVE ANY CASH DISTRIBUTIONS........... 24
TAX GAIN OR LOSS ON THE DISPOSITION OF OUR COMMON UNITS
COULD BE DIFFERENT THAN EXPECTED....................... 24
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND
FOREIGN PERSONS FACE UNIQUE TAX ISSUES FROM OWNING
COMMON UNITS THAT MAY RESULT IN ADVERSE TAX
CONSEQUENCES TO THEM................................... 25
WE WILL REGISTER AS A TAX SHELTER, WHICH MAY INCREASE
THE RISK OF AN IRS AUDIT OF US OR A UNITHOLDER......... 25
WE TREAT A PURCHASER OF OUR COMMON UNITS AS HAVING THE
SAME TAX BENEFITS AS THE SELLER. THE IRS MAY CHALLENGE
THIS TREATMENT, WHICH COULD ADVERSELY AFFECT THE VALUE
OF THE COMMON UNITS.................................... 25
YOU WILL LIKELY BE SUBJECT TO STATE, LOCAL AND FOREIGN
TAXES AND RETURN FILING REQUIREMENTS AS A RESULT OF
INVESTING IN OUR COMMON UNITS.......................... 25
USE OF PROCEEDS............................................. 26
CAPITALIZATION.............................................. 27
DILUTION.................................................... 28
CASH DISTRIBUTION POLICY.................................... 29
Distributions of Available Cash........................... 29
Operating Surplus and Capital Surplus..................... 29
Subordination Period...................................... 30
Distributions of Available Cash from Operating Surplus
during the Subordination Period......................... 32
Distributions of Available Cash from Operating Surplus
after the Subordination Period.......................... 32
Incentive Distribution Rights............................. 32
Percentage Allocations of Available Cash from Operating
Surplus and Hypothetical Annualized Yield............... 33
Distributions from Capital Surplus........................ 33
Adjustment to the Minimum Quarterly Distribution and
Target Distribution Levels.............................. 34
Distributions of Cash upon Liquidation.................... 34
CASH AVAILABLE FOR DISTRIBUTION............................. 37
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING
DATA...................................................... 39
</Table>
ii
<Page>
<Table>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 41
Introduction.............................................. 41
Results Of Operations--Dynegy Energy Partners
Predecessor............................................. 45
Liquidity And Capital Resources........................... 49
Contractual Obligations and Commercial Commitments........ 51
Impact of Inflation....................................... 53
Environmental Matters..................................... 54
Recent Accounting Pronouncements.......................... 54
Quantitative and Qualitative Disclosures About Market
Risk.................................................... 54
INDUSTRY OVERVIEW........................................... 56
BUSINESS.................................................... 60
Overview.................................................. 60
Our Relationship with Dynegy Inc.......................... 61
Our Relationship with Chevron Texaco...................... 61
Business Strategy......................................... 62
Competitive Strengths..................................... 62
Texas Gulf Coast Facilities............................... 63
Transportation and Logistics.............................. 69
Distribution and Marketing Services....................... 71
Dynegy Midstream Assets and Contracts..................... 74
Environmental and Regulatory Matters...................... 75
Title to Properties....................................... 78
Employees................................................. 79
Litigation................................................ 79
MANAGEMENT.................................................. 80
Management of Dynegy Energy Partners...................... 80
Directors and Executive Officers of Dynegy DEP GP LLC..... 81
Other Management.......................................... 82
Reimbursement of Expenses of our General Partner.......... 83
Executive Compensation.................................... 83
Compensation of Directors................................. 83
Long-Term Incentive Plan.................................. 83
Management Incentive Plan................................. 84
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 85
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 86
Distributions and Payments to the General Partner and its
Affiliates.............................................. 86
Agreements Governing the Transactions..................... 87
Omnibus Agreement......................................... 87
Contractual Arrangements.................................. 88
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 89
Conflicts of Interest..................................... 89
Fiduciary Responsibilities................................ 91
DESCRIPTION OF THE COMMON UNITS............................. 94
The Units................................................. 94
Transfer Agent and Registrar.............................. 94
Transfer of Common Units.................................. 94
</Table>
iii
<Page>
<Table>
DESCRIPTION OF THE SUBORDINATED UNITS....................... 96
Conversion of Subordinated Units.......................... 96
Limited Voting Rights..................................... 97
Distributions upon Liquidation............................ 97
THE PARTNERSHIP AGREEMENT................................... 98
Organization and Duration................................. 98
Purpose................................................... 98
Power of Attorney......................................... 98
Capital Contributions..................................... 98
Limited Liability......................................... 99
Voting Rights............................................. 100
Issuance of Additional Securities......................... 101
Amendment of the Partnership Agreement.................... 102
Actions Relating to the Operating Company................. 104
Merger, Sale or Other Disposition of Assets............... 104
Termination and Dissolution............................... 104
Liquidation and Distribution of Proceeds.................. 105
Withdrawal or Removal of the General Partner.............. 105
Transfer of General Partner Interests..................... 107
Transfer of Ownership Interests in General Partner........ 107
Transfer of Incentive Distribution Rights................. 107
Change of Management Provisions........................... 107
Limited Call Right........................................ 108
Meetings; Voting.......................................... 108
Status as Limited Partner or Assignee..................... 109
Non-citizen Assignees; Redemption......................... 109
Indemnification........................................... 109
Books and Reports......................................... 110
Right to Inspect our Books and Records.................... 110
Registration Rights....................................... 111
UNITS ELIGIBLE FOR FUTURE SALE.............................. 112
MATERIAL TAX CONSEQUENCES................................... 113
Partnership Status........................................ 113
Limited Partner Status.................................... 115
Tax Consequences of Unit Ownership........................ 115
Tax Treatment of Operations............................... 120
Disposition of Common Units............................... 121
Uniformity of Units....................................... 123
Tax-Exempt Organizations and Other Investors.............. 123
Administrative Matters.................................... 124
State, Local, Foreign and Other Tax Considerations........ 126
INVESTMENT IN DYNEGY ENERGY PARTNERS BY EMPLOYEE BENEFIT
PLANS..................................................... 128
UNDERWRITING................................................ 129
VALIDITY OF THE COMMON UNITS................................ 132
EXPERTS..................................................... 132
WHERE YOU CAN FIND MORE INFORMATION......................... 132
</Table>
iv
<Page>
<Table>
FORWARD-LOOKING STATEMENTS.................................. 132
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A--Form of Amended and Restated Agreement of
Limited Partnership of Dynegy Energy Partners L.P......... A-1
APPENDIX B--Application for Transfer of Common Units........ B-1
APPENDIX C--Glossary of Terms............................... C-1
APPENDIX D--Pro Forma Available Cash from Operating
Surplus................................................... D-1
</Table>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE AN OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE
INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT
COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
Until , 2002 (the 25th day after the date of this prospectus), all
dealers effecting transactions in our common units, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
v
<Page>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE HISTORICAL AND
PRO FORMA FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS. THE
INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-
ALLOTMENT OPTION IS NOT EXERCISED AND THAT ALL OF THE 1,100,000 COMMON UNITS
SUBJECT TO THE OVER-ALLOTMENT OPTION ARE PURCHASED BY AN AFFILIATE OF OUR
GENERAL PARTNER. YOU SHOULD READ "SUMMARY OF RISK FACTORS" BEGINNING ON PAGE 4
AND "RISK FACTORS" BEGINNING ON PAGE 13 FOR INFORMATION ABOUT IMPORTANT FACTORS
THAT YOU SHOULD CONSIDER BEFORE BUYING COMMON UNITS. WE INCLUDE A GLOSSARY OF
SOME OF THE TERMS USED IN THIS PROSPECTUS IN APPENDIX C.
DYNEGY ENERGY PARTNERS L.P.
We were recently formed by Dynegy Inc. to engage in the businesses of
fractionating, storing, terminalling, transporting, distributing and marketing
natural gas liquids, or NGLs. NGLs are principally produced as by-products of
oil and gas production and have a variety of applications, including as heating
fuels, petrochemical feedstocks and refining blend stocks. Our businesses
include:
- "fractionating," or separating, mixed NGLs at our Cedar Bayou fractionator
into component NGL products: ethane-propane mix, propane, normal butane,
isobutane and natural gasoline;
- providing NGL storage and terminal services at our Mont Belvieu, Texas
underground storage facility and our Galena Park marine terminal;
- providing NGL transportation and logistical services utilizing a diverse
portfolio of distribution assets located along the Gulf Coast and across
the United States; and
- distributing and marketing NGL products to refiners, petrochemical
companies, retail propane distributors, other marketing companies and
other end-users of NGL products.
Our assets and operations represent a substantial portion of Dynegy Inc.'s
NGL business located along the Texas Gulf Coast in and adjacent to Mont Belvieu,
Texas. Mont Belvieu is the hub of the domestic NGL industry with a concentration
of fractionation and storage facilities, significant pipeline infrastructure and
local demand for NGL products from Texas Gulf Coast petrochemical and refining
complexes. We also have significant NGL transportation and logistics assets
located throughout the United States that provide strategic support for our
operations and services to third parties.
In 2001, on a pro forma basis, we generated operating margin of
$92.5 million, EBITDA of $68.7 million and net income of $41.5 million. Our
operating margins are derived from fees earned in our fractionation, storage,
terminalling and transportation businesses and from margins on purchases and
sales of mixed NGLs and NGL products in our distribution and marketing services
business. In our fee-based businesses, we generally earn a fee based upon the
volumes of NGLs which we fractionate, store, terminal or transport. For the year
ended December 31, 2001, on a pro forma basis, approximately $42.3 million, or
46% of our total operating margin, was attributable to our fee-based businesses.
In our distribution and marketing services business, we generate margins
through the purchase and sale of mixed NGLs and NGL products. A significant
portion of our margins are derived from formula-based contracts, many of which
provide for a minimum fee per gallon. For the year ended December 31, 2001, on a
pro forma basis, we generated operating margins of $20.2 million, or 22% of our
total pro forma operating margin, from contracts containing formulas that are
subject to a minimum fee. We would have generated operating margin of
$16.6 million under these contracts had we received only the minimum fee per
gallon. The profitability of our remaining distribution and marketing services
business is generally dependent on the relative prices of mixed NGLs and NGL
products we purchase compared to the prices of NGL products we sell. We seek to
reduce commodity price exposure by maintaining a position that is substantially
balanced between our physical inventories and purchase obligations as compared
to our sales commitments.
<Page>
OUR RELATIONSHIP WITH DYNEGY INC.
We believe our relationship with Dynegy Inc. is one of our principal
strengths. Dynegy Inc. is a leading energy merchant and power generator in North
America, the United Kingdom and Continental Europe, with total assets of
approximately $25.0 billion as of December 31, 2001.
Dynegy Inc. has a significant interest in our partnership through its
ownership of a 55.2% limited partner interest and all of our 2% general partner
interest. We expect to benefit from our relationship with Dynegy Inc. through
access to management expertise and strong relationships throughout the energy
industry. We also expect that our relationship with Dynegy Inc. will enhance the
execution of our growth strategy by allowing us to pursue joint acquisition
opportunities or to acquire assets directly from Dynegy Inc.
At the closing of this offering we will enter into a number of contracts
with Dynegy Inc. or its affiliates, including:
- a 20-year mixed NGL and NGL product purchase and sale agreement pursuant
to which we will purchase all mixed NGLs and NGL products owned or
controlled by Dynegy Midstream Services, Limited Partnership, a
wholly-owned subsidiary of Dynegy Inc.;
- a 3-year agreement with Dynegy Holdings Inc., a wholly-owned subsidiary of
Dynegy Inc., to provide credit support for our purchases of mixed NGLs and
NGL products; and
- an omnibus agreement with Dynegy Inc. and Dynegy Midstream, which contains
limited non-competition and environmental indemnification provisions and
also provides for administrative services.
These agreements are more fully described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," and
"Certain Relationships and Related Transactions."
OUR RELATIONSHIP WITH CHEVRONTEXACO
In August 1996, Dynegy Inc. completed a business combination with a
subsidiary of Chevron Corporation, pursuant to which substantially all of
Chevron's midstream energy assets were merged into Dynegy Inc.'s operations. In
connection with this transaction, Dynegy Midstream entered into long-term NGL
agreements with Chevron and its affiliates to provide significant services
including:
- purchasing or marketing substantially all of the mixed NGLs and NGL
products produced or controlled by Chevron in the United States;
- supplying NGL products to Chevron's refining and chemical affiliates in
the United States; and
- providing transportation services in connection with Chevron's mixed NGLs
and NGL products.
At the closing of this offering, we will succeed to substantially all of
Dynegy Midstream's long-term agreements with the former Chevron. In October
2001, Chevron completed a merger with Texaco Inc., forming ChevronTexaco.
Dynegy Inc. is in the process of expanding its commercial relationship with
ChevronTexaco to include its purchase of substantially all of the United States
natural gas and NGL production of the former Texaco. As part of this expanded
relationship, we have executed agreements providing for our purchase of
substantially all of the domestic mixed NGLs and NGL products produced or
controlled by the former Texaco through August 31, 2006. The NGL volumes
received pursuant to this agreement will be sold through our distribution and
marketing services business. All historical financial and operating data with
respect to ChevronTexaco included in this prospectus reflect business activity
with Chevron prior to its merger with Texaco.
2
<Page>
BUSINESS STRATEGY
Our primary business strategies are:
- to grow our business through strategic acquisitions to increase per unit
cash flow;
- to maximize the benefits of our relationships with Dynegy Inc. and
ChevronTexaco;
- to generate stable cash flows to make quarterly cash distributions; and
- to manage our exposure to commodity price risk.
COMPETITIVE STRENGTHS
We believe that we are well positioned to execute our business strategies
successfully because of the following competitive strengths:
AFFILIATION WITH DYNEGY INC. AND CHEVRONTEXACO. We believe our
relationships with Dynegy Inc. and ChevronTexaco provide us with significant
business opportunities, including access to growth-oriented management with a
broad range of transaction experience and contacts throughout the energy
industry. We expect to pursue strategic acquisitions independently and jointly
with Dynegy Inc., and we may have the opportunity to make acquisitions directly
from Dynegy Inc. or ChevronTexaco. Additionally, Dynegy Inc. and ChevronTexaco
own significant domestic volumes of mixed NGLs and NGL products, substantially
all of which we have the right to purchase through our distribution and
marketing services business.
STRATEGIC LOCATION. We operate fractionation, storage and marine terminal
facilities that are strategically located along the Texas Gulf Coast in and
around Mont Belvieu, Texas, the hub of the domestic NGL industry.
SIGNIFICANT MARKET POSITION. We are a leading participant in the domestic
NGL fractionation, storage, terminal and transportation businesses. We are also
a significant provider of NGL distribution and marketing services, selling an
average of 490,000 barrels of NGL products per day in 2001. Our extensive
operations provide us with broad-based, real time market information regarding
NGL supply and demand.
VERTICALLY INTEGRATED OPERATIONS. Our vertically integrated assets permit
us to generate revenues throughout all facets of the NGL business, including the
transportation of mixed NGLs from production areas, the fractionation of mixed
NGLs into NGL products, the provision of storage and terminalling services and
the transportation, distribution and marketing of NGL products to end-users.
EXPERIENCED MANAGEMENT AND OPERATIONAL EXPERTISE. Our directors, senior
executives and key officers include some of the most senior officers of
Dynegy Inc. and have extensive experience in the natural gas, refining,
petrochemical, gas processing and NGL businesses. We believe we have established
a reputation in the NGL industry as a reliable and cost-effective supplier of
services to our customers and have a track record of safe, efficient operation
of our facilities. Our operating assets are currently ranked in the top quartile
in safety performance among our peer group in the gas processing and midstream
businesses.
SIGNIFICANT FINANCIAL FLEXIBILITY. Upon the closing of this offering, we
will enter into a $275 million bank credit facility, which will include a
$125 million term loan and a $150 million revolving credit facility. We expect
the entire amount of the term loan to be borrowed at closing. We will have the
ability to issue additional common units, which, combined with our additional
borrowing capacity under our revolving credit facility, should give us the
resources to finance strategic opportunities as they arise.
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SUMMARY OF RISK FACTORS
An investment in our common units involves risks associated with our
business, our partnership structure and the tax characteristics of common units.
Please carefully read the risks relating to these matters described under "Risk
Factors."
RISKS INHERENT IN OUR BUSINESS
- We may not have sufficient cash to enable us to pay the minimum quarterly
distribution each quarter.
- Our profitability depends upon demand for the services we provide and the
prices for mixed NGLs and NGL products.
- Our profitability depends upon the availability of a supply of mixed NGLs.
- We may suffer losses as a result of changes in market prices for mixed
NGLs and NGL products.
- We depend upon Dynegy Inc. and a limited number of third parties for a
majority of the mixed NGLs fractionated at the Cedar Bayou fractionator
and the NGL products we distribute and market.
- If the credit support provided by Dynegy Holdings is terminated or
diminished, our cost of doing business may increase if our customers
require us to provide additional or different credit support.
- An adverse result in Dynegy Inc.'s and its affiliates' legal proceedings
relating to Enron could have a material adverse effect on us.
- Restrictions in debt agreements may prevent us from engaging in some
beneficial transactions and from paying distributions.
- Unauthorized purchases or sales of mixed NGLs or NGL products by our
employees could result in significant losses.
- Our business would be adversely affected if service at our facilities or
transportation of mixed NGLs and NGL products were interrupted.
- Our market is highly competitive.
- Our business is seasonal.
RISKS INHERENT IN AN INVESTMENT IN THE COMMON UNITS
- Cost reimbursements and fees due our general partner may be substantial
and will reduce our cash available for distribution to you.
- Dynegy Inc. and its affiliates have conflicts of interests and limited
fiduciary responsibilities, which may permit them to favor their own
interests to the detriment of our unitholders.
- Unitholders have less power to elect or remove management than holders of
common stock in a corporation.
- You will experience immediate and substantial dilution of $5.90 per common
unit.
- We may issue additional common units without your approval, which would
dilute your ownership interest.
TAX RISKS TO COMMON UNITHOLDERS
- The IRS could treat us as a corporation for tax purposes, which would
substantially reduce the cash available for distribution to you.
- A successful IRS contest of the federal income tax positions we take may
adversely affect the market for our common units and the costs of any
contest will be borne by our unitholders and our general partner.
- You may be required to pay taxes on income from us even if you do not
receive any cash distributions.
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PARTNERSHIP STRUCTURE AND MANAGEMENT
All of our operations will be conducted through, and our operating assets
will be owned by, our subsidiaries. We will own all of our subsidiaries through
Dynegy Operating Partners L.P. Upon consummation of the offering of the common
units and the related transactions:
- Dynegy DEP GP LLC, our general partner, will own the 2% general partner
interest in us;
- an affiliate of Dynegy Inc. will own 1,100,000 common units and 8,750,000
subordinated units, representing an aggregate 55.2% limited partner
interest in us;
- we will own all of the limited partner interests in the operating
partnership; and
- the operating partnership will own its various subsidiary companies.
Our general partner is entitled to distributions on its general partner
interest and to distributions, if any, on its incentive distribution rights. Our
general partner has sole responsibility for conducting our business and for
managing our operations. Dynegy Inc. will provide us with various corporate
staff and support services. All direct general and administrative expenses
associated with Dynegy's provision of services to us will be charged to us as
incurred. In addition, Dynegy Inc. will be reimbursed for the indirect costs and
expenses it incurs in rendering these services, including an overhead allocation
to us of Dynegy Inc.'s indirect general and administrative expenses. The
reimbursement amount with respect to indirect general and administrative
services will not exceed $2 million for the first year following the closing of
this offering, but is subject to increase in subsequent years. The reimbursement
amount with respect to direct general and administrative expenses is not subject
to this cap. Please read "Certain Relationships and Related Transactions."
Our principal executive offices are located at 1000 Louisiana, Suite 5800,
Houston, Texas 77002, and our phone number is (713) 507-6400.
The chart on the following page depicts the organization and ownership of
Dynegy Energy Partners and the operating partnership after giving effect to the
offering of the common units and the related formation transactions.
5
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[CHART INDICATING OWNERSHIP STRUCTURE OF PARTNERSHIP AND RELATED ENTITIES]
6
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THE OFFERING
<Table>
Common units offered to the
public.................................. 7,650,000 common units.
8,750,000 common units if the underwriters exercise
their over-allotment option in full. To the extent that
the underwriters do not exercise their over-allotment
option to purchase 1,100,000 common units, an affiliate
of our general partner will be obligated to purchase
these common units at the initial public offering price.
Units outstanding after this
offering................................ 8,750,000 common units and 8,750,000 subordinated units,
each class representing a 49% limited partner interest
in us.
Cash distributions........................ Common units are entitled to receive distributions of
available cash of $0.4375 per quarter, or $1.75 on an
annualized basis, before any distributions are paid on
our subordinated units. In general, we will pay any cash
distributions we make each quarter in the following
manner:
- first, 98% to the common units and 2% to our general
partner, until each common unit has received a minimum
quarterly distribution of $0.4375 plus any arrearages
from prior quarters;
- second, 98% to the subordinated units and 2% to our
general partner, until each subordinated unit has
received a minimum quarterly distribution of $0.4375;
and
- third, 98% to all unitholders, pro rata, and 2% to our
general partner, until each unit has received a total
distribution of $0.4875.
If cash distributions exceed $0.4875 per unit in a
quarter, our general partner will receive increasing
percentages, up to 50%, of the cash we distribute in
excess of that amount. We refer to these distributions
as "incentive distributions."
We must distribute all of our cash on hand at the end of
each quarter, less reserves established by our general
partner. We refer to this cash as "available cash," and
we define its meaning in our partnership agreement and
in the glossary in Appendix C. The amount of available
cash may be greater than or less than the minimum
quarterly distribution.
We believe that, based on the assumptions listed on page
39 of this prospectus, we will have sufficient cash from
operations to make the minimum quarterly distribution of
$0.4375 for each quarter through June 30, 2003. The
amount of pro forma cash available for distribution
generated during 2001 would have been sufficient to
allow us to pay the minimum quarterly distribution on
all of the units during this period. Please read "Cash
Available for Distribution."
</Table>
7
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<Table>
Subordination period...................... The subordination period will end once we meet the
financial tests in the partnership agreement, but it
generally cannot end before June 30, 2007. When the
subordination period ends, all subordinated units will
convert into common units on a one-for-one basis, and
the common units will no longer be entitled to
arrearages.
Early conversion of subordinated units.... If we meet the financial tests in the partnership
agreement for any quarter ending on or after June 30,
2005, 25% of the subordinated units will convert into
common units. If we meet these tests for any quarter
ending on or after June 30, 2006, an additional 25% of
the subordinated units will convert into common units.
The early conversion of the second 25% of the
subordinated units may not occur until at least one year
after the early conversion of the first 25% of
subordinated units.
Issuance of additional units.............. In general, during the subordination period we can issue
up to 4,375,000 additional common units without
obtaining unitholder approval. We can also issue an
unlimited number of common units for acquisitions or
debt repayments that increase cash flow from operations
per unit on a pro forma basis. Please read "The
Partnership Agreement--Issuance of Additional
Securities."
Voting rights............................. Our general partner will manage and operate Dynegy
Energy Partners. Unlike the holders of common stock in a
corporation, you will have only limited voting rights on
matters affecting our business. You will have no right
to elect our general partner or its directors on an
annual or other continuing basis. The general partner
may not be removed except by a vote of the holders of at
least 66 2/3% of the outstanding units, including any
units owned by our general partner and its affiliates.
At the closing of this offering, affiliates of the
general partner will own enough units to prevent its
removal. Furthermore, any units held by a person that
owns 20% or more of any class of units then outstanding,
other than the general partner, its affiliates, their
transferees, and persons who acquired such units with
the prior approval of the board of directors of the
general partner, cannot vote on any matter.
Limited call right........................ If at any time our general partner and its affiliates
own 80% or more of the outstanding common units, our
general partner has the right, but not the obligation,
to purchase all of the remaining common units at a price
not less than the then-current market price of the
common units.
</Table>
8
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<Table>
Estimated ratio of taxable income to
distributions........................... We estimate that if you hold the common units you
purchase in this offering through December 31, 2004, you
will be allocated, on a cumulative basis, an amount of
federal taxable income for that period that will be
approximately % of the cash distributed to you with
respect to that period. Please read "Material Tax
Consequences--Tax Consequences of Unit Ownership--Ratio
of Taxable Income to Distributions" for the basis of
this estimate.
Exchange listing.......................... We have applied to list the common units on The New York
Stock Exchange under the symbol "DEP."
</Table>
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table shows summary historical financial and operating data of
the Dynegy Energy Partners Predecessor and pro forma financial data of Dynegy
Energy Partners, in each case for the periods and as of the dates indicated. The
summary historical financial data for the Dynegy Energy Partners Predecessor for
1999, 2000 and 2001 are derived from the audited financial statements of the
Dynegy Energy Partners Predecessor. The summary historical financial data for
the Dynegy Energy Partners Predecessor for 1997 and 1998 are derived from the
unaudited financial statements of the Dynegy Energy Partners Predecessor.
The summary pro forma financial statements of Dynegy Energy Partners show
the pro forma effect of:
- the contributions of certain assets and liabilities of the Dynegy Energy
Partners Predecessor to our operating partnership;
- the completion of this offering;
- initial borrowings of $125 million under our new $275 million bank credit
facility;
- the assignment of third party NGL exchange agreements from Dynegy
Midstream to us;
- the execution of various commercial agreements with Dynegy Midstream; and
- the execution of an omnibus agreement with Dynegy Inc. and Dynegy
Midstream in connection with the closing of this offering.
The summary pro forma financial and operating data for 2001 are derived from
the unaudited pro forma financial statements. The pro forma balance sheet
assumes the offering and related transactions occurred as of December 31, 2001,
and the pro forma statement of operations assumes the offering and related
transactions occurred on January 1, 2001.
We define EBITDA as net income plus depreciation and amortization expense
and interest expense. EBITDA provides additional information for evaluating our
ability to make the minimum quarterly distribution and is presented solely as a
supplemental measure. You should not consider EBITDA as an alternative to net
income, cash flows from operations or any other measure of financial performance
presented in accordance with generally accepted accounting principles. Our
EBITDA may not be comparable to EBITDA or similarly titled measures of other
entities as other entities may not calculate EBITDA in the same manner as we do.
Maintenance capital expenditures represent capital expenditures to replace
partially or fully depreciated assets or to maintain the existing operating
capacity of our assets and extend their useful lives. Expansion capital
expenditures represent capital expenditures to expand the existing operating
capacity of our assets, whether through construction or acquisition. Repair and
maintenance expenditures associated with existing assets that are minor in
nature and do not extend the useful life of existing assets are treated as
operating expenses as incurred.
We derived the information in the following table from, and that information
should be read together with and is qualified in its entirety by reference to,
the historical and pro forma financial statements and the accompanying notes
included elsewhere in this prospectus. The table should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<Page>
<Table>
<Caption>
DYNEGY ENERGY
PARTNERS L.P.
DYNEGY ENERGY PARTNERS PREDECESSOR--HISTORICAL PRO FORMA
---------------------------------------------------------------- --------------
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------------------------- --------------
1997 1998 1999 2000 2001 2001
----------- ----------- ---------- ---------- ---------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................ $2,783,249 $1,824,297 $2,549,181 $4,251,457 $3,888,199 $3,897,299
Cost of sales........................... 2,759,504 1,742,374 2,444,687 4,148,001 3,792,274 3,804,774
---------- ---------- ---------- ---------- ---------- ----------
Operating margin........................ $ 23,745 $ 81,923 $ 104,494 $ 103,456 $ 95,925 $ 92,525
Depreciation and amortization........... 12,024 13,886 14,016 17,288 18,578 18,578
Impairment charge....................... 10,603 -- -- -- -- --
General and administrative expenses..... 14,715 18,138 23,883 22,045 24,508 20,852
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)................. $ (13,597) $ 49,899 $ 66,595 $ 64,123 $ 52,839 $ 53,095
Equity in earnings (loss) of an
unconsolidated affiliate.............. (149) (9) 193 138 -- --
Interest expense........................ (27,101) (22,674) (22,012) (22,701) (19,534) (8,617)
Other income (expense), net............. 3,478 28 (630) (1,397) (831) (831)
Minority interest in income of a
subsidiary............................ -- (1,911) (1,942) (1,183) (2,118) (2,118)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....................... $ (37,369) $ 25,333 $ 42,204 $ 38,980 $ 30,356 $ 41,529
========== ========== ========== ========== ========== ==========
Net income per unit..................... $ 2.33
==========
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................ $ 587,766 $ 480,341 $ 646,362 $ 946,755 $ 610,989 $ 626,689
Payable to affiliates/Long-term debt.... 336,563 314,135 317,789 316,980 229,600 125,000
Combined equity/partners' capital....... 1,559 26,714 68,918 107,898 137,546 257,846
CASH FLOW DATA:
Net cash flow provided by (used in):
Operating activities.................. $ (11,121) $ (5,194) $ 8,734 $ (1,271) $ 9,512
Investing activities.................. -- (2,356) (6,993) (886) (4,254)
Financing activities.................. -- 13,221 (2,739) (1,667) (2,094)
OTHER FINANCIAL DATA:
EBITDA.................................. $ 12,359 $ 61,893 $ 78,232 $ 78,969 $ 68,468 $ 68,724
Maintenance capital expenditures........ 5,530 3,298 3,429 8,367 11,172 11,172
Expansion capital expenditures.......... 6,864 5,745 7,512 16,658 7,501 7,501
Total capital expenditures............ 12,394 9,043 10,941 25,025 18,673 18,673
OPERATING DATA (MBBLS/DAY) (UNAUDITED):
Volumes fractionated.................... 173 187 189 189
Volumes purchased from:
Dynegy Midstream...................... 112 94 80 80
ChevronTexaco......................... 77 71 63 63
Other................................. 274 303 344 344
---------- ---------- ---------- ----------
TOTAL................................. 463 468 487 487
========== ========== ========== ==========
Volumes sold:
Refinery services..................... 35 41 41 41
Wholesale propane..................... 48 53 51 51
Marketing............................. 374 368 398 398
---------- ---------- ---------- ----------
TOTAL................................. 457 462 490 490
========== ========== ========== ==========
</Table>
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SUMMARY OF CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Dynegy DEP GP LLC, our general partner, has a legal duty to manage us in a
manner beneficial to our unitholders. This legal duty originates in statutes and
judicial decisions and is commonly referred to as a "fiduciary" duty. Because
our general partner is indirectly owned by Dynegy Inc., however, its officers
and directors have fiduciary duties to manage the business of our general
partner in a manner beneficial to Dynegy Inc. and its stockholders. The officers
and directors of our general partner have significant relationships with, and
responsibilities to, Dynegy Inc. As a result of these relationships, conflicts
of interest may arise in the future between us and our unitholders, on the one
hand, and our general partner and Dynegy Inc. and its affiliates, on the other
hand. For a more detailed description of the conflicts of interest and fiduciary
responsibilities of our general partner, please read "Conflicts of Interest and
Fiduciary Responsibilities."
Our partnership agreement limits the liability and reduces the fiduciary
duties of our general partner to the unitholders. Our partnership agreement also
restricts the remedies available to unitholders for actions that might otherwise
constitute breaches of our general partner's fiduciary duty. By purchasing a
common unit, you are treated as having consented to various actions contemplated
in the partnership agreement and conflicts of interest that, without such
consent, might otherwise be considered a breach of fiduciary or other duties
under applicable state law.
For a description of our other relationships with our affiliates, please
read "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Contractual Obligations and Commercial Commitments" and "Certain
Relationships and Related Transactions."
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RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM THE CAPITAL STOCK OF
A CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH WE ARE SUBJECT ARE
SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN A SIMILAR
BUSINESS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS TOGETHER WITH
ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS IN EVALUATING AN
INVESTMENT IN THE COMMON UNITS.
IF ANY OF THE FOLLOWING RISKS WERE ACTUALLY TO OCCUR, OUR BUSINESS,
FINANCIAL CONDITION, OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN THAT CASE, WE MIGHT NOT BE ABLE TO PAY DISTRIBUTIONS ON OUR COMMON
UNITS, THE TRADING PRICE OF OUR COMMON UNITS COULD DECLINE AND YOU COULD LOSE
ALL OR PART OF YOUR INVESTMENT.
RISKS INHERENT IN OUR BUSINESS
WE MAY NOT HAVE SUFFICIENT CASH TO ENABLE US TO PAY THE MINIMUM QUARTERLY
DISTRIBUTION EACH QUARTER.
We may not have sufficient available cash each quarter to pay the minimum
quarterly distribution. The amount of cash we can distribute on our common units
principally depends upon the amount of cash we generate from our operations,
which will fluctuate from quarter to quarter based on, among other things:
- the prices of mixed NGLs and NGL products;
- the volume of mixed NGLs and NGL products we fractionate, store, terminal
and transport and for which we provide distribution and marketing
services;
- the level of our operating costs, including payments to our general
partner; and
- prevailing economic conditions.
In addition, the actual amount of cash we will have available for
distribution will depend on other factors such as:
- the costs of acquisitions, if any;
- fluctuations in our working capital;
- the level of capital expenditures we make;
- restrictions contained in our debt instruments and our debt service
requirements;
- our ability to make working capital borrowings under our revolving credit
facility; and
- the amount, if any, of cash reserves established by our general partner in
its discretion.
You should also be aware that the amount of cash we have available for
distribution depends primarily on our cash flow, including cash flow from
financial reserves and working capital borrowings, and not solely on
profitability, which will be affected by non-cash items. As a result, we may
make cash distributions during periods when we record losses and may not make
cash distributions during periods when we record net income.
OUR PROFITABILITY DEPENDS UPON DEMAND FOR THE SERVICES WE PROVIDE AND THE PRICES
FOR MIXED NGLS AND NGL PRODUCTS.
The mixed NGLs we fractionate have a variety of applications, including as
heating fuels, petrochemical feedstocks and refining blend stocks. A reduction
in demand for NGL products by end-users, whether because of general economic
conditions, reduced demand by consumers for products made with NGL products,
increased competition from petroleum-based products due to pricing differences,
mild winter weather or other reasons, could result in a decline in the volume of
13
<Page>
NGL products we handle or could reduce the fees we charge for our services,
which could have a material adverse effect on our results of operations.
ETHANE. Ethane is typically supplied as purity ethane or as part of
ethane-propane mix. Ethane is primarily used in the petrochemical industry as
feedstock for ethylene, one of the basic building blocks for a wide range of
plastics and other chemical products. Although ethane is typically extracted as
part of the mixed NGL stream at gas processing plants, if natural gas prices
increase significantly in relation to NGL product prices or if the demand for
ethylene falls, it may be more profitable for natural gas producers to leave the
ethane in the natural gas stream thereby reducing the volume of NGLs delivered
for fractionation. We have experienced periods in the past when natural gas
producers have retained ethane in the natural gas stream and may experience such
periods in the future. There can be no assurance that similar decisions by
natural gas producers in the future would not have a material adverse effect on
our results of operations.
PROPANE. Propane is used both as a petrochemical feedstock in the
production of ethylene and propylene and as a heating, engine and industrial
fuel. Changes in demand for ethylene and propylene could adversely affect demand
for propane. The demand for propane as a heating fuel is significantly affected
by weather conditions. The volume of propane sold is at its highest during the
six-month peak heating season of October through March. Demand for our propane
may be reduced during periods of warmer-than-normal weather. Any reduced demand
for propane could have a material adverse effect on our results of operations.
NORMAL BUTANE. Normal butane is used in the production of isobutane, as a
refined product blending component, as a fuel gas, either alone or in a mixture
with propane, and in the production of ethylene and propylene. Changes in the
mandated composition of refined products, demand for heating fuel and for
ethylene and propylene could adversely affect demand for normal butane and our
results of operations.
ISOBUTANE. Isobutane is predominantly used in refineries to produce
alkylates to enhance octane levels and in the production of MTBE, both of which
are used in motor gasoline. Accordingly, any action that reduces demand for
motor gasoline in general or MTBE in particular might similarly reduce demand
for isobutane. Many states have banned or restricted the use of MTBE in gasoline
commencing as early as 2003 in response to concerns about MTBE's adverse impact
on ground or surface water. Any reduced demand for isobutane as a result of
these or other factors could have a material adverse effect on our results of
operations.
NATURAL GASOLINE. Natural gasoline is used as a blending component for
certain refined products and as a feedstock used in the production of ethylene
and propylene. Changes in the mandated composition of motor gasoline and in
demand for ethylene and propylene could adversely affect demand for natural
gasoline and our results of operations.
OUR PROFITABILITY DEPENDS UPON THE AVAILABILITY OF A SUPPLY OF MIXED NGLS.
Our profitability is materially affected by the volume of mixed NGLs
fractionated at our Cedar Bayou fractionator. A material decrease in natural gas
production from producing areas that we rely on, as a result of depressed
commodity prices or otherwise, could result in a decline in the volume of NGL
products delivered to our Cedar Bayou fractionator for fractionation, thereby
reducing our revenues and operating income. Depressed natural gas prices may
result in producers shutting in natural gas wells, resulting in a decline of
mixed NGL production. This decline in supply could have a material adverse
effect on our results of operations.
14
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WE MAY SUFFER LOSSES AS A RESULT OF CHANGES IN MARKET PRICES FOR MIXED NGLS AND
NGL PRODUCTS.
In 2001, we sold an average of 490,000 barrels per day of mixed NGLs and NGL
products in connection with our distribution and marketing services business. We
took title to all of these volumes. Our profitability in this business is
accordingly dependent on the relative prices of mixed NGLs and NGL products we
purchase compared to the prices of the mixed NGLs and NGL products we sell. If
the market prices upon the sale of NGL products are lower than our acquisition
costs, we may incur significant operating losses. Market prices for mixed NGLs
and NGL products are determined by supply and demand factors which are beyond
our control. We do not typically acquire and hold inventory of mixed NGLs and
NGL products for the purpose of speculating on commodity prices. In order to
support our marketing and distribution business, however, we are required to
establish reserves of certain NGL products to permit us to respond to seasonal
demand for such products. Our efforts to maintain a position that is
substantially balanced between our physical inventories and our purchase
obligations as compared to our NGL product sales commitments may not be
sufficient to avoid losses in the event of unforeseen market developments.
WE DEPEND UPON DYNEGY INC. AND A LIMITED NUMBER OF THIRD PARTIES FOR A MAJORITY
OF THE MIXED NGLS FRACTIONATED AT THE CEDAR BAYOU FRACTIONATOR AND THE NGL
PRODUCTS WE DISTRIBUTE AND MARKET.
FEEDSTOCK FOR CEDAR BAYOU FRACTIONATOR. The majority of the NGL feedstock
for the Cedar Bayou fractionator is supplied by affiliates of BP and Williams,
and by our purchases of mixed NGLs from Dynegy Midstream. In 2001, our
distribution and marketing services segment accounted for 48% of the supply of
mixed NGLs fractionated at the Cedar Bayou fractionator. In addition, Williams
and BP supplied 25% and 12%, respectively, of the mixed NGLs we fractionated at
the Cedar Bayou fractionator. If these supplies were to decrease materially for
any reason, we would experience difficulty in replacing those lost barrels.
Because our operating costs are primarily fixed, a reduction in the supply of
mixed NGLs from these parties would result in a reduction of our revenues and a
decline in net income and cash flow, which would reduce our ability to make
distributions to our unitholders.
KEY CUSTOMERS AND SUPPLIERS. We depend upon a number of key customers and
suppliers, including Dynegy Midstream, ChevronTexaco and Chevron Phillips
Chemical Company. During the year ended December 31, 2001, approximately 16% and
13% of our mixed NGL and NGL product purchase volumes were made from Dynegy
Midstream and ChevronTexaco, respectively, and approximately 20% of our NGL
sales volumes were made to Chevron Phillips.
In connection with the closing of this offering, we will enter into a number
of 20-year commercial agreements with Dynegy Midstream, one of which will
provide for our purchase of all mixed NGLs and NGL products owned or controlled
by Dynegy Midstream. Our contract with ChevronTexaco, which provides for our
purchase of substantially all of ChevronTexaco's mixed NGLs and NGL products, is
currently scheduled to expire on August 31, 2006. Our contract with Chevron
Phillips to supply its NGL feedstock requirements is also currently scheduled to
expire on August 31, 2006. Moreover, these contracts may be terminated under
certain circumstances, including for reasons of force majeure. In addition to
these long-term arrangements, we derive a significant portion of our revenues
pursuant to short-term contracts. For the year ended December 31, 2001,
approximately 12% of our sales volumes were made on a spot basis to Louis
Dreyfus Plastics. The loss of these or other significant customers, or any
material reduction in the services we provide such customers, would materially
adversely affect our results of operations.
IF THE CREDIT SUPPORT PROVIDED BY DYNEGY HOLDINGS IS TERMINATED OR DIMINISHED,
OUR COST OF DOING BUSINESS MAY INCREASE IF OUR CUSTOMERS REQUIRE US TO PROVIDE
ADDITIONAL OR DIFFERENT CREDIT SUPPORT.
We will engage in transactions involving large dollar volumes, and therefore
our credit standing and capital resources will be important aspects of our
business. Our financial resources will be a major
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consideration for parties that enter into transactions with us, and such parties
may require letters of credit, other credit support or evidence of financial
responsibility prior to entering into transactions with us. Our general partner
believes that our ability to obtain credit to support our purchases of mixed
NGLs and NGL products will be fundamental to our business.
In connection with the closing of this offering, we will enter into a credit
support agreement with Dynegy Holdings Inc., a wholly owned subsidiary of
Dynegy Inc., pursuant to which Dynegy Holdings will agree to provide credit
support related to our purchase of mixed NGLs and NGL products in the ordinary
course of our business. The aggregate amount of the credit support agreement
will be limited to $ million and the facility will have a term of three years.
This credit support agreement will replace the guarantees that Dynegy Inc. and
Dynegy Holdings currently provide to support our operations. This credit support
agreement may terminate in the event we or certain of our subsidiaries obtain
investment grade credit ratings or our general partner is removed as general
partner. If Dynegy Holdings' ratings were to decline below investment grade or
its creditworthiness were to decline, our customers might require us to provide
additional or different credit support. In the event that we are unable to
establish our creditworthiness to the satisfaction of our customers, our results
of operations and financial condition would be materially adversely affected.
AN ADVERSE RESULT IN DYNEGY INC.'S AND ITS AFFILIATES' LEGAL PROCEEDINGS
RELATING TO ENRON COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
On November 28, 2001, our ultimate parent company, Dynegy Inc., terminated
its merger agreement with Enron Corp. On December 2, 2001, Enron filed a
voluntary petition for Chapter 11 reorganization under the Federal bankruptcy
laws and filed an adversary proceeding in the bankruptcy court alleging, among
other things, that Dynegy Inc. breached the merger agreement by terminating the
agreement and that Dynegy Inc. owes Enron damages of at least $10 billion based
on such alleged breach.
Dynegy Inc.'s management has publicly stated that it believes that Enron's
adversary proceeding against Dynegy Inc. has no merit. Dynegy Inc. filed its
answer to Enron's adversary proceeding on February 4, 2002 detailing its reasons
for terminating the merger agreement. Given our significant dependence on Dynegy
Inc. and its affiliates, an adverse result in Enron's damage action against
Dynegy Inc. or in any other legal proceedings pertaining to Enron could have a
material adverse effect on us.
RESTRICTIONS IN DEBT AGREEMENTS MAY PREVENT US FROM ENGAGING IN SOME BENEFICIAL
TRANSACTIONS AND FROM PAYING DISTRIBUTIONS.
Upon completion of this offering, we expect our total outstanding long-term
indebtedness to be approximately $125 million of debt under our bank credit
facility. Our payment of principal and interest on our debt will reduce the cash
available for distribution on our units. In addition, we will be prohibited by
our credit facility from making cash distributions during an event of default or
if the payment of a distribution would cause an event of default. Our leverage
and various limitations in our credit facility may reduce our ability to incur
additional debt, engage in some transactions, and capitalize on acquisition or
other business opportunities.
Dynegy Inc.'s and its affiliates' revolving credit agreements limit the
aggregate amount of debt Dynegy Inc. and its consolidated subsidiaries,
including us, may borrow. Since Dynegy Inc. and some of its affiliates will own
and control our general partner, we may not be permitted to incur additional
debt if the effect would be to cause an event of default under Dynegy Inc.'s or
its affiliates' revolving credit agreements. Any subsequent refinancing of
Dynegy Inc.'s or its affiliates' debt or our current debt or any new debt could
have similar or greater restrictions.
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UNAUTHORIZED PURCHASES OR SALES OF MIXED NGLS OR NGL PRODUCTS BY OUR EMPLOYEES
COULD RESULT IN SIGNIFICANT LOSSES.
We have adopted various internal policies and procedures designed to monitor
our purchases and sales of mixed NGLs and NGL products to ensure that we
maintain a position that is substantially balanced between our physical
inventories and our purchase obligations as compared to our NGL product sales
commitments. These policies and procedures are designed, in part, to prevent
unauthorized purchases or sales of mixed NGLs or NGL products by our employees.
We cannot assure you, however, that these steps will detect and prevent all
violations of our risk management policies and procedures, particularly if
deception or other intentional misconduct is involved.
OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF SERVICE AT OUR FACILITIES OR
TRANSPORTATION OF MIXED NGLS AND NGL PRODUCTS WERE INTERRUPTED.
Our operations are dependent upon the infrastructure for mixed NGLs and NGL
products that interconnect our facilities along the Texas Gulf Coast as well as
natural gas production areas, refiners and petrochemical plants. We, our
suppliers and our customers are dependent upon these interconnections both to
receive mixed NGLs and NGL products from producing and other areas and to
deliver NGLs and NGL products to purchasers. Any reduction in capabilities of
these interconnecting pipelines due to testing, line repair, reduced operating
pressures, or other causes could result in reduced volumes transported in these
pipelines. Any significant interruption in service at the facilities we own and
operate or in third-party pipelines or facilities that we use in providing
services to our customers could adversely affect our results of operations.
OUR MARKET IS HIGHLY COMPETITIVE.
Our competitors include large oil, natural gas and petrochemical companies,
some of whom have greater financial resources and access to mixed NGL supplies
than we do. Our Cedar Bayou fractionator competes for volumes of mixed NGLs with
three other fractionators at Mont Belvieu. Among its primary competitors are
Enterprise Products, Diamond Koch and Gulf Coast Fractionators. Dynegy Inc.
currently owns and will retain an ownership interest in Gulf Coast
Fractionators, a joint venture among Conoco, Mitchell Energy and Dynegy Inc.,
following this offering. In addition, certain major producers fractionate mixed
NGLs for their own account in captive facilities. The Mont Belvieu fractionators
also compete on a more limited basis with two fractionators in Conway, Kansas
and a number of decentralized, smaller fractionation facilities in Louisiana. In
recent years, the Conway market has occasionally experienced higher posted
prices for NGL products than prices at Mont Belvieu, causing customers to shift
volumes to the Conway market for fractionation. Our customers who are
significant producers of mixed NGLs and NGL products or consumers of NGL
products may develop their own processing facilities in lieu of using our
services or co-investing with us in new projects. Our principal competitors
include Enterprise Products and TEPPCO, with respect to our Mont Belvieu
underground storage facility, and Enterprise Products and EOTT, with respect to
our Galena Park marine terminal.
OUR BUSINESS IS SEASONAL.
While the volumes of mixed NGLS that we fractionate at our Cedar Bayou
facility are generally stable on an average annual basis, they often vary on a
seasonal basis. For example, we typically fractionate lower volumes during the
winter months, when more mixed NGLs are fractionated by facilities closer to the
field to capture propane for heating purposes and when natural gas wells and
certain oil wells tend to be less productive. Conversely, we typically
fractionate greater volumes during the summer months, when fewer mixed NGLs are
locally fractionated for heating purposes, when natural gas wells tend to be
more productive and when refineries have excess supply of mixed NGLs
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due to various regulatory restrictions. This seasonality in demand may cause our
results of operations to lack predictability on a quarter to quarter basis.
Similarly, weather conditions have a significant impact on the demand for
propane because end-users depend on propane principally for heating purposes.
Warmer-than-normal temperatures in one or more regions in which we operate can
significantly decrease the total volume of propane we sell. Lack of consumer
demand for propane may also adversely affect the retailers we transact with in
our wholesale propane marketing operations, exposing us to their inability to
satisfy their contractual obligations to us.
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED ON SEPTEMBER 11, 2001, HAVE
RESULTED IN INCREASED COSTS, AND FUTURE WAR OR RISK OF WAR MAY ADVERSELY IMPACT
OUR RESULTS OF OPERATIONS.
The impact that the terrorist attacks of September 11, 2001 may have on the
energy industry in general, and on us in particular, is not known at this time.
Uncertainty surrounding retaliatory military strikes or a sustained military
campaign may affect our operations in unpredictable ways, including disruptions
of fuel supplies and markets, particularly oil, and the possibility that
infrastructure facilities, including pipelines, production facilities,
processing plants and refineries, could be direct targets of, or indirect
casualties of, an act of terror. We have incurred additional costs since
September 11, 2001 to safeguard certain of our assets and we may be required to
incur significant additional costs in the future.
The terrorist attacks on September 11, 2001 and the changes in the insurance
markets attributable to the September 11 attacks may make certain types of
insurance more difficult for us to obtain. We may be unable to secure the levels
and types of insurance we would otherwise have secured prior to September 11,
2001. There can be no assurance that insurance will be available to us without
significant additional costs. A lower level of economic activity could also
result in a decline in energy consumption which could adversely affect our
revenues or restrict our future growth. Instability in the financial markets as
a result of terrorism or war could also affect our ability to raise capital.
OUR OWNERSHIP INTEREST IN THE CEDAR BAYOU FRACTIONATOR MAY BE REDUCED UPON
EXERCISE OF PURCHASE OPTIONS HELD BY OTHER PARTIES THAT, IF EXERCISED, COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We currently own an 88% effective economic interest in the limited
partnership that owns the Cedar Bayou fractionator. BP owns the remaining 12%
interest and has an option to purchase an additional interest in the limited
partnership, up to a maximum aggregate interest of 25%, at a contractually
defined price. BP's option expires on October 1, 2004.
Williams has an option to acquire a 5% ownership interest in the limited
partnership in exchange for a commitment to deliver a specified volume of mixed
NGLs to the facility through December 31, 2008. Williams also has an option to
purchase an additional 15% ownership interest in this limited partnership from
us at a contractually defined price. Both of Williams' options expire on
October 1, 2004.
If both BP and Williams exercise their respective options in full, our
effective economic interest in the limited partnership that owns the Cedar Bayou
fractionator would be reduced from 88% to 55.6%. We currently anticipate that we
would receive proceeds of approximately $40 million upon full exercise of these
options. Excluding the impact of the receipt or reinvestment of the proceeds of
this exercise, and assuming that there are no increased throughput volumes
associated with the new ownership percentages, our EBITDA in 2001 would have
been reduced by approximately $6.9 million had these options been exercised as
of January 1, 2001.
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WE MAY BE PROHIBITED FROM ACQUIRING OR OPERATING FRACTIONATION FACILITIES NEAR
MONT BELVIEU, TEXAS, OTHER THAN THE CEDAR BAYOU FRACTIONATOR.
In connection with Dynegy Inc.'s 1996 acquisition of assets from Chevron
U.S.A., Dynegy Inc. entered into a consent decree with the Federal Trade
Commission that will prohibit us from acquiring, directly or indirectly, or
operating additional fractionation facilities within ten miles of Mont Belvieu
until December 12, 2006, without the approval of the Federal Trade Commission.
Consequently, we may be unable to acquire additional fractionation capacity in
the Mont Belvieu area until the expiration of the consent order.
POTENTIAL FUTURE ACQUISITIONS AND EXPANSIONS, IF ANY, MAY AFFECT OUR BUSINESS BY
SUBSTANTIALLY INCREASING THE LEVEL OF OUR INDEBTEDNESS AND CONTINGENT
LIABILITIES AND CREATING INTEGRATION DIFFICULTIES.
From time to time, we will evaluate and acquire assets or businesses that we
believe complement our existing business and related assets. These acquisitions
may require substantial capital or the incurrence of additional indebtedness. If
we consummate any future acquisitions, our capitalization and results of
operations may change significantly, and you will not have the opportunity to
evaluate the economic, financial and other relevant information that we will
consider in determining the application of these funds and other resources.
WE ARE SUBJECT TO OPERATING AND LITIGATION RISKS THAT MAY NOT BE COVERED BY
INSURANCE.
Our operations are subject to operational hazards and unforeseen
interruptions such as natural disasters, adverse weather, accidents, fires,
explosions, hazardous materials releases, and other events beyond our control.
These events might result in a loss of equipment or life, injury, or extensive
property damage, as well as an interruption in our operations. We may not be
able to maintain or obtain insurance of the type and amount we desire at
reasonable rates. As a result of market conditions, premiums and deductibles for
certain of our insurance policies have increased substantially, and could
escalate further. In some instances, certain insurance could become unavailable
or available only for reduced amounts of coverage. For example, insurance
carriers are now requiring broad exclusions for losses due to war risk and
terrorist acts. If we were to incur a significant liability for which we were
not fully insured, it could have a material adverse effect on our financial
position.
OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION WITH RESPECT TO
ENVIRONMENTAL, SAFETY AND OTHER REGULATORY MATTERS.
Our business is subject to the jurisdiction of governmental agencies with
respect to a wide range of environmental, safety and other regulatory matters.
For example, the Railroad Commission of Texas regulates our Mont Belvieu
underground storage facility, the U.S. Coast Guard regulates our barge
operations and marine terminal, the U.S. Department of Transportation regulates
our tank trucks, certain pipelines and other logistic assets and the Federal
Energy Regulatory Commission regulates two of our Houston-area pipelines. In
addition, our operations are subject to permit requirements and increasingly
stringent regulations under numerous environmental laws, such as the federal
Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, and
similar state and local laws. We could be adversely affected by increased costs
due to more strict pollution control requirements or liabilities resulting from
compliance with future required operating or other regulatory permits. New
environmental regulations might adversely impact our activities. Federal and
state agencies also could impose additional safety requirements, any of which
could affect our profitability. In addition, there are risks of accidental
releases or spills associated with our operations, and there can be no assurance
that material costs and liabilities will not be incurred, including those
relating to claims for damages to property and persons.
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THE LOSS OF KEY PERSONNEL WOULD NEGATIVELY IMPACT OUR BUSINESS.
Our success will be largely dependent upon the continued services of members
of our senior management team. Our senior executive officers have significant
experience in the NGL industry as a result of which they have developed and
established relationships with a broad range of industry participants. The loss
of any of these executives and the business relationships they have established
could have a material adverse effect on our results of operations.
RISKS INHERENT IN AN INVESTMENT IN THE COMMON UNITS
COST REIMBURSEMENTS AND FEES DUE OUR GENERAL PARTNER MAY BE SUBSTANTIAL AND WILL
REDUCE OUR CASH AVAILABLE FOR DISTRIBUTION TO YOU.
Payments to our general partner will be substantial and will reduce the
amount of available cash for distribution to unitholders. Under the omnibus
agreement, Dynegy Inc. will provide us with corporate staff, support and
operating services that are substantially identical in nature and quality to the
services provided by Dynegy Inc. during the one-year period prior to the closing
date. As compensation for providing these services, Dynegy Inc. will be
reimbursed for the costs and expenses it incurs in rendering these services,
including an overhead allocation to us of Dynegy Inc.'s indirect general and
administrative expenses. The reimbursement amount with respect to indirect
general and administrative expenses is capped at $2 million, subject to
adjustment, for the first five years. After this five-year period, our general
partner will determine the general and administrative expenses that will be
allocated to us. General and administrative expenses directly associated with
providing services to us are not included in the overhead allocation pool and
are therefore not subject to the $2 million cap.
DYNEGY INC. AND ITS AFFILIATES HAVE CONFLICTS OF INTEREST AND LIMITED FIDUCIARY
RESPONSIBILITIES, WHICH MAY PERMIT THEM TO FAVOR THEIR OWN INTERESTS TO THE
DETRIMENT OF OUR UNITHOLDERS.
Following the offering, Dynegy Inc. and its affiliates will own a 2% general
partner interest and a 55.2% limited partner interest in us and will own and
control our general partner. Conflicts of interest may arise between
Dynegy Inc. and its affiliates, including our general partner, on the one hand,
and us, on the other hand. As a result of these conflicts, our general partner
may favor its own interests and the interests of its affiliates over the
interests of our unitholders. These conflicts include, among others, the
following situations:
- Some officers of Dynegy Inc. who will provide services to us will also
devote significant time to the businesses of Dynegy Inc. and will be
compensated by Dynegy Inc. for that time.
- Neither our partnership agreement nor any other agreement requires
Dynegy Inc. to pursue a business strategy that favors us or utilizes our
assets. Dynegy Inc.'s directors and officers have a fiduciary duty to make
these decisions in the best interests of the stockholders of Dynegy Inc.
without regard to the best interests of the common unitholders.
- Dynegy Inc. and its affiliates may compete with us, subject to the
limitations set forth in the omnibus agreement.
- Our general partner is allowed to take into account the interests of
parties other than us, such as Dynegy Inc., in resolving conflicts of
interest, which has the effect of reducing its fiduciary duty to our
unitholders.
- Our general partner may limit its liability and reduce its fiduciary
duties, while also restricting the remedies available to our unitholders
for actions that, without the limitations, might constitute breaches of
fiduciary duty. As a result of purchasing units, our unitholders consent
to some actions and conflicts of interest that, without such consent,
might otherwise constitute a breach of fiduciary or other duties under
applicable state law.
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- Our general partner determines the amount and timing of asset purchases
and sales, capital expenditures, borrowings, issuance of additional
partnership securities and reserves, each of which can affect the amount
of cash that is distributed to our unitholders.
- Our general partner determines which costs incurred by Dynegy Inc. and its
affiliates are reimbursable by us, subject to a five-year cap on some
indirect general and administrative expenses.
- Our partnership agreement does not restrict our general partner from
causing us to pay it or its affiliates for any services rendered on terms
that are fair and reasonable to us or entering into additional contractual
arrangements with any of these entities on our behalf.
- Our general partner controls the enforcement of obligations owed to us by
our general partner and its affiliates, including the commercial
agreements with Dynegy Inc. and its affiliates.
- Our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
- In some instances, our general partner may cause us to borrow funds in
order to permit the payment of cash distributions, even if the purpose or
effect of the borrowing is to make a distribution on the subordinated
units or to make incentive distributions or to hasten the expiration of
the subordination period.
- Our partnership agreement gives our general partner broad discretion in
establishing financial reserves for the proper conduct of our business.
These reserves also will affect the amount of cash available for
distribution. Our general partner may establish reserves for distribution
on the subordinated units, but only if those reserves will not prevent us
from distributing the full minimum quarterly distribution, plus any
arrearages, on the common units for the following four quarters.
UNITHOLDERS HAVE LESS POWER TO ELECT OR REMOVE MANAGEMENT THAN HOLDERS OF COMMON
STOCK IN A CORPORATION.
Unlike the holders of common stock in a corporation, unitholders have only
limited voting rights on matters affecting our business, and therefore limited
ability to influence management's decisions regarding our business. Unitholders
did not elect our general partner or its board of directors and will have no
right to elect our general partner or its board of directors on an annual or
other continuing basis.
The board of directors of our general partner is chosen by Dynegy Inc. and
its affiliates. Although our general partner has a fiduciary duty to manage our
partnership in a manner beneficial to Dynegy Energy Partners and the
unitholders, the directors of our general partner also have a fiduciary duty to
manage our general partner in a manner beneficial to Dynegy Inc. and its
stockholders.
Furthermore, if unitholders are dissatisfied with the performance of our
general partner, they will have little ability to remove our general partner.
First, our general partner generally may not be removed except upon the vote of
the holders of at least 66 2/3% of the outstanding units voting together as a
single class. Because our general partner and its affiliates will initially
control approximately 55.2% of all the units, our general partner currently
cannot be removed without the consent of our general partner and its affiliates.
Also, if our general partner is removed without cause during the subordination
period and units held by our general partner and its affiliates are not voted in
favor of that removal, all remaining subordinated units will automatically be
converted into common units and any existing arrearages on the common units will
be extinguished. A removal under these circumstances would adversely affect the
common units by prematurely eliminating their distribution and liquidation
preference over the subordinated units, which preferences would otherwise have
continued until we had met certain distribution and performance tests.
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Cause is narrowly defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding our general partner liable for
actual fraud, gross negligence, or willful or wanton misconduct in its capacity
as our general partner. Cause does not include most cases of charges of poor
management of the business, so the removal of our general partner because of the
unitholders' dissatisfaction with our general partner's performance in managing
our partnership will most likely result in the termination of the subordination
period.
Furthermore, unitholders' voting rights are further restricted by the
partnership agreement provision which states that any units held by a person
that owns 20% or more of any class of units then outstanding, other than our
general partner, its affiliates, their transferees and persons who acquired such
units with the prior approval of the board of directors of our general partner,
cannot be voted on any matter. In addition, the partnership agreement contains
provisions limiting the ability of unitholders to call meetings or to acquire
information about our operations, as well as other provisions limiting the
unitholders' ability to influence the manner or direction of management.
As a result of these provisions, the price at which the common units will
trade may be lower because of the absence or reduction of a takeover premium in
the trading price.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF $5.90 PER COMMON UNIT.
The assumed initial public offering price of $20.00 per unit exceeds our pro
forma net tangible book value of $14.10 per unit after this offering. Based on
an assumed initial public offering price of $20.00, you will incur immediate and
substantial dilution of $5.90 per common unit. The main factor causing dilution
is related to the fact that our general partner and its affiliates acquired
interests in us at equivalent per unit prices less than the public offering
price. Please read "Dilution."
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT YOUR APPROVAL, WHICH WOULD DILUTE
YOUR OWNERSHIP INTEREST.
During the subordination period, our general partner, without the approval
of our unitholders, may cause us to issue up to 4,375,000 additional common
units. Our general partner may also cause us to issue an unlimited number of
additional common units or other equity securities of equal rank with the common
units, without unitholder approval, in a number of circumstances such as:
- the issuance of common units in connection with acquisitions or debt
repayments that increase cash flow from operations per unit on a pro forma
basis;
- the conversion of subordinated units into common units;
- the conversion of units of equal rank with the common units into common
units under some circumstances;
- the conversion of our general partner interest and the incentive
distribution rights into common units as a result of the withdrawal of our
general partner; or
- issuances of common units under our long-term incentive plan.
After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of our
unitholders. Our partnership agreement does not give our unitholders the right
to approve our issuance of equity securities ranking junior to the common units
at any time.
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
- our unitholders' proportionate ownership interest in us will decrease;
- the amount of cash available for distribution on each unit may decrease;
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- because a lower percentage of total outstanding units will be subordinated
units, the risk that a shortfall in the payment of the minimum quarterly
distribution will be borne by our common unitholders will increase;
- the relative voting strength of each previously outstanding unit may be
diminished; and
- the market price of the common units may decline.
THE CONTROL OF OUR GENERAL PARTNER MAY BE TRANSFERRED TO A THIRD PARTY WITHOUT
UNITHOLDER CONSENT.
The general partner may transfer its general partner interest to a third
party in a merger or in a sale of all or substantially all of its assets without
the consent of the unitholders. Furthermore, there is no restriction in the
partnership agreement on the ability of the owner of our general partner to
transfer its ownership interest in our general partner to a third party. The new
owner of our general partner would then be in a position to replace the board of
directors and officers of our general partner with its own choices and to
control the decisions taken by our general partner.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL YOUR
COMMON UNITS AT AN UNDESIRABLE TIME OR PRICE.
If at any time our general partner and its affiliates own more than 80% of
the common units, our general partner will have the right, but not the
obligation, which it may assign to any of its affiliates or to us, to acquire
all, but not less than all, of the remaining common units held by unaffiliated
persons at a price not less than their then-current market price. As a result,
you may be required to sell your common units at an undesirable time or price
and may not receive any return on your investment. You may also incur a tax
liability upon a sale of your units. For additional information about the call
right, please read "The Partnership Agreement--Limited Call Right."
YOU MAY NOT HAVE LIMITED LIABILITY IF A COURT FINDS THAT WE HAVE NOT COMPLIED
WITH THE APPLICABLE STATUTES OR THAT UNITHOLDER ACTION CONSTITUTES CONTROL OF
OUR BUSINESS.
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. You could be held liable in some circumstances for our obligations
to the same extent as a general partner if a court determined that:
- we had been conducting business in any state without compliance with the
applicable limited partnership statute; or
- the right or the exercise of the right by our unitholders as a group to
remove or replace our general partner, to approve some amendments to the
partnership agreement, or to take other action under our partnership
agreement constituted participation in the "control" of our business.
The general partner generally has unlimited liability for the obligations of
the partnership, such as its debts and environmental liabilities, except for
those contractual obligations of the partnership that are expressly made without
recourse to our general partner.
In addition, under some circumstances, a unitholder may be liable to us for
the amount of a distribution for a period of three years from the date of the
distribution. Please read "The Partnership Agreement--Limited Liability" for a
discussion of the implications of the limitations on liability to a unitholder.
TAX RISKS
You should read "Material Tax Consequences" for a full discussion of the
expected material federal income tax consequences of owning and disposing of
common units.
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THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO YOU.
The anticipated after-tax benefit of an investment in us depends largely on
our classification as a partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on this or any
other matter affecting us.
If we were classified as a corporation for federal income tax purposes, we
would pay tax on our income at corporate rates, currently 35%, distributions
would generally be taxed again to you as corporate distributions, and no income,
gains, losses, or deductions would flow through to you. Because a tax would be
imposed upon us as an entity, the cash available for distribution to you would
be substantially reduced. Treatment of us as a corporation would result in a
material reduction in the anticipated cash flow and after-tax return to you and
therefore would likely result in a substantial reduction in the value of the
common units.
Current law may change so as to cause us to be taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
The partnership agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal, state
or local income tax purposes, then the minimum quarterly distribution amount and
the target distribution amount will be adjusted to reflect the impact of that
law on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY AFFECT THE MARKET FOR OUR COMMON UNITS AND THE COSTS OF ANY CONTEST
WILL BE BORNE BY OUR UNITHOLDERS AND OUR GENERAL PARTNER.
We have not requested any ruling from the IRS with respect to our
classification as a partnership for federal income tax purposes or any other
matter affecting us. The IRS may adopt positions that differ from our counsel's
conclusions expressed in this prospectus. It may be necessary to resort to
administrative or court proceedings to sustain some or all of our counsel's
conclusions or the positions we take. A court may not concur with all our
counsel's conclusions or the positions we take. Any contest with the IRS may
materially and adversely impact the market for our common units and the prices
at which they trade. In addition, the costs of any contest with the IRS will be
borne directly or indirectly by our unitholders and our general partner.
YOU MAY BE REQUIRED TO PAY TAXES ON INCOME FROM US EVEN IF YOU DO NOT RECEIVE
ANY CASH DISTRIBUTIONS.
You will be required to pay federal income taxes and, in some cases, state,
local and foreign income taxes on your share of our taxable income, whether or
not you receive cash distributions from us. You may not receive cash
distributions equal to your share of our taxable income or even the tax
liability that results from the taxation of your share of our taxable income.
TAX GAIN OR LOSS ON THE DISPOSITION OF OUR COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED.
If you sell your common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax basis in those common units.
Prior distributions in excess of the total net taxable income you were allocated
for a common unit, which decreased your tax basis in that common unit, will, in
effect, become taxable income to you if the common unit is sold at a price
greater than your tax basis in that common unit, even if the price you receive
is less than your original cost. A substantial portion of the amount realized,
whether or not representing gain, may be ordinary income to you. Should the IRS
successfully contest some positions we take, you could recognize more gain on
the sale of units than would be the case under those positions, without the
benefit of decreased income in prior years. In addition, if you sell your units,
you may incur a tax liability in excess of the amount of cash you receive from
the sale.
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<Page>
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN PERSONS FACE
UNIQUE TAX ISSUES FROM OWNING COMMON UNITS THAT MAY RESULT IN ADVERSE TAX
CONSEQUENCES TO THEM.
Investment in common units by tax-exempt entities, regulated investment
companies (known as mutual funds) and non-U.S. persons raises issues unique to
them. For example, virtually all of our income allocated to organizations exempt
from federal income tax, including individual retirement accounts and other
retirement plans, will be unrelated business income and will be taxable to them.
Very little of our income will be qualifying income to a regulated investment
company. Distributions to non-U.S. persons will be reduced by withholding taxes
at the highest effective rate applicable to individuals, and non-U.S. persons
will be required to file federal income tax returns and pay tax on their share
of our taxable income.
WE WILL REGISTER AS A TAX SHELTER, WHICH MAY INCREASE THE RISK OF AN IRS AUDIT
OF US OR A UNITHOLDER.
We intend to register with the IRS as a "tax shelter." We will advise you of
our tax shelter registration number once that number has been assigned. The IRS
requires that some types of entities, including some partnerships, register as
"tax shelters" in response to the perception that they claim tax benefits that
the IRS may believe to be unwarranted. As a result, we may be audited by the IRS
and tax adjustments could be made. Any unitholder owning less than a 1% profits
interest in us has very limited rights to participate in the income tax audit
process. Further, any adjustments in our tax returns will lead to adjustments in
our unitholders' tax returns and may lead to audits of unitholders' tax returns
and adjustments of items unrelated to us. You will bear the cost of any expense
incurred in connection with an examination of your personal tax return.
WE TREAT A PURCHASER OF OUR COMMON UNITS AS HAVING THE SAME TAX BENEFITS AS THE
SELLER. THE IRS MAY CHALLENGE THIS TREATMENT, WHICH COULD ADVERSELY AFFECT THE
VALUE OF THE COMMON UNITS.
Because we cannot match transferors and transferees of common units and
because of other reasons, we will adopt depreciation conventions that do not
conform to all aspects of the Treasury regulations. A successful IRS challenge
to those conventions could adversely affect the amount of tax benefits available
to you. It also could affect the timing of these tax benefits or the amount of
gain from the sale of common units and could have a negative impact on the value
of our common units or result in audit adjustments to your tax returns. Please
read "Material Tax Consequences--Uniformity of Units" for a further discussion
of the effect of the depreciation and amortization positions we will adopt.
YOU WILL LIKELY BE SUBJECT TO STATE, LOCAL AND FOREIGN TAXES AND RETURN FILING
REQUIREMENTS AS A RESULT OF INVESTING IN OUR COMMON UNITS.
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state, local and foreign income taxes, unincorporated
business taxes and estate, inheritance, or intangible taxes that are imposed by
the various jurisdictions in which we do business or own property. You will
likely be required to file state, local and foreign income tax returns and pay
state and local income taxes in some or all of the various jurisdictions in
which we do business or own property and may be subject to penalties for failure
to comply with those requirements. We will initially own property and conduct
business in Florida, Kentucky, Mississippi, Tennessee and Texas. We may do
business or own property in other states or foreign countries in the future. It
is your responsibility to file all federal, state and local tax returns. Our
counsel has not rendered an opinion on the state, local or foreign tax
consequences of an investment in our common units.
25
<Page>
USE OF PROCEEDS
We expect to receive net proceeds of approximately $143.2 million from the
sale of 7,650,000 common units offered by this prospectus, after deducting
underwriting discounts but before paying estimated offering expenses.
Additionally, we expect to receive proceeds of approximately $22.0 million from
the sale of 1,100,000 common units that an affiliate of our general partner will
be obligated to purchase to the extent the underwriters do not exercise the
over-allotment option. We base these amounts on an assumed public offering price
of $20.00 per unit.
We intend to use the aggregate net proceeds of $165.2 million from this
offering to:
- repay $148.3 million owed to Dynegy Inc. and its affiliates;
- reserve $13.7 million to establish working capital and to fund in advance
currently budgeted capital expenditures; and
- pay $3.2 million of expenses associated with the offering and the related
transactions.
Dynegy Inc. or its affiliates will receive $125.0 million of proceeds from
borrowings by our general partner and an affiliate under a bank credit facility.
Our operating partnership will assume the obligations of these parties under the
bank credit facility in connection with the closing of this offering.
26
<Page>
CAPITALIZATION
The following table shows:
- our historical capitalization as of December 31, 2001; and
- our pro forma capitalization as of December 31, 2001, adjusted to reflect
the offering of the common units, the application of the net proceeds we
receive in the offering in the manner described under "Use of Proceeds,"
the partial repayment of amounts owed to affiliates and converting the
balance owed to affiliates into equity.
This table is derived from, should be read together with and is qualified in
its entirety by reference to our historical and pro forma financial statements
and the accompanying notes included elsewhere in this prospectus. You should
also read this table in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<Table>
<Caption>
AS OF DECEMBER 31, 2001
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS)
Cash and cash equivalents.................................. $ 4,529 $ 13,700 (a) $ 18,229
======== ========= ========
Long-term debt:
Payable to affiliates.................................... $229,600 $(148,300)(b) $ --
(81,300)(c)
Revolving credit facility................................ -- 125,000 (d) 125,000
-------- --------- --------
Total long-term debt................................... $229,600 $(104,600) $125,000
Combined equity/partners' capital:
Combined equity.......................................... 137,546 (137,546)(e) --
Common unitholders....................................... -- 162,000 (f) 162,000
Subordinated unitholders................................. -- 93,929 (f) 93,929
General partner.......................................... -- 1,917 (f) 1,917
-------- --------- --------
Total combined equity/partners' capital................ $137,546 $ 120,300 $257,846
-------- --------- --------
Total capitalization................................. $367,146 $ 15,700 $382,846
======== ========= ========
</Table>
- ------------------------
(a) Reflects the net proceeds from the offering retained by us to fund certain
planned capital expenditures.
(b) Reflects the partial repayment of our net amount payable to affiliates with
$148.3 million of the net proceeds of the offering.
(c) Represents the capital contribution by an affiliate of our general partner
of $81.3 million, representing the forgiveness of a portion of our net
amount payable to affiliates.
(d) Represents initial borrowings of $125.0 million under our new bank credit
facility.
(e) Represents the conversion of the combined equity of the Dynegy Energy
Partners Predecessor to subordinated units of the partnership and the
general partner's interest in the partnership.
(f) Represents the resulting equity amounts of the common and subordinated
unitholders and the general partner interest.
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<Page>
DILUTION
Dilution is the amount by which the offering price paid by the purchasers of
common units sold in this offering will exceed the net tangible book value per
unit after the offering. On a pro forma basis as of December 31, 2001, after
giving effect to the offering of common units and the related transactions, our
net tangible book value was $251.8 million, or $14.10 per common unit.
Purchasers of common units in this offering will experience substantial and
immediate dilution in net tangible book value per common unit for financial
accounting purposes, as illustrated in the following table.
<Table>
Assumed initial public offering price per common unit....... $20.00
Pro forma net tangible book value per common unit before the
offering(1)(2)............................................ $11.65
Increase in net tangible book value per common unit
attributable to new investors............................. 2.45
------
Less: Pro forma net tangible book value per common unit
after the offering(2)(3).................................. 14.10
------
Immediate dilution in net tangible book value per common
unit to new investors..................................... $ 5.90
======
</Table>
- --------------------------
(1) Determined by dividing the number of units (1,100,000 common units,
8,750,000 subordinated units and the 2% general partner interest, which has
a dilutive effect equivalent to 357,143 units) to be issued to affiliates of
our general partner for their contribution of assets and liabilities to
Dynegy Energy Partners into the net pro forma tangible book value of the
contributed assets and liabilities.
(2) The net tangible book value does not include intangible assets with an
historical book value of $4.0 million and a pro forma book value of
$6.0 million.
(3) Determined by dividing the total number of units (8,750,000 common units,
8,750,000 subordinated units and the 2% general partner interest, which has
a dilutive effect equivalent to 357,143 units) to be outstanding after the
offering into the pro forma net tangible book value of Dynegy Energy
Partners, after giving effect to the application of the net proceeds of the
offering.
The following table sets forth the number of units that we will issue and
the total consideration contributed to Dynegy Energy Partners by our general
partner and its affiliates in respect of their units and by the purchasers of
common units in this offering upon consummation of the transactions contemplated
by this prospectus.
<Table>
<Caption>
UNITS ACQUIRED TOTAL CONSIDERATION
--------------------- ------------------------
NUMBER PERCENT AMOUNT PERCENT
---------- -------- ------------- --------
(IN MILLIONS)
General partner and affiliate(1)(2)........... 10,207,143 57.2% $123.0 44.6%
New investors................................. 7,650,000 42.8% 153.0 55.4%
---------- ----- ------ -----
Total....................................... 17,857,143 100.0% $276.0 100.0%
========== ===== ====== =====
</Table>
- --------------------------
(1) Upon the consummation of the transactions contemplated by this prospectus,
an affiliate of our general partner will own an aggregate of 1,100,000
common units (which assumes 1,100,000 common units will be purchased by an
affiliate of our general partner at the initial public offering price) and
8,750,000 subordinated units and our general partner will own a 2% general
partner interest in Dynegy Energy Partners having a dilutive effect
equivalent 357,143 units.
(2) The assets contributed by our general partner and its affiliates were
recorded at historical cost in accordance with generally accepted accounting
principles. Book value of the consideration provided by our general partner
and its affiliates, as of December 31, 2001, after giving effect to the
application of the net proceeds of the offering, is as follows:
<Table>
<Caption>
(IN MILLIONS)
-------------
Book value of net assets contributed........................ $ 137.5
Capital contribution by affiliates of our general partner... 81.3
Less: Borrowings under credit facility assumed from our
general partner and an affiliate of our general partner,
net of debt issuance costs................................ (95.8)
-------
Total consideration....................................... $ 123.0
=======
</Table>
28
<Page>
CASH DISTRIBUTION POLICY
DISTRIBUTIONS OF AVAILABLE CASH
GENERAL. Within 45 days after the end of each quarter, beginning with the
quarter ending June 30, 2002, we will distribute all of our available cash to
unitholders of record on the applicable record date. We will adjust the minimum
quarterly distribution for the period from the closing of the offering through
June 30, 2002, based on the actual length of the period.
DEFINITION OF AVAILABLE CASH. We define available cash in the glossary, and
it generally means, for each fiscal quarter, all cash on hand at the end of the
quarter:
- less the amount of cash that our general partner determines in its
reasonable discretion is necessary or appropriate to:
- provide for the proper conduct of our business;
- comply with applicable law, any of our debt instruments, or other
agreements; or
- provide funds for distributions to our unitholders and to our general
partner for any one or more of the next four quarters;
- plus all cash on hand on the date of determination of available cash for
the quarter resulting from working capital borrowings made after the end
of the quarter. Working capital borrowings are generally borrowings that
are made under our credit facility and in all cases are used solely for
working capital purposes or to pay distributions to partners.
INTENT TO DISTRIBUTE THE MINIMUM QUARTERLY DISTRIBUTION. We intend to
distribute to the holders of common units and subordinated units on a quarterly
basis at least the minimum quarterly distribution of $0.4375 per unit, or $1.75
per year, to the extent we have sufficient cash from our operations after
establishment of cash reserves and payment of fees and expenses, including
payments to our general partner. There is no guarantee, however, that we will
pay the minimum quarterly distribution on the common units in any quarter, and
we will be prohibited from making any distributions to unitholders if it would
cause an event of default, or an event of default is existing, under our credit
facility.
OPERATING SURPLUS AND CAPITAL SURPLUS
GENERAL. All cash distributed to unitholders will be characterized as
either "operating surplus" or "capital surplus." We distribute available cash
from operating surplus differently than available cash from capital surplus.
DEFINITION OF OPERATING SURPLUS. We define operating surplus in the
glossary, and for any period it generally means:
- our cash balance on the closing date of this offering; plus
- $20.0 million (as described below); plus
- all of our cash receipts after the closing of this offering, excluding
cash from borrowings that are not working capital borrowings, sales of
equity and debt securities and sales or other dispositions of assets
outside the ordinary course of business; plus
- working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for the quarter; less
- all of our operating expenditures after the closing of this offering,
including the repayment of working capital borrowings, but not the
repayment of other borrowings, and including maintenance capital
expenditures; less
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<Page>
- the amount of cash reserves that our general partner deems necessary or
advisable to provide funds for future operating expenditures.
DEFINITION OF CAPITAL SURPLUS. We also define capital surplus in the
glossary, and it will generally be generated only by:
- borrowings other than working capital borrowings;
- sales of debt and equity securities; and
- sales or other disposition of assets for cash, other than inventory,
accounts receivable and other current assets sold in the ordinary course
of business or as part of normal retirements or replacements of assets.
CHARACTERIZATION OF CASH DISTRIBUTIONS. We will treat all available cash
distributed as coming from operating surplus until the sum of all available cash
distributed since we began operations equals the operating surplus as of the
most recent date of determination of available cash. We will treat any amount
distributed in excess of operating surplus, regardless of its source, as capital
surplus. As reflected above, operating surplus includes $20.0 million in
addition to our cash balance on the closing date of this offering, cash receipts
from our operations and cash from working capital borrowings. This amount does
not reflect actual cash on hand at closing that is available for distribution to
our unitholders. Rather, it is a provision that will enable us, if we choose, to
distribute as operating surplus up to $20.0 million of cash we receive in the
future from non-operating sources, such as asset sales, issuances of securities,
and long-term borrowings, that would otherwise be distributed as capital
surplus. We do not anticipate that we will make any distributions from capital
surplus.
SUBORDINATION PERIOD
GENERAL. During the subordination period, which we define below and in the
glossary, the common units will have the right to receive distributions of
available cash from operating surplus in an amount equal to the minimum
quarterly distribution of $0.4375 per quarter, plus any arrearages in the
payment of the minimum quarterly distribution on the common units from prior
quarters, before any distributions of available cash from operating surplus may
be made on the subordinated units. The purpose of the subordinated units is to
increase the likelihood that during the subordination period there will be
available cash to be distributed on the common units.
DEFINITION OF SUBORDINATION PERIOD. We define the subordination period in
the glossary. The subordination period will extend until the first day of any
quarter beginning after June 30, 2007 that each of the following tests are met:
- distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
- the "adjusted operating surplus" (as defined below) generated during each
of the three consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and subordinated
units during those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
EARLY CONVERSION OF SUBORDINATED UNITS. Before the end of the subordination
period, 50% of the subordinated units, or up to 4,375,000 subordinated units,
may convert into common units on a
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<Page>
one-for-one basis immediately after the distribution of available cash to the
partners in respect of any quarter ending on or after:
- June 30, 2005 with respect to 25% of the subordinated units; and
- June 30, 2006 with respect to 25% of the subordinated units.
The early conversions will occur if at the end of the applicable quarter
each of the following occurs:
- distributions of available cash from operating surplus on the common units
and the subordinated units equal or exceed the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date;
- the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and subordinated
units during those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods; and
- there are no arrearages in payment of the minimum quarterly distribution
on the common units.
The second early conversion of the subordinated units may not occur, however,
until at least one year following the first early conversion of the subordinated
units.
DEFINITION OF ADJUSTED OPERATING SURPLUS. We define adjusted operating
surplus in the glossary and for any period it generally means:
- operating surplus generated with respect to that period; less
- any net increase in working capital borrowings with respect to that
period; less
- any net reduction in cash reserves for operating expenditures with respect
to that period not relating to an operating expenditure made with respect
to that period; plus
- any net decrease in working capital borrowings with respect to that
period; plus
- any net increase in cash reserves for operating expenditures with respect
to that period required by any debt instrument for the repayment of
principal, interest or premium.
Adjusted operating surplus is intended to reflect the cash generated from
operations during a particular period and therefore excludes net increases in
working capital borrowings and net drawdowns of reserves of cash generated in
prior periods.
EFFECT OF EXPIRATION OF THE SUBORDINATION PERIOD. Upon expiration of the
subordination period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders remove our
general partner other than for cause and units held by our general partner and
its affiliates are not voted in favor of such removal:
- the subordination period will end and each subordinated unit will
immediately convert into one common unit;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- the general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
31
<Page>
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter after the subordination period in the following manner:
- FIRST, 98% to the common unitholders, pro rata, and 2% to our general
partner until we distribute for each outstanding unit an amount equal to
the minimum quarterly distribution for that quarter;
- SECOND, 98% to the common unitholders, pro rata, and 2% to the general
partner, until we distribute for each outstanding common unit an amount
equal to any arrearages in payment of the minimum quarterly distribution
on the common units for any prior quarters during the subordination
period;
- THIRD, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until we distribute for each subordinated unit an amount
equal to the minimum quarterly distribution for that quarter; and
- THEREAFTER, in the manner described in "--Incentive Distribution Rights"
below.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus for any
quarter after the subordination period in the following manner:
- FIRST, 98% to all unitholders, pro rata, and 2% to the general partner,
until we distribute for each outstanding unit an amount equal to the
minimum quarterly distribution for that quarter; and
- THEREAFTER, in the manner described in "--Incentive Distribution Rights"
below.
INCENTIVE DISTRIBUTION RIGHTS
Incentive distribution rights represent the right to receive an increasing
percentage of quarterly distributions of available cash from operating surplus
after the minimum quarterly distribution and the target distribution levels have
been achieved. Our general partner currently holds the incentive distribution
rights but may transfer these rights separately from its general partner
interest, subject to restrictions in the partnership agreement.
If for any quarter:
- we have distributed available cash from operating surplus on each common
unit and subordinated unit in an amount equal to the minimum quarterly
distribution; and
- we have distributed available cash from operating surplus on each
outstanding common unit in an amount necessary to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution;
then we will distribute any additional available cash from operating surplus for
that quarter among the unitholders and our general partner in the following
manner:
- FIRST, 98% to all unitholders, pro rata, and 2% to our general partner,
until each unitholder receives a total of $0.4875 per unit for that
quarter (the "first target distribution");
- SECOND, 85% to all unitholders, pro rata, and 15% to our general partner,
until each unitholder receives a total of $0.5625 per unit for that
quarter (the "second target distribution");
- THIRD, 75% to all unitholders, pro rata, and 25% to our general partner,
until each unitholder receives a total of $0.6875 per unit for that
quarter (the "third target distribution");
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<Page>
- THEREAFTER, 50% to all unitholders, pro rata, and 50% to our general
partner.
In each case, the amount of the target distribution set forth above is exclusive
of any distributions to common unitholders to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution.
PERCENTAGE ALLOCATIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AND HYPOTHETICAL
ANNUALIZED YIELD
The following table illustrates the percentage allocations of the additional
available cash from operating surplus between the unitholders and our general
partner up to the various target distribution levels and a hypothetical
annualized percentage yield to be realized by a unitholder at each target
distribution level. For purposes of the following table, we calculated the
annualized percentage yield on a pretax basis assuming that:
- the common unit was purchased at an amount equal to the assumed initial
public offering price of $20.00 per common unit;
- we distributed each quarter during the first year following the investment
the amount set forth under the column "Total Quarterly Distribution Target
Amount;" and
- the quarterly distribution amounts shown do not include any common unit
arrearages.
The amounts set forth under "Marginal Percentage Interest in Distributions" are
the percentage interests of our general partner and the unitholders in any
available cash from operating surplus we distribute up to and including the
corresponding amount in the column "Total Quarterly Distribution Target Amount,"
until available cash from operating surplus we distribute reaches the next
target distribution level, if any. The percentage interests shown for the
unitholders and our general partner for the minimum quarterly distribution are
also applicable to quarterly distribution amounts that are less than the minimum
quarterly distribution.
<Table>
<Caption>
MARGINAL PERCENTAGE
INTEREST IN
DISTRIBUTIONS
----------------------
TOTAL QUARTERLY DISTRIBUTION GENERAL
TARGET AMOUNT HYPOTHETICAL ANNUALIZED YIELD UNITHOLDERS PARTNER
---------------------------- ----------------------------- ----------- --------
Minimum Quarterly
Distribution.................. $0.4375 8.75% 98% 2%
First Target Distribution....... up to $0.4875 up to 9.75% 98% 2%
Second Target Distribution...... above $0.4875 up to $0.5625 above 9.75% up to 11.25% 85% 15%
Third Target Distribution....... above $0.5625 up to $0.6875 above 11.25% up to 13.75% 75% 25%
Thereafter...................... above $0.6875 above 13.75% 50% 50%
</Table>
DISTRIBUTIONS FROM CAPITAL SURPLUS
HOW DISTRIBUTIONS FROM CAPITAL SURPLUS WILL BE MADE. We will make
distributions of available cash from capital surplus, if any, in the following
manner:
- FIRST, 98% to all unitholders, pro rata, and 2% to our general partner,
until we distribute for each common unit that was issued in this offering
an amount of available cash from capital surplus equal to the initial
public offering price;
- SECOND, 98% to the common unitholders, pro rata, and 2% to our general
partner, until we distribute for each common unit an amount of available
cash from capital surplus equal to any unpaid arrearages in payment of the
minimum quarterly distribution on the common units; and
- THEREAFTER, we will make all distributions of available cash from capital
surplus as if they were from operating surplus.
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<Page>
EFFECT OF A DISTRIBUTION FROM CAPITAL SURPLUS. The partnership agreement
treats a distribution of capital surplus as the repayment of the initial unit
price from this initial public offering, which is a return of capital. The
initial public offering price less any distributions of capital surplus per unit
is referred to as the "unrecovered initial unit price." Each time a distribution
of capital surplus is made, the minimum quarterly distribution and the target
distribution levels will be reduced in the same proportion as the corresponding
reduction in the unrecovered initial unit price. Because distributions of
capital surplus will reduce the minimum quarterly distribution, after any of
these distributions are made, it may be easier for our general partner to
receive incentive distributions and for the subordinated units to convert into
common units. Any distribution of capital surplus before the unrecovered initial
unit price is reduced to zero, however, cannot be applied to the payment of the
minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a unit issued in this offering in an
amount equal to the initial unit price, we will reduce the minimum quarterly
distribution and the target distribution levels to zero. We will then make all
future distributions from operating surplus, with 50% being paid to the holders
of units, 48% to the holders of the incentive distribution rights and 2% to our
general partner.
ADJUSTMENT TO THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to adjusting the minimum quarterly distribution and target
distribution levels to reflect a distribution of capital surplus, if we combine
our units into fewer units or subdivide our units into a greater number of
units, we will proportionately adjust:
- the minimum quarterly distribution;
- target distribution levels;
- unrecovered initial unit price;
- the number of common units issuable during the subordination period
without a unitholder vote; and
- the number of common units into which a subordinated unit is convertible.
For example, if a two-for-one split of the common units should occur, the
minimum quarterly distribution, the target distribution levels and the
unrecovered initial unit price would each be reduced to 50% of its initial
level. We will not make any adjustment by reason of the issuance of additional
units for cash or property.
In addition, if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, we will reduce the minimum quarterly distribution and the target
distribution levels by multiplying the same by one minus the sum of the highest
marginal federal corporate income tax rate that could apply and any increase in
the effective overall state and local income tax rates. For example, if we
became subject to a maximum marginal federal, and effective state and local
income tax rate of 38%, then the minimum quarterly distribution and the target
distributions levels would each be reduced to 62% of their previous levels.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
If we dissolve in accordance with the partnership agreement, we will sell or
otherwise dispose of our assets in a process called liquidation. We will first
apply the proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and our general partner, in
accordance with their capital account balances, as adjusted to reflect any gain
or loss upon the sale or other disposition of our assets in liquidation.
34
<Page>
The allocations of gain and loss upon liquidation are intended, to the
extent possible, to entitle the holders of outstanding common units to a
preference over the holders of outstanding subordinated units upon our
liquidation, to the extent required to permit common unitholders to receive
their unrecovered initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid arrearages in
payment of the minimum quarterly distribution on the common units. However,
there may not be sufficient gain upon our liquidation to enable the holders of
common units to fully recover all of these amounts, even though there may be
cash available for distribution to the holders of subordinated units. Any
further net gain recognized upon liquidation will be allocated in a manner that
takes into account the incentive distribution rights of our general partner.
MANNER OF ADJUSTMENTS FOR GAIN. The manner of the adjustment for gain is
set forth in the partnership agreement. If our liquidation occurs before the end
of the subordination period, we will allocate any gain to the partners in the
following manner:
- FIRST, to our general partner and the holders of units who have negative
balances in their capital accounts to the extent of and in proportion to
those negative balances;
- SECOND, 98% to the common unitholders, pro rata, and 2% to our general
partner until the capital account for each common unit is equal to the sum
of:
(1) the unrecovered initial unit price; plus
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs; plus
(3) any unpaid arrearages in payment of the minimum quarterly
distribution;
- THIRD, 98% to the subordinated unitholders, pro rata, and 2% to our
general partner until the capital account for each subordinated unit is
equal to the sum of:
(1) the unrecovered initial unit price; and
(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;
- FOURTH, 98% to all unitholders, pro rata, and 2% to the general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the first target distribution per unit over
the minimum quarterly distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the minimum quarterly
distribution per unit that we distributed 98% to the unitholders, pro
rata, and 2% to the general partner, for each quarter of our
existence;
- FIFTH, 85% to all unitholders, pro rata, and 15% to our general partner,
pro rata, until we allocate under this paragraph an amount per unit equal
to:
(1) the sum of the excess of the second target distribution per unit over
the first target distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the first target distribution per
unit that we distributed 85% to the units, pro rata, and 15% to our
general partner, pro rata, for each quarter of our existence;
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- SIXTH, 75% to all unitholders, pro rata, and 25% to our general partner,
until we allocate under this paragraph an amount per unit equal to:
(1) the sum of the excess of the third target distribution per unit over
the second target distribution per unit for each quarter of our
existence; less
(2) the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the second target distribution
per unit that we distributed 75% to the unitholders, pro rata, and
25% to our general partner for each quarter of our existence;
- THEREAFTER, 50% to all unitholders, pro rata, and 50% to our general
partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
clause (3) of the second bullet point above and all of the third bullet point
above will no longer be applicable.
MANNER OF ADJUSTMENTS FOR LOSSES. Upon our liquidation, we will generally
allocate any loss to our general partner and the unitholders in the following
manner:
- FIRST, 98% to holders of subordinated units in proportion to the positive
balances in their capital accounts and 2% to our general partner until the
capital accounts of the subordinated unitholders have been reduced to
zero;
- SECOND, 98% to the holders of common units in proportion to the positive
balances in their capital accounts and 2% to our general partner until the
capital accounts of the common unitholders have been reduced to zero; and
- THEREAFTER, 100% to our general partner.
If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
all of the first priority above will no longer be applicable.
ADJUSTMENTS TO CAPITAL ACCOUNTS. We will make adjustments to capital
accounts upon the issuance of additional units. In doing so, we will allocate
any unrealized and, for tax purposes, unrecognized gain or loss resulting from
the adjustments to the unitholders and our general partner in the same manner as
we allocate gain or loss upon liquidation. In the event that we make positive
adjustments to the capital accounts upon the issuance of additional units, we
will allocate any later negative adjustments to the capital accounts resulting
from the issuance of additional units or upon our liquidation in a manner that
results, to the extent possible, in the general partner's capital account
balances equaling the amount that they would have been if no earlier positive
adjustments to the capital accounts had been made.
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CASH AVAILABLE FOR DISTRIBUTION
We intend to pay each quarter, to the extent we have sufficient available
cash from operating surplus, the minimum quarterly distribution of $0.4375 per
unit, or $1.75 per year, on all the common units and subordinated units.
Available cash for any quarter will consist generally of all cash on hand at the
end of that quarter, plus working capital borrowings after the end of the
quarter, as adjusted for reserves. Operating surplus generally consists of cash
on hand at the closing of this offering, cash generated from operations after
deducting related expenditures (including the general partner's fees and
expenses) and other items, plus working capital borrowings after the end of the
quarter, plus $20.0 million. The definitions of available cash and operating
surplus are in the glossary.
The amounts of available cash from operating surplus needed to pay the
minimum quarterly distribution for one quarter and for four quarters on the
common units, the subordinated units, and the general partner interest to be
outstanding immediately after the transactions are approximately:
<Table>
<Caption>
ONE QUARTER FOUR QUARTERS
------------ --------------
(DOLLARS IN THOUSANDS)
Common units........................................ $3,828 $15,312
Subordinated units.................................. 3,828 15,312
2% general partner interest......................... 156 624
------ -------
Total............................................. $7,812 $31,248
====== =======
</Table>
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS WOULD HAVE BEEN SUFFICIENT TO
PAY THE MINIMUM QUARTERLY DISTRIBUTION ON ALL UNITS.
If we had completed the transactions contemplated in this prospectus on
January 1, 2001, pro forma available cash from operating surplus generated
during 2001 would have been approximately $48.9 million. This amount would have
been sufficient to allow us to pay the full minimum quarterly distribution on
the common units, the subordinated units and the related distribution on the
general partner interest during this period.
We derived the amounts of pro forma available cash from operating surplus
shown above from our pro forma financial statements in the manner described in
Appendix D. The pro forma adjustments are based upon currently available
information and specific estimates and assumptions. The pro forma financial
statements do not purport to present our results of operations had the
transactions contemplated in this prospectus actually been completed as of the
dates indicated. In addition, available cash from operating surplus as defined
in the partnership agreement is a cash accounting concept, while our pro forma
financial statements have been prepared on an accrual basis. As a result, you
should only view the amount of pro forma available cash from operating surplus
as a general indication of the amount of available cash from operating surplus
that we might have generated had Dynegy Energy Partners been formed in earlier
periods.
Pro forma available cash from operating surplus has not been reduced to
reflect expected incremental direct general and administrative expenses of
approximately $1.4 million, primarily related to the operation of our
partnership as a separate public entity. Estimated incremental expenses relating
to the operation of our partnership as a separate legal entity include costs
associated with tax return preparation, audit fees, annual and quarterly reports
to unitholders, investor relations and incremental insurance requirements.
WE BELIEVE WE WILL HAVE SUFFICIENT AVAILABLE CASH FROM OPERATING SURPLUS
FOLLOWING THE OFFERING TO PAY THE MINIMUM QUARTERLY DISTRIBUTION ON ALL UNITS
THROUGH JUNE 30, 2003.
We believe that, following completion of this offering, we will have
sufficient available cash from operating surplus to allow us to make the full
minimum quarterly distribution on all the outstanding
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units for each quarter through June 30, 2003. Our belief is based on a number of
specific assumptions, including the following:
- Volumes fractionated at the Cedar Bayou fractionator will decrease by
approximately 13% from the previous two-year average of 188,000 barrels
per day due to (a) a one time shutdown for completion of a purity ethane
capital improvement project and (b) reduced volumes of NGLs from key
natural gas producing regions due to changes in forecasted natural gas and
NGL prices.
- The average fractionation margin per gallon will be no less than 85% of
the average fractionation margin per gallon during 2001 after giving
effect to the completion of the purity ethane capital improvement project
in the fourth quarter of 2002. In addition, we assume current recovery of
variable costs attributable to fuel and energy.
- Leased capacity and throughput volumes at our Mont Belvieu underground
storage facility will decline by approximately 10% compared to 2001
principally as a result of lower throughput volumes at the Cedar Bayou
fractionator and lower forecasted petrochemical demand for NGL products.
- The fees for storage and throughput at our Mont Belvieu underground
storage facility will generally remain consistent with 2001 levels.
- Revenues for the Galena Park marine terminal will increase by
approximately 10% compared to 2001 due to new third party business.
- Transportation volumes will increase by approximately 5% compared to 2001
due to the expansion of our truck fleet, more than offsetting expected
declines in our barge activity.
- The expiration of two service contracts will result in an overall decline
in transportation operating margin of approximately $3 million compared to
2001. Excluding this non-recurring business, transportation operating
margin will remain consistent with 2001 levels.
- Margins from our distribution and marketing services operations, which are
generally dependent on the relative price of mixed NGLs and NGL products
we purchase compared to the prices of NGL products we sell, will decline
no more than 20% from 2001 levels due to lower forecasted petrochemical
demand for NGL products.
- Indirect general and administrative expenses allocated to us will not
exceed $2 million per year in accordance with the omnibus agreement.
- Other general and administrative expenses will increase by approximately
$2 million from 2001 levels.
- Maintenance capital expenditures will be approximately $8.5 million during
2002 and 2003.
- Capital projects planned for the Cedar Bayou fractionator and Galena Park
marine terminal will be completed when expected at a budgeted cost of
$13.7 million.
- No material incidents will occur that disrupt our operations.
- Market, regulatory, insurance and overall economic conditions will not
change substantially.
Although we believe our assumptions are reasonable, our assumptions relate
to matters that are not within our control and cannot be predicted with any
degree of certainty. If our assumptions are not realized, the actual available
cash from operating surplus that we generate could be substantially less than
that currently expected and could, therefore, be insufficient to permit us to
make cash distributions at the levels described above. Accordingly, we cannot
assure you that we will make distributions of the minimum quarterly distribution
or any other amounts. Please read "Risk Factors--Risks Inherent in Our
Business."
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table shows summary historical financial and operating data of
the Dynegy Energy Partners Predecessor and pro forma financial data of Dynegy
Energy Partners, in each case for the periods and as of the dates indicated. The
summary historical financial data for the Dynegy Energy Partners Predecessor for
1999, 2000 and 2001 are derived from the audited financial statements of the
Dynegy Energy Partners Predecessor. The summary historical financial data for
the Dynegy Energy Partners Predecessor for 1997 and 1998 are derived from the
unaudited financial statements of the Dynegy Energy Partners Predecessor.
The pro forma financial statements of Dynegy Energy Partners L.P. give pro
forma effect to:
- the contributions of certain assets and liabilities of the Dynegy Energy
Partners Predecessor to our operating partnership;
- the completion of this offering;
- initial borrowings of $125 million under our new $275 million bank credit
facility;
- the assignment of third party NGL exchange agreements from Dynegy
Midstream to us;
- the execution of various commercial agreements with Dynegy Midstream; and
- the execution of an omnibus agreement with Dynegy Inc. and some of its
affiliates in connection with the closing of this offering.
The summary pro forma financial and operating data for 2001 are derived from
the unaudited pro forma financial statements. The pro forma balance sheet
assumes the offering and related transactions occurred as of December 31, 2001,
and the pro forma statement of income assumes the offering and related
transactions occurred on January 1, 2001.
We define EBITDA as net income plus depreciation and amortization expense
and interest expense. EBITDA provides additional information for evaluating our
ability to make the minimum quarterly distribution and is presented solely as a
supplemental measure. You should not consider EBITDA as an alternative to net
income, cash flows from operations, or any other measure of financial
performance presented in accordance with generally accepted accounting
principles. Our EBITDA may not be comparable to EBITDA or similarly titled
measures of other entities as other entities may not calculate EBITDA in the
same manner as we do.
Maintenance capital expenditures represent capital expenditures to replace
partially or fully depreciated assets or to maintain the existing operating
capacity of our assets and extend their useful lives. Expansion capital
expenditures represent capital expenditures to expand the existing operating
capacity of our assets, whether through construction or acquisition. Repair and
maintenance expenditures associated with existing assets that are minor in
nature and do not extend the useful life of existing assets are treated as
operating expenses as incurred.
We derived the information in the following table from, and that information
should be read together with and is qualified in its entirety by reference to,
the historical and pro forma financial statements and the accompanying notes
included elsewhere in this prospectus. The table should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<Table>
<Caption>
DYNEGY ENERGY
PARTNERS L.P.
PRO FORMA
DYNEGY ENERGY PARTNERS PREDECESSOR--HISTORICAL --------------
---------------------------------------------------------------- YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------------------------- --------------
1997 1998 1999 2000 2001 2001
----------- ----------- ---------- ---------- ---------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................ $2,783,249 $1,824,297 $2,549,181 $4,251,457 $3,888,199 $3,897,299
Cost of sales........................... 2,759,504 1,742,374 2,444,687 4,148,001 3,792,274 3,804,774
---------- ---------- ---------- ---------- ---------- ----------
Operating margin........................ $ 23,745 $ 81,923 $ 104,494 $ 103,456 $ 95,925 $ 92,525
Depreciation and amortization........... 12,024 13,886 14,016 17,288 18,578 18,578
Impairment charge....................... 10,603 -- -- -- -- --
General and administrative expenses..... 14,715 18,138 23,883 22,045 24,508 20,852
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)................. $ (13,597) $ 49,899 $ 66,595 $ 64,123 $ 52,839 $ 53,095
Equity in earnings (loss) of an
unconsolidated affiliate.............. (149) (9) 193 138 -- --
Interest expense........................ (27,101) (22,674) (22,012) (22,701) (19,534) (8,617)
Other income (expense), net............. 3,478 28 (630) (1,397) (831) (831)
Minority interest in income of a
subsidiary............................ -- (1,911) (1,942) (1,183) (2,118) (2,118)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....................... $ (37,369) $ 25,333 $ 42,204 $ 38,980 $ 30,356 $ 41,529
========== ========== ========== ========== ========== ==========
Net income per unit..................... $ 2.33
==========
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................ $ 587,766 $ 480,341 $ 646,362 $ 946,755 $ 610,989 $ 626,689
Payable to affiliates/Long-term debt.... 336,563 314,135 317,789 316,980 229,600 125,000
Combined equity/partners' capital....... 1,559 26,714 68,918 107,898 137,546 257,846
CASH FLOW DATA:
Net cash flow provided by (used in):
Operating activities.................. $ (11,121) $ (5,194) $ 8,734 $ (1,271) $ 9,512
Investing activities.................. -- (2,356) (6,993) (886) (4,254)
Financing activities.................. -- 13,221 (2,739) (1,667) (2,094)
OTHER FINANCIAL DATA:
EBITDA.................................. $ 12,359 $ 61,893 $ 78,232 $ 78,969 $ 68,468 $ 68,724
Maintenance capital expenditures........ 5,530 3,298 3,429 8,367 11,172 11,172
Expansion capital expenditures.......... 6,864 5,745 7,512 16,658 7,501 7,501
Total capital expenditures............ 12,394 9,043 10,941 25,025 18,673 18,673
OPERATING DATA (MBBLS/DAY) (UNAUDITED):
Volumes fractionated.................... 173 187 189 189
Volumes purchased from:
Dynegy Midstream...................... 112 94 80 80
ChevronTexaco......................... 77 71 63 63
Other................................. 274 303 344 344
---------- ---------- ---------- ----------
TOTAL................................. 463 468 487 487
========== ========== ========== ==========
Volumes sold:
Refinery services..................... 35 41 41 41
Wholesale propane..................... 48 53 51 51
Marketing............................. 374 368 398 398
---------- ---------- ---------- ----------
TOTAL................................. 457 462 490 490
========== ========== ========== ==========
</Table>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with the historical financial statements
included in this prospectus. For more detailed information regarding the basis
of presentation for the following information, you should read the notes to the
historical financial statements included in this prospectus.
INTRODUCTION
We were recently formed by Dynegy Inc. to engage in the businesses of
fractionating, storing, terminalling, transporting, distributing and marketing
NGLs. We own a collection of physical assets concentrated along the Texas Gulf
Coast in and adjacent to Mont Belvieu, Texas. We also have significant NGL
transportation and logistics assets located throughout the United States that
provide strategic support for our distribution and marketing services operations
and enable us to provide transportation and logistics services to third parties.
Our vertically integrated assets enable us to generate revenues throughout all
facets of the NGL business, including the transportation of mixed NGLs from
production areas, the fractionation of mixed NGLs into NGL products, the
provision of storage and terminalling services and the distribution and
marketing of NGL products to end-users.
Our assets and operations are currently held in various limited partnerships
and limited liability companies owned by affiliates of Dynegy Inc. and are
collectively referred to as the Dynegy Energy Partners Predecessor. These assets
and operations, including the related liabilities, will be contributed to our
operating partnership upon the closing of this offering. The following
discussion has been prepared as if the contribution of these assets and
operations had occurred and we had operated as a stand-alone business throughout
the periods presented.
Certain of Dynegy Inc.'s NGL assets and operations will be retained by
Dynegy Midstream, which is an indirect, wholly-owned subsidiary of Dynegy Inc.
The assets and operations to be retained by Dynegy Midstream include interests
in NGL gathering and processing facilities, pipelines, storage facilities and
fractionation facilities, which are primarily located in Louisiana, Texas and
New Mexico. The assets and operations to be retained by Dynegy Midstream are not
included in the audited financial statements of our predecessor. The audited
financial statements of our predecessor and the following discussion present
only those businesses that will be contributed to our operating partnership as
if they had existed as a single entity separate from Dynegy Inc. and Dynegy
Midstream during the periods presented.
We have three reportable operating segments: Texas Gulf Coast Facilities,
Transportation and Logistics, and Distribution and Marketing Services. Our
reportable segments are generally organized according to the type of services
rendered and location of assets.
TEXAS GULF COAST FACILITIES. Our Texas Gulf Coast Facilities segment
includes the Cedar Bayou fractionator, our Mont Belvieu underground storage
facility, our Galena Park marine terminal and our Houston-area pipeline
infrastructure, which interconnects these facilities and provides connections to
end users. This segment constitutes all of our fractionation, storage and
terminalling operations in and around the key NGL market area of Mont Belvieu,
Texas.
We operate and own an 88% effective economic interest in the Cedar Bayou
fractionator. All operating results discussed herein reflect 100% of the assets
and operating results associated with this fractionator. Our partner's 12%
effective economic interest in this fractionator is reflected as minority
interest in our combined balance sheets and as minority interest in the income
of a subsidiary in our combined statements of operations. The Cedar Bayou
fractionator generally earns fees based on the volumes of mixed NGLs it
fractionates pursuant to tolling arrangements with the owners of the mixed NGLs.
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Fractionation contracts typically include a base fee per gallon and also
include an adjustment for changes in certain variable costs, such as energy.
Energy costs fluctuate with throughput levels and the relative price of natural
gas and power consumed as energy in operations. Historically, our fractionation
contracts have provided for quarterly adjustments in fees to recover changes in
these variable costs. During periods of rising energy prices, the energy
component of the fee we charge to customers is less than then prevailing energy
prices and during periods of falling energy prices, the energy component of the
fee we charge to customers is greater than then prevailing energy prices. Where
possible, we endeavor to enter into contracts with monthly fee adjustments in
order to more timely reflect changes in variable costs. Depending on the success
of our contracting efforts, we expect changes in energy costs to have a less
significant impact on our operating margins received from fractionation
activities in the future. Other operating costs and expenses incurred in our
fractionation operations include fixed costs related to routine maintenance as
well as costs associated with field and support personnel.
Operating margins related to our fractionation operations are also affected
by the difference between the price of purity ethane, which is a highly
concentrated form of ethane, and the price of ethane contained in ethane-propane
mix. We produce ethane-propane mix at the Cedar Bayou fractionator, while other
competing fractionators at Mont Belvieu produce purity ethane. As a competitive
measure, some of our contracts provide that we compensate customers for the
difference between the price of purity ethane and the price of ethane contained
in ethane-propane mix. Therefore, costs associated with our fractionation
operations increase as the price of purity ethane increases relative to the
price of ethane in ethane-propane mix. We are planning capital expenditures in
2002 at the Cedar Bayou fractionator that will enable the facility to produce
approximately 25,000 barrels of purity ethane in order to mitigate a portion of
this variable cost. These capital expenditures will be funded by a portion of
the proceeds received from the offering.
Our Mont Belvieu underground storage facility and our Galena Park marine
terminal generate revenues from fees charged to customers both for the lease of
storage space and the receipt and delivery of mixed NGLs and NGL products.
Operating costs and expenses incurred in our operations at these facilities
include energy costs, costs related to routine maintenance as well as costs
associated with field and support personnel. Energy costs fluctuate with
throughput levels and the relative price of natural gas and power consumed as
energy in operations. We may also enter into derivative financial instruments to
hedge a portion of our exposure to changes in natural gas prices with respect to
energy consumed in our operations.
TRANSPORTATION AND LOGISTICS. We operate or manage significant NGL
transportation and logistics assets located along the Texas Gulf Coast and
throughout the continental United States, including propane distribution
terminals, pipeline injection terminals, barges, rail cars and tank trucks. Our
transportation infrastructure supports the product delivery requirements of our
distribution and marketing services business and enables us to provide
transportation services to customers for a fee. Our transportation and logistics
segment includes an investment in a barge transportation company, in which we
owned a 25% interest through May 2000, at which time we purchased the remaining
75% interest in the company for $11.0 million.
DISTRIBUTION AND MARKETING. Our distribution and marketing services segment
includes refinery services, wholesale propane marketing and other purchases and
sales of mixed NGLs and NGL products. In 2001, we sold an average of 490,000
barrels per day of mixed NGLs and NGL products, 16% of which we purchased from
Dynegy Midstream and 13% of which we purchased from ChevronTexaco.
In connection with our refinery services operations, we purchase NGL
products from, and resell NGL products to, refinery customers such as
ChevronTexaco. NGL product purchases typically consist of propane and butane
produced at gas plants or at refineries as by-products of the crude oil refining
process. We resell these NGL products and realize a margin equal to a fixed fee
per gallon or a
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percentage of the resale price, which is generally subject to a minimum fee per
gallon. We also supply NGL products, primarily butane, to refineries for use in
the refining process. We purchase these NGL products and resell them to some of
our refinery customers for a margin equal to a fixed fee per gallon or a
percentage of the resale price.
Our wholesale propane marketing operations include the sale of propane and
related logistical services to retailers, end-users and multi-state distributors
for a fixed price or for the posted price at the time of delivery. Our propane
supply comes from our refinery services operations and from our other
distribution and marketing operations.
In our other distribution and marketing services business, we enter into
contracts to purchase mixed NGLs and NGL products from NGL producers and to sell
mixed NGLs and NGL products to end-users and other marketing companies. We
generally purchase mixed NGLs and NGL products from producers at a monthly
pricing index less applicable fractionation, transportation and marketing fees.
We resell the products purchased from NGL producers to petrochemical
manufacturers, refineries and other marketing companies. For example, one of the
contracts we will enter into with Dynegy Midstream at the closing of this
offering will obligate Dynegy Midstream to sell all of its mixed NGLs and NGL
products to us for the next 20 years. This contract will provide for the
purchase of mixed NGLs and NGL products at an OPIS index base price less
adjustments for transportation and fractionation costs and a distribution and
marketing services fee equal to a percentage of the base price, subject to a
minimum fee per gallon.
In addition to margins that we earn from purchasing and selling NGL products
pursuant to contracts, we also earn a margin by purchasing and selling NGL
products in the spot market and in the forward market to support our physical
product sales requirements. Through these transactions we seek to maintain a
position that is substantially balanced between our physical inventories and
purchase obligations as compared to our sales commitments. As part of our risk
management strategy, we also enter into floating price collar arrangements and
financial swaps to manage some of our exposure to commodity price risk. We
generally purchase NGL products for which we have a market and structure our
sales contracts so that NGL price fluctuations do not significantly affect the
margins we receive. We do not typically acquire and hold inventory or derivative
financial instruments for the purpose of speculating on commodity price changes
that might expose us to indeterminable losses. In the past, however, we have
executed derivative financial instruments within guidelines established by
Dynegy Inc.'s Board of Directors that were not considered to be a hedge.
Subsequent to the offering and related transactions, we expect that
substantially all of our derivative financial instruments will be entered into
as hedging devices in an effort to manage a portion of our exposure to commodity
price risk or will qualify as normal purchases or normal sales in accordance
with applicable accounting guidelines.
The profitability of our distribution and marketing services segment depends
on the volume of NGL products purchased and sold, the level of marketing fees
charged to our refinery services customers and other customers and the margins
associated with selling NGL products at a price in excess of the cost incurred
in acquiring the NGL products. The difference between the cost of NGL products
and sales prices typically changes in periods of rising or falling NGL products
prices. When market prices of NGL products rise or fall, sales prices and
related revenues are directly affected. Our inventory costs and corresponding
cost of sales generally increase or decrease at a slower rate than market prices
because we use an average cost method of accounting for our NGL products
inventory. During times of falling market prices, our operating margins are
reduced as a result of our sales prices declining faster than our average
inventory costs. In times of rising market prices, the opposite effect occurs as
our average inventory costs increase at a slower rate than the market prices for
NGL products, thereby increasing our operating margins.
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SIGNIFICANT ACCOUNTING POLICIES. We have identified three accounting
policies that require a significant amount of judgment and are considered to be
important to the portrayal of our financial position and results of operations.
These policies include the accounting for long-lived assets, the evaluation of
counterparty credit risk and revenue recognition.
The carrying values of long-lived assets are reviewed in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Our long-lived assets consist of our fractionation, storage,
terminalling and transportation assets. Based on our reviews of these carrying
values of our long-lived assets in accordance with SFAS No. 121, no impairments
were incurred during 1999, 2000 and 2001.
Substantially all of our accounts receivable at December 31, 2001, result
from billings to entities engaged in industrial and petrochemical businesses.
These industry concentrations have the potential to impact our overall exposure
to credit risk, either positively or negatively, as our customer base may be
similarly affected by changes in economic, industry, weather or other
conditions. Receivables are generally not collateralized; however, we believe
the credit risk posed by industry concentration is generally offset by the
creditworthiness of our customer base.
We recognize revenues from our fractionation, storage, terminalling and
transportation activities using the accrual method of accounting as volumes are
fractionated, stored and transported in accordance with contractual terms. The
accrual method of accounting is also used for substantially all of our NGL
distribution and marketing services activities, with revenues from product sales
and marketing services recognized when title passes to a customer or when the
service is performed. In connection with our adoption of Statement of Financial
Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001, we adopted the fair value model of
accounting for certain of our distribution and marketing services activities as
required by SFAS No. 133.
Our forward purchase and sales contracts qualify as and are designated as
normal purchases or sales within the guidelines provided by SFAS No. 133 and are
accounted for using traditional accrual accounting. We utilize our physical
assets throughout our distribution and marketing operations and substantially
all of our purchases and sales made in connection with our distribution and
marketing services operations result in the physical delivery of commodities to
our customers. We utilize our assets in connection with our distribution and
marketing services operations through the transportation of mixed NGLs from
production areas, the fractionation of mixed NGLs into NGL products, the
utilization of storage and terminalling services and the transportation of NGL
products to end users. Our short-term financial instrument contracts entered
into to hedge fuel requirements in order to minimize the risk of fluctuations in
natural gas prices are designated as cash flow hedges. The effective portion of
changes in the fair value of these transactions is recorded in other
comprehensive income, which is a component of equity, until the related hedged
items impact earnings. Any ineffective portion of the hedge, if any, is reported
in earnings immediately. Our short-term financial swaps and options entered into
to manage some of our exposure to natural gas and NGL products commodity price
risk are not considered to be a hedge and are recorded at fair-value through
current earnings with subsequent changes in fair value also recorded through
current earnings.
GENERAL AND ADMINISTRATIVE EXPENSES. Dynegy Inc. allocates general and
administrative expenses to its subsidiaries based on a formula that considers
payroll expenses and net book value of property, plant and equipment. Indirect
general and administrative expenses relate to centralized corporate functions
that we share with Dynegy Inc. and its affiliates, including, certain legal,
accounting, treasury, information technology, insurance, administration of
employee benefit plans and other corporate services. All direct general and
administrative expenses will be charged to us as incurred. During
December 2001, Dynegy Inc. implemented a policy whereby all of its subsidiaries
began prepaying
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general and administrative expenses on a quarterly basis. In connection with
this policy, we prepaid approximately $7.2 million of our general and
administrative expenses to Dynegy Inc. during December 2001 associated with the
first three months of 2002. These costs are reflected as prepayments in our
consolidated balance sheet as of December 31, 2001. In connection with this
offering, we will enter into an agreement with Dynegy Inc. that will provide
for, among other things, a five-year, $2 million per year cap on the indirect
general and administrative expenses that can be charged to us, subject to an
escalator and adjustments for expansions of our operations. During 2001, the
amount of this allocation of indirect general and administrative expenses was
approximately $5.6 million.
RESULTS OF OPERATIONS--DYNEGY ENERGY PARTNERS PREDECESSOR
Our management evaluates segment performance on the basis of operating
margin, which is derived by subtracting cost of sales from revenues. The
following table sets forth operating margin by segment, combined operating
margin and net income and certain operating data for the Dynegy Energy Partners
Predecessor for the years ended December 31, 1999, 2000 and 2001. Average NGL
prices are calculated based on the historical composition of our mixed NGL
stream and, accordingly, may not be the same as reported by others.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
(IN THOUSANDS)
FINANCIAL DATA:
Operating margin by segment:
Texas Gulf Coast Facilities............................... $ 31,926 $ 26,004 $ 29,094
Transportation and Logistics.............................. 6,758 9,428 9,015
Distribution and Marketing Services....................... 65,810 68,024 57,816
-------- -------- --------
Combined operating margin............................... 104,494 103,456 95,925
Depreciation and amortization............................. 14,016 17,288 18,578
General and administrative expenses....................... 23,883 22,045 24,508
-------- -------- --------
Operating income........................................ 66,595 64,123 52,839
Equity in earnings of an unconsolidated affiliate......... 193 138 --
Affiliate interest expense................................ (22,012) (22,701) (19,534)
Other expenses, net....................................... (630) (1,397) (831)
Minority interest in income of a subsidiary............... (1,942) (1,183) (2,118)
-------- -------- --------
Net income.............................................. $ 42,204 $ 38,980 $ 30,356
======== ======== ========
OPERATING DATA (MBBLS/DAY):
Volumes fractionated...................................... 173 187 189
Refinery services volumes sold............................ 35 41 41
Wholesale propane volumes sold............................ 48 53 51
Marketing volumes sold.................................... 374 368 398
COMMODITY PRICE DATA:
Average NGL price ($/Gal)................................. $ 0.34 $ 0.55 $ 0.45
Average natural gas price--Henry Hub
(First of Month) ($/MMBtu).............................. $ 2.29 $ 3.89 $ 4.26
</Table>
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Our combined revenues for the year ended December 31, 2001 were
$3.9 billion compared to $4.3 billion for the year ended December 31, 2000, a
decrease of $363.3 million, or 9%. Cost of sales
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for the year ended December 31, 2001 was $3.8 billion compared to $4.1 billion
for the year ended December 31, 2000, a decrease of $355.7 million, or 9%.
Operating margin for the year ended December 31, 2001 was $95.9 million compared
to $103.4 million for the year ended December 31, 2000, a decrease of
$7.5 million, or 7%.
TEXAS GULF COAST FACILITIES. Operating margin for the Texas Gulf Coast
Facilities segment was $29.1 million in 2001 compared to $26.0 million in 2000,
an increase of $3.1 million, or 12%. Operating margin for the Cedar Bayou
fractionator increased $8.9 million, from $14.2 million in 2000 to
$23.1 million in 2001, primarily due to a reduction in fuel consumption as a
result of the completion of several energy efficiency projects at the facility
coupled with quarterly fractionation fee adjustments designed to adjust for
prior quarter energy costs. Operating margins associated with the fractionation
facility were, to a lesser extent, negatively affected by costs associated with
an increase in the price of purity ethane relative to the price of ethane
contained in ethane-propane mix and increased operating costs associated with
higher electricity prices. Partially offsetting the increase in operating margin
related to the Cedar Bayou fractionator was a $1.4 million decrease in operating
margin at the Galena Park terminal and the Mont Belvieu storage facility. These
lower margins were primarily due to higher operating costs, including higher
electricity prices. Operating margin for the Texas Gulf Coast Facilities also
includes results associated with hedging instruments entered into to mitigate a
portion of our price risk related to our fuel consumption at the Cedar Bayou
fractionator. The impact of these hedging instruments increased operating margin
by $2.3 million in 2000 and decreased operating margin by $2.1 million in 2001.
TRANSPORTATION AND LOGISTICS. Operating margin for the Transportation and
Logistics segment was $9.0 million in 2001 compared to $9.4 million in 2000, a
decrease of $0.4 million, or 4%. The decrease was due to a non-recurring service
provided during 2000, which was completed in 2001.
DISTRIBUTION AND MARKETING SERVICES. Operating margin for the Distribution
and Marketing Services segment was $57.8 million in 2001 compared to
$68.0 million in 2000, a decrease of $10.2 million, or 15%. Operating margin for
the distribution and marketing services segment includes results related to
certain crude oil marketing activity in which we will no longer engage.
Excluding the results relating to such crude oil marketing activity, operating
margin for the Distribution and Marketing Services segment was $58.1 million in
2001 compared to $79.1 million in 2000, a decrease of $21.0 million, or 27%. The
following discussion of operating margin excludes the results attributable to
our crude oil marketing activity.
Operating margin associated with refinery services decreased by
approximately $0.7 million, from $10.0 million in 2000 to $9.3 million in 2001,
primarily as a result of the declining price environment. NGL product prices
averaged $0.45 per gallon during 2001 compared to an average of $0.55 per gallon
during 2000. Fees associated with refinery services contracts are generally
assessed based on a percentage of the resale price. Volumes associated with
refinery services remained relatively stable at approximately 41,000 barrels per
day.
Operating margin related to our wholesale propane marketing services
decreased by approximately $9.0 million, from $25.6 million in 2000 to
$16.5 million in 2001, primarily due to a significant decline in demand for
propane coupled with the declining price environment. The significant decline in
demand for propane was caused by the unusually mild winter season experienced
during 2001 compared to the unusually high demand for propane during 2000.
Volumes sold in connection with our wholesale propane marketing services
decreased to 51,000 barrels per day in 2001 from 53,000 barrels per day in 2000.
Propane product prices averaged $0.47 per gallon during 2001 compared to an
average of $0.58 per gallon during 2000.
Operating margin associated with our other distribution and marketing
services decreased approximately $11.3 million, from $43.5 million in 2000 to
$32.2 million in 2001, generally due to a
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combination of lower sales prices obtained in a declining price environment and
higher cost of sales as we sold higher average cost NGL product inventories. The
declining price environment also reduced our marketing fee from a percentage of
our base NGL product purchase price to the minimum fee per gallon under certain
of our contracts with NGL producers, such as Dynegy Midstream. The decline in
operating margin was also partially due to decreased volumes. Volumes received
under our contract with Dynegy Midstream decreased 9,700 barrels per day, from
82,400 in 2000 to 72,700 in 2001 due to Dynegy Midstream's divestiture during
2001 of non-core gas processing plants.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
ended December 31, 2001 was $18.6 million compared to $17.3 million for the year
ended December 31, 2000, an increase of $1.3 million, or 7%. The increase
related to capital expenditures incurred during 2001, including a major rework
program associated with our barge fleet and the completion of several energy
efficiency projects at the Cedar Bayou fractionator. We also completed a project
at our Mont Belvieu underground storage facility designed to increase the amount
of propane that can be transported by rail from the facility.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 2001 were $24.5 million compared to
$22.0 million for the year ended December 31, 2000, an increase of
$2.5 million, or 11%. The increase was due to increased indirect allocations
from Dynegy Inc., primarily associated with increased Dynegy Inc. headcount.
EQUITY IN EARNINGS OF AN UNCONSOLIDATED AFFILIATE. Equity in earnings of an
unconsolidated affiliate was $138,000 for the year ended December 31, 2000,
related to our 25% interest in the net income of a barge transportation company.
We purchased the remaining 75% interest in the company during May 2000, at which
time the company became a consolidated entity within our transportation and
logistics segment and was no longer accounted for as an equity investment.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2001 was
$19.5 million compared to $22.7 million for the year ended December 31, 2000, a
decrease of $3.2 million, or 14%. Interest expense relates to our payable to
affiliate balance and is allocated from Dynegy Inc. using weighted average
interest rates associated with Dynegy Inc.'s corporate debt. The decrease was
consistent with the decrease in our payable to affiliate balance during 2001.
The decrease in our payables to affiliate balance during 2001 was a result of
cash management activities performed by Dynegy Inc. on behalf of certain of the
entities constituting our predecessor.
OTHER EXPENSES. Other expenses, net, for the year ended December 31, 2001
were $0.8 million compared to $1.4 million for the year ended December 31, 2000,
a decrease of $0.6 million, or 41%. Other expenses primarily consisted of
franchise tax expense and bad debt expense and were net of interest income
earned on cash accounts. The decrease in bad debt expense was approximately
$0.6 million, which resulted from improved collection efforts coupled with an
assessment of the adequacy of the allowance for doubtful accounts balance during
2001.
MINORITY INTEREST IN INCOME OF A SUBSIDIARY. Minority interest in income of
a subsidiary for the year ended December 31, 2001 was $2.1 million compared to
$1.2 million for the year ended December 31, 2000, an increase of $0.9 million,
or 79%. Minority interest in income of a subsidiary relates to the net results
attributed to a minority interest holder who owns a 12% effective economic
interest in the Cedar Bayou fractionator.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Our combined revenues for the year ended December 31, 2000 were
approximately $4.3 billion compared to $2.5 billion for the year ended
December 31, 1999, an increase of approximately $1.7 billion, or 67%. Cost of
sales for the year ended December 31, 2000 was $4.1 billion compared to
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$2.4 billion for the year ended December 31, 1999, an increase of $1.7 billion,
or 70%. Operating margin for the year ended December 31, 2000 was
$103.5 million compared to $104.5 million for the year ended December 31, 1999,
a decrease of $1.0 million, or 1%.
TEXAS GULF COAST FACILITIES. Operating margin for the Texas Gulf Coast
Facilities segment was $26.0 million in 2000 compared to $31.9 million in 1999,
a decrease of $5.9 million, or 19%. Operating margin related to the Cedar Bayou
fractionator decreased $6.3 million, from $20.5 million in 1999 to
$14.2 million in 2000, primarily due to increased operating costs incurred as a
result of increased natural gas prices. Average natural gas prices increased 70%
from $2.29 per MMBtu in 1999 to $3.89 per MMBtu in 2000. Our contracts provide
that our customers are responsible for certain variable costs, including the
price of natural gas. Our ability to adjust our fee for these costs is subject
to a delay, which has historically been three months but is generally being
shortened to one month in new contracts. This delay negatively affected our
operating margin in 2000 but positively affected our operating margin in 2001.
Also contributing to the decrease in operating margin at the Cedar Bayou
fractionator were increased costs associated with an increase in the price of
purity ethane relative to the price of ethane contained in ethane-propane mix.
These increased costs were partially offset by revenues attributable to an
increase in volumes fractionated of 14,000 barrels per day. The remaining
$1.9 million decrease in operating margin related to the Galena Park and Mont
Belvieu storage facilities and was primarily due to higher operating costs,
including higher electricity prices. Operating margin for the Texas Gulf Coast
Facilities also includes results associated with hedging instruments entered
into to mitigate a portion of our price risk related to our fuel consumption at
the Cedar Bayou fractionator. The impact of these hedging instruments increased
operating margin by $2.3 million in 2000. There were no such hedging instruments
entered into in 1999.
TRANSPORTATION AND LOGISTICS. Operating margin for the Transportation and
Logistics segment was $9.4 million in 2000 compared to $6.8 million in 1999, an
increase of $2.7 million, or 40%. Of this increase, $1.1 million related to our
purchase of the remaining 75% interest in a barge transportation company during
2000 and associated consolidated accounting treatment. The remaining increase
primarily related to additional transportation volumes obtained as a result of
increased drilling activity and corresponding NGL production in the Gulf of
Mexico.
DISTRIBUTION AND MARKETING SERVICES. Operating margin for the Distribution
and Marketing Services segment was $68.0 million in 2000 compared to
$65.8 million in 1999, an increase of $2.2 million, or 3%. Operating margin for
the distribution and marketing services segment includes results related to
certain crude oil marketing activity that will not be entered into in the
future. Excluding the results relating to such crude oil marketing activity,
operating margin for the Distribution and Marketing Services segment was
$79.1 million in 2000 compared to $64.7 million in 1999, an increase of
$14.4 million, or 22%.
Operating margin associated with refinery services increased approximately
$4.8 million, from $5.2 million in 1999 to $10.0 million in 2000, primarily due
to higher NGL prices and an increase in volumes associated with a new contract
entered into during 2000. NGL products prices averaged $0.55 per gallon during
2000 compared to $0.34 per gallon during 1999. Volumes sold in connection with
our refinery services operations increased approximately 6,000 barrels per day
during 2000.
Operating margin attributable to our wholesale propane marketing services
increased approximately $4.3 million, from $21.3 million in 1999 to
$25.6 million in 2000. During 2000, the country experienced tight propane
supplies resulting from high demand due to sustained cold weather conditions and
regional supply disruptions. As a result, we experienced higher than usual
margins during 2000. Volumes sold in connection with our wholesale propane
marketing services increased approximately 5,000 barrels per day during 2000.
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Operating margin associated with our other distribution and marketing
services increased approximately $5.3 million from $38.2 million in 1999 to
$43.5 million in 2000. This increase was generally due to a combination of
higher NGL sales prices obtained in an increasing price environment and lower
cost of sales as we sold lower average cost NGL inventories. The rising price
environment also increased our marketing fee received for certain of our
contracts with NGL producers, such as Dynegy Midstream, as these fees are
generally assessed based on a percentage of the base NGL product purchase price.
The increase in operating margin due to higher prices was partially offset by a
decrease in volumes. Volumes received under our contract with Dynegy Midstream
decreased approximately 25,000 barrels per day due to the sale by Dynegy
Midstream of non-core gas processing plants during 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
ended December 31, 2000 was $17.3 million compared to $14.0 million for the year
ended December 31, 1999, an increase of $3.3 million, or 23%. Of this increase,
$1.6 million related to additional property, plant and equipment recorded as a
result of our purchase of the remaining 75% interest in a barge transportation
company during 2000. The remaining increase was primarily attributable to
capital expenditures related to the completion of several energy efficiency
projects at the Cedar Bayou fractionator.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 2000 were $22.0 million compared to
$23.9 million for the year ended December 31, 1999, a decrease of $1.8 million,
or 8%. During 2000, Dynegy Inc. completed two significant acquisitions. Our
assets therefore became a smaller percentage of the total assets of Dynegy Inc.
and its subsidiaries, which resulted in Dynegy Inc. allocating a smaller
percentage of general and administrative expenses to us during 2000.
EQUITY IN EARNINGS OF AN UNCONSOLIDATED AFFILIATE. Equity in earnings of an
unconsolidated affiliate was $138,000 for the year ended December 31, 2000
compared to $193,000 for the year ended December 31, 1999. Equity in earnings of
an unconsolidated affiliate related to our 25% interest in the net income of a
barge transportation company.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2000
increased $0.7 million to $22.7 million compared to $22.0 million for the year
ended December 31, 1999. Interest expense relates to our payable to affiliates
balance and was allocated from Dynegy Inc. using weighted average interest rates
associated with Dynegy Inc.'s corporate debt.
OTHER EXPENSES. Other expenses, net, for the year ended December 31, 2000
were $1.4 million compared to $0.6 million for the year ended December 31, 1999.
Other expenses primarily consisted of franchise tax expense and bad debt expense
and were net of interest income earned on cash accounts. Interest income totaled
approximately $150,000 during the year ended December 31, 2000, compared to
approximately $800,000 during the year ended December 31, 1999.
MINORITY INTEREST IN INCOME OF A SUBSIDIARY. Minority interest in income of
a subsidiary for the year ended December 31, 2000 was $1.2 million compared to
$1.9 million for the year ended December 31, 1999, a decrease of $0.7 million,
or 39%. Minority interest in income of a subsidiary relates to the net results
attributed to a minority interest holder who owns an approximate 12% interest in
the Cedar Bayou fractionator.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our working capital requirements and funded
our capital expenditures with cash generated from operations and affiliated
borrowings. We believe that cash generated from operations and our borrowing
capacity under our new credit facility will be sufficient to meet our working
capital requirements, anticipated capital expenditures and scheduled debt
payments
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for at least the next several years. Our ability to satisfy debt service
obligations, to fund planned capital expenditures, to make acquisitions and to
pay distributions to our unitholders will depend upon our future operating
performance, which will be affected by prevailing economic conditions in the NGL
industry and financial, business and other factors, some of which are beyond our
control. For a more complete discussion of factors that will affect cash flow we
generate from our operations, please read "Risk Factors."
CASH FLOWS AND CAPITAL EXPENDITURES
Net cash provided by (used in) operating activities for the years ended
December 31, 1999, 2000 and 2001 totaled $8.7 million, $(1.3) million and
$9.5 million, respectively. The decrease in operating cash flow during 2000
primarily related to inventory purchases at higher NGL prices and increased
inventory on hand as of December 31, 2000. Inventory was unusually high at
December 31, 2000 due to the purchase of inventory at the end of December that
was sold in the following month. The increase in operating cash flow during 2001
primarily related to a decrease in inventory on hand as of December 31, 2001.
The variances in operating cash flow from year to year are also attributable to
our participation in Dynegy Inc.'s cash management program and the related
receipt and payment of operating cash flows through our net payable to
affiliates balance. Additionally, during December 2001, Dynegy Inc. implemented
a new policy pursuant to which all of its subsidiaries began prepaying general
and administrative expenses on a quarterly basis. In connection with this new
policy, we prepaid approximately $7.2 million of our general and administrative
expenses to Dynegy Inc. during December 2001 associated with the first three
months of 2002. Subsequent to the completion of this offering and related
transactions, we will not participate in Dynegy Inc.'s cash management program
and we will settle all amounts payable to and receivable from Dynegy Inc. and
its affiliates on a monthly or quarterly basis.
Net cash used in investing activities for the years ended December 31, 1999,
2000 and 2001 totaled $7.0 million, $0.9 million and $4.3 million, respectively.
Net cash used in investing activities relates to capital expenditures, offset by
proceeds from asset sales. The decrease in net cash used in investing activities
during 2000 as compared to 1999 was primarily attributable to proceeds received
from the sale of a pipeline-related asset. Historically, our capital
expenditures have included both cash capital expenditures and non-cash capital
expenditures. Non-cash capital expenditures are funded through Dynegy Inc.'s
cash management program and are reflected in our payable to affiliates balance.
Following this offering, we will no longer participate in Dynegy Inc.'s cash
management program and all capital expenditures will be funded by us. Please
read "--Liquidity and Capital Resources."
Cash capital expenditures for the years ended December 31, 1999, 2000 and
2001 totaled $7.0 million, $4.6 million and $4.3 million, respectively, and
primarily related to the Cedar Bayou fractionator. The decreases in capital
expenditures during 2000 and 2001 related to the completion of an expansion
project during 1999 and several energy efficiency projects during 2000 and 2001
at the Cedar Bayou fractionator. Non-cash capital expenditures for the years
ended December 31, 1999, 2000 and 2001, totaled $3.9 million, $20.4 million and
$14.4 million, respectively. The increase in non-cash capital expenditures
during 2000 primarily related to our purchase of the remaining 75% interest in a
barge transportation company. Non-cash capital expenditures incurred during 2001
primarily related to a major rework program associated with our barge fleet
along with the completion of a project at our Mont Belvieu underground storage
facility designed to increase the amount of propane that can be transported by
rail from the facility.
Net cash used in financing activities for the years ended December 31, 1999,
2000 and 2001 totaled $2.7 million, $1.7 million and $2.1 million, respectively,
and related to distributions to a minority interest holder that owns an
approximate 12% interest in the Cedar Bayou fractionator. The fluctuations in
distributions were consistent with the fluctuations in the net results
attributable to the Cedar Bayou fractionator.
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CAPITAL REQUIREMENTS
The fractionation, storage, terminalling and transportation business
requires continual investment to maintain existing operations and ensure
compliance with safety and environmental regulations. The capital requirements
of our business have consisted, and we expect them to continue to consist,
primarily of:
- Maintenance capital expenditures, such as capital expenditures to replace
partially or fully depreciated assets or to maintain the existing
operating capacity of our assets and extend their useful lives; and
- Expansion capital expenditures, such as capital expenditures to expand the
existing operating capacity of our assets, whether through construction or
acquisition.
We estimate that our average annual maintenance capital expenditures for our
current operations will be approximately $8.5 million through 2004.
We are currently planning expansion capital expenditures of $13.7 million at
our existing facilities for 2002. Approximately $10.6 million relates to our
effective 88% economic interest in the Cedar Bayou fractionator. In late 2002,
the Cedar Bayou fractionator will be upgraded to allow production of up to
25,000 barrels per day of purity ethane. Following completion of this upgrade,
the fractionator will be able to produce both purity ethane and ethane-propane
mix. We believe that this upgrade will allow us to reduce costs associated with
reimbursements we make to certain customers for the difference between the price
of purity ethane and the price of ethane contained in ethane-propane mix. Our
partner will fund its 12% share of the project. The total cost of the project,
expected to be $12.0 million, will be recorded to property, plant and equipment,
as expended. The reimbursement from our partner will be recorded as a reduction
to minority interest in our combined balance sheet.
The remaining $3.1 million of planned expansion capital expenditures
primarily relates to our Galena Park marine terminal. We are planning
modifications at the Galena Park marine terminal that will allow us to receive,
store and transport crude butadiene to and from the facility. This project will
accommodate a new customer contract that will become effective upon completion
of the project.
We will retain approximately $13.7 million of the proceeds from the offering
to fund certain of these capital expenditures. We expect to fund our remaining
capital expenditure requirements, including any acquisitions, from cash provided
by operations, from the proceeds of borrowings or the issuance of additional
common units.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
DESCRIPTION OF CREDIT FACILITY
In connection with the closing of this offering, we will enter into a three
year $275 million credit facility. This credit facility will be composed of a
$125 million term loan and a $150 million revolving credit facility. The
$150 million revolving credit facility includes a $75 million working capital
sublimit that will be used for ongoing working capital needs. The revolving
credit facility will be available for general partnership purposes, including
future acquisitions. We expect all of the term loan to be borrowed at the
closing of the offering. Subsequent to this offering, we expect that all of the
$150 million revolving credit facility will be available for borrowing.
Our obligations under the credit facility will be unsecured. Indebtedness
under the credit facility will rank equally with all the outstanding unsecured
and unsubordinated debt of our operating partnership.
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We may prepay all loans at any time without penalty. We must reduce all
borrowings under the working capital facility to zero for a period of at least
15 consecutive days once during each year, beginning on the effective date of
the credit agreement.
Indebtedness under the credit facility will bear interest at LIBOR plus an
applicable margin that we expect will range from % to %. We will incur a
commitment fee on the unused portions of the revolving credit facility and term
loan.
In addition, the credit facility will contain various covenants limiting our
operating partnership's and its subsidiaries ability to:
- incur indebtedness;
- grant certain liens;
- merge or consolidate unless we are the survivor;
- sell all or substantially all of our assets;
- make distributions other than from available cash; or
- create obligations for some lease payments.
The credit facility also will contain covenants requiring us to maintain
specified ratios of:
- EBITDA (as defined in the credit facility), pro forma for any asset
acquisition, to interest expense of not less than to ; and
- Total debt to EBITDA, pro forma for any asset acquisitions, of not more
than to .
CREDIT SUPPORT AGREEMENT
In connection with the closing of this offering, we will enter into a credit
support agreement with Dynegy Holdings to provide credit support in the form of
guarantees relating to our purchase of mixed NGLs and NGL products in the
ordinary course of our business. The aggregate amount of the credit support
agreement will be limited to $ million and the facility will have a term of
three years. The obligations under the credit support agreement will be
unsecured. Obligations under this facility will rank equally with all the
outstanding unsecured debt of one of our operating partnership's wholly owned
subsidiaries.
Dynegy Holdings may terminate the credit support agreement if:
- we, our operating partnership or one of our operating partnership's
subsidiaries receives a credit rating of at least Baa3 and BBB- from
Moody's and Standard & Poor's, respectively; or
- our general partner is removed as general partner.
If our general partner transfers its general partner interest to another
person as part of a merger or consolidation of the general partner or sale by
the general partner of all or substantially all of its assets or general partner
interest to another person, Dynegy Holdings may assign its rights and
obligations under the credit support agreement to the transferee or affiliate
thereof with a credit rating from Moody's and Standard & Poor's equal to or
higher than Baa3 and BBB- respectively. Please read "The Partnership
Agreement--Transfer of General Partner Interests." The credit support agreement
will have representations and warranties, covenants and events of default
similar to our credit facility.
Our general partner may choose to replace all or a portion of the credit
support agreement with letters of credit or other credit support arrangements
that may reduce cash available for distribution. If the credit support agreement
of Dynegy Holdings is terminated or its credit support is diminished, our
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cost of doing business may increase if our customers require us to provide
additional or different credit support.
OTHER CONTRACTUAL COMMITMENTS
Effective January 1, 2002, we have entered into a number of commercial
agreements with Dynegy Midstream. These agreements have a 20-year term and
include:
- A Mixed NGL and NGL Product Purchase and Sale Agreement, pursuant to which
we will purchase all of Dynegy Midstream's owned or controlled mixed NGLs
and NGL products. The purchase price for the mixed NGLs and NGL products
will be based on OPIS index price, less adjustments for transportation and
fractionation costs and a distribution and marketing services fee equal to
a percentage of the base price, subject to a minimum fixed fee per gallon.
This agreement formalizes the current business practice between Dynegy
Midstream and our distribution and marketing services business.
- A Mixed NGL Gathering Agreement, a Storage Agreement and a Fractionation
Agreement which give us the ability to utilize services provided by Dynegy
Midstream's assets located in Louisiana. Our distribution and marketing
services business acquires mixed NGLs in Louisiana pursuant to purchase
and exchange agreements. The gathering agreement provides that Dynegy
Midstream will receive NGLs at the tailgates of certain plants located in
the Lake Charles area and deliver them to its storage facility in exchange
for a per gallon fee for all volumes gathered. The storage agreement
provides for reserved storage capacity for mixed NGLs and NGL products for
a fixed fee of approximately $2 million per year. We have the option of
fractionating our Louisiana volumes at Dynegy Midstream's Lake Charles
fractionator or at the Cedar Bayou fractionator. To the extent we
fractionate these volumes at the Cedar Bayou fractionator, we will pay
Dynegy Midstream a transportation fee for the use of its bi-directional
pipeline which connects its Louisiana assets to Mont Belvieu. Fees
associated with these agreements will be assessed based on our usage of
each of the services to be provided.
In addition to the agreements with Dynegy Midstream, we are party to
numerous long-term and short-term contracts with various suppliers relating to
the purchase of mixed NGLs and NGL products. Our obligations under these
contracts do not obligate us to make fixed future payments. Other than the
$2 million storage fee we will pay to Dynegy Midstream described above, the
payments we will make under these contracts and our agreements with Dynegy
Midstream are not determinable, because they depend upon the volumes of mixed
NGLs and NGL products we purchase and prevailing market prices.
We also enter into short term lease agreements primarily in connection with
our transportation and logistics operations, none of which has a term of more
than six months. Our future minimum commitments associated with these short term
lease agreements total $1.1 million in 2002.
IMPACT OF INFLATION
Inflation in the United States has been relatively low in recent years and
did not have a material impact on our results of operations for the years ended
December 31, 1999, 2000 and 2001, but remains a factor in the United States
economy and may increase the cost to acquire or replace property, plant and
equipment and may increase the costs of labor and supplies. To the extent
permitted by competition, regulation and our existing agreements, we will
continue to pass along increased costs to our customers in the form of higher
fees.
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ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations adopted by
various governmental authorities in the jurisdictions in which these operations
are conducted. We have incurred no significant environmental costs, accrued
liabilities or expenditures to mitigate or eliminate future environmental
contamination for the years ended December 31, 1999, 2000 and 2001.
We have, however, included in our capital budget some projected expenditures
for compliance with environmental regulations. Specifically, our Texas Gulf
Coast facilities are located within the Houston-Galveston ozone non-attainment
area under the federal Clean Air Act. Pursuant to regulations for the
Houston-Galveston area recently approved by the U.S. Environmental Protection
Agency, our Texas Gulf Coast facilities will be subject to more stringent air
emissions requirements beginning in 2004.
Under the omnibus agreement, Dynegy Midstream will indemnify us for five
years after the closing of this offering against certain potential environmental
liabilities associated with the operation of the assets contributed to us by
Dynegy Midstream and occurring or existing before the closing date of this
offering. We will indemnify Dynegy Inc. and its affiliates for environmental
losses and expenses incurred by them to the extent Dynegy Midstream is not
required to indemnify us.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 discontinues
goodwill amortization over its estimated useful life; rather, goodwill will be
subject to at least an annual fair-value based impairment test. Similarly,
goodwill associated with equity-method investments will no longer be amortized.
With regard to intangible assets, SFAS No. 142 states that an acquired
intangible asset should be recognized separately if the benefit of the
intangible asset is obtained through contractual rights or if the intangible
asset can be sold, transferred, licensed, rented or exchanged, without regard to
the acquirer's intent. Net goodwill of $4.1 million will no longer be amortized
subsequent to the adoption of SFAS No. 142, effective January 1, 2002, but will
be subject to a fair-value based impairment test on an annual basis. We do not
expect to incur an impairment charge upon the adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred,
with the associated asset retirement costs being capitalized as a part of the
carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure
requirements that provide a description of asset retirement obligations and
reconciliation of changes in the components of those obligations. We are
evaluating the future financial effects of adopting SFAS No. 143 and expect to
adopt the standard effective January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
objective of SFAS No. 144 is to establish one accounting model for long-lived
assets to be disposed of by sale as well as resolve implementation issues
related to SFAS No. 121. The adoption of SFAS No. 144, effective January 1,
2002, did not have a material impact on our financial condition or results of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates
and prices. The principal market risk to which we are exposed is commodity price
risk. We are required to purchase
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and hold physical inventories of NGL products to support our distribution and
marketing services operations. We seek to maintain a position that is
substantially balanced between our physical inventories and purchase obligations
as compared to our sales commitments. One of the ways we accomplish this is by
purchasing and selling NGL products forward at fixed prices. From time to time,
we may also enter into floating price collar arrangements and financial swaps to
manage some of our exposure to NGL products commodity price risk. Changes in
natural gas prices impact fuel costs associated with our fractionation and
storage activities. We may enter into financial instrument contracts to hedge
fuel requirements in order to minimize the risk of changes in natural gas
prices. The absolute notional contract amounts associated with commodity
risk-management contracts were as follows:
<Table>
<Caption>
DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
Natural Gas Liquids (MMBbls).......................... 14.956 4.100 5.367
Natural Gas (Bcf)..................................... 9.840 6.480 1.125
</Table>
Future estimated net cash inflows for these commodity risk management
contracts at December 31, 2001, based on then current prices, total
approximately $5.2 million during 2002.
We do not typically acquire and hold NGL inventory or derivative financial
instruments for the purpose of speculating on NGL price changes that might
expose us to indeterminable losses, although we have occasionally executed
derivative financial instruments within guidelines established by Dynegy Inc.'s
Board of Directors that were not considered to be a normal purchase or sale or a
hedge within the applicable accounting guidelines. Control procedures have been
established to facilitate management of the market risk in our portfolio. These
procedures include daily reporting of our market positions and measurement of
our exposure to market risk. We measure our exposure to market risk using "value
at risk," or VaR which represents the potential loss in value of our portfolio
due to adverse commodity price changes over a period of time. We estimate VaR
using a JP Morgan RiskMetrics-TM- approach. Inputs for the VaR calculation
include current prices, historical price volatility, volumes, instrument
valuations (such as Black-Scholes) and statistical correlation data. While
management believes that these assumptions and approximations are reasonable,
there is no uniform industry methodology for estimating VaR, and different
assumptions and/or approximations could produce materially different VaR
estimates.
We use historical data to estimate VaR and, to better reflect current asset
and liability volatilities, these historical data are weighted to give greater
importance to more recent observations. An inherent limitation of VaR is that
past changes in market risk factors, even when weighted toward more recent
observations, may not produce accurate predictions of future market risk. VaR
should be evaluated in light of this and the methodology's other limitations.
For the VaR numbers reported below, a one-day time horizon and a 95%
confidence level were used. This implies that there is a 5% chance that the
value of our portfolio will fall by more than the reported VaR in any given day.
Thus, a loss in portfolio value greater than the reported VaR on a single day
would be anticipated to occur about once every 20 days. Gains and losses on a
single day can exceed reported VaR by significant amounts. Gains or losses can
also accumulate over a longer time horizon such as number of consecutive days.
The following table includes the average, high and low VaR for 2001
<Table>
<Caption>
HIGH LOW AVERAGE
-------- -------- --------
(IN MILLIONS)
One Day VaR -- 95% Confidence Level......................... $4.2 $0.7 $2.2
</Table>
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INDUSTRY OVERVIEW
We are engaged in the business of fractionating, storing, terminalling,
transporting, distributing and marketing NGLs. NGLs are principally produced as
by-products of oil and gas production and have a variety of applications,
including use as residential, industrial and agricultural heating fuels and use
as petrochemical feedstocks and refining blend stocks. When produced at the
wellhead, natural gas contains pipeline-quality natural gas, mixed NGLs and
impurities. Gas processing plants located near production areas separate
pipeline-quality natural gas, principally methane, from mixed NGLs and other
materials. After being extracted in the field, mixed NGLs, sometimes referred to
as "y-grade" or "raw make," are typically transported to a centralized facility
for separation into separate NGL products through the process of fractionation.
Crude oil and condensate production also contain varying amounts of mixed NGLs,
which are removed during the refining process and are either marketed directly
from the refinery or fractionated by refiners or delivered to NGL fractionation
facilities for processing. In 2001, domestic supplies of mixed NGLs originated
from:
- domestic gas processing plants (64%);
- domestic crude oil refineries (24%); and
- imports (12%).
Domestic NGL production has increased moderately over the last ten years.
The primary suppliers of mixed NGLs are gas processing plants, refineries and
butane-propane imports. The following charts summarize (i) the supply sources of
mixed NGLs in the United States over the past ten years and the projected
volumes of mixed NGLs through 2005 and (ii) the domestic demand for each NGL
products during the same period:
SUPPLY SOURCES OF MIXED NGLS
(THOUSANDS OF BARRELS PER DAY)
<Table>
<Caption>
DOMESTIC
-------------------------------- PERCENT OF TOTAL
GAS -------------------
PLANTS REFINERIES TOTAL IMPORTS TOTAL DOMESTIC IMPORTS
-------- ---------- -------- -------- -------- -------- --------
1992................................. 1,698 607 2,305 179 2,484 93% 7%
1993................................. 1,736 592 2,328 263 2,591 90% 10%
1994................................. 1,726 611 2,337 264 2,601 90% 10%
1995................................. 1,762 654 2,416 269 2,685 90% 10%
1996................................. 1,832 663 2,495 279 2,774 90% 10%
1997................................. 1,827 703 2,530 273 2,803 90% 10%
1998................................. 1,773 685 2,458 328 2,786 88% 12%
1999................................. 1,850 692 2,542 250 2,792 91% 9%
2000................................. 1,917 707 2,624 254 2,878 91% 9%
2001(e).............................. 1,833 699 2,532 341 2,873 88% 12%
2002(e).............................. 1,930 710 2,640 335 2,975 89% 11%
2003(e).............................. 1,973 716 2,689 400 3,089 87% 13%
2004(e).............................. 2,020 723 2,743 458 3,201 86% 14%
2005(e).............................. 2,063 730 2,793 526 3,319 84% 16%
</Table>
- ------------------------
Source: Purvin and Gertz (February 2001)
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DOMESTIC DEMAND FOR NGL PRODUCTS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<Table>
<Caption>
ETHANE PROPANE NORMAL BUTANE ISOBUTANE NATURAL GASOLINE
1985 579,556 933,446 231,900 162,236 332,292
1986 502,359 862,685 245,479 176,257 288,197
1987 491,970 956,841 233,169 204,783 302,419
1988 526,757 962,180 258,079 218,045 312,959
1989 468,194 1,027,658 267,894 210,500 311,570
1990 517,480 949,023 246,402 200,422 324,871
1991 572,113 1,017,220 239,026 208,006 343,159
1992 576,244 1,074,175 258,480 227,231 358,433
1993 598,551 1,062,450 242,161 272,410 362,241
1994 597,919 1,134,478 261,012 260,625 371,767
1995 625,598 1,185,641 263,054 248,366 384,499
1996 691,874 1,208,265 265,232 244,094 383,768
1997 679,344 1,236,950 256,162 268,186 355,605
1998 653,954 1,208,922 243,382 268,390 332,441
1999 724,047 1,298,620 233,012 261,163 354,008
2000 771,305 1,272,406 234,838 264,884 347,601
2001 686,108 1,309,114 262,903 267,782 346,653
2002 707,570 1,346,192 286,036 272,906 362,006
2003 718,365 1,413,085 310,965 276,839 369,795
2004 740,548 1,486,697 317,370 280,239 376,494
2005 760,036 1,555,181 340,631 280,813 381,900
</Table>
- ------------------------
Source: Purvin and Gertz (February 2001)
FRACTIONATION. NGL fractionation facilities separate mixed NGL streams into
discrete NGL products: ethane, propane, ethane-propane mix, normal butane,
isobutane and natural gasoline. Mixed NGLs are fractionated by heating mixed NGL
streams and processing them through a series of distillation towers, which
separate mixed NGLs based on differing boiling points of the various NGL
products. As the temperature of the NGL stream is increased, the lightest NGL
product, which has the lowest boiling point, boils off to the top of the tower
where it is condensed and transferred to storage. The mixture from the bottom of
the first tower is then moved into the next tower where the process is repeated,
and a different NGL product is separated and stored. This process is repeated
until the NGLs have been separated into all their components.
The following diagram illustrates the fractionation process:
NGL FRACTIONATION
[CHART ILLUSTRATING FRACTIONATION PROCESS]
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NGL PRODUCTS. The following chart illustrates the various NGL products and
their end uses:
NGL PRODUCTS AND END USES
[CHART INDICATING NGL PRODUCTS AND END USES]
STORAGE. Chemical and refining companies, industrial end-users and
marketers typically use storage facilities because they lack storage capacity,
either because of size constraints or the specialized handling requirements of
the stored product. Above-ground storage of NGL products in refrigerated or
pressurized containers is uneconomical in the quantities required for efficient
processing and industrial consumption. For these reasons, these products are
typically stored in underground caverns, or wells, within salt domes or salt
beds. These salt formations stabilize the stored products and can contain large
quantities of hydrocarbons in a safer manner and at a significantly lower
per-unit cost than any above-ground alternative. Brine is used to displace the
stored products and to maintain pressure in the underground well as product
volumes fluctuate.
TRANSPORTATION. NGL products are transported to market by means of
pipelines, pressurized barges, rail cars and tank trucks. The method of
transportation utilized depends on, among other factors, the existing resources
of the transporter, the locations of the production points and the delivery
points, cost efficiency and the quantity of NGL products being transported.
Pipelines are generally the most cost-effective mode of transportation when
large, consistent volumes of NGL products are to be delivered. Barges are used
to transport volumes of NGL products accessible by inland or intracoastal
waterways. Production points and delivery points not connected by pipelines and
inaccessible by barge are serviced by rail car or tank truck.
DISTRIBUTION AND MARKETING SERVICES. NGL marketing services typically
include the supply, marketing and transportation of mixed NGLs and NGL products
to and from NGL producers and end-users. The principal markets for NGL
distribution and marketing services are petrochemical facilities, refineries and
industrial end-users located throughout the United States. NGL products are
generally priced according to a published commodity market index. The NGL
marketing industry is a highly competitive commodity business with a significant
degree of price transparency. Factors that enhance a company's ability to
capitalize on opportunities existing in the NGL market are an asset base that is
vertically integrated and strategically located, a reputation for service and
reliability and flexible contract terms.
MARKET HUB. A significant portion of our assets are located in and around
Mont Belvieu, Texas, which is located approximately 25 miles east of Houston.
Mont Belvieu has become the hub of the domestic NGL industry largely because it
is situated on a large, naturally-occurring salt dome that
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provides for the economical underground storage of significant quantities of
mixed NGLs and NGL products. In addition to its large underground storage
infrastructure, Mont Belvieu is strategically located in close proximity to
refineries and petrochemical plants on the Texas and Louisiana Gulf Coast.
Furthermore, Mont Belvieu also serves as a focal point for the pricing and
balancing of the global markets for NGL products. Excluding mixed NGLs
fractionated in non-commercial facilities that service refineries on a
proprietary basis or fractionation facilities situated at gas processing plants
that are utilized for local sales, approximately 50% of all mixed NGLs
fractionated in the United States are fractionated in the Mont Belvieu area.
COMPETITION. The consumption of NGL products in the United States can be
separated into four distinct markets. Petrochemical production provides the
largest end-use market, followed by refining, residential and commercial heating
and industrial uses. There are other hydrocarbon alternatives, primarily refined
petroleum products, that can be substituted for NGL products in most end uses.
In some uses, such as residential and commercial heating, a substitution of
other hydrocarbon products for NGL products would require a significant expense
or delay. For other uses, such as the production of refined products, ethylene,
industrial fuels and petrochemical feedstocks, other hydrocarbon products can be
substituted without significant delay or expense.
Because certain NGL products compete with other refined petroleum products
in the fuel and petrochemical feedstock markets, NGL product prices are set by
or in competition with refined petroleum products. Increased production and
imports of NGLs and NGL products in the United States may decrease NGL product
prices in relation to refined petroleum alternatives and thereby increase
consumption of NGL products as NGL products are substituted for other more
expensive refined petroleum products. Conversely, a decrease in the production
and exports of NGLs and NGL products could increase NGL products prices in
relation to refined petroleum product prices and thereby decrease consumption of
NGLs. Because of the relationship of crude oil and natural gas production to NGL
production, however, we believe that any imbalance in the prices of NGLs and NGL
products and alternative products would be temporary.
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BUSINESS
OVERVIEW
We were recently formed by Dynegy Inc. to engage in the businesses of
fractionating, storing, terminalling, transporting, distributing and marketing
natural gas liquids, or NGLs. NGLs are principally produced as by-products of
oil and gas production and have a variety of applications, including use as
heating fuels, petrochemical feedstocks and refining blend stocks. Our
businesses include:
- "fractionating," or separating, mixed NGLs at our Cedar Bayou fractionator
into component NGL products: ethane-propane mix, propane, normal butane,
isobutane and natural gasoline;
- providing NGL storage and terminal services at our Mont Belvieu, Texas
underground storage facility and our Galena Park marine terminal;
- providing NGL transportation and logistical services utilizing a diverse
portfolio of distribution assets located along the Gulf Coast and across
the United States; and
- distributing and marketing NGL products to refiners, petrochemical
companies, retail propane distributors, other marketing companies and
other end-users of NGL products.
Our assets and operations represent a substantial portion of Dynegy Inc.'s
NGL business located along the Texas Gulf Coast in and adjacent to Mont Belvieu,
Texas. Mont Belvieu is the hub of the domestic NGL industry with a concentration
of fractionation and storage facilities, significant pipeline infrastructure and
local demand for NGL products from Texas Gulf Coast petrochemical and refining
complexes. We also have significant NGL transportation and logistics assets
located throughout the United States that provide strategic support for our
operations and services to third parties.
In 2001, on a pro forma basis, we generated operating margin of
$92.5 million, EBITDA of $68.7 million and net income of $41.5 million. Our
operating margins are derived from fees earned in our fractionation, storage,
terminalling and transportation businesses and from margins on purchases and
sales of mixed NGLs and NGL products in our distribution and marketing services
business. In our fee-based businesses, we generally earn a fee based upon the
volumes of NGLs which we fractionate, store, terminal or transport. For the year
ended December 31, 2001, on a pro forma basis, approximately $42.3 million, or
46% of our total operating margin, was attributable to our fee-based businesses.
In our distribution and marketing services business, we generate margins
through the purchase and sale of mixed NGLs and NGL products. A significant
portion of our margins are derived from formula-based contracts, many of which
provide for a minimum fee per gallon. For the year ended December 31, 2001, on a
pro forma basis, we generated operating margin of $20.2 million, or 22% of our
total pro forma operating margin, from contracts containing formulas that are
subject to a minimum fee. We would have generated operating margin of $16.6
million under these contracts had we received only the minimum fee per gallon.
The profitability of our remaining distribution and marketing services business
is generally dependent on the relative prices of mixed NGLs and NGL products we
purchase compared to the prices of NGL products we sell. We seek to reduce
commodity price exposure by maintaining a position that is substantially
balanced between our physical inventories and our purchase obligations as
compared to our sales commitments.
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OUR RELATIONSHIP WITH DYNEGY INC.
We believe our relationship with Dynegy Inc. is one of our principal
strengths. Dynegy Inc. is a leading energy merchant and power generator in North
America, the United Kingdom and Continental Europe, with total assets of
approximately $25.0 billion as of December 31, 2001.
Dynegy Inc. has a significant interest in our partnership through its
ownership of a 55.2% limited partner interest and all of our 2% general partner
interest. We expect to benefit from our relationship with Dynegy Inc. through
access to management expertise and strong relationships throughout the energy
industry. We also expect that our relationship with Dynegy Inc. will enhance the
execution of our growth strategy by allowing us to pursue joint acquisition
opportunities or to acquire assets directly from Dynegy Inc.
At the closing of this offering we will enter into a number of contracts
with Dynegy Inc. or its affiliates, including:
- a 20-year mixed NGL and NGL product purchase and sale agreement pursuant
to which we will purchase all mixed NGLs and NGL products owned or
controlled by Dynegy Midstream;
- a 3-year agreement with Dynegy Holdings to provide credit support for our
purchases of mixed NGLs and NGL products; and
- an omnibus agreement with Dynegy Inc. and Dynegy Midstream, which contains
limited non-competition and environmental indemnification provisions and
also provides for administrative services.
These agreements are more fully described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," and
"Certain Relationships and Related Transactions."
OUR RELATIONSHIP WITH CHEVRONTEXACO
In August 1996, Dynegy Inc. completed a business combination with a
subsidiary of Chevron Corporation pursuant to which substantially all of
Chevron's midstream energy assets were merged into Dynegy Inc.'s operations. In
connection with this transaction, Dynegy Midstream entered into long-term NGL
agreements with Chevron and its affiliates to provide significant services,
including:
- purchasing or marketing substantially all of the mixed NGLs and NGL
products produced or controlled by Chevron in the United States;
- supplying NGL products to Chevron's refining and chemical affiliates in
the United States; and
- providing transportation services in connection with Chevron's mixed NGLs
and NGL products.
At the closing of the offering, we will succeed to substantially all of
Dynegy Midstream's long-term NGL agreements with the former Chevron. In October
2001, Chevron completed a merger with Texaco Inc., forming ChevronTexaco.
Dynegy Inc. is in the process of expanding its commercial relationship with
ChevronTexaco to include its purchase of substantially all of the United States
natural gas and NGL production of the former Texaco. As part of this expanded
relationship, we have executed agreements providing for our purchase of
substantially all of the mixed NGLs and NGL products produced or controlled by
the former Texaco through August 31, 2006. The NGL volumes received pursuant to
this agreement will be sold through our distribution and marketing services
business. All historical financial and operating data with respect to
ChevronTexaco included in this prospectus reflect business activity with Chevron
prior to its merger with Texaco.
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BUSINESS STRATEGY
Our primary business strategies are:
STRATEGIC GROWTH. We plan to implement an aggressive growth strategy of
pursuing accretive acquisitions that increase distributable cash flow on a per
unit basis. We will pursue these acquisitions independently, as well as jointly
with Dynegy Inc. Future acquisition targets may include assets to be directly
integrated into our current operations or acquisitions of NGL and other
energy-related businesses in which we are not currently active. Additionally, we
may have the opportunity to make acquisitions directly from Dynegy Inc. in the
future.
In addition, as a result of ongoing consolidation within the petroleum
industry, major oil companies are focusing on their core competencies, such as
the exploration and production of oil and natural gas. Many of these companies
have outsourced fractionation, storage, terminalling transportation,
distribution and marketing of mixed NGLs and NGL products. We believe this
outsourcing trend will provide additional opportunities for our storage,
terminalling transportation, distribution and marketing services businesses.
MAXIMIZATION OF THE BENEFITS OF OUR RELATIONSHIPS WITH DYNEGY INC. AND
CHEVRONTEXACO. Dynegy Inc. and ChevronTexaco are engaged in numerous aspects of
the energy industry and have a long history of aggressively pursuing and
consummating energy acquisitions. Through our relationships with Dynegy Inc. and
ChevronTexaco, we will have access to management expertise and strong
relationships throughout the energy industry that we intend to utilize to
implement our strategies. Dynegy Inc. intends to utilize our partnership as the
primary growth vehicle for its NGL business. For this reason, we expect to have
the opportunity to participate with Dynegy Inc. in considering transactions that
we would not be able to pursue independently. We also expect that potential
sellers will be more inclined to contact us and to solicit bids from us as a
result of our affiliation with Dynegy Inc.
GENERATE STABLE CASH FLOWS. A substantial portion of our operating margin
is generated by the fractionation, storage, terminalling, transportation and
logistics services we provide for a fee. In addition, a significant portion of
our margins in our distribution and marketing services business are derived from
formula-based contracts, many of which provide for a minimum fee per gallon. We
believe that our vertically integrated assets coupled with our industry
expertise should enable us to benefit from capacity, demand and distribution
inefficiencies in the market to support stable cash flows for our unitholders.
MANAGE OUR EXPOSURE TO COMMODITY PRICE RISK. We seek to reduce commodity
price exposure by maintaining a position that is substantially balanced between
our physical inventories and our purchase obligations as compared to our NGL
product sales commitments. As part of our risk management strategy, we enter
into hedging devices to manage some of our exposure to commodity price risk. Our
policy is generally to purchase only NGL products for which we have a market and
to structure our sales contracts so that NGL price fluctuations do not
significantly affect the margins we receive.
COMPETITIVE STRENGTHS
We believe that we are well positioned to execute our business strategies
successfully because of the following competitive strengths:
AFFILIATION WITH DYNEGY INC. AND CHEVRONTEXACO. We believe our
relationships with Dynegy Inc. and ChevronTexaco provide us with significant
business opportunities, including access to growth-oriented management with a
broad range of transaction experience and contacts throughout the energy
industry. We expect to pursue strategic acquisitions independently and jointly
with Dynegy Inc., and we may have the opportunity to make acquisitions directly
from Dynegy Inc. or ChevronTexaco. Additionally, Dynegy Inc. and ChevronTexaco
own significant domestic volumes of mixed NGLs and NGL products,
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substantially all of which we have the right to purchase through our
distribution and marketing services business.
STRATEGIC LOCATION. We operate fractionation, storage and marine terminal
facilities that are strategically located along the Texas Gulf Coast in and
around Mont Belvieu, Texas, the hub of the domestic NGL industry.
SIGNIFICANT MARKET POSITION. We are a leading participant in the domestic
NGL fractionation, storage, terminal and transportation businesses. We are also
a significant provider of NGL distribution and marketing services, selling an
average of 490,000 barrels of NGL products per day in 2001. Our extensive
operations provide us with broad-based, real time market information regarding
NGL supply and demand.
VERTICALLY INTEGRATED OPERATIONS. Our vertically integrated assets permit
us to generate revenues throughout all facets of the NGL business, including the
transportation of mixed NGLs from production areas, the fractionation of mixed
NGLs into NGL products, the provision of storage and terminalling services and
the transportation, distribution and marketing of NGL products to end-users.
EXPERIENCED MANAGEMENT AND OPERATIONAL EXPERTISE. Our directors, senior
executives and key officers include some of the most senior officers of
Dynegy Inc. and have extensive experience in the natural gas, refining,
petrochemical, gas processing and NGL businesses. We believe we have established
a reputation in the NGL industry as a reliable and cost-effective supplier of
services to our customers and have a track record of safe, efficient operation
of our facilities. Our operating assets are currently ranked in the top quartile
in safety performance among our peer group in the gas processing and midstream
businesses.
SIGNIFICANT FINANCIAL FLEXIBILITY. Upon the closing of this offering, we
will enter into a $275 million bank credit facility, which will include a
$125 million term loan and a $150 million revolving credit facility. We expect
the entire amount of the term loan to be borrowed at closing. We will have the
ability to issue additional common units, which, combined with our additional
borrowing capacity under our revolving credit facility, should give us the
resources to finance strategic opportunities as they arise.
TEXAS GULF COAST FACILITIES
We own and operate an extensive network of fractionation, storage and
terminalling assets in the Texas Gulf Coast area. This network is principally
composed of our Cedar Bayou fractionator, our Mont Belvieu underground storage
facility, our Galena Park marine terminal and our Houston-area pipeline
infrastructure, which interconnects these facilities and provides connections to
end-users.
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The following diagram illustrates our Texas Gulf Coast Facilities:
TEXAS GULF COAST FACILITIES
[DIAGRAM ILLUSTRATING TEXAS GULF COAST FACILITIES]
THE CEDAR BAYOU FRACTIONATOR. At Mont Belvieu, we operate and own an 88%
effective economic interest in the Cedar Bayou fractionator. It is one of the
largest NGL fractionation facilities in the United States with an aggregate
capacity of approximately 215,000 barrels per day. The Cedar Bayou fractionator
includes three fractionation trains consisting of two de-ethanizers, three
depropanizers, three debutanizers and two deisobutanizers. Of its 215,000 barrel
per day aggregate capacity, the Cedar Bayou fractionator has capacity to
fractionate up to 175,000 barrels of mixed NGLs that contain ethane and heavier
NGL products and 40,000 barrels of mixed NGLs that do not contain ethane.
RECENT AND PLANNED EXPANSION OF THE CEDAR BAYOU FRACTIONATOR. Original
portions of the facility were constructed in the late 1950s, with significant
additional facilities constructed in the late 1960s and 1970s. During 1998 and
1999, we upgraded the Cedar Bayou fractionator to increase its capacity to
process mixed NGLs that do not contain ethane from 25,000 barrels per day to
40,000 barrels per day. During the past several years, we have completed several
energy efficiency projects that have resulted in a 15% reduction in overall
energy consumption.
In late 2002, the Cedar Bayou fractionator will be upgraded to allow
production of up to 25,000 barrels per day of purity ethane. Following
completion of this upgrade, the fractionator will be able to produce both purity
ethane and ethane-propane mix. We believe that this upgrade will allow us to
reduce costs associated with certain of our contracts that require us to
compensate our customers for the difference between the price of purity ethane
and the price of ethane contained in ethane-propane mix.
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The following chart depicts the average daily capacity of the Cedar Bayou
fractionator over the last five years:
CEDAR BAYOU NGL FRACTIONATION CAPACITY
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(IN THOUSANDS OF BARRELS PER DAY)
Mixed NGL stream with ethane.................... 175 175 175 175 175
Mixed NGL stream without ethane................. 25 25 40 40 40
--- --- --- --- ---
TOTAL......................................... 200 200 215 215 215
</Table>
MIXED NGL SUPPLY TO THE CEDAR BAYOU FRACTIONATOR. The majority of mixed
NGLs delivered to the Cedar Bayou fractionator for processing arrives by
pipeline. Mixed NGLs are also delivered by truck, rail car, barge and ship. Our
fractionator is connected to most of the major common carrier pipelines that
carry mixed NGLs to Mont Belvieu from producing basins in New Mexico, West Texas
and North Texas. The vast majority of NGL products exiting our facility are
transported by pipeline for delivery to petrochemical plants and refineries. Our
fractionator also supports outbound transportation by truck or rail.
UTILIZATION OF THE CEDAR BAYOU FRACTIONATOR. In 2001, the Cedar Bayou
fractionator operated at a capacity of 88%, fractionating an average of
approximately 189,000 barrels per day. While the volumes we fractionate are
generally stable in terms of annual averages, the volumes of mixed NGLs we
fractionate may vary on a seasonal basis. For example, we typically fractionate
lower volumes during the winter months, when more mixed NGLs are fractionated by
facilities closer to the field to capture propane for heating purposes and when
natural gas wells tend to be less productive. Conversely, we typically
fractionate greater volumes during the summer months, when fewer mixed NGLs are
locally fractionated for heating purposes, when natural gas wells tend to be
more productive and when refineries have excess supply of mixed NGLs due to
certain regulatory restrictions, increasing deliveries to the Mont Belvieu area.
The following table shows the average daily volumes of mixed NGLs fractionated
and the utilization at the Cedar Bayou fractionator over the last three years:
VOLUMES FRACTIONATED AND UTILIZATION
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
(IN THOUSANDS OF
BARRELS PER DAY)
Average daily production................................... 173 187 189
Average capacity utilization............................... 80% 87% 88%
</Table>
OWNERSHIP AND OPERATION OF THE CEDAR BAYOU FRACTIONATOR. We operate the
Cedar Bayou fractionator pursuant to an operating agreement that extends until
2022, and we own an 88% effective economic interest in Cedar Bayou
Fractionators, L.P., the limited partnership that owns the Cedar Bayou
fractionator. BP owns the remaining 12% interest and has an option to purchase
an additional interest in the fractionator, up to a maximum aggregate interest
of 25%, at a contractually defined price. BP's option expires on October 1,
2004.
Williams has an option to acquire a 5% ownership interest in the partnership
that owns the Cedar Bayou fractionator in exchange for a commitment to deliver a
specified volume of mixed NGLs to the facility through December 31, 2008.
Williams also has an option to purchase up to an additional 15%
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ownership interest in this partnership from us at a contractually defined price.
Both of Williams' options expire on October 1, 2004.
If both BP and Williams were to exercise their respective options in full,
our effective economic interest in the fractionator would be reduced from 88% to
55.6%. We currently anticipate that we would receive proceeds of approximately
$40 million upon full exercise of these options. Excluding the impact of the
receipt or reinvestment of the proceeds of this exercise, and assuming that
there are no increased throughput volumes associated with the new ownership
percentages, our EBITDA in 2001 would have been reduced by approximately
$6.9 million.
CEDAR BAYOU FRACTIONATOR CONTRACTS AND CUSTOMERS. The Cedar Bayou
fractionator generally fractionates mixed NGLs for a fee pursuant to tolling
arrangements with the owners of the mixed NGLs. Fractionation contracts
typically include a base processing fee per gallon and also include an
adjustment for changes in certain variable costs, such as energy. Historically,
our fractionation contracts have provided for quarterly adjustments in fees to
recover changes in these variable costs. During periods of rising energy prices,
the energy component of the fee we charge to customers is less than then
prevailing energy prices and during periods of falling energy prices, the fee we
charge to customers is greater than then prevailing energy prices. Where
possible, we endeavor to enter into contracts with monthly fee adjustments in
order to more timely reflect changes in variable costs.
Our operating margins related to our fractionation operations are also
affected by the difference between the price of purity ethane, which is a highly
concentrated form of ethane, and the price of ethane contained in ethane-propane
mix. We produce ethane-propane mix, but not purity ethane, at the Cedar Bayou
fractionator. The other competing fractionators at Mont Belvieu produce purity
ethane. As a competitive measure some of our contracts provide that we
compensate customers for the difference between the price of purity ethane and
the price of ethane contained in ethane-propane mix. Therefore, costs associated
with our fractionation operations increase as the price of purity ethane
increases relative to the price of ethane in ethane-propane mix.
The Cedar Bayou fractionator has long-term fractionation agreements with our
distribution and marketing services business, BP and Williams. The Cedar Bayou
fractionator derives approximately 85% of its fractionation volumes pursuant to
these three contracts. Our distribution and marketing services business and BP
generally have agreed to deliver to the Cedar Bayou fractionator for
fractionation all of the mixed NGLs that they own or control and deliver to the
Mont Belvieu area. Pursuant to its fractionation agreement, Williams has
generally agreed to deliver to the Cedar Bayou fractionator approximately 35,000
barrels of mixed NGLs per day. The following chart depicts the Cedar Bayou
fractionator's top five suppliers of mixed NGL streams by percentage of total
volumes fractionated for 2000 and 2001:
PRINCIPAL 2000 AND 2001 NGL FRACTIONATION CUSTOMERS
<Table>
<Caption>
PERCENT OF
TOTAL VOLUMES
FRACTIONATED
----------------------
SUPPLIER 2000 2001
- -------- -------- --------
Dynegy Energy Partners Predecessor.......................... 54% 48%
Williams.................................................... 22% 25%
BP.......................................................... 14% 12%
El Paso Energy.............................................. 6% 5%
ExxonMobil.................................................. 0% 8%
</Table>
An average of 91,000 barrels per day of the total volumes fractionated at
the Cedar Bayou fractionator during 2001 were fractionated for our distribution
and marketing services business. Of this amount, approximately 72,000 barrels
per day, or 79%, were purchased from Dynegy Midstream. Our
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distribution and marketing services business will purchase all of the mixed NGLs
owned or controlled by Dynegy Midstream pursuant to a 20-year agreement that
will be entered into in connection with the closing of this offering. See "Our
Relationship with Dynegy Inc."
MONT BELVIEU UNDERGROUND STORAGE FACILITY. Our Mont Belvieu underground
storage facility is the primary storage area for mixed NGLs and NGL products
fractionated at the Cedar Bayou fractionator and is connected by more than 50
pipelines to our suppliers and customers. The facility consists of 26
underground wells, 20 of which are owned by us and six of which are owned by
Chevron Phillips Chemical Company, with a total permitted storage capacity of
85 million barrels. We operate the Mont Belvieu facility pursuant to a
cost-sharing agreement with Chevron Phillips Chemical Company. The facility's
storage capacity and extensive pipeline connectivity, both with respect to third
parties and to the Cedar Bayou fractionator and Galena Park marine terminal,
make it one of the largest, most integrated and most flexible NGL storage
facilities in the United States.
We generate fee-based revenue by providing long-term and short-term storage
services and throughput capability to third-party domestic customers. Storage
fees are charged based on the volumes of NGL storage capacity leased and upon
receipt and delivery of mixed NGLs and NGL products. Chemical and refining
companies, industrial end-users and marketers typically use storage facilities
because they lack storage capacity, either because of size constraints or the
specialized handling requirements of the stored product. We also provide storage
services to industrial end-users, marketers and traders that need access to
storage capacity.
In addition to third-party business, our Mont Belvieu underground storage
facility also generates fee-based revenues from the Cedar Bayou fractionator. We
have a contract with the Cedar Bayou fractionator, pursuant to which we provide
two wells dedicated to storage of mixed NGLs, each with a capacity of two
million barrels. The contract also requires us to provide an additional one
million barrels of mixed NGL capacity and 6.7 million barrels of capacity for
NGL products. In return, the Cedar Bayou fractionator pays us an annual fee
adjusted for inflation. The contract extends until December 31, 2022. The
following table depicts our top five storage customers by percentage of total
revenues associated with our Mont Belvieu underground storage facility for 2000
and 2001:
PRINCIPAL 2000 AND 2001 MONT BELVIEU STORAGE CUSTOMERS
<Table>
<Caption>
PERCENT OF
MONT BELVIEU
STORAGE REVENUES
-------------------------
CUSTOMER 2000 2001
- -------- -------- --------
Cedar Bayou fractionator.................................... 39% 45%
Chevron Phillips Chemical Company........................... 25% 24%
Eastman Chemical Company.................................... 3% 5%
BP.......................................................... 3% 5%
Equistar.................................................... 2% 3%
</Table>
GALENA PARK MARINE TERMINAL. We own and operate the Galena Park marine
terminal, a large NGL import/export facility located on the Houston Ship
Channel. This marine terminal enables us to provide distribution, storage,
terminalling and inventory management services to our customers. The marine
terminal currently has an aggregate storage capacity of 700,000 barrels in
above-ground storage tanks and is connected by four pipelines to our Mont
Belvieu underground storage facility.
The marine terminal receives and delivers mixed NGLs, NGL products and
chemical products by pipeline, barge and ship. The marine terminal has three
ship docks that can generally accommodate any vessel capable of navigating the
Houston Ship Channel, including large seagoing NGL carriers. Two of the ship
docks may be configured to accept barges, and the marine terminal has three
dedicated
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barge berths to complement its docks. The marine terminal has an import capacity
of up to 10,000 barrels per hour and an export capacity of up to 8,000 barrels
per hour.
We operate the Galena Park marine terminal and, while we own most of the
assets at the facility, we operate for Chevron Phillips Chemical Company an
ethylene import and export facility. We have use of refrigeration equipment that
comprises the ethylene export facility for NGL products. We generate fee-based
revenue at the marine terminal primarily by providing third-party domestic and
international customers long-term and short-term storage and terminalling
services. Domestically, our Galena Park marine terminal receives volumes from
refineries and supplies feedstocks to refineries and petrochemical companies.
With respect to volumes destined for or arriving from foreign locations, we
adjust our import and export capabilities to match prevailing market conditions.
The following table depicts our top five Galena Park customers by percentage of
total volumes associated with our Galena Park marine terminal for 2000 and 2001:
PRINCIPAL 2000 AND 2001 GALENA PARK CUSTOMERS
<Table>
<Caption>
PERCENT OF
GALENA PARK
VOLUMES
-------------------
CUSTOMER 2000 2001
- -------- -------- --------
Dynegy Global Liquids....................................... 21% 29%
Dynegy Energy Partners Predecessor.......................... 26% 19%
Chevron Phillips Chemical Company........................... 27% 15%
Koch Hydrocarbons........................................... 7% 14%
Texas Petrochemicals........................................ 6% 10%
</Table>
We periodically provide services to Dynegy Global Liquids, an affiliate of
our general partner, for the international import and export of mixed NGLs and
NGL products on a spot, as available basis. Each contract is entered into at the
time Dynegy Global Liquids requires the needed service at market-based rates.
Even though no long-term contract exists to provide these services, we expect
that we will continue to provide import and export handling services to Dynegy
Global Liquids in the future as opportunities arise. Specifically, because of
the flexibility of our Galena Park marine terminal and its interconnectivity
with our other Texas Gulf Coast assets, we believe we are well positioned to
capitalize on increasing globalization of the NGL industry. In addition, our
long-standing relationships with our customers generally have led to repeat
business and the renewal of both short-term and long-term contracts.
HOUSTON-AREA PIPELINE INFRASTRUCTURE. We own and operate an extensive
network of pipelines connecting the Cedar Bayou fractionator, our Mont Belvieu
underground storage facility, our Galena Park marine terminal and end users.
These pipelines allow efficient transfer of mixed NGLs and NGL products among
our fractionation, storage and terminal facilities, our customers' facilities
and third-party facilities. In the aggregate, these pipelines are approximately
150 miles in length and are used to service petrochemical manufacturers and
refinery services customers. Two of the pipelines connecting our facilities are
regulated by FERC.
COMPETITION. The Cedar Bayou fractionator competes principally with other
fractionators located in Mont Belvieu. Among its primary competitors are
Enterprise Products, Diamond Koch and Gulf Coast Fractionators. Enterprise
Products operates a fractionator in Mont Belvieu that is approximately the same
size as the Cedar Bayou fractionator. Diamond Koch's fractionator is also
located in Mont Belvieu and has an average capacity of 160,000 barrels per day.
In addition to the Enterprise and Diamond Koch facilities, Gulf Coast
Fractionators is a joint venture among Conoco, Mitchell Energy and Dynegy Inc.,
and is operated by Conoco. This fractionator is also located in Mont Belvieu and
has an average capacity of 110,000 barrels per day. Pursuant to a consent decree
entered into between
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Dynegy Inc. and the Federal Trade Commission, Dynegy Inc. is precluded from
participating in commercial decisions related to the operation of Gulf Coast
Fractionators.
Although competition for mixed NGL fractionation services is based primarily
on the fractionation fee, the ability of a fractionator to obtain and distribute
product is a factor considered by owners of mixed NGLs in deciding where to
fractionate mixed NGLs. A fractionator such as the Cedar Bayou fractionator
connected to an extensive transportation and distribution system has direct
access to a larger market.
Our principal competitors include Enterprise Products and TEPPCO, with
respect to our Mont Belvieu underground storage facility, and Enterprise
Products and EOTT, with respect to our Galena Park marine terminal.
TRANSPORTATION AND LOGISTICS
We have an NGL transportation and logistics infrastructure that is composed
of a wide range of transportation and distribution assets designed to satisfy
the various delivery requirements of our distribution and marketing services
business, including transportation of mixed NGLs and NGL products to and from
fractionation, storage, pipeline and terminal facilities owned by us or third
parties. We own and operate 88 tank trucks and have access to approximately
2,000 rail cars through a services agreement with ChevronTexaco. We also own and
operate 21 pressurized barges. We maximize use of our transportation assets by
providing fee-based transportation services to refineries and petrochemical
companies in the Gulf of Mexico region using available capacity in our tank
truck fleet, rail cars and pressurized barges.
STORAGE AND TERMINALS. As part of our transportation and logistics
operations, we own and/or operate a number of storage and terminal facilities,
which we use to deliver NGL products to our customers and to support our
distribution and marketing business. The following table summarizes the type,
location, connections and throughput of these assets:
STORAGE AND TERMINAL FACILITIES
<Table>
<Caption>
THROUGHPUT
FOR THE YEAR ENDED
DECEMBER 31,
STORAGE AND TERMINAL FACILITIES LOCATION CONNECTIONS 2001
- ------------------------------- ---------------- --------------------- ------------------
(COUNTY, STATE) (IN THOUSANDS
OF GALLONS)
Hattiesburg Underground Storage
Facility............................. Washington, MS Pipeline, Truck, Rail 73,309
Greenville Propane Terminal............ Greenville, MS Truck, Barge, Rail 20,688
Calvert City Propane Terminal.......... Marshall, KY Pipeline, Truck 45,457
Pt. Everglades Propane Terminal........ Broward, FL Truck, Barge 48,612
Tampa Propane Terminal................. Hillsborough, FL Truck, Barge, Rail 56,004
Tyler Propane Terminal................. Smith, TX Pipeline, Truck 8,483
Chattanooga Propane Terminal*.......... Hamilton, TN Truck, Rail N/A
Gladewater Injection Terminal.......... Gregg, TX Pipeline, Truck 35,455
Bridgeport Injection Terminal.......... Jack, TX Pipeline, Truck 19,294
Abilene Injection Terminal............. Taylor, TX Pipeline, Truck 16,044
-------
TOTAL................................ 323,346
</Table>
- ------------------------
* Acquired in January 2002 from ChevronTexaco
HATTIESBURG UNDERGROUND STORAGE FACILITY. We operate and own a 50% interest
in the Hattiesburg underground propane storage facility in Washington County,
Mississippi. The Hattiesburg facility
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consists of three injection wells for underground storage with a total capacity
of 5.9 million barrels. This facility is connected by an 8-inch pipeline to the
Dixie pipeline system, a propane pipeline that runs from the Gulf Coast to North
Carolina and Georgia. It is also connected to Chevron's Pascagoula, Mississippi
refinery by the Plantation pipeline. In addition to its pipeline connections,
the facility serves as a major terminal for receipt and delivery of NGL products
by truck and rail. Hattiesburg is equipped with eight automated truck loading
racks and tank car racks capable of accommodating 16 rail cars. These
capabilities make the Hattiesburg facility a significant support structure for
our distribution and marketing services business.
PROPANE TERMINALS. We operate and, in most cases, have an ownership
interest in six propane terminals in Kentucky, Mississippi, Florida, Tennessee
and Texas. The Florida and Mississippi terminals are supplied with NGL products
from multiple supply points by pressurized barges. The Texas and Kentucky
terminals are primarily supplied with product from Mont Belvieu by pipeline. The
Tennessee terminal is supplied with product from various points by rail. These
facilities are equipped with truck loading racks and pipeline connections and,
excluding the Tennessee terminal that was acquired effective January 1, 2002,
accounted for an average propane sales volume of 16,474 barrels per day in 2001.
INJECTION TERMINALS. Our Abilene, Bridgeport and Gladewater terminals are
pipeline injection facilities for mixed NGLs that are brought in by truck, to be
offloaded into tanks and injected into the ChevronTexaco-operated West Texas
Pipeline system. These facilities are equipped with truck racks for offloading
mixed NGLs and storage tanks for pumping the mixed NGLs into this pipeline
system. In 2001, these terminals had an aggregate throughput of 4,618 barrels
per day. The volumes serviced at these terminals are expected to increase with
increased area drilling.
TANK TRUCKS. We own and operate a fleet of tank trucks to transport mixed
NGLs and NGL products and liquid chemical products. The fleet includes both high
pressure and low pressure equipment, enabling us to deliver a wide range of
products to our customers. The trucks are generally used to transport propane
from storage or terminals to market or to gather mixed NGLs from refineries and
gas plants for delivery to fractionators or other refineries. The fleet,
composed of 88 tractors and 109 trailers, is positioned near primary production
and distribution assets in Texas, Louisiana and Mississippi. Our fleet
transports in the aggregate an average of 21,500 barrels per day. The following
chart indicates the location, quantity and capacity of our tank truck assets:
TANK TRUCKS
<Table>
<Caption>
BASE LOCATION TRAILERS CAPACITY
- ------------- -------- ---------
(GALLONS)
Abilene, TX.............................................. 6 63,000
Bridgeport, TX........................................... 15 157,500
Gladewater, TX........................................... 11 115,500
Mont Belvieu, TX......................................... 53 490,500
Hammond, LA.............................................. 21 220,500
Greenville, MS........................................... 3 31,500
--- ---------
TOTAL.................................................. 109 1,078,500
</Table>
RAIL CARS. We have access to over 2,000 rail cars pursuant to a services
agreement with ChevronTexaco. These rail cars are strategically located across
the United States and can transport NGLs and several other products. We
primarily transport butane, propane and propylene to market and transport in the
aggregate an average of 33,000 barrels per day.
BARGES. Our pressurized barge fleet is used to transport NGL products
throughout the Gulf Coast market. We currently own and operate the largest fleet
of seagoing pressurized barges in North America. These barges generally move
butane in and out of refineries and transport propane and
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refinery-grade propylene to market. Our barge fleet consists of five seagoing
pressurized barges, 14 inland pressurized barges and two combination pressurized
barges suitable for both inland and seagoing service. The fleet's operational
base in Belle Chasse, Louisiana, is strategically located for serving the Gulf
Coast market.
We may also enter into short-term lease agreements for the use of barges as
necessary to supplement the capacity of our owned fleet to meet our
transportation obligations. In 2001, we transported an aggregate of 2.2 million
barrels on leased barges.
The following chart indicates the type, quantity, ownership and capacity of
the pressurized barges in our fleet:
BARGES
<Table>
<Caption>
QUANTITY
TYPE OF SERVICE OWNED CAPACITY
- --------------- -------- ------------
(IN BARRELS)
Inland *................................................. 14 183,939
Seagoing**............................................... 5 104,031
Combination***........................................... 2 33,296
-- -------
TOTAL.................................................. 21 321,266
</Table>
- ------------------------
* Intracoastal Waterway and Mississippi River
** Across the Gulf of Mexico
*** Used for both inland and seagoing service
DISTRIBUTION AND MARKETING SERVICES
Our vertically integrated, strategically located physical assets enable us
to successfully distribute and market NGL products. Because our business is
vertically integrated, we are able to capitalize on marketing opportunities
existing in the NGL markets we serve through the operation of our physical
assets. Our strategically located asset base and significant contractual
relationships, coupled with our operational and industry expertise, allow us to
capture capacity, demand and distribution inefficiencies that exist from time to
time in the market.
Our distribution and marketing services include:
- refinery services;
- wholesale propane marketing; and
- purchasing mixed NGLs and NGL products from NGL producers and other
sources and selling NGL products to petrochemical manufacturers,
refineries and other marketing companies.
The following chart depicts the average daily volumes we have sold since
1999:
VOLUMES SOLD BY DISTRIBUTION AND MARKETING SERVICES
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
(IN THOUSANDS OF
BARRELS PER DAY)
Refinery Services...................................... 35 41 41
Wholesale Propane...................................... 48 53 51
Marketing.............................................. 374 368 398
--- --- ---
TOTAL................................................ 457 462 490
</Table>
We market significant volumes of mixed NGLs and NGL products under term
contracts for major producers, including Dynegy Midstream and ChevronTexaco. Of
the volumes we purchased during 2001, Dynegy Midstream accounted for
approximately 16% and ChevronTexaco accounted for
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approximately 13%. In addition, Chevron Phillips purchased approximately 20% of
the volumes we sold. In addition to our sales to Chevron Phillips, for the year
ended December 31, 2001, approximately 12% of our sales volumes were made on a
spot basis to Louis Dreyfus Plastics.
REFINERY SERVICES. In 2001, we sold an average of 41,000 barrels per day of
NGLs through our refinery services business. In this business, we purchase mixed
NGLs and NGL products primarily from refineries and, to a lesser extent, from
gas plants, including plants owned by Dynegy Midstream. We sell these NGLs to
refinery customers or to other customers through our distribution and marketing
services business. Our refinery and gas plant customers require our services
because they generally lack pipeline connections and consequently must receive
and ship products by truck or rail.
The primary NGL products we handle in our refinery services business are
butane and propane. Most of the butane is sold to other refineries, while the
propane is sold through our wholesale marketing operations. We generally earn a
margin by retaining a portion of the resale price or a fixed minimum fee per
gallon. We also transport mixed NGLs from refineries and gas plants to injection
terminals for transportation by pipeline to major fractionation hubs.
We have contracts ranging in term from one to five years with a total of 26
refineries and gas plants, including all six of Chevron's United States
refineries. Our other refinery services suppliers include Ultramar Diamond
Shamrock/Valero, Citgo, Alon USA, Atofina and Amerada Hess. The following map
shows the location of the refineries and gas plants with whom we have contracts:
REFINERY SERVICES CUSTOMERS
[MAP ILLUSTRATING LOCATION OF REFINERY SERVICES CUSTOMERS]
WHOLESALE PROPANE MARKETING. In 2001, we sold an average of approximately
51,000 barrels of propane per day to more than 800 retailers nationwide. Our
propane supply comes from our refinery services operations and our other
distribution and marketing operations. Our customers include major multi-state
gas retailers such as Suburban Propane Partners, L.P., AmeriGas Partners, L.P.,
and Ferrellgas, L.P. and independent retailers such as, Allied Propane and
Gasco. Multi-state retailers generally account for approximately 40% of our
wholesale propane sales, while independent retailers make up the balance. We
generally sell propane to retailers pursuant to contracts that are generally
renewable each year. The contracts either provide for sales at a fixed price
based on the current price established at Mont Belvieu or allow us to charge the
posted price at the time of delivery. Some of our contracts have maximum and
minimum seasonal purchase guidelines. We have a number of offices strategically
located in six regions across the country, each supported by a manager and sales
force. Our primary advantage in our wholesale propane marketing operations is
our reputation for service and
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reliability. Our extensive network of transportation and logistics assets and
multiple sources of propane supply enable us to capitalize on marketing
opportunities, while delivering propane efficiently and in volumes sufficient to
meet our contractual obligations. As a result, we believe that we have
established a reputation in our industry as a high-value, reliable supplier.
OTHER DISTRIBUTION AND MARKETING SERVICES. In 2001, we sold an average of
398,000 barrels per day of mixed NGLs and NGL products through our marketing
operations. We enter into contracts both to purchase mixed NGLs and NGL products
from NGL producers and to sell NGL products to end-users and other marketing
companies. We generally purchase mixed NGLs and NGL products from producers at a
monthly pricing index less applicable fractionation, transportation and
marketing fees. We resell the products purchased from NGL producers to
petrochemical manufacturers, refineries and other marketing companies. For
example, one of the contracts we will enter into with Dynegy Midstream at the
closing of this offering will obligate Dynegy Midstream to sell all of its mixed
NGLs and NGL products to us for the next 20 years. This contract will provide
for the purchase of mixed NGLs at an OPIS index base price less adjustments for
transportation and fractionation costs and a distribution and marketing services
fee equal to a percentage of the sales price, subject to a minimum fee per
gallon.
In addition to margins that we earn from buying NGL products pursuant to
term contracts, we also earn a margin by purchasing and selling NGL products in
the spot market and in the forward market. Through these transactions we seek to
maintain a position that is substantially balanced between our physical
inventories and purchase obligations for NGLs as compared to our NGL product
sales commitments. As part of our risk management strategy, we also enter into
floating price collar arrangements, financial swaps and NGL products futures
contracts to manage some of our exposure to commodity price risk. Generally, we
purchase only NGL products for which we have a market and structure our sales
contracts so that NGL price fluctuations do not significantly affect the margins
we receive. We do not typically acquire and hold NGL inventory or derivative
financial instruments for the purpose of speculating on NGL price changes that
might expose us to indeterminable losses.
The profitability of our distribution and marketing services business
depends on the volume of NGL products purchased and sold, the level of marketing
fees charged to our refinery services customers and other customers and the
margins associated with selling NGL products at a price in excess of the costs
incurred in acquiring the NGL products. The difference between the cost of NGL
products and sales prices typically changes in periods of rising or falling NGL
products prices. When market prices of NGL products rise or fall, sales prices
and related revenues are directly affected.
COMPETITION. Our wholesale propane marketing operations compete with
numerous regional propane producers and suppliers throughout the United States.
Our major regional competitors are BP in the Midwest, Phillips and Conoco in the
Southwest and Enterprise in the West and Southeast. In addition, we compete with
numerous wholesalers that ship propane along the major NGL pipelines.
Our other primary competitors with respect to our Distribution and Marketing
Services business include Louis Dreyfus, Duke Energy, El Paso Energy and
Enterprise Products.
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DYNEGY MIDSTREAM ASSETS AND CONTRACTS
In connection with our formation, Dynegy Midstream will retain
Dynegy Inc.'s midstream assets that are not being contributed to our
partnership. The assets and operations to be retained by Dynegy Midstream
include the following:
- GAS GATHERING AND PROCESSING PLANTS. Dynegy Midstream owns interests in 22
gas processing plants, as well as associated and stand-alone gas gathering
pipeline systems. These assets are primarily located near the wellhead in
key producing areas of Louisiana, New Mexico and Texas.
- LOUISIANA AREA OPERATIONS. Louisiana area operations include the Lake
Charles fractionator, the Hackberry storage facility, the Lake Charles
mixed NGL gathering system and the Lake Charles to Mont Belvieu
bi-directional pipeline. The Hackberry storage facility is primarily
operated in conjunction with the Lake Charles fractionator to store mixed
NGLs prior to fractionation and to store NGL products after fractionation.
The Lake Charles mixed NGL gathering system is utilized to gather mixed
NGLs from processing plants situated near the Lake Charles fractionator.
The primary purpose of the Lake Charles to Mont Belvieu bi-directional
pipeline is to transport BG mix, a mixture of butane and gasoline, which
the Lake Charles fractionator is unable to fractionate, to the Cedar Bayou
fractionator, which has the ability to fractionate these products. The
Lake Charles to Mont Belvieu bi-directional pipeline is integral to the
operations of the Lake Charles fractionator.
- GULF COAST FRACTIONATOR. Dynegy Midstream has a 38.75% ownership interest
in the Gulf Coast Fractionator. Although the Gulf Coast Fractionator is
located in the Texas Gulf Coast area, it is not operated and managed with
our assets and operations constituting the Texas Gulf Coast Facilities.
Rather, the Gulf Coast Fractionator is operated by Conoco.
- THE WEST TEXAS PIPELINE. Dynegy Midstream has a 39% ownership interest in
the West Texas Pipeline which carries mixed NGLs from gas processing
plants to fractionation facilities. The West Texas Pipeline is operated by
an affiliate of ChevronTexaco.
- GLOBAL MARKETING AND TRANSPORTATION. Dynegy Midstream charters four very
large gas carriers which support its international marketing operations.
Effective January 1, 2002, we have entered into a number of commercial
agreements with Dynegy Midstream. These agreements have a 20-year term and
include:
- A Mixed NGL and NGL Product Purchase and Sale Agreement, pursuant to which
we will purchase all of Dynegy Midstream's owned or controlled mixed NGLs
and NGL products. The purchase price for the mixed NGLs and NGL products
will be based on an OPIS index price, less adjustments for transportation
and fractionation costs and a distribution and marketing services fee
equal to a percentage of the base price, subject to a minimum fixed fee
per gallon. This agreement formalizes the current business practice
between Dynegy Midstream and our distribution and marketing services
business.
- A Mixed NGL Gathering Agreement, a Storage Agreement and a Fractionation
Agreement which give us the ability to utilize services provided by Dynegy
Midstream's assets located in Louisiana. Our marketing and distribution
business acquires mixed NGLs in Louisiana pursuant to purchase and
exchange agreements. The gathering agreement provides that Dynegy
Midstream will receive mixed NGLs from us at the tailgates of certain
plants located in the Lake Charles area and deliver them to its storage
facility in exchange for a per gallon fee for all volumes gathered. The
storage agreement provides for storage capacity for mixed NGLs and NGL
products for a fee of approximately $2 million per year. We have the
option of fractionating our Louisiana volumes at Dynegy Midstream's Lake
Charles fractionator or at the Cedar Bayou fractionator. To the extent we
fractionate these volumes at the Cedar Bayou
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fractionator, we will pay Dynegy Midstream a transportation fee for the
use of its bi-directional pipeline which connects its Louisiana assets to
Mont Belvieu. Fees associated with these agreements will be assessed based
on our usage of each of the services to be provided.
ENVIRONMENTAL AND REGULATORY MATTERS
Our activities are subject to various state and local laws and regulations,
as well as orders of regulatory bodies, governing a wide variety of matters,
including marketing, production, pricing, community right-to-know, protection of
the environment, safety and other matters.
ENVIRONMENTAL. We believe that our operations and facilities are in
substantial compliance with applicable environmental regulations. However, risks
of process upsets, accidental releases or spills can be associated with our
operations and there can be no assurance that significant costs and liabilities
will not be incurred, including those relating to claims for damage to property
and persons.
The clear trend in environmental regulation is to place more restrictions
and limitations on activities that may affect the environment, such as emissions
of pollutants, generation and disposal of wastes and use and handling of
chemical substances. The usual remedy for failure to comply with these laws and
regulations is the assessment of administrative, civil and, in some instances,
criminal penalties or, in some circumstances, injunctions. We believe that the
cost of compliance with environmental laws and regulations will not have a
material adverse effect on our results of operations or financial condition.
However, it is possible that the costs of compliance with environmental laws and
regulations will continue to increase, and thus there can be no assurance as to
the amount or timing of future expenditures for environmental compliance or
remediation, and actual future expenditures may be different from the amounts
currently anticipated. In the event of future increases in costs, we may be
unable to pass on those increases to our customers. We will attempt to
anticipate future regulatory requirements that might be imposed and plan
accordingly in order to remain in compliance with changing environmental laws
and regulations and to minimize the costs of such compliance.
SOLID WASTE. We currently own or lease, and have in the past owned or
leased, properties that have been used over the years for NGL fractionating,
treatment, transportation and storage. Solid waste disposal practices within the
NGL industry and other oil and natural gas related industries have improved over
the years with the passage and implementation of various environmental laws and
regulations. We are aware that hydrocarbons and other solid wastes associated
with historical activities are present in certain onsite soils at our Mont
Belvieu location. These materials are in stable soil, and are not the subject of
any current or anticipated remedial obligation. The materials were left in place
several years ago as part of waste disposal area closures conducted in
accordance with applicable regulatory requirements at the time. We have no
reason to believe that the continued presence of the materials is causing any
ongoing contamination of groundwater or other environmental media. Hydrocarbons
and other solid wastes also may have been disposed of on or under other
properties owned or leased by us during the operating history of those
facilities. In addition, a small number of our properties may have been operated
by third parties over whom we had no control as to such entities' handling of
hydrocarbons or other wastes and the manner in which such substances may have
been disposed of or released. State and federal laws applicable to oil and
natural gas wastes and properties have gradually become more strict and,
pursuant to such laws and regulations, we could be required to remove or
remediate previously disposed wastes or property contamination, including
groundwater contamination. To the extent that we become obligated to remedy any
of these conditions in the near term, Dynegy Midstream has agreed to indemnify
us in an aggregate amount not to exceed $12.5 million for five years after the
closing of this offering for certain potential environmental liabilities
occurring or existing before the closing date. We do not believe that the
presence of these conditions on our properties is likely to result in
unrecovered expenditures or liability that would have a material adverse effect
on our operations.
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We generate both hazardous and nonhazardous solid wastes which are subject
to requirements of the federal Resource Conservation and Recovery Act ("RCRA")
and comparable state statutes. From time to time, the U.S. Environmental
Protection Agency ("EPA") has considered making changes in nonhazardous waste
standards that would result in stricter disposal requirements for these wastes.
Furthermore, it is possible that some wastes generated by us that are currently
classified as nonhazardous may in the future be designated as "hazardous
wastes," resulting in the wastes being subject to more rigorous and costly
disposal requirements. Changes in applicable regulations may result in an
increase in our capital expenditures or operating expenses.
SUPERFUND. The federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), also known as the "Superfund" law, and similar
state laws, impose liability without regard to fault or the legality of the
original conduct, on certain classes of persons, including the owner or operator
of a site and companies that disposed or arranged for the disposal of the
hazardous substances found at the site. CERCLA also authorizes the EPA and, in
some cases, third parties to take actions in response to threats to the public
health or the environment and to seek to recover from the responsible classes of
persons the costs they incur. Although "petroleum" is excluded from CERCLA's
definition of a "hazardous substance," in the course of our ordinary operations
we will generate wastes that may fall within the definition of a "hazardous
substance." We may be responsible under CERCLA for all or part of the costs
required to clean up sites at which such wastes have been disposed. We have not
received any notification that we may be potentially responsible for cleanup
costs under CERCLA.
CLEAN AIR ACT. Our operations are subject to the federal Clean Air Act and
comparable state statutes. Amendments to the Clean Air Act adopted in 1990
contain provisions that may result in the imposition of increasingly stringent
pollution control requirements with respect to air emissions from the operations
of our pipelines and our processing and storage facilities. Such air pollution
control requirements may include specific equipment or technologies, permits
with emissions and operational limitations, pre-approval of new or modified
projects or facilities producing air emissions, and similar measures. For
example, our Texas Gulf Coast facilities are located in the Houston-Galveston
ozone non-attainment area, which is categorized as a "severe" non-attainment
area under the Clean Air Act. "Severe" non-attainment areas are subject to more
restrictive regulations for the issuance of air permits for new or modified
facilities. In addition, existing sources of air emissions in the
Houston-Galveston area are subject to stringent emission reduction requirements.
We have included in our capital budget some projected expenditures for
compliance with emission reduction requirements applicable to our Texas Gulf
Coast facilities for which compliance is required beginning in 2004. We expect
that our maintenance capital expenditures over the next four years will include
approximately $6.2 million for equipment upgrades to comply with these new
requirements. Failure to comply with applicable air statutes or regulations may
lead to the assessment of administrative, civil or criminal penalties, and/or
result in the limitation or cessation of construction or operation of certain
air emission sources. We believe that our operations, including our processing
facilities, pipelines and storage facilities, are in substantial compliance with
applicable air emission control requirements.
CLEAN WATER ACT. The Federal Water Pollution Control Act, also known as the
Clean Water Act, and similar state laws require containment of potential
discharges of contaminants into federal and state waters. Regulations
promulgated pursuant to these laws require entities that discharge into federal
and state waters to obtain National Pollutant Discharge Elimination System
("NPDES") and/or state permits authorizing these discharges. The Clean Water Act
and analogous state laws provide penalties for releases of unauthorized
contaminants into the water and impose substantial liability for the costs of
removing spills from such waters. In addition, the Clean Water Act and analogous
state laws require that individual permits or coverage under general permits be
obtained by covered facilities for discharges of stormwater runoff. We believe
that we will be able to obtain, or be included under, these Clean Water Act
permits and that compliance with the conditions of such permits will not have a
material effect on our operations.
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UNDERGROUND STORAGE REQUIREMENTS. We currently own and operate underground
storage caverns that have been created in naturally occurring salt domes in
Texas and Mississippi. These storage caverns are used to store NGLs, NGL
products, propane/propylene mix, ethylene and propylene. Surface brine pits and
brine disposal wells are used in the operation of the storage caverns. All of
these facilities are subject to strict environmental regulation by the Texas
Railroad Commission and other state agencies under the Texas Natural Resources
Code and by the Mississippi State Oil and Gas Board under similar Mississippi
statutes. Regulations implemented under such statutes address the operation,
maintenance and/or abandonment of such underground storage facilities, pits and
disposal wells, and require that permits be obtained. Failure to comply with the
governing statutes or the implementing regulations may lead to the assessment of
administrative, civil or criminal penalties. We believe that our salt dome
storage operations, including the caverns, brine pits and brine disposal wells,
are in substantial compliance with applicable statutes.
SAFETY REGULATION. Our pipelines are subject to regulation by the U.S.
Department of Transportation ("DOT") under the Hazardous Liquid Pipeline Safety
Act, as amended ("HLPSA"), relating to the design, installation, testing,
construction, operation, replacement and management of pipeline facilities. The
HLPSA covers crude oil, carbon dioxide, NGL and petroleum products pipelines and
requires any entity which owns or operates pipeline facilities to comply with
the regulations under the HLPSA, to permit access to and allow copying of
records and to make certain reports and provide information as required by the
Secretary of Transportation. Our truck terminals and trucking operations are
subject to a separate set of DOT safety regulations. We believe that our
pipeline and trucking operations are in substantial compliance with applicable
DOT requirements; however, due to the possibility of new or amended laws and
regulations or reinterpretation of existing laws and regulations, there can be
no assurance that future compliance with the DOT regulations will not have a
material adverse effect on our results of operations or financial position.
The workplaces associated with our processing, terminal and storage
facilities and the pipelines, trucks and marine vessels we operate are subject
to the requirements of the federal Occupational Safety and Health Act ("OSHA")
and comparable state statutes. We believe that we have conducted our operations
in substantial compliance with OSHA requirements, including general industry
standards, record keeping requirements and monitoring of occupational exposure
to regulated substances. Our marine vessel and terminal operations are also
subject to safety and operational standards established and monitored by the
U.S. Coast Guard, as discussed above.
In general, we expect to increase our expenditures relating to compliance
with likely higher industry and regulatory safety standards such as those
described above. These expenditures cannot be accurately estimated at this time,
but we do not expect them to have a material adverse effect on our business.
MARINE TRANSPORTATION. The Interstate Commerce Act exempts from economic
regulation the water transportation of petroleum cargoes in bulk. Accordingly,
our transportation rates, which are negotiated with our customers, are not
subject to special rate regulation under the provisions of such act or
otherwise. The operation of tank ships, tugboats and barges, however, is subject
to regulation under various federal laws and international conventions, as
interpreted and implemented by the United States Coast Guard, as well as certain
state and local laws. Tank ships, tugboats and barges are required to meet
construction and repair standards established by the American Bureau of
Shipping, a private organization, and the United States Coast Guard and to meet
operational and safety standards presently established by the United States
Coast Guard.
JONES ACT. The Jones Act is a federal law that restricts maritime
transportation between United States points to vessels built and registered in
the United States and owned and manned by United States citizens. Since we
engage in maritime transportation between United States points, we are subject
to the provisions of the law. As a result, we are responsible for monitoring the
ownership of
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our subsidiaries that engage in maritime transportation and for taking any
remedial action necessary to insure that no violation of the Jones Act ownership
restrictions occurs. The Jones Act also requires that all United States-flag
vessels be manned by United States citizens. Foreign-flag seamen generally
receive lower wages and benefits than those received by United States citizen
seamen. This requirement significantly increases operating costs of United
States-flag vessel operations compared to foreign-flag vessel operations.
Certain foreign governments subsidize their nations' shipyards. This results in
lower shipyard costs both for new vessels and repairs than those paid by United
States-flag vessel owners. The United States Coast Guard and American Bureau of
Shipping maintain the most stringent regime of vessel inspection in the world,
which tends to result in higher regulatory compliance costs for United
States-flag operators than for owners of vessels registered under foreign flags
of convenience.
PIPELINE REGULATION. Two pipelines that connect our Mont Belvieu and Galena
Park facilities are subject to rate regulation by the FERC under the Interstate
Commerce Act. The Interstate Commerce Act requires that tariff rates for
regulated pipelines be just and reasonable and non-discriminatory. The
Interstate Commerce Act permits challenges to proposed new or changed rates by
protest and challenges to rates that are already on file and in effect by
complaint. Because we are the only shipper on these pipelines, we do not believe
that it is likely that there will be a challenge to our rates that would
materially affect our revenues and cash flows.
TITLE TO PROPERTIES
Substantially all of our pipelines are constructed on rights-of-way granted
by record owners of such property. Some of the rights-of-way are shared with
other pipelines owned by affiliates of Dynegy Inc. and third parties. In some
instances such rights-of-way are revocable at the election of the grantor. Lands
over which rights-of-way have been obtained may be subject to prior liens. We
have obtained permits from public authorities to cross over or under, or to lay
facilities in or along water courses, county roads, municipal streets and state
highways, and in some instances, these permits are revocable at the election of
the grantor. We have also obtained permits from railroad companies to cross over
or under lands or rights-of-way, many of which are also revocable at the
grantor's election.
Some of our facilities are located on lands which are leased. Some or all of
those lands may be subject to prior liens which have not been subordinated to
the leases.
Some of the leases, easements, rights-of-way, permits and licenses
transferred or to be transferred to us require the consent of the grantor to
transfer these rights. Our general partner believes that it has obtained or will
obtain third-party consents, permits and authorizations sufficient for the
transfer to us of the assets necessary for us to operate our business in all
material respects as described in this prospectus. With respect to any consents,
permits or authorizations which have not yet been obtained, our general partner
believes that such consents, permits or authorizations will be obtained after
the closing of this offering, or that the failure to obtain such consents,
permits or authorizations will have no material adverse effect on the operation
of our business.
Our general partner believes that we have satisfactory title to all of our
assets. Record title to some of our assets may continue to be held by affiliates
of Dynegy Inc. until we have made the appropriate filings in the jurisdictions
in which such assets are located and obtained any consents and approvals that
are not obtained prior to the transfer. We will make these filings and seek
these consents after the completion of this offering. Although title to these
properties is subject to encumbrances in certain cases, such as customary
interests generally retained in connection with acquisition of real property,
liens related to environmental liabilities associated with historical
operations, liens for current taxes and other burdens and minor easements,
restrictions and other encumbrances to which the underlying properties were
subject at the time of acquisition by our predecessor or us, our general partner
believes that none of these burdens will materially detract from
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the value of our properties or from our interest in them or will materially
interfere with their use in the operation of our business.
EMPLOYEES
To carry out our operations, our general partner or its affiliates employ
approximately 290 individuals who provide direct support to our operations. None
of these employees are represented by labor unions.
LITIGATION
We are a party to various legal actions that have arisen in the ordinary
course of business. We do not believe that the resolution of these matters will
have a material adverse effect on our financial condition or results of
operations.
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MANAGEMENT
MANAGEMENT OF DYNEGY ENERGY PARTNERS
Dynegy DEP GP LLC, as our general partner, will manage our operations and
activities on our behalf. Our general partner is not elected by our unitholders
and will not be subject to re-election in the future. Unitholders will not
directly or indirectly participate in our management or operation. Our general
partner owes a fiduciary duty to our unitholders. Our general partner will be
liable, as general partner, for all of our debts (to the extent not paid from
our assets), except for indebtedness or other obligations that are made
specifically non-recourse to it. However, whenever possible, our general partner
intends to incur indebtedness or other obligations that are non-recourse.
At least two members of the board of directors of our general partner will
serve on a conflicts committee to review specific matters that the board
believes may involve conflicts of interest. The conflicts committee will
determine if the resolution of the conflict of interest is fair and reasonable
to us. The members of the conflicts committee may not be officers or employees
of our general partner or directors, officers, or employees of its affiliates
and must meet the independence standards to serve on an audit committee of a
board of directors established by the New York Stock Exchange. Any matters
approved by the conflicts committee will be conclusively deemed to be fair and
reasonable to us, approved by all of our partners, and not a breach by our
general partner of any duties it may owe us or our unitholders. In addition, the
members of the conflicts committee will also serve on an audit committee that
will review our external financial reporting, recommend engagement of our
independent auditors and review procedures for internal auditing and the
adequacy of our internal accounting controls. The members of the conflicts
committee will also serve on the compensation committee, which will oversee
compensation decisions for the officers of our general partner as well as the
compensation plans described below.
In compliance with the rules of the New York Stock Exchange, the members of
the board of directors named below will appoint two independent members within
three months of the listing of the common units on the New York Stock Exchange
and one additional independent member within 12 months of that listing. The
three newly appointed members will serve as the initial members of the audit and
compensation committees.
We are managed and operated by the directors and officers of our general
partner. All of our operational personnel will be employees of Dynegy Inc. or
its subsidiaries.
Some officers of our general partner may spend a substantial amount of time
managing the business and affairs of Dynegy Inc. and its other affiliates. These
officers may face a conflict regarding the allocation of their time between our
business and the other business interests of Dynegy Inc. Our general partner
intends to cause its officers to devote as much time to the management of our
business and affairs as is necessary for the proper conduct of our business and
affairs.
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DIRECTORS AND EXECUTIVE OFFICERS OF DYNEGY DEP GP LLC
The following table shows information for the directors and executive
officers of our general partner. Executive officers and directors are elected
for one-year terms.
<Table>
<Caption>
NAME AGE POSITION WITH THE GENERAL PARTNER
- ---- -------- ---------------------------------
Stephen W. Bergstrom...................... 43 Chairman of the Board of Directors
Robert D. Doty, Jr........................ 43 Director
Stephen A. Furbacher...................... 54 Chief Executive Officer, Chief Operating
Officer and Director
Michael R. Mott........................... 41 Chief Financial Officer
Terry D. Jones............................ 44 Senior Vice President and General Counsel
</Table>
Stephen W. Bergstrom is the Chairman of the Board of Directors of our
general partner. Mr. Bergstrom also serves as President, Chief Operating Officer
and a member of the Board of Directors of Dynegy Inc. Mr. Bergstrom is
responsible for the day-to-day execution of Dynegy Inc.'s strategy across its
operating business units. Mr. Bergstrom was formerly President and Chief
Operating Officer of Dynegy Marketing and Trade and Executive Vice President of
Dynegy Inc. After joining Dynegy Inc. in 1986 as Vice President of Gas Supply,
Mr. Bergstrom was appointed to Senior Vice President of Gas Marketing and Supply
in 1987.
Robert D. Doty, Jr. is a member of the Board of Directors of our general
partner. Mr. Doty also serves as the Senior Vice President and Chief Financial
Officer of Dynegy Inc. He joined Dynegy Inc. in 1991 and has served as its
principal financial officer since May 2000. In this capacity, Mr. Doty is
responsible for the overall financial strategy and operations of Dynegy Inc.,
including accounting, finance, investor relations, risk control, treasury and
tax. Mr. Doty previously served as Senior Vice President of Finance. Prior to
joining Dynegy Inc., Mr. Doty was employed by Arthur Andersen LLP.
Stephen A. Furbacher is the Chief Executive Officer, Chief Operating Officer
and a member of the Board of Directors of our general partner. Mr. Furbacher
also serves as President and Chief Operating Officer of Dynegy Midstream. He has
direct management responsibility for Dynegy Midstream's natural gas liquids
production, marketing, transportation and storage businesses. He also directs
Dynegy Midstream's natural gas gathering, compression, transportation, treating,
and liquids-extraction operations. Mr. Furbacher was formerly President of
Warren Petroleum Company (now Dynegy Midstream), the natural gas liquids
division of Chevron U.S.A., Inc. Mr. Furbacher was appointed to his current
position with Dynegy Inc. in September 1996. He is the immediate past president
of the Gas Processors Association and was past chairman of the Natural Gas
Supply Association Steering Committee.
Michael R. Mott is Chief Financial Officer of our general partner. Mr. Mott
also serves as Senior Vice President and Controller of Dynegy Inc. Mr. Mott
joined Dynegy Inc. in 1995 as Director of Financial Reporting and was appointed
to Vice President and Assistant Controller in January 2000. Mr. Mott has served
as Senior Vice President and Controller of Dynegy Inc. since March 2001. Prior
to joining Dynegy Inc., Mr. Mott was employed by Price Waterhouse.
Terry D. Jones is Senior Vice President and General Counsel of our general
partner. Mr. Jones also serves as Senior Vice President and General Counsel of
Dynegy Midstream and has served in this capacity since September 1996.
Mr. Jones served as Vice President and General Counsel of Trident NGL, Inc. from
March 1995 until September 1996 and served as Vice President and Corporate
Counsel of Dynegy Inc.'s predecessor from March 1994 until assuming his duties
with Trident NGL, Inc. Prior to his employment with Dynegy Inc. and its
predecessors, Mr. Jones was a partner in the New Orleans law firm of Simon,
Peragine, Smith and Redfearn from January 1990 through February 1994.
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OTHER MANAGEMENT
The following table shows information for other management of our general
partner.
<Table>
<Caption>
NAME AGE POSITION WITH THE GENERAL PARTNER
- ---- -------- ---------------------------------
Ron M. Logan............................. 41 Senior Vice President, Business Development
Vincent T. McConnell..................... 43 Senior Vice President, Marketing
John L. Gawronski........................ 50 Senior Vice President, Wholesale and
Transportation
Hunter I. Battle......................... 44 Senior Vice President, Texas Gulf Coast
David R. Pittenger....................... 43 Senior Vice President and Controller
Terry A. Hart............................ 32 Finance Director
</Table>
Ron M. Logan is Senior Vice President, Business Development of our general
partner. Mr. Logan also serves as Vice President of Dynegy Midstream responsible
for the Louisiana Gulf Coast Region, a position he has held since
February 2001. Mr. Logan joined NGC Corporation in 1997 as director of NGL
Supply and was named Vice President of Dynegy Inc.'s East Region Liquids
business in 1999. Prior to this, Mr. Logan held positions of increasing
responsibility in marketing, business development, and trading with Chevron
Chemical Company, Chevron Products Company, Chevron USA Production Company and
predecessor companies from 1984 through 1997.
Vincent T. McConnell is Senior Vice President, Marketing of our general
partner. Mr. McConnell also serves as Senior Vice President of Liquids Trading
for Dynegy Midstream, a position he had held since August 1997. Mr. McConnell
has held various management positions with Dynegy Inc. and its affiliates since
February 1987.
John L. Gawronski is Senior Vice President, Wholesale and Transportation of
our general partner. Mr. Gawronski previously served as Vice President of
Wholesale Marketing and Transportation for Dynegy Midstream from August 1997 to
present. Prior to his employment with Dynegy Midstream, Mr. Gawronski was
employed with Warren Petroleum Company and served as Region Manager, Western NGL
Region from 1990 to 1996. Prior to his employment with Warren Petroleum, he was
with Petrolane L.P. as an Operational Regional Manager from 1979 to 1989.
Hunter I. Battle is Senior Vice President, Texas Gulf Coast Facilities of
our general partner. Mr. Battle held a similar position with Dynegy Midstream
from 1999 to present. From 1996 to 1999, Mr. Battle was employed by Dynegy
Midstream as Director of Business Development. Prior to his employment with
Dynegy Midstream, Mr. Battle was employed by Warren Petroleum Company from 1981
to 1996, during which time he held various positions in the gas processing and
downstream businesses.
David R. Pittenger is Senior Vice President and Controller of our general
partner. Mr. Pittenger also serves as Vice President and Controller for Dynegy
Midstream. Mr. Pittenger has served in this capacity since September 1998. Prior
to his employment with Dynegy Midstream, Mr. Pittenger was with KN Energy from
1996 to 1998, most recently as Director of Marketing Accounting. Prior to his
employment with KN Energy, he was with American Oil and Gas from 1989 to 1996 as
Director of Accounting and with Cabot Corporation from 1981 to 1989 as Director
of Rates. Mr. Pittenger was associated with Ernst & Whinney from 1979 to 1981.
Terry A. Hart is Finance Director of our general partner. Mr. Hart also
serves as Director of Structured Finance for Dynegy Inc. Mr. Hart has served in
this capacity since February 2000 and has responsibility for a variety of
international and domestic finance activities. Prior to joining Dynegy Inc.,
Mr. Hart served as Project Finance Manager and Accounting Manager for Illinova
Generating
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Company from May 1995 to January 2000. Additionally, Mr. Hart was the division
controller for Illinova Business Development Group and held various accounting
positions at Illinois Power Company.
REIMBURSEMENT OF EXPENSES OF OUR GENERAL PARTNER
Our general partner will not receive any management fee or other
compensation for its management of Dynegy Energy Partners. Our general partner
and its affiliates will be reimbursed for expenses incurred on our behalf. All
direct general and administrative expenses will be charged to us as incurred.
Indirect general and administrative costs relate to centralized corporate
functions that we share with Dynegy Inc., including certain legal, accounting,
treasury, information technology, insurance, administration of employee benefit
plans and other corporate services. The reimbursement amount with respect to
indirect general and administrative expenses will not exceed $2 million for the
first year. For each of the following four years, this amount may be increased
by no more than the greater of 7% per year or the percentage increases in the
consumer price index, and is also subject to adjustment for expansions of our
operations. General and administrative expenses directly associated with
providing services to us (such as legal and accounting services) are not
included in the overhead allocation pool and are therefore not subject to the
$2 million cap. The 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. Please read "Certain
Relationships and Related Transactions--Omnibus Agreement."
EXECUTIVE COMPENSATION
We and our general partner were formed in February 2002. Accordingly, our
general partner paid no compensation to its directors and officers with respect
to the 2001 fiscal year. We have not accrued any obligations with respect to
management incentive or retirement benefits for the directors and officers for
the 2001 fiscal year. Officers and employees of our general partner may
participate in employee benefit plans and arrangements sponsored by our general
partner or its affiliates, including plans which may be established by our
general partner or its affiliates in the future.
COMPENSATION OF DIRECTORS
Officers or employees of our general partner who also serve as directors
will not receive additional compensation. Our general partner anticipates that
each independent director will receive compensation for attending meetings of
the board of directors as well as committee meetings. The amount of compensation
to be paid to the independent directors has not yet been determined. In
addition, each independent director will be reimbursed for out-of-pocket
expenses in connection with attending meetings of the board of directors or
committees. Each director will be fully indemnified by us for actions associated
with being a director to the extent permitted under Delaware law.
LONG-TERM INCENTIVE PLAN
In connection with the consummation of this offering, our general partner
intends to adopt a long-term incentive plan for employees and directors of our
general partner and employees of its affiliates who perform services for us. The
long-term incentive plan will be designed to more closely align the financial
interests of these individuals with those of our common unitholders and is
expected to consist of unit options and restricted units. The plan will be
administered by the compensation committee of our general partner's board of
directors.
As is customary in these types of plans, we anticipate that our general
partner's board of directors in its discretion may terminate or amend the
long-term incentive plan at any time with respect to any units for which a grant
has not yet been made. Our general partner's board of directors also will have
the right to alter or amend the long-term incentive plan or any part of the plan
from time to time,
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including increasing the number of units that may be granted subject to
unitholder approval as required by the exchange upon which the common units are
listed at that time. However, no change in any outstanding grant will be
permitted that would materially impair the rights of the participant without the
consent of the participant.
MANAGEMENT INCENTIVE PLAN
Our general partner expects to award incentive compensation under the
Dynegy Inc. Incentive Compensation Plan, which contains the flexibility to
permit these awards. Awards will be made under the management incentive plan in
an effort to enhance the performance of our general partner's key employees by
rewarding them with cash awards for achieving annual financial and operational
performance objectives. The compensation committee in its discretion may
determine individual participants and payments, if any, for each fiscal year.
The board of directors of our general partner may change the manner in which it
implements the management incentive plan at any time. We will reimburse our
general partner for payments and costs incurred under the plan.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units that will
be issued upon the consummation of this offering and the related transactions
and held by beneficial owners of 5% or more of the units, by directors of our
general partner, by each named executive officer and by all directors and
officers of our general partner as a group.
<Table>
<Caption>
PERCENTAGE OF PERCENTAGE OF PERCENTAGE
COMMON COMMON SUBORDINATED SUBORDINATED OF TOTAL
UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
- ------------------------ ------------ ------------- ------------ ------------- ------------
Dynegy DEP LP LLC(1)........................ 1,100,000 12.6% 8,750,000 100% 56.3%
Stephen W. Bergstrom........................ (2) * -- -- *
Robert D. Doty, Jr.......................... (2) * -- -- *
Stephen A. Furbacher........................ (2) * -- -- *
Michael R. Mott............................. (2) * -- -- *
Terry D. Jones.............................. (2) * -- -- *
All directors and executive officers as a
group (5 persons).........................
</Table>
- ------------------------------
* Represents less than 1%.
(1) Affiliates of Dynegy Inc. own Dynegy DEP LP LLC. Dynegy Inc. is the ultimate
parent company of Dynegy DEP LP LLC and may, therefore, be deemed to
beneficially own the units held by DEP LP LLC.
(2) Represents common units expected to be purchased in the directed unit
program.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
After this offering, affiliates of Dynegy Inc. will own 1,100,000 common
units and 8,750,000 subordinated units representing an aggregate 55.2% limited
partner interest in us. In addition, our general partner will own a 2% general
partner interest in us and the incentive distribution rights. Our general
partner's ability, as general partner, to manage and operate Dynegy Energy
Partners and Dynegy Inc.'s affiliates' ownership of an aggregate 55.2% limited
partner interest in us, effectively gives our general partner the ability to
veto some of our actions and to control our management.
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES
The following table summarizes the distributions and payments to be made by
us to our general partner and its affiliates in connection with the formation,
ongoing operation, and liquidation of Dynegy Energy Partners. These
distributions and payments were determined by and among affiliated entities and,
consequently, are not the result of arm's-length negotiations.
<Table>
FORMATION STAGE
The consideration received by our general
partner and its affiliates for the
transfer of their interests in the
operating partnership to us............. - 1,100,000 common units;
- 8,750,000 subordinated units;
- 2% general partner interest in Dynegy Energy
Partners; and
- the incentive distribution rights.
OPERATIONAL STAGE
Distributions of available cash to our
general partner and its affiliates...... We will generally make cash distributions 98% to the
unitholders including an affiliate of our general partner, as
holder of 1,100,000 common units and 8,750,000 subordinated
units, and 2% to our general partner. In addition, if
distributions exceed the minimum quarterly distribution and
other higher target levels, our general partner will be
entitled to increasing percentages of the distributions, up to
50% of the distributions above the highest target level.
Assuming we have sufficient available cash to pay the full
minimum quarterly distribution on all of our outstanding units
for four quarters, our general partner would receive
distributions of approximately $0.6 million on its 2% general
partner interest and an affiliate of our general partner would
receive distributions of approximately $15.3 million on its
common units and subordinated units.
Payments to our general partner and its
affiliates.............................. The general partner will be entitled to reimbursement for all
expenses it incurs on our behalf, including direct and
indirect general and administrative expenses. Please read
"--Omnibus Agreement."
</Table>
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<Table>
Withdrawal or removal of our general
partner................................. If our general partner withdraws or is removed, its general
partner interest and its incentive distribution rights will
either be sold to the new general partner for cash or
converted into common units, in each case for an amount equal
to the fair market value of those interests. Please read "The
Partnership Agreement--Withdrawal or Removal of the General
Partner."
LIQUIDATION STAGE
Liquidation............................... Upon our liquidation, the partners, including our general
partner, will be entitled to receive liquidating distributions
according to their particular capital account balances.
</Table>
AGREEMENTS GOVERNING THE TRANSACTIONS
We and other parties have entered into or will enter into the various
documents and agreements that will effect transactions, including the vesting of
assets in, and the assumption of liabilities by, the subsidiaries, and the
application of the proceeds of this offering. These agreements will not be the
result of arm's-length negotiations and consequently may not be as favorable to
us as they might have been if we had negotiated them with unaffiliated third
parties. All of the transaction expenses incurred in connection with these
transactions, including the expenses associated with vesting assets into our
subsidiaries, will be paid from the proceeds of this offering.
OMNIBUS AGREEMENT
Upon the closing of the offering of the common units, we will enter into an
omnibus agreement with Dynegy Inc. and Dynegy Midstream that will govern
potential competition and indemnification obligations among us and the other
parties to the agreement, the provision of support services by Dynegy Inc. and
our use of the Dynegy Inc. name and trademark.
NON-COMPETITION PROVISIONS. Dynegy Inc. will agree for so long as
Dynegy Inc. controls the general partner or there is no change of control of
Dynegy Inc., not to engage in the business of providing
- fractionation and NGL storage services;
- NGL distribution and marketing services; and
- transportation and logistics services to producers and consumers of NGLs
in the continental United States.
This restriction will not apply to:
- any business operated by Dynegy Inc. or its affiliates as of the closing
of this offering;
- any business conducted by Dynegy Inc. with the approval of the conflicts
committee of our general partner;
- any business acquired or constructed by Dynegy Inc. or its affiliates
after the closing that is directly connected to and integrated with the
assets owned by Dynegy Inc. or its affiliates;
- any business acquired or constructed by Dynegy Inc. or its affiliates that
has a fair market value or construction cost of less than $20 million;
- any business acquired or constructed by Dynegy Inc. or its affiliates that
has a fair market value or construction cost in excess of $20 million if
we have been offered the opportunity to purchase
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the business and we decline to do so with the concurrence of the conflicts
committee of our general partner;
- any business acquired by Dynegy Inc. or its affiliates that includes a
fractionation facility with a capacity of not more than 10,000 barrels per
day that is directly connected to and integrated with a gas processing
plant; and
- any business acquired by Dynegy Inc. or its affiliates in connection with
the acquisition of other businesses or assets where the restricted
business has a fair market value in excess of $20 million and represents
less than a majority of the total value paid by Dynegy Inc. or its
affiliates.
INDEMNIFICATION PROVISIONS. Under the omnibus agreement, Dynegy Midstream
will indemnify us for five years after the closing of this offering against
certain potential environmental liabilities associated with the operation of the
assets contributed to us by Dynegy Midstream and occurring or existing before
the closing date of this offering. Dynegy Midstream's maximum liability for this
indemnification obligation will not exceed $12.5 million. Dynegy Midstream will
also indemnify us for liabilities relating to the assets retained by Dynegy
Midstream or its affiliates and for certain contractual claims brought by third
parties arising from events that occur prior to the closing date of this
offering with respect to contracts to which Dynegy Midstream was a party.
We will indemnify Dynegy Inc. and its affiliates for environmental losses
incurred by them to the extent Dynegy Midstream is not required to indemnify us.
SERVICES. Under the omnibus agreement, Dynegy Inc. will provide us with
corporate staff, support and operating services that are substantially identical
in nature and quality to the services previously provided by Dynegy Inc. in
connection with its management and operation of our assets during the one-year
period prior to the closing date. These services will include centralized
corporate functions, such as legal, accounting, treasury, information
technology, insurance, administration of employee benefit plans and other
corporate services. As compensation for providing these services, Dynegy Inc.
will be reimbursed for the costs and expenses it incurs in rendering these
services, including an overhead allocation to us of Dynegy Inc.'s indirect
general and administrative expenses from its corporate allocation pool. The
reimbursement amount with respect to indirect general and administrative
expenses will not exceed $2 million for the first year. For each of the
following four years, this amount may be increased by no more than the greater
of 7% per year or the percentage increase in the consumer price index for the
applicable year. In addition, our general partner will have the right to agree
to further increases in connection with expansions of our operations through the
acquisition or construction of new assets or businesses. After this five-year
period, our general partner will determine the general and administrative
expenses that will be allocated to us. Administrative and general expenses
directly associated with providing services to us (such as legal and accounting
services) are not included in the overhead allocation pool and are therefore not
subject to the $2 million cap. The provisions of the omnibus agreement regarding
Dynegy Inc.'s services will terminate upon a change of control of Dynegy Inc. or
if Dynegy Inc. or its affiliates cease to control our general partner.
LICENSE PROVISIONS. Pursuant to the omnibus agreement, Dynegy will grant us
a nontransferable, nonexclusive, royalty-free right and license to use the
Dynegy name and mark.
The omnibus agreement may not be amended without the approval of the
conflicts committee of our general partner.
CONTRACTUAL ARRANGEMENTS
At the closing of this offering, we will enter into a number of commercial
agreements with Dynegy Midstream and a guarantee facility with Dynegy Holdings.
Please read "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Contractual Obligations and Commercial Commitments."
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Conflicts of interest exist and may arise in the future as a result of the
relationships between our general partner and its affiliates (including
Dynegy Inc.), on the one hand, and our partnership and our limited partners, on
the other hand. The directors and officers of our general partner have fiduciary
duties to manage our general partner in a manner beneficial to its owners. At
the same time, the directors of our general partner have fiduciary duties to
manage our partnership in a manner beneficial to us and our unitholders.
The partnership agreement contains provisions that allow our general partner
to take into account the interests of parties in addition to our interests when
resolving conflicts of interest. In effect, these provisions limit our general
partner's fiduciary duties to the unitholders. The partnership agreement also
restricts the remedies available to unitholders for actions taken that, without
those limitations, might constitute breaches of fiduciary duty. Whenever a
conflict arises between our general partner or its affiliates, on the one hand,
and our partnership or any other partner, on the other, our general partner will
resolve that conflict. At the request of our general partner, a conflicts
committee of the board of directors of our general partner will review conflicts
of interest. Our general partner will not be in breach of its obligations under
the partnership agreement or its duties to us or the unitholders if the
resolution of the conflict is considered fair and reasonable to us. Any
resolution is considered fair and reasonable to us if that resolution is:
- approved by the conflicts committee, although no party is obligated to
seek approval and our general partner may adopt a resolution or course of
action that has not received approval;
- on terms no less favorable to us than those generally being provided to or
available from unrelated third parties; or
- fair to us, taking into account the totality of the relationships between
the parties involved, including other transactions that may be
particularly favorable or advantageous to us.
Unless the resolution is specifically provided for in the partnership
agreement, when resolving a conflict, our general partner may consider:
- the relative interests of the parties involved in the conflict or affected
by the action;
- any customary or accepted industry practices or historical dealings with a
particular person or entity; and
- generally accepted accounting practices or principles and other factors it
considers relevant, if applicable.
Conflicts of interest could arise in the situations described below, among
others:
ACTIONS TAKEN BY OUR GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH AVAILABLE FOR
DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE RIGHT TO CONVERT SUBORDINATED
UNITS.
The amount of cash that is available for distribution to unitholders is
affected by decisions of our general partner regarding such matters as:
- amount and timing of asset purchases and sales;
- cash expenditures;
- borrowings;
- issuance of additional units; and
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- the creation, reduction or increase of reserves in any quarter.
In addition, borrowings by us and our affiliates do not constitute a breach
of any duty owed by our general partner to the unitholders, including borrowings
that have the purpose or effect of:
- enabling our general partner to receive distributions on any subordinated
units held by it or the incentive distribution rights; or
- hastening the expiration of the subordination period.
For example, if we have not generated sufficient cash from our operations to
pay the minimum quarterly distribution on our common units and on our
subordinated units, then the partnership agreement permits us to borrow funds,
which would enable us to make this distribution on all outstanding units. Please
read "Cash Distribution Policy--Subordination Period."
The partnership agreement provides that the partnership and our subsidiaries
may borrow funds from our general partner and its affiliates. Our general
partner and its affiliates may not borrow funds from us, the operating
partnership or the subsidiaries.
WE DO NOT HAVE ANY OFFICERS OR EMPLOYEES AND RELY SOLELY ON OFFICERS AND
EMPLOYEES OF OUR GENERAL PARTNER AND ITS AFFILIATES.
We will not have any officers or employees and will rely solely on officers
and employees of our general partner, its affiliates and the employees of the
subsidiaries. Affiliates of our general partner conduct businesses and
activities of their own in which we have no economic interest. If these separate
activities are significantly greater than our activities, there could be
material competition for the time and effort of the officers and employees who
provide services to our general partner. The officers of our general partner are
not required to work full time on our affairs. These officers are required to
devote significant time to the affairs of Dynegy Inc. or its affiliates and are
compensated by them for the services rendered to them.
WE WILL REIMBURSE OUR GENERAL PARTNER AND ITS AFFILIATES FOR ITS EXPENSES.
We will reimburse our general partner and its affiliates for costs incurred
in managing and operating us, including costs incurred in rendering corporate
staff and support services to us. The 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,
subject to a five-year cap on indirect general and administrative expenses that
can be allocated to us.
OUR GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY REGARDING OUR OBLIGATIONS.
Our general partner intends to limit its liability under contractual
arrangements so that the other party has recourse only to our assets and not
against our general partner or its assets. The partnership agreement provides
that any action taken by our general partner to limit its or our liability is
not a breach of our general partner's fiduciary duties, even if we could have
obtained terms that are more favorable without the limitation on liability.
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF OUR GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH US.
Any agreements between us, on the one hand, and our general partner and its
affiliates, on the other, will not grant to the unitholders, separate and apart
from us, the right to enforce the obligations of our general partner and its
affiliates in our favor.
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CONTRACTS BETWEEN US, ON THE ONE HAND, AND OUR GENERAL PARTNER AND ITS
AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS.
The partnership agreement allows our general partner to pay itself or its
affiliates for any services rendered, provided these services are rendered on
terms that are fair and reasonable to us. Our general partner may also enter
into additional contractual arrangements with any of its affiliates on our
behalf. Neither the partnership agreement nor any of the other agreements,
contracts and arrangements between us and our general partner and its affiliates
are or will be the result of arm's-length negotiations.
All of these transactions entered into after the sale of the common units
offered in this offering are to be on terms that are fair and reasonable to us.
Our general partner and its affiliates will have no obligation to permit us
to use any facilities or assets of our general partner and its affiliates,
except as may be provided in contracts entered into specifically dealing with
that use. There is no obligation of our general partner and its affiliates to
enter into any contracts of this kind.
COMMON UNITS ARE SUBJECT TO OUR GENERAL PARTNER'S LIMITED CALL RIGHT.
Our general partner may exercise its right to call and purchase common units
as provided in the partnership agreement or assign this right to one of its
affiliates or to us. Our general partner may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise this right. As a
result, a common unitholder may have his common units purchased from him at an
undesirable time or price. Please read "The Partnership Agreement--Limited Call
Right."
WE MAY NOT CHOOSE TO RETAIN SEPARATE COUNSEL FOR OURSELVES OR FOR THE HOLDERS OF
COMMON UNITS.
The attorneys, independent accountants and others who perform services for
us have been retained by our general partner. Attorneys, independent accountants
and others who perform services for us are selected by our general partner or
the conflicts committee and may perform services for our general partner and its
affiliates. We may retain separate counsel for ourselves or the holders of
common units if a conflict of interest arises between our general partner and
its affiliates, on the one hand, and us or the holders of common units, on the
other, depending on the nature of the conflict. We do not intend to do so in
most cases.
OUR GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH US.
The partnership agreement provides that our general partner will be
restricted from engaging in any business activities other than those incidental
to its ownership of interests in us and certain services the employees of our
general partner are currently providing to Dynegy Inc. and its affiliates.
Except as provided in the partnership agreement and the omnibus agreement,
affiliates of our general partner are not prohibited from engaging in other
businesses or activities, including those that might be in direct competition
with us.
FIDUCIARY RESPONSIBILITIES
Our general partner is accountable to us and our unitholders as a fiduciary.
The Delaware Revised Uniform Limited Partnership Act, which we refer to in this
prospectus as the Delaware Act, provides that Delaware limited partnerships may,
in their partnership agreements, restrict or expand the fiduciary duties owed by
our general partner to limited partners and the partnership. Please read
"Certain Relationships and Related Transactions--Omnibus Agreement."
Our partnership agreement contains various provisions restricting the
fiduciary duties that might otherwise be owed by our general partner. Fiduciary
duties owed to unitholders by our general partner
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are prescribed by law and the partnership agreement. The following is a summary
of the material restrictions of the fiduciary duties owed by our general partner
to the limited partners:
<Table>
State-law fiduciary duty standards........ Fiduciary duties are generally considered to include an
obligation to act with due care and loyalty. The duty of
care, in the absence of a provision in a partnership
agreement providing otherwise, would generally require a
general partner to act for the partnership in the same
manner as a prudent person would act on his own behalf.
The duty of loyalty, in the absence of a provision in a
partnership agreement providing otherwise, would
generally prohibit a general partner of a Delaware
limited partnership from taking any action or engaging
in any transaction where a conflict of interest is
present.
The Delaware Act generally provides that a limited
partner may institute legal action on behalf of the
partnership to recover damages from a third party where
a general partner has refused to institute the action or
where an effort to cause a general partner to do so is
not likely to succeed. In addition, the statutory or
case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself
and all other similarly situated limited partners to
recover damages from a general partner for violations of
its fiduciary duties to the limited partners.
Partnership agreement modified
standards............................... Our partnership agreement contains provisions that waive
or consent to conduct by our general partner and its
affiliates that might otherwise raise issues as to
compliance with fiduciary duties or applicable law. For
example, our partnership agreement permits our general
partner to make a number of decisions in its "sole
discretion." This entitles our general partner to
consider only the interests and factors that it desires
and it has no duty or obligation to give any
consideration to any interest of, or factors affecting,
us, our affiliates or any limited partner. Other
provisions of the partnership agreement provide that our
general partner's actions must be made in its reasonable
discretion. These standards reduce the obligations to
which our general partner would otherwise be held.
Our partnership agreement generally provides that
affiliated transactions and resolutions of conflicts of
interest not involving a required vote of unitholders
must be "fair and reasonable" to us under the factors
previously set forth. In determining whether a
transaction or resolution is "fair and reasonable," our
general partner may consider interests of all parties
involved, including its own. Unless our general partner
has acted in bad faith, the action taken by our general
partner shall not constitute a breach of its fiduciary
duty. These
</Table>
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<Table>
standards reduce the obligations to which our general
partner would otherwise be held.
In addition to the other more specific provisions
limiting the obligations of our general partner, our
partnership agreement further provides that our general
partner and its officers and directors will not be
liable for monetary damages to us, the limited partners
or assignees for errors of judgment or for any acts or
omissions if our general partner and those other persons
acted in good faith.
</Table>
If you purchase any common units, you agree to be bound by the provisions in
the partnership agreement, including the provisions discussed above. This is in
accordance with the policy of the Delaware Act favoring the principle of freedom
of contract and the enforceability of partnership agreements. The failure of a
limited partner or assignee to sign a partnership agreement does not render the
partnership agreement unenforceable against that person.
We must indemnify our general partner and its officers, directors,
employees, affiliates, partners, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by our
general partner or these other persons. We must provide this indemnification if
our general partner or these persons acted in good faith and in a manner they
reasonably believed to be in, or (in the case of a person other than our general
partner) not opposed to, our best interests. We also must provide this
indemnification for criminal proceedings if our general partner or these other
persons had no reasonable cause to believe their conduct was unlawful. Thus, our
general partner could be indemnified for its negligent acts if it met these
requirements concerning good faith and our best interests. Please read "The
Partnership Agreement--Indemnification."
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DESCRIPTION OF THE COMMON UNITS
THE UNITS
The common units and the subordinated units represent limited partner
interests in us. The holders of units are entitled to participate in partnership
distributions and exercise the rights or privileges available to limited
partners under our partnership agreement. For a description of the relative
rights and preferences of holders of common units and subordinated units in and
to partnership distributions, please read "Description of Common Units," "Cash
Distribution Policy" and "Description of Subordinated Units." For a description
of the rights and privileges of limited partners under our partnership
agreement, including voting rights, please read "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
DUTIES
will serve as registrar and transfer agent for the common units.
We pay all fees charged by the transfer agent for transfers of common units,
except the following that must be paid by unitholders:
- surety bond premiums to replace lost or stolen certificates, taxes and
other governmental charges;
- special charges for services requested by a holder of a common unit; and
- other similar fees or charges.
There is no charge to unitholders for disbursements of our cash
distributions. We will indemnify the transfer agent, its agents and each of
their stockholders, directors, officers and employees against all claims and
losses that may arise out of acts performed or omitted for its activities in
that capacity, except for any liability due to any gross negligence or
intentional misconduct of the indemnified person or entity.
RESIGNATION OR REMOVAL
The transfer agent may resign, by notice to us, or be removed by us. The
resignation or removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its acceptance of
the appointment. If no successor has been appointed and accepted the appointment
within 30 days after notice of the resignation or removal, our general partner
may act as the transfer agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
The transfer of the common units to persons that purchase directly from the
underwriters will be accomplished through the completion, execution and delivery
of a transfer application by the investor. Any later transfers of a common unit
will not be recorded by the transfer agent or recognized by us unless the
transferee executes and delivers a transfer application. By executing and
delivering a transfer application, the transferee of common units:
- becomes the record holder of the common units and is an assignee until
admitted into our partnership as a substituted limited partner;
- automatically requests admission as a substituted limited partner in our
partnership;
- agrees to be bound by the terms and conditions of, and executes, our
partnership agreement;
- represents that the transferee has the capacity, power and authority to
enter into the partnership agreement;
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- grants powers of attorney to officers of our general partner and any
liquidator of us as specified in the partnership agreement; and
- makes the consents and waivers contained in the partnership agreement.
An assignee will become a substituted limited partner of our partnership for
the transferred common units upon the consent of our general partner and the
recording of the name of the assignee on our books and records. Our general
partner may withhold its consent in its sole discretion.
A transferee's broker, agent or nominee may complete, execute and deliver a
transfer application. We are entitled to treat the nominee holder of a common
unit as the absolute owner. In that case, the beneficial holder's rights are
limited solely to those that it has against the nominee holder as a result of
any agreement between the beneficial owner and the nominee holder.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in our partnership for the transferred common
units. A purchaser or transferee of common units who does not execute and
deliver a transfer application obtains only:
- the right to assign the common unit to a purchaser or other transferee;
and
- the right to transfer the right to seek admission as a substituted limited
partner in our partnership for the transferred common units.
Thus, a purchaser or transferee of common units who does not execute and
deliver a transfer application:
- will not receive cash distributions, unless the common units are held in a
nominee or "street name" account and the nominee or broker has executed
and delivered a transfer application; and
- may not receive some federal income tax information or reports furnished
to record holders of common units.
The transferor of common units has a duty to provide the transferee with all
information that may be necessary to transfer the common units. The transferor
does not have a duty to insure the execution of the transfer application by the
transferee and has no liability or responsibility if the transferee neglects or
chooses not to execute and forward the transfer application to the transfer
agent. Please read "The Partnership Agreement--Status as Limited Partner or
Assignee."
Until a common unit has been transferred on our books, we and the transfer
agent, may treat the record holder of the unit as the absolute owner for all
purposes, except as otherwise required by law or applicable stock exchange
regulations.
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DESCRIPTION OF THE SUBORDINATED UNITS
The subordinated units are a separate class of limited partner interests in
our partnership, and the rights of holders to participate in distributions to
partners differ from, and are subordinate to, the rights of the holders of
common units. For any given quarter, any available cash will first be
distributed to our general partner and to the holders of common units, until the
holders of common units have received the minimum quarterly distribution plus
any arrearages, and then will be distributed to the holders of subordinated
units. Please read "Cash Distribution Policy."
CONVERSION OF SUBORDINATED UNITS
The subordination period will generally extend until the first day of any
quarter beginning after June 30, 2007, in which each of the following events
occurs:
(1) distributions of available cash from operating surplus on each of
the outstanding common units and subordinated units equaled or exceeded the
sum of the minimum quarterly distributions for each of the three
consecutive, non-overlapping four-quarter periods immediately preceding that
date;
(2) the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding that
date equaled or exceeded the sum of the minimum quarterly distributions on
all of the outstanding common units and subordinated units during those
periods on a fully diluted basis and the related distribution on the 2%
general partner interest during those periods; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
Before the end of the subordination period, 25% of the subordinated units
(up to 2,187,500 subordinated units) will convert early into common units on a
one-for-one basis immediately after the distribution of available cash to the
partners in respect of any quarter ending on or after June 30, 2005, and 25% of
the subordinated units (up to 2,187,500 subordinated units) will convert early
into common units on a one-for-one basis on the first day after the record date
established for the distribution for any quarter ending on or after June 30,
2006, if at the end of the applicable quarter each of the following three events
occurs:
(1) distributions of available cash from operating surplus on each of
the outstanding common units and subordinated units equaled or exceeded the
sum of the minimum quarterly distributions for each of the three
consecutive, non-overlapping four-quarter periods immediately preceding that
date;
(2) the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding that
date equaled or exceeded the sum of the minimum quarterly distributions on
all of the outstanding common units and subordinated units during those
periods on a fully diluted basis and the related distribution on the 2%
general partner interest during those periods; and
(3) there are no arrearages in payment of the minimum quarterly
distribution on the common units.
PROVIDED, HOWEVER, that the early conversion of the second 25% of the
subordinated units may not occur until at least one year following the early
conversion of the first 25% of the subordinated units.
Upon expiration of the subordination period, all remaining subordinated
units will convert into common units on a one-for-one basis and will then
participate, pro rata, with the other common units in distributions of available
cash. In addition, if Dynegy DEP GP LLC is removed as our general
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partner under circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of that removal:
- the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- our general partner will have the right to convert its general partner
interests and its incentive distribution rights into common units or to
receive cash in exchange for those interests based on the fair market
value of those interests at the time.
LIMITED VOTING RIGHTS
Holders of subordinated units sometimes vote as a single class together with
the common units and sometimes vote as a class separate from the holders of
common units and, as in the case of holders of common units, will have very
limited voting rights. During the subordination period, common units and
subordinated units each vote separately as a class on the following matters:
(1) a sale or exchange of all or substantially all of our assets,
(2) the election of a successor general partner in connection with the
removal of the general partner,
(3) dissolution or reconstitution of our partnership,
(4) a merger of our partnership,
(5) issuance of limited partner interests in some circumstances, and
(6) some amendments to the partnership agreement including any amendment
that would cause us to be treated as an association taxable as a
corporation.
The subordinated units are not entitled to a separate class vote on approval
of the withdrawal of our general partner or the transfer by our general partner
of its general partner interest or incentive distribution rights under some
circumstances. Removal of our general partner requires:
- a 66 2/3% vote of all outstanding units voting as a single class, and
- the election of a successor general partner by the holders of a majority
of the outstanding common units and subordinated units, voting as separate
classes.
Under the partnership agreement, our general partner generally will be
permitted to effect amendments to the partnership agreement that do not
materially adversely affect unitholders without the approval of any unitholders.
DISTRIBUTIONS UPON LIQUIDATION
If we liquidate during the subordination period, in some circumstances,
holders of outstanding common units will be entitled to receive more per unit in
liquidating distributions than holders of outstanding subordinated units. The
per unit difference will be dependent upon the amount of gain or loss that we
recognize in liquidating our assets. Following conversion of the subordinated
units into common units, all units will be treated the same upon liquidation.
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THE PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. The form of the partnership agreement is included in this prospectus
as Appendix A. The form of partnership agreement of the operating partnership is
included as an exhibit to the registration statement of which this prospectus
constitutes a part. We will provide prospective investors with a copy of these
agreements upon request at no charge.
We summarize the following provisions of the partnership agreement elsewhere
in this prospectus:
- With regard to distributions of available cash, please read "Cash
Distribution Policy."
- With regard to the transfer of common units, please read "Description of
the Common Units--Transfer of Common Units."
- With regard to allocations of taxable income and taxable loss, please read
"Material Tax Consequences."
ORGANIZATION AND DURATION
We were organized on February 15, 2002 and will have a perpetual existence.
PURPOSE
Our purpose under the partnership agreement is limited to serving as the
limited partner of the operating partnership and engaging in any business
activities that may be engaged in by the operating partnership or that are
approved by our general partner. The partnership agreement of the operating
partnership provides that the operating partnership may, directly or indirectly,
engage in:
- its operations as conducted immediately before our initial public
offering;
- any other activity approved by our general partner but only to the extent
that our general partner reasonably determines that, as of the date of the
acquisition or commencement of the activity, the activity generates
"qualifying income" as this term is defined in Section 7704 of the
Internal Revenue Code; or
- any activity that enhances the operations of an activity that is described
in either of the two preceding clauses.
Although our general partner has the ability to cause us and the operating
partnership or its subsidiaries to engage in activities other than the
fractionating, storing, terminalling, transporting, distributing and marketing
of NGLs, our general partner has no current plans to do so. Our general partner
is authorized in general to perform all acts deemed necessary to carry out our
purposes and to conduct our business.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to 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 our general partner the authority
to amend, and to make consents and waivers under, the partnership agreement.
CAPITAL CONTRIBUTIONS
Unitholders are not obligated to make additional capital contributions,
except as described below under "--Limited Liability."
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LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of our
business within the meaning of the Delaware Act and that he otherwise acts in
conformity with the provisions of the partnership agreement, his liability under
the Delaware Act will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common units plus his
share of any undistributed profits and assets. If it were determined, however,
that the right, or exercise of the right, by the limited partners as a group:
- to remove or replace our general partner;
- to approve some amendments to the partnership agreement; or
- to take other action under the partnership agreement;
constituted "participation in the control" of our business for the purposes of
the Delaware Act, then the limited partners could be held personally liable for
our obligations under the laws of Delaware, to the same extent as our general
partner. This liability would extend to persons who transact business with us
who reasonably believe that the limited partner is a general partner. Neither
the partnership agreement nor the Delaware Act specifically provides for legal
recourse against our general partner if a limited partner were to lose limited
liability through any fault of our general partner. While this does not mean
that a limited partner could not seek legal recourse, we know of no precedent
for this type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner if, after the distribution, all liabilities of the limited
partnership, other than liabilities to partners on account of their partnership
interests and liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair value of the assets
of the limited partnership. For the purpose of determining the fair value of the
assets of a limited partnership, the Delaware Act provides that the fair value
of property subject to liability for which recourse of creditors is limited
shall be included in the assets of the limited partnership only to the extent
that the fair value of that property exceeds the nonrecourse liability. The
Delaware Act provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was in violation of
the Delaware Act shall be liable to the limited partnership for the amount of
the distribution for three years. Under the Delaware Act, an assignee who
becomes a substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except the
assignee is not obligated for liabilities unknown to him at the time he became a
limited partner and that could not be ascertained from the partnership
agreement.
Our subsidiaries own properties and conduct business in five states.
Maintenance of our limited liability as a limited partner of the operating
partnership may require compliance with legal requirements in the jurisdictions
in which the operating partnership conducts business, including qualifying our
subsidiaries to do business there. Limitations on the liability of limited
partners for the obligations of a limited partner have not been clearly
established in many jurisdictions. If, by virtue of our limited partner interest
in the operating partnership or otherwise, it were determined that we were
conducting business in any state without compliance with the applicable limited
partnership or limited liability company statute, or that the right or exercise
of the right by the limited partners as a group to remove or replace our general
partner, to approve some amendments to the partnership agreement, or to take
other action under the partnership agreement constituted "participation in the
control" of our business for purposes of the statutes of any relevant
jurisdiction, then the limited partners could be held personally liable for our
obligations under the law of that jurisdiction to the same extent as our general
partner under the circumstances. We will operate in a manner that our general
partner considers reasonable and necessary or appropriate to preserve the
limited liability of the limited partners.
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VOTING RIGHTS
The following matters require the unitholder vote specified below. Matters
requiring the approval of a "unit majority" require:
- during the subordination period, the approval of a majority of the common
units, excluding those common units held by our general partner and its
affiliates, and a majority of the subordinated units, voting as separate
classes; and
- after the subordination period, the approval of a majority of the common
units.
<Table>
Issuance of additional common units or units Unit majority, with certain exceptions
of equal rank with the common units during described under "--Issuance of Additional
the subordination period Securities."
Issuance of units senior to the common units Unit majority.
during the subordination period
Issuance of units junior to the common units No approval right.
during the subordination period
Issuance of additional units after the No approval right.
subordination period
Amendment of the partnership agreement Certain amendments may be made by the general
partner without the approval of the
unitholders. Other amendments generally
require the approval of a unit majority.
See "--Amendment of the Partnership
Agreement."
Merger of our partnership or the sale of all Unit majority. See "--Merger, Sale or Other
or substantially all of our assets Disposition of Assets."
Dissolution of our partnership Unit majority. See "--Termination and
Dissolution."
Reconstitution of our partnership upon Approval of a majority of the common units
dissolution and subordinated units voting as separate
classes.
Withdrawal of the general partner The approval of a majority of the common
units, excluding common units held by the
general partner and its affiliates, is
required for the withdrawal of the general
partner prior to June 30, 2012 in a manner
which would cause a dissolution of our
partnership. See "--Withdrawal or Removal
of our General Partner."
Removal of the general partner Not less than 66 2/3% of the outstanding
units, including units held by our general
partner and its affiliates. See
"--Withdrawal or Removal of the General
Partner."
Transfer of the general partner interest We may transfer the general partner interest
without a vote of our unitholders in
connection with the general partner's
merger or consolidation with or into, or
sale of all or
</Table>
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<Table>
substantially all of its assets to such
person. The approval of a majority of the
common units, excluding common units held
by the general partner and its affiliates,
is required in other circumstances for a
transfer of the general partner interest to
a third party prior to June 30, 2012. See
"--Transfer of General Partner Interests."
Transfer of incentive distribution rights Except for transfers to an affiliate or
another person as part of the general
partner's merger or consolidation with or
into, or sale of all or substantially all
of its assets to such person, the approval
of a majority of the common units and the
subordinated units, voting separately as a
class, is required in most circumstances
for a transfer of the incentive
distribution rights to a third party prior
to June 30, 2012. See "--Transfer of
Incentive Distribution Rights."
Transfer of ownership interests in the No approval required at any time. See "--
general partner Transfer of Ownership Interests in the
General Partner."
</Table>
ISSUANCE OF ADDITIONAL SECURITIES
The partnership agreement authorizes us to issue an unlimited number of
additional partnership securities and rights to buy partnership securities for
the consideration and on the terms and conditions established by our general
partner in its sole discretion without the approval of the unitholders. During
the subordination period, however, except as we discuss in the following
paragraph, we may not issue equity securities ranking senior to the common units
or an aggregate of more than 4,375,000 additional common units or units on a
parity with the common units, in each case, without the approval of the holders
of a majority of the outstanding common units and subordinated units, voting as
separate classes.
During or after the subordination period, we may issue an unlimited number
of common units as follows:
- upon exercise of the underwriters' over-allotment option;
- upon conversion of the subordinated units;
- under employee benefit plans;
- upon conversion of the general partner interest and incentive distribution
rights as a result of a withdrawal of our general partner;
- in the event of a combination or subdivision of common units; or
- in connection with an acquisition, capital improvement or debt repayment
that increases cash flow from operations per unit on a pro forma basis.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our distributions of available cash. In
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addition, the issuance of additional partnership interests may dilute the value
of the interests of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership securities that, in the sole
discretion of our general partner, have special voting rights to which the
common units are not entitled.
Upon issuance of additional partnership securities, other than upon exercise
of the underwriters' over-allotment option, our general partner will be required
to make additional capital contributions to the extent necessary to maintain its
2% general partner interest in us and the operating partnership. Moreover, our
general partner will have the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase common units,
subordinated units or other equity securities whenever, and on the same terms
that, we issue those securities to persons other than our general partner and
its affiliates, to the extent necessary to maintain its percentage interest,
including its interest represented by common units and subordinated units, that
existed immediately prior to each issuance. The holders of common units will not
have preemptive rights to acquire additional common units or other partnership
securities.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
GENERAL. Amendments to the partnership agreement may be proposed only by or
with the consent of our general partner, which consent may be given or withheld
in its sole discretion. In order to adopt a proposed amendment, other than the
amendments discussed below, our general partner must seek written approval of
the holders of the number of units required to approve the amendment or call a
meeting of the limited partners to consider and vote upon the proposed
amendment. Except as we describe below, an amendment must be approved by a unit
majority.
PROHIBITED AMENDMENTS. No amendment may be made that would:
- enlarge the obligations of any limited partner without its consent, unless
approved by at least a majority of the type or class of limited partner
interests so affected;
- enlarge the obligations of, restrict in any way any action by or rights
of, or reduce in any way the amounts distributable, reimbursable or
otherwise payable by us to our general partner or any of its affiliates
without the consent of our general partner, which may be given or withheld
in its sole discretion;
- change the duration of our partnership;
- provide that our partnership is not dissolved upon an election to dissolve
our partnership by our general partner that is approved by a unit
majority; or
- give any person the right to dissolve our partnership other than our
general partner's right to dissolve our partnership with the approval of a
unit majority.
The provision of the partnership agreement preventing the amendments having the
effects described in any of the clauses above can be amended upon the approval
of the holders of at least 90% of the outstanding units voting together as a
single class.
NO UNITHOLDER APPROVAL. Our general partner may generally make amendments
to the partnership agreement without the approval of any limited partner or
assignee to reflect:
- a change in our name, the location of our principal place of business, our
registered agent or our registered office;
- the admission, substitution, withdrawal, or removal of partners in
accordance with the partnership agreement;
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- the reduction in the vote needed to remove the general partner from not
less than 66 2/3% of all outstanding units to a lesser percentage of all
outstanding units;
- an increase in the percentage of a class of units that a person or group
may own without losing their voting rights from 20% to a higher
percentage;
- a change that, in the sole discretion of our general partner, is necessary
or advisable for us to qualify or to continue our qualification as a
limited partnership or a partnership in which the limited partners have
limited liability under the laws of any state or to ensure that neither
we, the operating partnership nor its subsidiaries will be treated as an
association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
- an amendment that is necessary, in the opinion of our counsel, to prevent
us or our general partner or its directors, officers, agents, or trustees
from in any manner being subjected to the provisions of the Investment
Company Act of 1940, the Investment Advisors Act of 1940, or plan asset
regulations adopted under the Employee Retirement Income Security Act of
1974, whether or not substantially similar to plan asset regulations
currently applied or proposed;
- subject to the limitations on the issuance of additional partnership
securities described above, an amendment that in the discretion of our
general partner is necessary or advisable for the authorization of
additional partnership securities or rights to acquire partnership
securities;
- any amendment expressly permitted in the partnership agreement to be made
by our general partner acting alone;
- an amendment effected, necessitated or contemplated by a merger agreement
that has been approved under the terms of the partnership agreement;
- any amendment that, in the discretion of our general partner, is necessary
or advisable for the formation by us of, or our investment in, any
corporation, partnership or other entity, as otherwise permitted by the
partnership agreement;
- a change in our fiscal year or taxable year and related changes; and
- any other amendments substantially similar to any of the matters described
in the clauses above.
In addition, our general partner may make amendments to the partnership
agreement without the approval of any limited partner or assignee if those
amendments, in the discretion of our general partner:
- do not adversely affect the limited partners (or any particular class of
limited partners) in any material respect;
- are necessary or advisable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state statute;
- are necessary or advisable to facilitate the trading of limited partner
interests or to comply with any rule, regulation, guideline or requirement
of any securities exchange on which the limited partner interests are or
will be listed for trading, compliance with any of which our general
partner deems to be in our best interest and the best interest of the
limited partners;
- are necessary or advisable for any action taken by our general partner
relating to splits or combinations of units under the provisions of the
partnership agreement; or
- are required to effect the intent expressed in this prospectus or the
intent of the provisions of the partnership agreement or are otherwise
contemplated by the partnership agreement.
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OPINION OF COUNSEL AND UNITHOLDER APPROVAL. Our general partner will not be
required to obtain an opinion of counsel that an amendment will not result in a
loss of limited liability to the limited partners or result in our being treated
as an entity for federal income tax purposes if one of the amendments described
above under "--No Unitholder Approval" should occur. No other amendments to the
partnership agreement will become effective without the approval of holders of
at least 90% of the units unless we obtain an opinion of counsel to the effect
that the amendment will not affect the limited liability under applicable law of
any of our limited partners or cause us, the operating partnership or our
subsidiaries to be taxable as a corporation or otherwise to be taxed as an
entity for federal income tax purposes (to the extent not previously taxed as
such).
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding units in relation to other
classes of units will require the approval of at least a majority of the type or
class of units so affected. Any amendment that reduces the voting percentage
required to take any action must be approved by the affirmative vote of limited
partners constituting not less than the voting requirement sought to be reduced.
ACTION RELATING TO THE OPERATING COMPANY
Without the approval of the holders of units representing a unit majority,
our general partner is prohibited from consenting on our behalf, as the sole
member of the operating company, to any amendment to the limited liability
company agreement of the operating company or taking any action on our behalf
permitted to be taken by a member of the operating company in each case that
would adversely affect our limited partners (or any particular class of limited
partners) in any material respect.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The partnership agreement generally prohibits our general partner, without
the prior approval of a unit majority, from causing us to, among other things,
sell, exchange or otherwise dispose of all or substantially all of our assets in
a single transaction or a series of related transactions, including by way of
merger, consolidation or other combination, or approving on our behalf the sale,
exchange or other disposition of all or substantially all of the assets of our
subsidiaries. Our general partner may, however, mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of our assets without that
approval. Our general partner may also sell all or substantially all of our
assets under a foreclosure or other realization upon those encumbrances without
that approval.
If conditions specified in the partnership agreement are satisfied, our
general partner may merge us or any of our subsidiaries into, or convey some or
all of our assets to, a newly formed entity if the sole purpose of that merger
or conveyance is to change our legal form into another limited liability entity.
The unitholders are not entitled to dissenters' rights of appraisal under the
partnership agreement or applicable Delaware law in the event of a merger or
consolidation, a sale of substantially all of our assets or any other
transaction or event.
TERMINATION AND DISSOLUTION
We will continue as a limited partnership until terminated under the
partnership agreement. We will dissolve upon:
- the election of our general partner to dissolve us, if approved by a unit
majority;
- the sale, exchange or other disposition of all or substantially all of our
assets and properties and our subsidiaries;
- the entry of a judicial order dissolving Dynegy Energy Partners; or
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- the withdrawal or removal of our general partner or any other event that
results in its ceasing to be our general partner other than by reason of a
transfer of its general partner interest in accordance with the
partnership agreement or withdrawal or removal following approval and
admission of a successor.
Upon a dissolution under the last clause, the holders of a majority of the
outstanding common units and subordinated units, voting as separate classes, may
also elect, within specific time limitations, to reconstitute us and continue
our business on the same terms and conditions described in the partnership
agreement by forming a new limited partnership on terms identical to those in
the partnership agreement and having as general partner an entity approved by
the holders of a majority of the outstanding common units and subordinated
units, voting as separate classes, subject to our receipt of an opinion of
counsel to the effect that:
- the action would not result in the loss of limited liability of any
limited partner; and
- neither our partnership, the reconstituted limited partnership nor the
operating partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of that right to continue.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the liquidator authorized to wind up our affairs will,
acting with all of the powers of our general partner that the liquidator deems
necessary or desirable in its judgment, liquidate our assets and apply the
proceeds of the liquidation as provided in "Cash Distribution
Policy--Distributions of Cash upon Liquidation." The liquidator may defer
liquidation of our assets for a reasonable period or distribute assets to
partners in kind if it determines that a sale would be impractical or would
cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
Except as described below, our general partner has agreed not to withdraw
voluntarily as our general partner prior to June 30, 2012 without obtaining the
approval of the holders of at least a majority of the outstanding common units,
excluding common units held by our general partner and its affiliates, and
furnishing an opinion of counsel regarding limited liability and tax matters. On
or after June 30, 2012, our general partner may withdraw as general partner
without first obtaining approval of any unitholder by giving 90 days' written
notice, and that withdrawal will not constitute a violation of the partnership
agreement. Notwithstanding the foregoing, our general partner may withdraw
without unitholder approval upon 90 days' notice to the limited partners if at
least 50% of the outstanding common units are held or controlled by one person
and its affiliates other than our general partner and its affiliates. In
addition, the partnership agreement permits our general partner in some
instances to sell or otherwise transfer all of its general partner interest in
us without the approval of the unitholders. Please read "--Transfer of General
Partner Interest and Incentive Distribution Rights."
Upon the withdrawal of our general partner under any circumstances, other
than as a result of a transfer by our general partner of all or a part of its
general partner interest in us, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is not elected, or
is elected but an opinion of counsel regarding limited liability and tax matters
cannot be obtained, we will be dissolved, wound up and liquidated, unless within
180 days after that withdrawal, the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes, agree in
writing to continue our business and to appoint a successor general partner.
Please read "--Termination and Dissolution."
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Our general partner may not be removed unless that removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units,
including units held by our general partner and its affiliates, and we receive
an opinion of counsel regarding limited liability and tax matters. Any removal
of our general partner is also subject to the approval of a successor general
partner by the vote of the holders of a majority of the outstanding common units
and subordinated units, voting as separate classes. The ownership of more than
33 1/3% of the outstanding units by our general partner and its affiliates would
give it the practical ability to prevent its removal. At the closing of this
offering, affiliates of our general partner will own 56.3% of the outstanding
units. The general partner has the right to decrease, but not subsequently
increase, the percentage required to remove the general partner from not less
than 66 2/3% of all outstanding units to a lesser percentage of all outstanding
units.
The partnership agreement also provides that if our general partner is
removed under circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of that removal:
- the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- our general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests based on the fair market
value of those interests at the time.
In the event of removal of a general partner under circumstances where cause
exists or withdrawal of a general partner where that withdrawal violates the
partnership agreement, a successor general partner will have the option to
purchase the general partner interest and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where our general partner
withdraws or is removed by the limited partners, the departing general partner
will have the option to require the successor general partner to purchase the
general partner interest of the departing general partner and its incentive
distribution rights for the fair market value. In each case, this fair market
value will be determined by agreement between the departing general partner and
the successor general partner. If no agreement is reached, an independent
investment banking firm or other independent expert selected by the departing
general partner and the successor general partner will determine the fair market
value. Or, if the departing general partner and the successor general partner
cannot agree upon an expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value.
If the option described above is not exercised by either the departing
general partner or the successor general partner, the departing general
partner's general partner interest and its incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
In addition, we will be required to reimburse the departing general partner
for all amounts due the departing general partner, including, without
limitation, all employee-related liabilities, including severance liabilities,
incurred for the termination of any employees employed by the departing general
partner or its affiliates for our benefit.
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TRANSFER OF GENERAL PARTNER INTERESTS
Except for transfer by our general partner of all, but not less than all, of
its general partner interest in us and the operating partnership to:
- an affiliate of our general partner (other than an individual); or
- another entity as part of the merger or consolidation of our general
partner with or into another entity or the transfer by our general partner
of all or substantially all of its assets to another entity,
our general partner may not transfer all or any part of its general partner
interest in us to another person prior to June 30, 2012 without the approval of
the holders of at least a majority of the outstanding common units, excluding
common units held by our general partner and its affiliates. As a condition of
this transfer, the transferee must, among other things, assume the rights and
duties of our general partner, agree to be bound by the provisions of the
partnership agreement, furnish an opinion of counsel regarding limited liability
and tax matters, agree to acquire all of the general partner's interest in the
operating partnership and agree to be bound by the provisions of the partnership
agreements of the operating partnership.
The general partner and its affiliates may at any time transfer units to one
or more persons, without unitholder approval, except that they may not transfer
subordinated units to us.
TRANSFER OF OWNERSHIP INTERESTS IN GENERAL PARTNER
At any time, the members of our general partner may sell or transfer all or
part of their membership interests in our general partner without the approval
of the unitholders.
TRANSFER OF INCENTIVE DISTRIBUTION RIGHTS
The general partner or its affiliates or a subsequent holder may transfer
its incentive distribution rights to an affiliate or another person as part of
its merger or consolidation with or into, or sale of all or substantially all of
its assets to, that person without the prior approval of the unitholders; but,
in each case, the transferee must agree to be bound by the provisions of the
partnership agreement. Prior to June 30, 2012, other transfers of the incentive
distribution rights will require the affirmative vote of holders of a majority
of the outstanding common units and subordinated units, voting as separate
classes. On or after June 30, 2012, the incentive distribution rights will be
freely transferable.
CHANGE OF MANAGEMENT PROVISIONS
The partnership agreement contains specific provisions that are intended to
discourage a person or group from attempting to remove Dynegy DEP GP LLC as our
general partner or otherwise change management. If any person or group other
than our general partner and its affiliates acquires beneficial ownership of 20%
or more of any class of units, that person or group loses voting rights on all
of its units. The general partner has the discretion to increase, but not
subsequently decrease, the ownership percentage at which voting rights are
forfeited. This loss of voting rights does not apply to any person or group that
acquires the units from our general partner or its affiliates and any
transferees of that person or group approved by our general partner or to any
person or group who acquires the units with the prior approval of the board of
directors.
The partnership agreement also provides that if our general partner is
removed under circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of that removal:
- the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
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- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and
- our general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.
LIMITED CALL RIGHT
If at any time our general partner and its affiliates own more than 80% of
the then-issued and outstanding partnership securities of any class, our general
partner will have the right, which it may assign in whole or in part to any of
its affiliates or to us, to acquire all, but not less than all, of the remaining
partnership securities of the class held by unaffiliated persons as of a record
date to be selected by our general partner, on at least ten but not more than
60 days notice. The purchase price in the event of this purchase is the greater
of:
- the highest cash price paid by either of our general partner or any of its
affiliates for any partnership securities of the class purchased within
the 90 days preceding the date on which our general partner first mails
notice of its election to purchase those partnership securities; and
- the current market price as of the date three days before the date the
notice is mailed.
As a result of our general partner's right to purchase outstanding partnership
securities, a holder of partnership securities may have his partnership
securities purchased at an undesirable time or price. The tax consequences to a
unitholder of the exercise of this call right are the same as a sale by that
unitholder of his common units in the market. Please read "Tax
Considerations--Disposition of Common Units."
MEETINGS; VOTING
Except as described below regarding a person or group owning 20% or more of
any class of units then outstanding, unitholders or assignees who are record
holders of units on the record date will be entitled to notice of, and to vote
at, meetings of our limited partners and to act upon matters for which approvals
may be solicited. Common units that are owned by an assignee who is a record
holder, but who has not yet been admitted as a limited partner, will be voted by
our general partner at the written direction of the record holder. Absent
direction of this kind, the common units will not be voted, except that, in the
case of common units held by our general partner on behalf of non-citizen
assignees, our general partner will distribute the votes on those common units
in the same ratios as the votes of limited partners on other units are cast.
Our general partner does not anticipate that any meeting of unitholders will
be called in the foreseeable future. Any action that is required or permitted to
be taken by the unitholders may be taken either at a meeting of the unitholders
or without a meeting if consents in writing describing the action so taken are
signed by holders of the number of units necessary to authorize or take that
action at a meeting. Meetings of the unitholders may be called by our general
partner or by unitholders owning at least 20% of the outstanding units of the
class for which a meeting is proposed. Unitholders may vote either in person or
by proxy at meetings. The holders of a majority of the outstanding units of the
class or classes for which a meeting has been called, represented in person or
by proxy, will constitute a quorum unless any action by the unitholders requires
approval by holders of a greater percentage of the units, in which case the
quorum will be the greater percentage.
Each record holder of a unit has a vote according to his percentage interest
in us, although additional limited partner interests having special voting
rights could be issued. Please read "--Issuance of Additional Securities."
However, if at any time any person or group, other than our general partner and
its affiliates, or a direct or subsequently approved transferee of our general
partner or its affiliates, acquires, in the aggregate, beneficial ownership of
20% or more of any class of units then outstanding,
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that person or group will lose voting rights on all of its units and the units
may not be voted on any matter and will not be considered to be outstanding when
sending notices of a meeting of unitholders, calculating required votes,
determining the presence of a quorum or for other similar purposes. Common units
held in nominee or street name account will be voted by the broker or other
nominee in accordance with the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise. The
general partner has the right to increase, but not subsequently decrease, the
voting percentage at which voting rights are forfeited. Except as the
partnership agreement otherwise provides, subordinated units will vote together
with common units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of common units under the partnership
agreement will be delivered to the record holder by us or by the transfer agent.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability," the common units will
be fully paid, and unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner for the right to
share in allocations and distributions from us, including liquidating
distributions. Our general partner will vote and exercise other powers
attributable to common units owned by an assignee that has not become a
substitute limited partner at the written direction of the assignee. See
"--Meetings; Voting." Transferees that do not execute and deliver a transfer
application will not be treated as assignees or as record holders of common
units, and will not receive cash distributions, federal income tax allocations
or reports furnished to holders of common units. Please read "Description of the
Common Units--Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If we are or become subject to federal, state or local laws or regulations
that, in the reasonable determination of our general partner, create a
substantial risk of cancellation or forfeiture of any property that we have an
interest in because of the nationality, citizenship or other related status of
any limited partner or assignee, we may redeem the units held by the limited
partner or assignee at their current market price. In order to avoid any
cancellation or forfeiture, our general partner may require each limited partner
or assignee to furnish information about his nationality, citizenship or related
status. If a limited partner or assignee fails to furnish information about his
nationality, citizenship or other related status within 30 days after a request
for the information or if our general partner determines after receipt of the
information that the limited partner or assignee is not an eligible citizen, the
limited partner or assignee may be treated as a non-citizen assignee. In
addition to other limitations on the rights of an assignee that is not a
substituted limited partner, a non-citizen assignee does not have the right to
direct the voting of his units and may not receive distributions in kind upon
our liquidation.
INDEMNIFICATION
Under the partnership agreement, in most circumstances, we will indemnify
the following persons, to the fullest extent permitted by law, from and against
all losses, claims, damages or similar events:
- our general partner;
- any departing general partner;
- any person who is or was an affiliate of a general partner or any
departing general partner;
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- any person who is or was a member, partner, officer, director, employee,
agent or trustee of our general partner or any departing general partner
or any affiliate of a general partner or any departing general partner; or
- any person who is or was serving at the request of a general partner or
any departing general partner or any affiliate of a general partner or any
departing general partner as an officer, director, employee, member,
partner, agent or trustee of another person.
Any indemnification under these provisions will only be out of our assets.
Our general partner will not be personally liable for, or have any obligation to
contribute or loan funds or assets to us to enable us to effectuate,
indemnification. We may purchase insurance against liabilities asserted against
and expenses incurred by persons for our activities, regardless of whether we
would have the power to indemnify the person against liabilities under the
partnership agreement.
BOOKS AND REPORTS
Our general partner is required to keep appropriate books of our business at
our principal offices. The books will be maintained for both tax and financial
reporting purposes on an accrual basis. For tax and fiscal reporting purposes,
our fiscal year is the calendar year.
We will furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we will also
furnish or make available summary financial information within 90 days after the
close of each quarter.
We will furnish each record holder of a unit with information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. This information is expected to be furnished in summary form so
that some complex calculations normally required of partners can be avoided. Our
ability to furnish this summary information to unitholders will depend on the
cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns,
regardless of whether he supplies us with information.
RIGHT TO INSPECT OUR BOOKS AND RECORDS
The partnership agreement provides that a limited partner can, for a purpose
reasonably related to his interest as a limited partner, upon reasonable demand
and at his own expense, have furnished to him:
- 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 the partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of attorney
under which they have been executed;
- 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 interests or which we are
required by law or by agreements with third parties to keep confidential.
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REGISTRATION RIGHTS
Under the partnership agreement, we have agreed to register for resale under
the Securities Act of 1933 and applicable state securities laws any common
units, subordinated units or other partnership securities proposed to be sold by
our general partner or any of its affiliates or their assignees if an exemption
from the registration requirements is not otherwise available. These
registration rights continue for two years following any withdrawal or removal
of Dynegy DEP GP LLC as our general partner. We are obligated to pay all
expenses incidental to the registration, excluding underwriting discounts and
commissions. Please read "Units Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered by this prospectus, an affiliate
of our general partner will own an aggregate of 1,100,000 common units and
8,750,000 subordinated units. All of the subordinated units will convert into
common units at the end of the subordination period and some may convert
earlier. The sale of these common and subordinated units could have an adverse
impact on the price of the common units or on any trading market that may
develop.
The common units sold in the offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any common units held by an "affiliate" of ours may not be resold publicly
except in compliance with the registration requirements of the Securities Act or
under an exemption under Rule 144 or otherwise. Rule 144 permits securities
acquired by an affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three month period, the greater of:
- 1% of the total number of the securities outstanding; or
- the average weekly reported trading volume of the common units for the
four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of sale provisions,
notice requirements, and the availability of current public information about
us. A person who is not deemed to have been an affiliate of ours at any time
during the three months preceding a sale, and who has beneficially owned his
common units for at least two years, would be entitled to sell common units
under Rule 144 without regard to the public information requirements, volume
limitations, manner of sale provisions, and notice requirements of Rule 144.
Prior to the end of the subordination period, we may not issue equity
securities of the partnership ranking prior or senior to the common units or an
aggregate of more than 4,375,000 common units or an equivalent amount of
securities ranking on a parity with the common units without the approval of the
holders of the outstanding common units and subordinated units, voting as
separate classes, subject to certain exceptions described under "The Partnership
Agreement--Issuance of Additional Securities."
The partnership agreement provides that, after the subordination period, we
may issue an unlimited number of limited partner interests of any type without a
vote of the unitholders. The partnership agreement does not restrict our ability
to issue equity securities ranking junior to the common units at any time. Any
issuance of additional common units or other equity securities would result in a
corresponding decrease in the proportionate ownership interest in us represented
by, and could adversely affect the cash distributions to and market price of,
common units then outstanding. Please read "The Partnership Agreement--Issuance
of Additional Securities."
Under the partnership agreement, the general partner and its affiliates have
the right to cause us to register under the Securities Act and applicable state
securities laws the offer and sale of any units that they hold. Subject to the
terms and conditions of the partnership agreement, these registration rights
allow the general partner and its affiliates or their assignees holding any
units to require registration of any of these units and to include any of these
units in a registration by us of other units, including units offered by us or
by any unitholder. The general partner will continue to have these registration
rights for two years following its withdrawal or removal as a general partner.
In connection with any registration of this kind, we will indemnify each
unitholder participating in the registration and its officers, directors, and
controlling persons from and against any liabilities under the Securities Act or
any applicable state securities laws arising from the registration statement or
prospectus. We will bear all costs and expenses incidental to any registration,
excluding any underwriting discounts and commissions. Except as described below,
the general partner and its affiliates may sell their units in private
transactions at any time, subject to compliance with applicable laws.
Dynegy Inc., Dynegy Energy Partners, our general partner and the directors
and executive officers of the general partner have agreed not to sell any common
units they beneficially own for a period of 180 days from the date of this
prospectus. Please read "Underwriting" for a description of these lock-up
provisions.
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MATERIAL TAX CONSEQUENCES
This addresses all of the material tax considerations that may be relevant
to prospective unitholders who are individual citizens or residents of the
United States and, unless otherwise noted in this section, expresses the opinion
of Vinson & Elkins L.L.P., special counsel to our general partner and us,
insofar as it relates to matters of United States federal income tax law and
legal conclusions with respect to those matters. This section is based upon
current provisions of the Internal Revenue Code, existing and proposed
regulations, and current administrative rulings and court decisions, all of
which are subject to change. Later changes in these authorities may cause the
tax consequences to vary substantially from the consequences described below.
Unless the context otherwise requires, references in this section to "us" or
"we" are references to Dynegy Energy Partners and the operating partnership.
No attempt has been made in this section to comment on all federal income
tax matters affecting us or the unitholders. Moreover, this section focuses on
unitholders who are individual citizens or residents of the United States and
has only limited application to corporations, estates, trusts, nonresident
aliens or other unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, individual retirement accounts (IRAs),
real estate investment trusts (REITs) or mutual funds. Accordingly, we recommend
that each prospective unitholder consult, and depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences particular to
him of the ownership or disposition of common units.
All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section, unless otherwise noted, are the
opinion of Vinson & Elkins L.L.P. and are based on the accuracy of the
representations made by us.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the common units and the prices
at which common units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by the unitholders and our general partner.
Furthermore, the tax treatment of us, or of an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read "--Tax
Consequences of Unit Ownership--Treatment of Short Sales");
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"--Disposition of Common Units--Allocations Between Transferors and
Transferees"); and
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "--Tax Consequences of Unit Ownership--Section 754
Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of whether
cash
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distributions are made to him by the partnership. Distributions by a partnership
to a partner are generally not taxable unless the amount of cash distributed is
in excess of the partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our status as a partnership for federal income tax purposes
or whether our operations generate "qualifying income" under Section 7704 of the
Code. Instead, we will rely on the opinion of Vinson & Elkins L.L.P. that, based
upon the Internal Revenue Code, its regulations, published revenue rulings and
court decisions and the representations described below, Dynegy Energy Partners
will be classified as a partnership and the operating partnership will be
disregarded as an entity separate from Dynegy Energy Partners for federal income
tax purposes.
Section 7704 of the Internal Revenue Code provides that publicly traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
income and gains derived from the transportation, storage and processing of
crude oil, natural gas and products thereof. Other types of qualifying income
include interest other than from a financial business, dividends, gains from the
sale of real property and gains from the sale or other disposition of assets
held for the production of income that otherwise constitutes qualifying income.
We estimate that less than 3.8% of our current income is not qualifying income;
however, this estimate could change from time to time. Based upon and subject to
this estimate, the factual representations made by us and our general partner
and a review of the applicable legal authorities, counsel is of the opinion that
at least 90% of our current gross income constitutes qualifying income.
In rendering its opinion, Vinson & Elkins L.L.P. has relied on factual
representations made by us and our general partner. The representations made by
us and our general partner upon which Vinson & Elkins L.L.P. has relied are:
- Neither we nor the operating partnership will elect to be treated as a
corporation; and
- For each taxable year, more than 90% of our gross income will be income
that, in our counsel's opinion, is "qualifying income" within the meaning
of Section 7704(d) of the Internal Revenue Code.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
in return for stock in that corporation, and then distributed that stock to the
unitholders in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and us so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
tax basis in his common units, or taxable capital gain, after the unitholder's
tax basis in his common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the units.
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The remainder of this section is based on Vinson & Elkins L.L.P.'s opinion
that Dynegy Energy Partners will be classified as a partnership and the
operating partnership will be disregarded as an entity separate from Dynegy
Energy Partners for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of Dynegy Energy Partners will
be treated as partners of Dynegy Energy Partners for federal income tax
purposes. Also:
- assignees who have executed and delivered transfer applications, and are
awaiting admission as limited partners; and
- unitholders whose common units are held in street name or by a nominee and
who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units,
will be treated as partners of Dynegy Energy Partners for federal income tax
purposes. As there is no direct authority addressing assignees of common units
who are entitled to execute and deliver transfer applications and become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, counsel's opinion does not extend to these
persons. Furthermore, a purchaser or other transferee of common units who does
not execute and deliver a transfer application may not receive some federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application for those
common units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to those units for federal income tax purposes. Please read
"--Tax Consequences of Unit Ownership--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in Dynegy Energy Partners for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return his
share of our income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by him. Consequently, we may
allocate income to a unitholder even if he has not received a cash distribution.
Each unitholder will be required to include in income his allocable share of our
income, gains, losses and deductions for our taxable year ending with or within
his taxable year.
TREATMENT OF DISTRIBUTIONS. Distributions by us to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "--Disposition of Common Units" below.
To the extent our distributions cause a unitholder's "at risk" amount to be less
than zero at the end of any taxable year, he must recapture any losses deducted
in previous years. Please read "--Limitations on Deductibility of Losses."
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Any reduction in a unitholder's share of our liabilities for which no
partner, including our general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. A decrease in a unitholder's percentage interest in us because of
our issuance of additional common units will decrease his share of our
nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his tax basis in his
common units, if the distribution reduces the unitholder's share of our
"unrealized receivables," including depreciation recapture, and/or substantially
appreciated "inventory items," both as defined in the Internal Revenue Code, and
collectively, "Section 751 Assets." To that extent, he will be treated as having
been distributed his proportionate share of the Section 751 Assets and having
exchanged those assets with us in return for the non-pro rata portion of the
actual distribution made to him. This latter deemed exchange will generally
result in the unitholder's realization of ordinary income, which will equal the
excess of (1) the non-pro rata portion of that distribution over (2) the
unitholder's tax basis for the share of Section 751 Assets deemed relinquished
in the exchange.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS. We estimate that a purchaser of
common units in this offering who owns those common units from the date of
closing of this offering through December 31, 2004, will be allocated an amount
of federal taxable income for that period that will be less than % of the cash
distributed with respect to that period. We anticipate that after the taxable
year ending December 31, 2004, the ratio of allocable taxable income to cash
distributions to the unitholders will increase. These estimates are based upon
the assumption that gross income from operations will approximate the amount
required to make the minimum quarterly distribution on all units and other
assumptions with respect to capital expenditures, cash flow and anticipated cash
distributions. These estimates and assumptions are subject to, among other
things, numerous business, economic, regulatory, competitive and political
uncertainties beyond our control. Further, the estimates are based on current
tax law and tax reporting positions that we will adopt and with which the IRS
could disagree. Accordingly, we cannot assure you that these estimates will
prove to be correct. The actual percentage of distributions that will constitute
taxable income could be higher or lower, and any differences could be material
and could materially affect the value of the common units.
BASIS OF COMMON UNITS. A unitholder's initial tax basis for his common
units will be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his share of our income
and by any increases in his share of our nonrecourse liabilities. That basis
will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to be capitalized. A
limited partner will have no share of our debt that is recourse to our general
partner, but will have a share, generally based on his share of profits, of our
nonrecourse liabilities. Please read "--Disposition of Common Units--Recognition
of Gain or Loss."
LIMITATIONS ON DEDUCTIBILITY OF LOSSES. The deduction by a unitholder of
his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder, if more than 50%
of the value of the corporate unitholder's stock is owned directly or indirectly
by five or fewer individuals or some tax-exempt organizations, to the amount for
which the unitholder is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A unitholder must recapture
losses deducted in previous years to the extent that distributions cause his at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that his tax basis or at risk
amount, whichever is the limiting factor, is subsequently increased. Upon the
taxable disposition of a unit, any gain recognized by a unitholder can be offset
by losses that were previously suspended by the at risk limitation but may not
be offset by losses suspended by the basis limitation.
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Any excess loss above that gain previously suspended by the at risk or basis
limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire or
hold his units, if the lender of those borrowed funds owns an interest in us, is
related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our nonrecourse
liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly traded partnership.
Consequently, any losses we generate will only be available to offset our
passive income generated in the future and will not be available to offset
income from other passive activities or investments, including our investments
or investments in other publicly traded partnerships, or salary or active
business income. Similarly, a unitholder's share of our net income may be offset
by our 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. Passive losses that are not deductible
because they exceed a unitholder's share of income we generate may be deducted
in full when he disposes of his entire investment in us in a fully taxable
transaction with an unrelated party. The passive activity loss rules are applied
after other applicable limitations on deductions, including the at risk rules
and the basis limitation.
LIMITATIONS ON INTEREST DEDUCTIONS. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." Investment interest expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- our interest expense attributed to portfolio income; and
- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit.
Net investment income includes gross income from property held for
investment and amounts treated as portfolio income under the passive loss rules,
less deductible expenses, other than interest, directly connected with the
production of investment income, but generally does not include gains
attributable to the disposition of property held for investment. The IRS has
indicated that net passive income from a publicly traded partnership constitutes
investment income for purposes of the limitations on the deductibility of
investment interest. In addition, the unitholder's share of our portfolio income
will be treated as investment income.
ENTITY-LEVEL COLLECTIONS. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or our
general partner or any former unitholder, we are authorized to pay those taxes
from our funds. That payment, if made, will be treated as a distribution of cash
to the partner on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are authorized to
treat the payment as a distribution to all current unitholders. We are
authorized to amend the partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
later
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distributions, so that after giving effect to these distributions, the priority
and characterization of distributions otherwise applicable under the partnership
agreement is maintained as nearly as is practicable. Payments by us as described
above could give rise to an overpayment of tax on behalf of an individual
partner in which event the partner would be required to file a claim in order to
obtain a credit or refund.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among our general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made to the
common units in excess of distributions to the subordinated units, or incentive
distributions are made to our general partner, gross income will be allocated to
the recipients to the extent of these distributions. If we have a net loss for
the entire year, that loss will be allocated first to our general partner and
the unitholders in accordance with their percentage interests in us to the
extent of their positive capital accounts and, second, to our general partner.
Specified items of our income, gain, loss and deduction will be allocated to
account for the difference between the tax basis and fair market value of
property contributed to us by our general partner and its affiliates, referred
to in this discussion as "Contributed Property." The effect of these allocations
to a unitholder purchasing common units in this offering essentially will be the
same as if the tax basis of our assets were equal to their fair market value at
the time of this offering. In addition, items of recapture income will be
allocated to the extent possible to the partner who was allocated the deduction
giving rise to the treatment of that gain as recapture income in order to
minimize the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of our income and gain will be allocated in an amount and manner to
eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction, other than an
allocation required by the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the fair market value
of Contributed Property, and "tax" capital account, credited with the tax basis
of Contributed Property, referred to in this discussion as the "Book-Tax
Disparity," will generally be given effect for federal income tax purposes in
determining a partner's share of an item of income, gain, loss or deduction only
if the allocation has substantial economic effect. In any other case, a
partner's share of an item will be determined on the basis of his interest in
us, which will be determined by taking into account all the facts and
circumstances, including his relative contributions to us, the interests of all
the partners in profits and losses, the interests of all the partners in cash
flow and other nonliquidating distributions and the rights of all the partners
to distributions of capital upon liquidation.
Vinson & Elkins L.L.P. is of the opinion that, with the exception of the
issues described in "--Tax Consequences of Unit Ownership--Section 754 Election"
and "--Disposition of Common Units--Allocations Between Transferors and
Transferees," allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partner's share of an item of
income, gain, loss or deduction.
TREATMENT OF SHORT SALES. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
those units. If so, he would no longer be a partner for those units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period:
- any of our income, gain, loss or deduction with respect to those units
would not be reportable by the unitholder;
- any cash distributions received by the unitholder as to those units would
be fully taxable; and
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- all of these distributions would appear to be ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership interests. Please
also read "--Disposition of Common Units--Recognition of Gain or Loss."
ALTERNATIVE MINIMUM TAX. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The current minimum tax
rate for noncorporate taxpayers is 26% on the first $175,000 of alternative
minimum taxable income in excess of the exemption amount and 28% on any
additional alternative minimum taxable income. Prospective unitholders should
consult with their tax advisors as to the impact of an investment in units on
their liability for the alternative minimum tax.
TAX RATES. In general, the highest effective United States federal income
tax rate for individuals for 2002 is 38.6% and the maximum United States federal
income tax rate for net capital gains of an individual for 2002 is 20% if the
asset disposed of was held for more than 12 months at the time of disposition.
SECTION 754 ELECTION. We will make the election permitted by Section 754 of
the Internal Revenue Code. That election is irrevocable without the consent of
the IRS. The election will generally permit us to adjust a common unit
purchaser's tax basis in our assets ("inside basis") under Section 743(b) of the
Internal Revenue Code to reflect his purchase price. This election does not
apply to a person who purchases common units directly from us. The
Section 743(b) adjustment belongs to the purchaser and not to other partners.
For purposes of this discussion, a partner's inside basis in our assets will be
considered to have two components: (1) his share of our tax basis in our assets
("common basis") and (2) his Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal Revenue Code require,
if the remedial allocation method is adopted (which we will adopt), a portion of
the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury Regulation Section 1.167(c)-l(a)(6), a
Section 743(b) adjustment attributable to property subject to depreciation under
Section 167 of the Internal Revenue Code rather than cost recovery deductions
under Section 168 is generally required to be depreciated using either the
straight-line method or the 150% declining balance method. Under our partnership
agreement, our general partner is authorized to take a position to preserve the
uniformity of units even if that position is not consistent with these Treasury
Regulations. Please read "--Tax Treatment of Operations--Uniformity of Units."
Although Vinson & Elkins L.L.P. is unable to opine as to the validity of
this approach because there is no clear authority on this issue, we intend to
depreciate the portion of a Section 743(b) adjustment attributable to unrealized
appreciation in the value of Contributed Property, to the extent of any
unamortized Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful life applied to
the common basis of the property, or treat that portion as non-amortizable to
the extent attributable to property the common basis of which is not
amortizable. This method is consistent with the regulations under Section 743 of
the Internal Revenue Code but is arguably inconsistent with Treasury Regulation
Section 1.167(c)-l(a)(6), which is not expected to directly apply to a material
portion of our assets. To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized Book-Tax
Disparity, we will apply the rules described in the Treasury Regulations and
legislative history. If we determine that
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this position cannot reasonably be taken, we may take a depreciation or
amortization position under which all purchasers acquiring units in the same
month would receive depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same applicable rate as if
they had purchased a direct interest in our assets. This kind of aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to some unitholders. Please read "--Tax Treatment
of Operations--Uniformity of Units."
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have a higher tax basis in his share of our assets for
purposes of computing, among other items, his depreciation and depletion
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 tax
basis in his units is lower than those units' share of the aggregate tax basis
of our assets immediately prior to the transfer. Thus, the fair market value of
the units may be affected either favorably or unfavorably by the election.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue Code. The IRS could
seek to reallocate some or all of any Section 743(b) adjustment allocated by us
to our tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. We cannot assure you that the determinations we
make will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether. Should the IRS
require a different basis adjustment to be made, and should, in our opinion, the
expense of compliance exceed the benefit of the election, we may seek permission
from the IRS to revoke our Section 754 election. If permission is granted, a
subsequent purchaser of units may be allocated more income than he would have
been allocated had the election not been revoked.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR. We use the year ending December 31 as
our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of our
income, gain, loss and deduction for our taxable year ending within or with his
taxable year. In addition, a unitholder who has a taxable year ending on a date
other than December 31 and who disposes of all of his units following the close
of our taxable year but before the close of his taxable year must include his
share of our income, gain, loss and deduction in income for his taxable year,
with the result that he will be required to include in income for his taxable
year his share of more than one year of our income, gain, loss and deduction.
Please read "--Disposition of Common Units--Allocations Between Transferors and
Transferees."
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION. The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between the fair market
value of our assets and their tax basis immediately prior to this offering will
be borne by our general partner and its affiliates. Please read "--Tax
Consequences of Unit Ownership--Allocation of Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
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If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property we own will likely be required to recapture some or all, of
those deductions as ordinary income upon a sale of his interest in us. Please
read "--Tax Consequences of Unit Ownership--Allocation of Income, Gain, Loss and
Deduction" and "--Disposition of Common Units--Recognition of Gain or Loss."
The costs incurred in selling our units (called "syndication expenses") must
be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as syndication expenses.
VALUATION AND TAX BASIS OF OUR PROPERTIES. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates of basis are subject to
challenge and will not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the character and
amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years and incur interest and penalties with respect to those
adjustments.
DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured by
the sum of the cash or the fair market value of other property received by him
plus his share of our nonrecourse liabilities. Because the amount realized
includes a unitholder's share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability in excess of any
cash received from the sale.
Prior distributions from us in excess of cumulative net taxable income for a
common unit that decreased a unitholder's tax basis in that common unit will, in
effect, become taxable income if the common unit is sold at a price greater than
the unitholder's tax basis in that common unit, even if the price received is
less than his original cost.
Except as noted below, gain or loss recognized by a unitholder, other than a
"dealer" in units, on the sale or exchange of a unit held for more than one year
will generally be taxable as capital gain or loss. Capital gain recognized by an
individual on the sale of units held more than 12 months will generally be taxed
at a maximum rate of 20%. However, a portion of this gain or loss, which will
likely be substantial, will be separately computed and taxed as ordinary income
or loss under Section 751 of the Internal Revenue Code to the extent
attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Capital losses may offset
capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gains in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a
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sale or other disposition of less than all of those interests, a portion of that
tax basis must be allocated to the interests sold using an "equitable
apportionment" method. Treasury Regulations under Section 1223 of the Internal
Revenue Code allow a selling unitholder who can identify common units
transferred with an ascertainable holding period to elect to use the actual
holding period of the common units transferred. Thus, according to the ruling, a
common unitholder will be unable to select high or low basis common units to
sell as would be the case with corporate stock, but, according to the
regulations, may designate specific common units sold for purposes of
determining the holding period of units transferred. A unitholder electing to
use the actual holding period of common units transferred must consistently use
that identification method for all subsequent sales or exchanges of common
units. A unitholder considering the purchase of additional units or a sale of
common units purchased in separate transactions should consult his tax advisor
as to the possible consequences of this ruling and application of the
regulations.
Specific provisions of the Internal Revenue Code affect the taxation of some
financial products and securities, including partnership interests, by treating
a taxpayer as having sold an "appreciated" partnership interest, one in which
gain would be recognized if it were sold, assigned or terminated at its fair
market value, if the taxpayer or related persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the applicable
exchange on the first business day of the month, which we refer to in this
prospectus as the Allocation Date. However, gain or loss realized on a sale or
other disposition of our assets other than in the ordinary course of business
will be allocated among the unitholders on the Allocation Date in the month in
which that gain or loss is recognized. As a result, a unitholder transferring
units may be allocated income, gain, loss and deduction realized after the date
of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Vinson & Elkins L.L.P. is unable to opine on the
validity of this method of allocating income and deductions between unitholders.
If this method is not allowed under the Treasury Regulations, or only applies to
transfers of less than all of the unitholder's interest, our taxable income or
losses might be reallocated among the unitholders. We are authorized to revise
our method of allocation between unitholders to conform to a method permitted
under future Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes of
them prior to the record date set for a cash distribution for that quarter will
be allocated items of our income, gain, loss and deductions attributable to that
quarter but will not be entitled to receive that cash distribution.
NOTIFICATION REQUIREMENTS. A person who purchases units from another
unitholder is required to notify us in writing of that purchase within 30 days
after purchase. We are required to notify the IRS of that transaction and to
furnish specified information to the transferor and transferee. However, these
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reporting requirements do not apply to a sale by an individual who is a citizen
of the United States and who effects the sale or exchange through a broker.
CONSTRUCTIVE TERMINATION. We will be considered to have been terminated for
tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than
12 months of our taxable income or loss being includable in his taxable income
for the year of termination. We would be required to make new tax elections
after a termination, including a new election under Section 754 of the Internal
Revenue Code, and a termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject us to, any tax legislation
enacted before the termination.
UNIFORMITY OF UNITS
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. In the absence of uniformity, we may be unable to
completely comply with a number of federal income tax requirements, both
statutory and regulatory. A lack of uniformity can result from a literal
application of Treasury Regulation Section 1.167(c)-1(a)(6). Any non-uniformity
could have a negative impact on the value of the units. Please read "--Tax
Consequences of Unit Ownership--Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property, to
the extent of any unamortized Book-Tax Disparity, using a rate of depreciation
or amortization derived from the depreciation or amortization method and useful
life applied to the common basis of that property, or treat that portion as
nonamortizable, to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the regulations under
Section 743 of the Internal Revenue Code, but is arguably inconsistent with
Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly
apply to a material portion of our assets. Please read "--Tax Consequences of
Unit Ownership--Section 754 Election." To the extent that the Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized
Book-Tax Disparity, we will apply the rules described in the Treasury
Regulations and legislative history. If we determine that this position cannot
reasonably be taken, we may adopt a depreciation and amortization position under
which all purchasers acquiring units in the same month would receive
depreciation and amortization deductions, whether attributable to a common basis
or Section 743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our property. If this latter position is adopted,
it may result in lower annual depreciation and amortization deductions than
would otherwise be allowable to some unitholders and risk the loss of
depreciation and amortization deductions not taken in the year that these
deductions are otherwise allowable. This position will not be adopted if we
determine that the loss of depreciation and amortization deductions will have a
material adverse effect on the unitholders. If we choose not to utilize this
aggregate method, we may use any other reasonable depreciation and amortization
method to preserve the uniformity of the intrinsic tax characteristics of any
units that would not have a material adverse effect on the unitholders. The IRS
may challenge any method of depreciating the Section 743(b) adjustment described
in this paragraph. If this challenge were sustained, the uniformity of units
might be affected, and the gain from the sale of units might be increased
without the benefit of additional deductions. Please read "--Disposition of
Common Units--Recognition of Gain or Loss."
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
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Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder that is a tax-exempt
organization will be unrelated business taxable income and will be taxable to
them.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States because
of the ownership of units. As a consequence, they will be required to file
federal tax returns to report their share of our income, gain, loss or deduction
and pay federal income tax at regular rates on their share of our net income or
gain. Moreover, under rules applicable to publicly traded partnerships, we will
withhold at the highest effective tax rate applicable to individuals from cash
distributions made quarterly to foreign unitholders. Each foreign unitholder
must obtain a taxpayer identification number from the IRS and submit that number
to our transfer agent on a Form W-8 or applicable substitute form in order to
obtain credit for these withholding taxes.
In addition, because a foreign corporation that owns units will be treated
as engaged in a United States trade or business, that corporation may be subject
to the United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its share of our income and gain, as adjusted for changes
in the foreign corporation's "U.S. net equity," which are effectively connected
with the conduct of a United States trade or business. That tax may be reduced
or eliminated by an income tax treaty between the United States and the country
in which the foreign corporate unitholder is a "qualified resident." In
addition, this type of unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
sale or disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business of the foreign unitholder.
Apart from the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has owned less than 5%
in value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the sale or disposition.
ADMINISTRATIVE MATTERS
INFORMATION RETURNS AND AUDIT PROCEDURES. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take various
accounting and reporting positions, some of which have been mentioned earlier,
to determine his share of income, gain, loss and deduction. We cannot assure you
that those positions will yield a result that conforms to the requirements of
the Internal Revenue Code, regulations or administrative interpretations of the
IRS. Neither we nor counsel can assure prospective unitholders that the IRS will
not successfully contend in court that those positions are impermissible. Any
challenge by the IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each unitholder to adjust a prior year's
tax liability, and possibly may result in an audit of his return. Any audit of a
unitholder's return could result in adjustments not related to our returns as
well as those related to our returns.
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Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code requires
that one partner be designated as the "Tax Matters Partner" for these purposes.
The partnership agreement names Dynegy DEP GP LLC as our Tax Matters Partner.
The Tax Matters Partner will make some elections on our behalf and on behalf
of unitholders. In addition, the Tax Matters Partner can extend the statute of
limitations for assessment of tax deficiencies against unitholders for items in
our returns. The Tax Matters Partner may bind a unitholder with less than a 1%
profits interest in us to a settlement with the IRS unless that unitholder
elects, by filing a statement with the IRS, not to give that authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which
all the unitholders are bound, of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, judicial review
may be sought by any unitholder having at least a 1% interest in profits or by
any group of unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go forward, and each
unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of this
consistency requirement may subject a unitholder to substantial penalties.
NOMINEE REPORTING. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;
(b) whether the beneficial owner is:
(1) a person that is not a United States person;
(2) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the
foregoing; or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred for
the beneficial owner; and
(d) specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost
for purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
REGISTRATION AS A TAX SHELTER. The Internal Revenue Code requires that "tax
shelters" be registered with the Secretary of the Treasury. The temporary
Treasury Regulations interpreting the tax shelter registration provisions of the
Internal Revenue Code are extremely broad. It is arguable that we are not
subject to the registration requirement on the basis that we will not constitute
a tax shelter. However, we will register as a tax shelter with the Secretary of
Treasury in the absence of assurance that we will
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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 A TAX SHELTER REGISTRATION NUMBER DOES NOT INDICATE THAT INVESTMENT
IN US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY
THE IRS.
We will supply our tax shelter registration number to you when one has been
assigned to us. A unitholder who sells or otherwise transfers a unit in a later
transaction must furnish the registration number to the transferee. The penalty
for failure of the transferor of a unit to furnish the registration number to
the transferee is $100 for each failure. The unitholders must disclose our tax
shelter registration number on Form 8271 to be attached to the tax return on
which any deduction, loss or other benefit we generate is claimed or on which
any of our income is included. A unitholder who fails to disclose the tax
shelter registration number on his return, without reasonable cause for that
failure, will be subject to a $250 penalty for each failure. Any penalties
discussed are not deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:
(1) for which there is, or was, "substantial authority;" or
(2) as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property, or
the adjusted basis of any property, claimed on a tax return is 200% or more of
the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL, FOREIGN AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will be subject to other taxes,
including state, local and foreign income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in which you are a
resident. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in us. We will initially own property or do business in Florida,
Kentucky, Mississippi, Tennessee and Texas. We may also own property or do
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business in other jurisdictions in the future. Although you may not be required
to file a return and pay taxes in some jurisdictions because your income from
that jurisdiction falls below the filing and payment requirement, you will be
required to file income tax returns and to pay income taxes in many of these
jurisdictions in which we do business or own property and may be subject to
penalties for failure to comply with those requirements. In some jurisdictions,
tax losses may not produce a tax benefit in the year incurred and may not be
available to offset income in subsequent taxable years. Some of the
jurisdictions may require us, or we may elect, to withhold a percentage of
income from amounts to be distributed to a unitholder who is not a resident of
the jurisdiction. Withholding, the amount of which may be greater or less than a
particular unitholder's income tax liability to the jurisdiction, generally does
not relieve a nonresident unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to unitholders for
purposes of determining the amounts distributed by us. Please read "--Tax
Consequences of Unit Ownership--Entity-Level Collections." Based on current law
and our estimate of our future operations, our general partner anticipates that
any amounts required to be withheld will not be material.
It is the responsibility of each unitholder to investigate the legal and tax
consequences, under the laws of pertinent jurisdictions, of his investment in
us. Accordingly, each prospective unitholder should consult, and must depend
upon, his tax counsel or other advisor with regard to those matters. Further, it
is the responsibility of each unitholder to file all state, local and foreign,
as well as United States federal tax returns, that may be required of him.
Vinson & Elkins L.L.P. has not rendered an opinion on the state, local or
foreign tax consequences of an investment in us.
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INVESTMENT IN DYNEGY ENERGY PARTNERS BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to additional
considerations because the investments of these plans are subject to the
fiduciary responsibility and prohibited transaction provisions of ERISA, and
restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other things,
consideration should be given to:
(a) whether the investment is prudent under Section 404(a)(1)(B) of ERISA;
(b) whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(l)(C) of ERISA; and
(c) whether the investment will result in recognition of unrelated business
taxable income by the plan and, if so, the potential after-tax investment
return.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in us is authorized by the appropriate governing instrument and is a
proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibits
employee benefit plans, and IRAs that are not considered part of an employee
benefit plan, from engaging in specified transactions involving "plan assets"
with parties that are "parties in interest" under ERISA or "disqualified
persons" under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether the plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that our general partner also would be
fiduciaries of the plan and our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Internal Revenue Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity interests
would be deemed "plan assets" under some circumstances. Under these regulations,
an entity's assets would not be considered to be "plan assets" if, among other
things,
(a) the equity interests acquired by employee benefit plans are publicly
offered securities; i.e., the equity interests are widely held by 100 or
more investors independent of the issuer and each other, freely
transferable and registered under some provisions of the federal
securities laws,
(b) the entity is an "operating company,"--i.e., it is primarily engaged in
the production or sale of a product or service other than the investment
of capital either directly or through a majority owned subsidiary or
subsidiaries, or
(c) there is no significant investment by benefit plan investors, which is
defined to mean that less than 25% of the value of each class of equity
interest, disregarding some interests held by our general partner, its
affiliates, and some other persons, is held by the employee benefit plans
referred to above, IRAs and other employee benefit plans not subject to
ERISA, including governmental plans.
Our assets should not be considered "plan assets" under these regulations
because it is expected that the investment will satisfy the requirements in
(a) above.
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
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UNDERWRITING
Under the terms of an underwriting agreement, which will be filed as an
exhibit to the registration statement relating to this prospectus, each of the
underwriters named below for whom Lehman Brothers Inc. is acting as
representative, have severally agreed to purchase from us the respective number
of common units opposite their names below.
<Table>
<Caption>
NUMBER OF
COMMON
UNDERWRITERS UNITS
- ------------ -----------
Lehman Brothers Inc.........................................
----------
Total..................................................... 7,650,000
==========
</Table>
The underwriting agreement provides that the underwriters' obligations to
purchase the common units depend on the satisfaction of the conditions contained
in the underwriting agreement, and that if any of the common units are purchased
by the underwriters, all of the common units must be purchased. The conditions
contained in the underwriting agreement include the condition that all the
representations and warranties made by us to the underwriters are true, that
there has been no material adverse change in our condition or in the financial
markets and that we deliver to the underwriters customary closing documents.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional common units. This underwriting fee is the difference
between the initial price to the public and the amount the underwriters pay to
us to purchase the common units. On a per unit basis, the underwriting fee is
% of the initial price to public.
<Table>
<Caption>
NO EXERCISE FULL EXERCISE
----------- -------------
Per unit............................................. $ $
Total.............................................. $ $
</Table>
We estimate that total expenses of the offering, other than underwriting
discounts and commissions, will be approximately $3.2 million.
We have been advised by the underwriters that the underwriters propose to
offer the common units directly to the public at the initial price to the public
set forth on the cover page of this prospectus and to dealers (who may include
the underwriters) at this price to the public less a concession not in excess of
$ per unit. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per unit to certain brokers and dealers. After
the offering, the underwriters may change the offering price and other selling
terms.
Dynegy Inc., Dynegy Energy Partners, our general partner, the operating
partnership and the general partner of the operating partnership have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act of 1933 and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement, or to
contribute to payments that may be required to be made in respect of these
liabilities.
We have granted to the underwriters an option to purchase up to an aggregate
of 1,100,000 additional common units at the initial price to the public less the
underwriting discount set forth on the cover page of this prospectus exercisable
solely to cover over-allotments, if any. Such option may be exercised at any
time until 30 days after the date of this prospectus. If this option is
exercised, each underwriter will be committed, subject to satisfaction of the
conditions specified in the underwriting agreement, to purchase a number of
additional common units proportionate to the underwriter's initial commitment as
indicated in the preceding table, and we will be obligated, pursuant to the
option, to
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sell these common units to the underwriters. To the extent that the underwriters
do not exercise this option, affiliates of Dynegy Inc. will purchase these
common units at the initial public offering price.
Dynegy Inc. and its affiliates, including the partnership, the operating
partnership, our general partner and the directors and executive officers of our
general partner have agreed that they will not, directly or indirectly, sell,
offer or otherwise dispose of any common units or enter into any derivative
transaction with similar effect as a sale of common units for a period of
180 days after the date of this prospectus without the prior written consent of
Lehman Brothers Inc. The restrictions described in this paragraph do not apply
to:
- the sale of common units to the underwriters; or
- common units issued by us under employee incentive plans or upon the
exercise of options issued under employee incentive plans.
Lehman Brothers Inc., in its sole discretion, may release the units subject
to lock-up agreements in whole or in part at any time with or without notice.
When determining whether or not to release units from lock-up agreements, Lehman
Brothers Inc. will consider, among other factors, the unitholders' reasons for
requesting the release, the number of units for which the release is being
requested and market conditions at the time.
In connection with this offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment transactions involve sales by the underwriters of the
common units in excess of the number of units the underwriters are
obligated to purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short position.
In a covered short position, the number of units over-allotted by the
underwriters is not greater than the number of units they may purchase in
the over-allotment option. In a naked short position, the number of units
involved is greater than the number of units in the over-allotment option.
The underwriters may close out any short position by either exercising
their over-allotment option and/or purchasing common units in the open
market.
- Syndicate covering transactions involve purchases of the common units in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of the common
units to close out the short position, the underwriters will consider,
among other things, the price of common units available for purchase in
the open market as compared to the price at which they may purchase common
units through the over-allotment option. If the underwriters sell more
common units than could be covered by the over-allotment option, which we
refer to in this prospectus as a naked short position, the position can
only be closed out by buying common units in the open market. A naked
short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the common
units in the open market after pricing that could adversely affect
investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common units originally sold by the
syndicate member are purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common units or preventing or retarding a decline in the market price of the
common units. As a result, the price of the common units may be higher than
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the price that might otherwise exist in the open market. These transactions may
be effected on The New York Stock Exchange or otherwise and, if commenced, may
be discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common units. In addition, neither we nor any
of the underwriters make any representation that the underwriters will engage in
these stabilizing transactions or that any transaction, once commenced, will not
be discontinued without notice.
At our request, the underwriters are reserving up to 382,500 common units
for sale at the initial public offering price to directors, officers and
employees of Dynegy Inc. and its affiliates through a directed unit program. The
number of common units available for sale to the general public in the public
offering will be reduced to the extent these persons purchase these reserved
units. Any common units not so purchased will be offered by the underwriters to
the general public on the same basis as the other common units offered by this
prospectus.
We intend to apply to list the common units on The New York Stock Exchange,
under the symbol "DEP."
Prior to this offering, there has been no public market for the common
units. The initial public offering price was determined by negotiation between
us and the representatives. The principal factors considered in determining the
public offering price included the following:
- the information set forth in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
units of generally comparable entities.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us and our affiliates.
Because the National Association for Securities Dealers, Inc. views the
common units offered hereby as interests in a direct participation program, the
offering is being made in compliance with Rule 2810 of the NASD's Conduct Rules.
Investor suitability with respect to the common units should be judged similarly
to the suitability with respect to other securities that are listed for trading
on a national securities exchange.
The underwriters have informed us that they do not intend to confirm sales
to accounts over which they exercise discretionary authority without the prior
written approval of the customer.
A prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by one or more of the
underwriters and/or selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view offering terms
online and, depending upon the particular underwriter or selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to
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allocate a specific number of shares for sale to online brokerage account
holders. Any such allocation for online distributions will be made by the
representatives on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any
underwriter's or selling group member's web site and any information contained
in any other web site maintained by an underwriter or selling group member is
not part of this prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter or selling group member in its capacity as underwriter or selling
group member and should not be relied upon by investors.
VALIDITY OF THE COMMON UNITS
The validity of the common units will be passed upon for us by Vinson &
Elkins L.L.P., Houston, Texas. Certain legal matters in connection with the
common units offered hereby will be passed upon for the underwriters by Baker
Botts L.L.P., Houston, Texas. Baker Botts L.L.P. has, from time to time,
performed legal services for Dynegy Inc. and its affiliates unrelated to this
offering, including matters relating to litigation arising out of the merger
agreement between Dynegy Inc., Enron Corp. and their respective affiliates.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-l regarding the common units. This prospectus does not
contain all of the information found in the registration statement. For further
information regarding Dynegy Energy Partners and the common units offered by
this prospectus, you may desire to review the full registration statement,
including its exhibits and schedules, filed under the Securities Act of 1933.
The registration statement of which this prospectus forms a part, including its
exhibits and schedules, may be inspected and copied at the public reference room
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of the materials may also be obtained from the SEC at prescribed
rates by writing to the public reference room maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of this public reference room by calling the
SEC at l-800-SEC-0330.
The SEC maintains a World Wide Web site on the Internet at
http://www.sec.gov. Our registration statement, of which this prospectus
constitutes a part, can be downloaded from the SEC's web site and can also be
inspected and copied at the offices of The New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
We intend to furnish our unitholders annual reports containing our audited
financial statements and furnish or make available quarterly reports containing
our unaudited interim financial information for the first three fiscal quarters
of each of our fiscal years.
FORWARD-LOOKING STATEMENTS
Statements included in this prospectus which are not historical facts
(including any statements concerning plans and objectives of management for
future operations or economic performance, or assumptions related thereto) are
forward-looking statements. In addition, we and our representatives
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may from time to time make other oral or written statements which are also
forward-looking statements.
These forward-looking statements are made based upon management's current
plans, expectations, estimates, assumptions and beliefs concerning future events
impacting us and therefore involve a number of risks and uncertainties. We
caution that forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied in the
forward-looking statements.
Important factors that could cause our actual results of operations or our
actual financial condition to differ include, but are not necessarily limited
to:
- the timing and extent of changes in NGL commodity prices;
- the supply of mixed NGLs and the demand for the services we provide and
NGL products
- the effectiveness of our risk-management policies and procedures and our
ability to establish our creditworthiness and satisfy our financial
commitments;
- our ability to effectively compete for market share with industry
participants;
- our ability to maintain our relationships with Dynegy Inc. and its
affiliates, ChevronTexaco and our other key suppliers and customers;
- environmental risks affecting our business;
- accidents;
- labor relations and costs;
- the failure of equipment or processes to operate in accordance with
specifications or expectations;
- costs and other effects of legal and administrative proceedings,
settlements, investigations and claims, including matters involving
Dynegy Inc. and its affiliates and environmental liabilities that may not
be covered by indemnity or insurance;
- the timing of receipt of necessary governmental permits;
- changes in governmental regulation or enforcement practices, especially
with respect to environmental, health and safety matters;
- the occurrence of unusual operating conditions including force majeure;
- risks and uncertainties relating to general domestic and international
economic (including inflation and interest rates) and political
conditions; and
- changes in financial market conditions.
Many of such factors are beyond our ability to control or predict. Investors
are cautioned not to put undue reliance on forward-looking statements.
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INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
DYNEGY ENERGY PARTNERS L.P.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS:
Introduction............................................ F-2
Pro Forma Combined Balance Sheet as of December 31,
2001................................................... F-3
Pro Forma Combined Statement of Operations for the year
ended December 31, 2001................................ F-4
Notes to Pro Forma Combined Financial Statements........ F-5
DYNEGY ENERGY PARTNERS PREDECESSOR
COMBINED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................ F-8
Combined Balance Sheets as of December 31, 2000 and
2001................................................... F-9
Combined Statements of Operations, Comprehensive Income
and Changes in Combined Equity for the years ended
December 31, 1999, 2000 and 2001....................... F-10
Combined Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001....................... F-11
Notes to Combined Financial Statements.................. F-12
DYNEGY DEP GP LLC
Report of Independent Public Accountants................ F-22
Balance Sheet as of February 15, 2002................... F-23
Note to Balance Sheet................................... F-24
DYNEGY ENERGY PARTNERS L.P.
Report of Independent Public Accountants................ F-25
Balance Sheet as of February 15, 2002................... F-26
Note to Balance Sheet................................... F-27
</Table>
F-1
<Page>
PRO FORMA COMBINED FINANCIAL STATEMENTS OF
DYNEGY ENERGY PARTNERS L.P.
INTRODUCTION
The following pro forma financial statements are based upon the historical
financial statements of the Dynegy Energy Partners Predecessor, which includes
businesses of indirect wholly-owned affiliates of Dynegy Inc. Effective with the
closing of this offering, Dynegy Energy Partners L.P. will own and operate these
businesses. The transfer is considered to be a reorganization of entities under
common control and will be recorded at historical cost. The pro forma financial
statements have been derived from the historical financial statements of the
Dynegy Energy Partners Predecessor set forth elsewhere herein. The pro forma
financial statements have been prepared on the basis that Dynegy Energy Partners
L.P. will be treated as a partnership for federal income tax purposes. The pro
forma financial statements should be read in conjunction with the accompanying
notes to pro forma financial statements and with the historical financial
statements and related notes set forth elsewhere herein.
The pro forma adjustments are based upon currently available information and
certain estimates and assumptions, and therefore the actual adjustments will
differ from the pro forma adjustments. However, management believes that the
assumptions used provide a reasonable basis for presenting the significant
effects of the offering and related transactions as contemplated and that the
pro forma adjustments give appropriate effect to those assumptions and are
properly applied in the pro forma financial statements. The pro forma financial
statements may not be indicative of the results that actually would have
occurred if we had assumed the operations of the Dynegy Energy Partners
Predecessor on the dates indicated. In addition, the pro forma financial
statements are not necessarily indicative of the results of our future
operations.
The following pro forma financial statements have been prepared as if the
offering and related transactions had taken place on December 31, 2001, in the
case of the Pro Forma Combined Balance Sheet and as of January 1, 2001, in the
case of the Pro Forma Combined Statement of Operations.
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DYNEGY ENERGY PARTNERS L.P.
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
HISTORICAL PRO FORMA
PREDECESSOR ADJUSTMENTS PRO FORMA
----------- ----------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 4,529 $ 175,000 (a) $ 18,229
(13,000)(b)
(148,300)(c)
Accounts receivable...................................... 230,128 230,128
Inventories.............................................. 40,120 40,120
Assets from risk-management activities................... 7,217 7,217
Prepayments.............................................. 7,166 7,166
-------- --------- --------
Total current assets................................... 289,160 13,700 302,860
PROPERTY, PLANT AND EQUIPMENT.............................. 413,447 413,447
Less--Accumulated depreciation........................... (96,685) (96,685)
-------- --------
Property, plant and equipment, net..................... 316,762 316,762
OTHER ASSETS, net.......................................... 5,067 2,000 (d) 7,067
-------- --------- --------
Total assets......................................... $610,989 $ 15,700 $626,689
======== ========= ========
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................. $227,099 $227,099
Liabilities from risk management activities.............. 2,869 2,869
-------- --------
Total current liabilities.............................. 229,968 229,968
LONG-TERM LIABILITIES:
Payable to affiliates.................................... 229,600 $(148,300)(c) --
(81,300)(e)
Long-term debt........................................... -- 125,000 (d) 125,000
-------- --------- --------
Total liabilities...................................... 459,568 (104,600) 354,968
MINORITY INTEREST.......................................... 13,875 13,875
COMBINED EQUITY............................................ 137,546 (123,000)(d) --
81,300 (e)
(95,846)(f)
PARTNERS' EQUITY
Common units............................................. -- 175,000 (a) 162,000
(13,000)(b)
Subordinated units....................................... -- 93,929 (f) 93,929
General partner interest................................. -- 1,917 (f) 1,917
-------- --------- --------
Total partners' capital................................ -- 257,846 257,846
-------- --------- --------
Total liabilities and equity......................... $610,989 $ 15,700 $626,689
======== ========= ========
</Table>
See accompanying notes to pro forma combined financial statements.
F-3
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DYNEGY ENERGY PARTNERS L.P.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
DECEMBER 31, 2001
(IN THOUSANDS--EXCEPT PER UNIT AMOUNTS)
<Table>
<Caption>
HISTORICAL PRO FORMA
PREDECESSOR ADJUSTMENTS PRO FORMA
----------- ----------- ----------
Revenues................................................. $3,888,199 $16,100 (g) $3,897,299
$(7,000)(h)
Cost of sales............................................ 3,792,274 12,500 (i) 3,804,774
---------- ------- ----------
Operating margin....................................... 95,925 (3,400) 92,525
Depreciation and amortization............................ 18,578 18,578
General and administrative expenses...................... 24,508 (3,656)(j) 20,852
---------- ------- ----------
Operating income....................................... 52,839 256 53,095
Other income/(expense)................................... (831) (831)
Interest expense......................................... (19,534) (667)(d) (8,617)
19,534 (k)
(7,950)(l)
Minority interest in income of a subsidiary.............. (2,118) (2,118)
---------- ------- ----------
Net income............................................. $ 30,356 $11,173 $ 41,529
========== ======= ==========
General partner's interest in net income................. $ 831(m)
==========
Limited partners' interest in net income................. $ 40,698
==========
Net income per limited partner unit...................... $ 2.33(m)
==========
Weighted average number of limited partners units
outstanding............................................ 17,500
==========
</Table>
See accompanying notes to pro forma combined financial statements.
F-4
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DYNEGY ENERGY PARTNERS L.P.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) Reflects the proceeds to Dynegy Energy Partners L.P. of $175.0 million from
the issuance and sale of 7,650,000 units to the public and 1,100,000 common
units to an affiliate of our general partner (assuming the underwriters do
not exercise their over-allotment option) at an initial public offering
price of $20.00 per unit.
(b) Reflects payment of the underwriting discount of approximately $9.8 million
(assuming the underwriters do not exercise their over-allotment option) and
legal and other professional fees and expenses of approximately
$3.2 million associated with the offering. These expenses will be allocated
to the common units.
(c) Reflects the partial repayment of our net amount payable to affiliates with
$148.3 million of the net proceeds of the offering. Approximately
$13.7 million of the net proceeds from the offering will be retained by us
to fund certain planned capital expenditures.
(d) Represents the capital contribution related to borrowings of $125.0 million
under our credit facility that will be assumed from our general partner and
an affiliate of our general partner, net of debt financing fees of
$2.0 million. The debt financing fees will be capitalized and amortized over
the three-year life of the associated debt.
(e) Represents the capital contribution by an affiliate of our general partner
of $81.3 million, representing the forgiveness of a portion of our net
amount payable to affiliates.
(f) Represents the conversion of the adjusted combined equity of the Dynegy
Energy Partners Predecessor of $95.8 million to the subordinated units of
the partnership and the general partner's interest in the partnership. The
conversion is as follows:
- $93.9 million for 8,750,000 subordinated units,
- $1.9 million for the general partner's 2% interest.
(g) Reflects the pro forma fees received by us as a result of the assignment of
third party NGL exchange agreements from Dynegy Midstream to us effective
January 1, 2002. Currently, Dynegy Midstream has a number of NGL exchange
agreements with third parties that own processing plants located in and
around the Lake Charles, Louisiana area. These NGL exchange agreements
obligate Dynegy Midstream to take delivery of all of the customers' NGL
production volumes at their processing plants in Louisiana and deliver the
same volumes of NGL products for their account in Mont Belvieu. The customer
generally pays a cent per gallon fee for gathering, fractionation, pipeline
transportation, distribution and marketing services. Subsequent to this
offering and related transactions, these exchange contracts will be assigned
to our distribution and marketing services business. In addition, we will
enter into contracts with Dynegy Midstream to obtain necessary storage,
gathering, fractionation and pipeline transportation services from Dynegy
Midstream's retained businesses in Louisiana to service these contracts.
(see pro forma adjustment (i) below). Pro forma revenues were calculated
based on historical fees received by Dynegy Midstream in connection with
these exchange contracts.
(h) Reflects the pro forma reduction in revenue associated with fees which will
no longer be paid by Dynegy Midstream to our Cedar Bayou fractionator in
connection with the third-party NGL exchange agreements we are assuming as
described in pro forma footnote (g) above. Currently, such fractionation
fees are paid to us by Dynegy Midstream. Upon assignment of the NGL exchange
agreements from Dynegy Midstream to us, such fractionation fees will be paid
by our distribution and marketing services business to the Cedar Bayou
fractionator and will become inter-segment revenues that will be eliminated
in consolidation. The pro forma reduction in
F-5
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DYNEGY ENERGY PARTNERS L.P.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
revenue was calculated based on historical volumes fractionated by Dynegy
Midstream at the Cedar Bayou fractionator in connection with the third-party
NGL exchange agreements. The fractionation fees that will be charged to our
marketing and distribution services business by the Cedar Bayou fractionator
are consistent with the fees charged to Dynegy Midstream, pursuant to each
respective contract.
(i) Reflects the pro forma fees paid as a result of commercial agreements
entered into with Dynegy Midstream. These agreements have an effective date
of January 1, 2002. We will have the ability to use certain services, at our
election, to be provided by Dynegy Midstream's assets located in Louisiana.
(i) GATHERING. The gathering agreement will allow us to deliver mixed NGLs
from our customers processing plants to the Hackberry storage facility
owned by Dynegy Midstream.
(ii) STORAGE. The storage services agreement will provide us with
3.1 million barrels of storage space at the Hackberry storage facility.
(iii) FRACTIONATION. We will enter into an agreement with Dynegy Midstream
that will allow us to fractionate mixed NGLs at Dynegy Midstream's Lake
Charles fractionator. We also have the ability to fractionate
Louisiana-sourced mixed NGLs at our Cedar Bayou fractionator. In order
to move these volumes to our Cedar Bayou fractionator we will pay
Dynegy Midstream a fee for the use of its bi-directional pipeline which
connects its Louisiana assets to Mont Belvieu.
We will pay Dynegy Midstream a volume-based fee under each of the agreements
described above. Pro forma costs were calculated based on historical volumes
gathered, stored, fractionated and transported by Dynegy Midstream, in
connection with the third-party NGL exchange agreements assumed by us from
Dynegy Midstream, in accordance with the contractual fee structures included
in each of the service contracts noted above.
(j) Reflects adjustments to general and administrative costs associated with the
formation of the partnership. While general and administrative costs
incurred by our general partner that are allocable to us may be
significantly higher, our general partner has agreed to only charge us up to
$2.0 million for indirect general and administrative costs during the first
year of our formation. For each of the following four years, this amount may
be increased by no more than the greater of 7% per year or the percentage
increase in the consumer price index for the applicable year. The cap is
also subject to adjustment for expansions of our operations. Indirect
general and administrative costs that are subject to the cap relate to
centralized corporate functions which we share with Dynegy Inc. and its
affiliates. These centralized corporate functions include certain legal,
accounting, treasury, technology, insurance, the administration of employee
benefit plans and other corporate services. All direct general and
administrative costs will be charged to us as incurred. Indirect general and
administrative costs incurred by Dynegy Inc. during 2001 totaled
$5.6 million. We also expect to incur incremental direct general and
administrative costs associated with this offering of approximately
$1.4 million, which are not reflected in this adjustment, primarily related
to the operation of our partnership as a separate public entity. Estimated
incremental expenses relating to the operation of our partnership as a
separate public entity include costs associated with tax return preparation,
audit fees, annual and quarterly reports to unitholders, investor relations
and incremental insurance requirements.
(k) Reflects the elimination of historical interest expense related to our
payable to affiliates balance.
F-6
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DYNEGY ENERGY PARTNERS L.P.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(l) Reflects pro forma interest expense on borrowings of $125.0 million under
our new credit facility, plus fees for the $150.0 million of unused
availability under this credit facility. The weighted average interest rate
for the outstanding borrowings was 6.0%. If interest rates were to change by
0.125%, our annual debt coverage obligations would change by approximately
$0.2 million.
(m) The general partner's allocation of net income is based on its combined 2%
interest in the partnership. The general partners' 2% allocation of net
income has been deducted before calculating the net income per limited
partners' unit. The computation of net income per limited partner unit
assumes that 8,750,000 common units and 8,750,000 subordinated units were
outstanding at all times during the periods presented.
F-7
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Dynegy Inc.:
We have audited the accompanying combined balance sheets of Dynegy Energy
Partners Predecessor (comprising certain entities owned by affiliates of
Dynegy Inc.) and subsidiaries as of December 31, 2000 and 2001, and the related
combined statements of operations, comprehensive income and changes in combined
equity and combined statements of cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Dynegy Energy
Partners Predecessor and subsidiaries as of December 31, 2000 and 2001, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
February 4, 2002
F-8
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
-------------------
2000 2001
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,365 $ 4,529
Accounts receivable, net of allowance for doubtful
accounts of $1,609 and $2,102........................... 489,419 230,128
Inventories............................................... 134,673 40,120
Assets from risk-management activities.................... -- 7,217
Prepayments (Note 10)..................................... 14 7,166
-------- --------
Total current assets.................................. 625,471 289,160
PROPERTY, PLANT AND EQUIPMENT............................... 394,991 413,447
Less--Accumulated depreciation............................ (78,391) (96,685)
-------- --------
Property, plant and equipment, net.................... 316,600 316,762
OTHER ASSETS, net........................................... 4,684 5,067
-------- --------
Total assets.......................................... $946,755 $610,989
======== ========
LIABILITIES AND COMBINED EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $508,026 $227,099
Liabilities from risk-management activities............... -- 2,869
-------- --------
Total current liabilities............................. 508,026 229,968
LONG-TERM LIABILITIES:
Payable to affiliates (Note 10)........................... 316,980 229,600
-------- --------
Total liabilities..................................... 825,006 459,568
COMMITMENTS AND CONTINGENCIES (Note 8)
MINORITY INTEREST........................................... 13,851 13,875
COMBINED EQUITY............................................. 107,898 137,546
-------- --------
Total liabilities and combined equity................. $946,755 $610,989
======== ========
</Table>
The accompanying notes are an integral part of these combined financial
statements.
F-9
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME
AND CHANGES IN COMBINED EQUITY
(IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
---------- ---------- ----------
REVENUES:
Third party............................................ $2,470,040 $4,167,153 $3,834,122
Affiliate.............................................. 79,141 84,304 54,077
---------- ---------- ----------
Total revenues..................................... 2,549,181 4,251,457 3,888,199
COST OF SALES:
Third party............................................ 1,913,128 3,424,953 3,216,953
Affiliate.............................................. 531,559 723,048 575,321
---------- ---------- ----------
Total cost of sales................................ 2,444,687 4,148,001 3,792,274
---------- ---------- ----------
Operating margin................................... 104,494 103,456 95,925
DEPRECIATION AND AMORTIZATION............................ 14,016 17,288 18,578
GENERAL AND ADMINISTRATIVE EXPENSES...................... 23,883 22,045 24,508
---------- ---------- ----------
Operating income................................... 66,595 64,123 52,839
EQUITY IN EARNINGS OF AN UNCONSOLIDATED AFFILIATE........ 193 138 --
AFFILIATE INTEREST EXPENSE............................... (22,012) (22,701) (19,534)
OTHER EXPENSES, net...................................... (630) (1,397) (831)
MINORITY INTEREST IN INCOME OF A SUBSIDIARY.............. (1,942) (1,183) (2,118)
---------- ---------- ----------
NET INCOME............................................... $ 42,204 $ 38,980 $ 30,356
========== ========== ==========
OTHER COMPREHENSIVE INCOME:
Derivative hedging activity (Note 4)................... -- -- (708)
TOTAL COMPREHENSIVE INCOME............................... $ -- $ -- $ 29,648
========== ========== ==========
COMBINED EQUITY:
AT BEGINNING OF PERIOD................................. $ 26,714 $ 68,918 $ 107,898
NET INCOME............................................. 42,204 38,980 30,356
OTHER COMPREHENSIVE INCOME............................. -- -- (708)
---------- ---------- ----------
AT END OF PERIOD....................................... $ 68,918 $ 107,898 $ 137,546
========== ========== ==========
</Table>
The accompanying notes are an integral part of these combined financial
statements.
F-10
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 2000 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 42,204 $ 38,980 $ 30,356
Items not affecting cash flows from operating activities--
Depreciation and amortization........................... 14,016 17,288 18,578
Minority interest in income of a subsidiary............. 1,942 1,183 2,118
Risk management activities.............................. -- -- (5,056)
Change in assets and liabilities resulting from operating
activities--
Accounts receivable..................................... (131,374) (229,424) 259,291
Inventories............................................. (38,611) (71,475) 94,553
Prepayments............................................. 384 277 (7,152)
Accounts payable and accrued liabilities................ 121,678 262,706 (280,927)
Payable to affiliates................................... (294) (21,060) (101,799)
Other, net................................................ (1,211) 254 (450)
--------- --------- ---------
Net cash provided by (used in) operating activities... 8,734 (1,271) 9,512
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (6,993) (4,612) (4,254)
Proceeds from asset sale.................................. -- 3,726 --
--------- --------- ---------
Net cash used in investing activities................. (6,993) (886) (4,254)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to minority interest partners............... (2,739) (1,667) (2,094)
--------- --------- ---------
Net cash used in financing activities................. (2,739) (1,667) (2,094)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (998) (3,824) 3,164
CASH AND CASH EQUIVALENTS, beginning of year................ 6,187 5,189 1,365
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 5,189 $ 1,365 $ 4,529
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Increase in property, plant and equipment in exchange for
payable to affiliate...................................... 3,948 20,413 14,419
Increase in property, plant and equipment related to
investment in affiliate (Note 6).......................... -- 13,021 --
</Table>
The accompanying notes are an integral part of these combined financial
statements.
F-11
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
The accompanying combined financial statements and notes thereto present the
combined financial position, results of operations, changes in combined equity
and cash flows of certain natural gas liquids (NGL) assets and operations
principally engaged in providing fractionation, storage, terminalling,
transportation, distribution and marketing services to producers and consumers
of mixed NGLs and NGL products. These assets and operations are currently held
in various limited partnerships and limited liability companies which are owned
by affiliates of Dynegy Inc. (Dynegy). These assets and operations are
collectively referred to as the Dynegy Energy Partners Predecessor (DEPP). These
combined financial statements are prepared in connection with the formation and
proposed public offering of limited partner units in Dynegy Energy Partners L.P.
(the Partnership) which will own the businesses previously within DEPP.
Dynegy will retain certain of its NGL assets and operations, including
interests in NGL gathering and processing facilities, pipelines, storage
facilities and fractionation facilities, which are primarily located in
Louisiana, New Mexico and Texas. The retained assets and operations have been
excluded from the accompanying combined financial statements of DEPP. These
combined financial statements present only those businesses that will be
contributed to the Partnership as if DEPP had existed as a single entity
separate from Dynegy during the periods presented. All intercompany transactions
within DEPP have been eliminated.
DEPP's operations are concentrated along the Texas Gulf Coast in and
adjacent to Mont Belvieu, Texas, the hub of the domestic NGL industry. DEPP's
current operations include (1) fractionating mixed NGLs into component NGL
products: ethane, propane, ethane-propane mix, normal butane, isobutane and
natural gasoline; (2) providing storage and terminal services for producers of
mixed NGLs and consumers of NGL products; (3) providing NGL transportation and
logistical services to various customers throughout the United States and
(4) distributing and marketing NGL products to refineries, petrochemical
companies, retail propane distributors and other end users of NGL products.
2. SIGNIFICANT ACCOUNTING POLICIES:
The accounting policies of DEPP conform to accounting principles generally
accepted in the United States. The more significant of such accounting policies
are described below. The preparation of the combined financial statements in
conformity with accounting principles generally accepted in the United States
requires management to develop estimates and make assumptions that affect the
reported financial position and results of operations and impact the nature and
extent of disclosure, if any, of contingent assets and liabilities. Actual
results could differ materially from those estimates. Management believes the
accounting policies that require the most significant judgments and estimates
are the accounting for long-lived assets, the evaluation of credit risk and
revenue recognition.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all demand deposits and funds invested
in short-term investments with original maturities of three months or less.
CONCENTRATION OF CREDIT RISK
Substantially all of DEPP's accounts receivable at December 31, 2001, result
from billings to entities engaged in industrial and petrochemical businesses.
These industry concentrations have the potential to impact DEPP's overall
exposure to credit risk, either positively or negatively, as the
F-12
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DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
customer base may be similarly affected by changes in economic, industry,
weather or other conditions. Receivables are generally not collateralized;
however, DEPP believes the credit risk posed by industry concentration is
generally offset by the creditworthiness of its customer base.
INVENTORIES
Inventories consist primarily of NGLs totaling $134.1 million and
$39.9 million at December 31, 2000 and 2001, respectively. NGL inventory is
valued at the lower of weighted average cost or market. Materials and supplies
inventory of $0.6 million and $0.2 million at December 31, 2000 and 2001,
respectively, is carried at the lower of cost or market using the
specific-identification method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisting principally of fractionation,
storage and terminalling facilities is recorded at cost. Expenditures for major
replacements, renewals and major maintenance that expand the existing operating
capacity of assets or expand their useful lives are capitalized. Expenditures
for repairs and minor renewals to maintain facilities in operating condition and
that do not extend the useful life of existing assets are expensed as incurred.
Depreciation is provided using the straight-line method over the estimated
economic service lives of the assets, which range from 7 years to 25 years.
Composite depreciation rates are applied to functional groups of property having
similar economic characteristics. Gains and losses are not recognized for
retirements of property, plant and equipment subject to composite depreciation
rates until the asset group that is subject to the composite rate is retired.
The carrying values of long-lived assets are reviewed in accordance with
provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."
ENVIRONMENTAL COSTS AND OTHER CONTINGENCIES
Environmental costs for remediation are accrued and charged to expense based
on estimates of known remediation requirements. Such accruals are based on
management's best estimate of the ultimate costs to remediate the site. Ongoing
environmental compliance costs are charged to expense as incurred, and
expenditures to mitigate or prevent future environmental contamination are
capitalized. DEPP incurred no significant environmental costs, accrued
liabilities or expenditures to mitigate or eliminate future environmental
contamination for the years ended December 31, 1999, 2000 and 2001.
GOODWILL
Net goodwill of $4.4 million and $4.1 million at December 31, 2000 and 2001,
respectively, is amortized on a straight-line basis over its estimated useful
life of 25 years and is included in other assets in the accompanying combined
balance sheets. Accumulated amortization of goodwill was $1.6 million and
$1.9 million at December 31, 2000 and 2001, respectively. Goodwill amortization
expense was $0.3 million for each of the years ended December 31, 1999, 2000 and
2001, respectively. Goodwill relates to the acquisition of an NGL services
company.
REVENUE RECOGNITION
Fractionation, storage and terminalling and transportation revenues are
recognized as volumes are fractionated, stored, handled at our marine terminal
facility and transported in accordance with
F-13
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DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
contractual terms. The accrual method of accounting is used for substantially
all NGL distribution and marketing services activities, with revenues from
product sales and marketing services recognized when title passes to a customer
or when the service is performed. See Note 4 for discussion of change in
accounting principle due to the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," during 2001.
INCOME TAXES
No provision for federal income taxes is necessary in the combined financial
statements of DEPP because, as its assets and operations are held in limited
partnerships and limited liability companies, it is not subject to federal
income tax and the tax effect of its activities accrues to the owners.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 discontinues
goodwill amortization over its estimated useful life; rather, goodwill will be
subject to at least an annual fair-value-based impairment test. Similarly,
goodwill associated with equity-method investments will no longer be amortized.
With regard to intangible assets SFAS No. 142 states that an acquired intangible
asset should be recognized separately if the benefit of the intangible asset is
obtained through contractual rights or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, without regard to the acquirer's
intent. Net goodwill of $4.1 million will no longer be amortized subsequent to
the adoption of SFAS No. 142, effective January 1, 2002, but will be subject to
a fair-value based impairment test on an annual basis. We do not expect to incur
an impairment charge upon adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred,
with the associated asset retirement costs being capitalized as a part of the
carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure
requirements that provide a description of asset-retirement obligations and
reconciliation of changes in the components of those obligations. DEPP is
evaluating the future financial effects of adopting SFAS No. 143 and expects to
adopt the standard effective January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
objective of SFAS No. 144 is to establish one accounting model for long-lived
assets to be disposed of by sale as well as resolve implementation issues
related to SFAS No. 121. The adoption of SFAS No. 144, effective January 1,
2002, did not have a material impact on DEPP's financial condition or results of
operations.
3. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS:
DEPP is exposed to certain market risks, which arise from transactions
entered into in the normal course of business. The principal market risk to
which DEPP is exposed is commodity price risk.
F-14
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS: (CONTINUED)
DEPP is required to purchase and hold physical inventories of NGL products
to support its marketing obligations. DEPP seeks to maintain a position that is
substantially balanced between its physical inventories and purchase obligations
relative to its sales of NGL products. One of the ways DEPP accomplishes this is
by purchasing and selling NGL products forward at fixed prices. From time to
time, DEPP may also enter into floating price collar arrangements and financial
swaps to manage some of its exposure to NGL products commodity price risk.
Changes in natural gas prices impact fuel costs associated with fractionation
and storage activities. DEPP may enter into financial instrument contracts to
hedge fuel requirements in order to minimize the risk of market fluctuations.
The absolute notional contract amounts associated with commodity
risk-management contracts as of December 31, 1999, 2000 and 2001 were as
follows:
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
Natural Gas Liquids (MMBbls).......................... 14.956 4.100 5.367
Natural Gas (Bcf)..................................... 9.840 6.480 1.125
</Table>
Future estimated net cash inflows for these commodity risk management
contracts at December 31, 2001, based on then current prices, total
approximately $5.2 million during 2002.
DEPP has established control procedures to facilitate management of the
market risk inherent its risk management portfolio. The procedures include daily
reporting of market positions and the measurement of exposure to market risk.
DEPP measures its exposure to market risk using Value at Risk. Value at Risk
represents the potential loss in value of DEPP's risk management portfolio due
to adverse market conditions over a defined time horizon with a specified
confidence level. DEPP relies on Value at Risk to determine the maximum
potential reduction in its contract portfolio value allowed within a given
probability over a defined period. Additional measures are used to determine the
treatment of risks outside the Value at Risk methodologies, such as market
volatility, liquidity, event and correlation risk.
4. CHANGE IN ACCOUNTING PRINCIPLE:
The FASB issued, and subsequently amended, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which became effective and was
adopted by DEPP January 1, 2001. Provisions in SFAS No. 133, as amended, affect
the accounting and disclosure of certain contractual arrangements and operations
of DEPP.
When a transaction is entered into, DEPP will assess whether the transaction
meets the criteria of a derivative under SFAS No. 133. In cases where a
transaction is not a derivative and therefore not subject to SFAS No. 133,
traditional accrual accounting applies, and revenue or expense is recorded when
physical delivery takes place or the transaction otherwise settles. If the
transaction meets the criteria of a derivative under SFAS No. 133, a
determination will be made whether the derivative qualifies for classification
as a normal purchase or sale. If the derivative meets the criteria for
classification as a normal purchase or sale, the transaction can be documented
as normal and thereby exempted from the basic accounting requirements of SFAS
No. 133. If the derivative qualifies for and is documented as a normal purchase
or sale, traditional accrual accounting will apply.
If the derivative does not meet the criteria as a normal purchase or sale, a
determination is made whether the derivative should be designated as a hedge of
a cash flow or a hedge of a fair value
F-15
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. CHANGE IN ACCOUNTING PRINCIPLE: (CONTINUED)
exposure. For derivatives qualifying as hedges of future cash flows, the
effective portion of changes in fair value is recorded in other comprehensive
income, which is a component of equity, until the related hedged items impact
earnings. Any ineffective portion of a hedge is reported in earnings
immediately. If the derivative qualifies as a hedge of a fair value exposure or
is not designated and documented as a hedge, it is marked-to-market through
current earnings. If the derivative qualifies as a hedge of a fair value
exposure, the hedged item is also recorded at fair value. DEPP does not
typically enter into fair value hedge transactions.
In its efforts to maintain a position that is substantially balanced between
its physical inventories of NGL products and purchase obligations, relative to
its sales obligations, DEPP routinely purchases and sells NGL products forward
at fixed prices. These forward purchase and sales contracts qualify as and are
designated as normal purchases or sales within the guidelines provided by SFAS
No. 133 and are accounted for using traditional accrual accounting. DEPP may
enter into short-term financial instrument contracts to hedge fuel requirements
in order to minimize the risk of fluctuations in natural gas prices. Such
transactions qualify as and are designated as cash flow hedges. The effective
portion of changes in the fair value these transactions is recorded in other
comprehensive income, which is a component of equity, until the related hedged
items impact earnings. Any ineffective portion of the hedge, if any, is reported
in earnings immediately. From time to time, DEPP may also enter into short-term
financial swaps and options to manage some of its exposure to natural gas and
NGL products commodity price risk which are not considered to be a hedge and are
marked-to-market through current earnings. Net results associated with these
transactions increased our operating margin by approximately $7.0 million during
2001.
Market prices used to value financial instruments reflect management's
consideration of, among other things, closing exchange and over-the-counter
quotations, the time value of money and volatility factors underlying the
commitments. Gains and losses from hedging transactions are recognized in income
in the periods for which the underlying transaction is realized. If the
necessary correlation to the transaction being hedged ceases to exist, DEPP
ceases to account for the contract as a hedge and recognizes future changes in
the value of that financial instrument in income. If the underlying contract
being hedged by a derivative financial instrument is disposed of or otherwise
terminated, the gain or loss associated with such contract is no longer deferred
and is recognized in the period the underlying contract is eliminated.
DEPP has recorded the impact of the adoption of SFAS No. 133, as amended, as
a cumulative effect adjustment in DEPP's combined results during the year ended
December 31, 2001. At January 1, 2001, DEPP's financial statements were adjusted
to record a cumulative effect of adopting this accounting change. The amounts
recorded, which had no impact on net income for the year, are as follows (in
thousands):
<Table>
<Caption>
OTHER
COMPREHENSIVE
INCOME
---------------
Adjustment to fair value of derivatives.................... $ 47
</Table>
F-16
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. CHANGE IN ACCOUNTING PRINCIPLE: (CONTINUED)
Changes in combined equity related to derivatives for the year ended
December 31, 2001 were as follows (in thousands):
<Table>
Transition adjustment as of January 1, 2001................. $ 47
Current period declines in fair value, net.................. (1,155)
Reclassifications to earnings, net.......................... 400
-------
Balance at December 31, 2001................................ $ (708)
=======
</Table>
During the year ended December 31, 2001, there was no ineffectiveness from
changes in fair value of hedge positions because we enter into derivative
financial instruments with terms, such as location, volume and time period, that
mirror the terms of the hedged item. Additionally, no amounts were reclassified
to earnings during the year ended December 31, 2001 in connection with
forecasted transactions that were no longer considered probable of occurring.
The $0.7 million recorded in other comprehensive income at December 31, 2001 is
expected to be reclassified to future earnings, contemporaneously with the
related fuel purchases over the 12-month period ending December 31, 2002. The
actual amounts that will be reclassified to earnings over the next 12 months
could vary materially from this estimated amount as a result of changes in
market conditions. DEPP's credit risk associated with NGL or natural gas
contracts results from the risk of loss or non-performance by counterparties.
DEPP reviews and assesses counterparty risk to limit any material impact to its
operations. Due to the credit-worthiness of counterparties and the short-term
nature of its commitments, DEPP generally does not anticipate non-performance by
its counterparties. However, during 2001, DEPP recorded a $1.3 million charge to
fully reserve for its exposure to Enron Corp., which is included in cost of
sales in the accompanying statement of operations.
5. PROPERTY, PLANT AND EQUIPMENT:
Investments in property, plant and equipment as of December 31, 2000 and
2001, consist of the following (in thousands):
<Table>
<Caption>
2000 2001
-------- --------
Fractionation........................................... $149,166 $152,976
Storage and terminalling................................ 212,739 225,431
Transportation.......................................... 33,086 35,040
-------- --------
394,991 413,447
Less--Accumulated depreciation.......................... (78,391) (96,685)
-------- --------
$316,600 $316,762
======== ========
</Table>
6. UNCONSOLIDATED AFFILIATE:
The equity method of accounting is used for investments in companies in
which DEPP has a voting interest between 20 percent and 50 percent. Prior to
May 2000, DEPP owned a 25% interest in a barge transportation company. During
May 2000, DEPP purchased the remaining 75% interest in the affiliate for
$11 million, at which time the affiliate became a consolidated entity and was no
longer accounted for as an equity investment. Upon purchase of the remaining 75%
interest in the company, DEPP
F-17
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. UNCONSOLIDATED AFFILIATE: (CONTINUED)
reclassified its total net investment in unconsolidated affiliate to property,
plant and equipment and began reflecting 100% of the company's operating results
in its combined statements of operations.
7. MINORITY INTEREST:
Minority interest on the combined balance sheets reflects a third-party
investment of 12 percent in the Cedar Bayou fractionation facility. The net
results attributed to minority interest holders in this combined entity are
classified as minority interest in income of a subsidiary in the accompanying
combined statements of operations.
8. COMMITMENTS AND CONTINGENCIES:
LEGAL PROCEEDINGS
DEPP and it parent, Dynegy, are subject to various legal proceedings and
claims that arise in the normal course of business. In the opinion of
management, the amount of ultimate liability with respect to these actions will
not have a material adverse effect on the combined financial position or results
of operations of DEPP.
CONTRACTUAL COMMITMENTS
DEPP is party to numerous long-term and short-term contracts with various
suppliers relating to the purchase of mixed NGLs and NGL products. DEPP's
obligations under these contracts are not determinable because they depend on
the volumes of mixed NGLs and NGL products purchased at prevailing market rates.
These contracts do not obligate DEPP to make fixed future payments.
DEPP also enters into short-term lease agreements primarily in connection
with its transportation and logistics operations, none of which has a term in
excess of six months. DEPP's future minimum commitments associated with these
short-term lease agreements total $1.1 million in 2002.
9. REGULATORY ISSUES:
DEPP is subject to regulation by various federal, state and local agencies.
These rules and regulations affect the industry as a whole; therefore, DEPP does
not believe that it is affected in a manner significantly different from that of
its competitors.
10. RELATED-PARTY TRANSACTIONS:
Dynegy allocates general and administrative expenses to its subsidiaries
based on a formula which considers payroll expenses and net book value of
property plant and equipment. Allocated general and administrative expenses
include, but are not limited to, payroll costs for employees directly and
indirectly associated with the activities of the subsidiary, accounting,
employee benefits, headquarters rent and technology. Management believes the
allocation methodologies used are reasonable. However, management estimates that
DEPP's general and administrative costs would have been approximately
$1.4 million higher had DEPP been a separate publicly traded company during the
periods presented. During December 2001, Dynegy implemented a policy whereby all
of its subsidiaries began prepaying general and administrative expenses on a
quarterly basis. In connection with this policy, DEPP prepaid to Dynegy
approximately $7.2 million of its general and administrative expenses associated
with the first
F-18
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED-PARTY TRANSACTIONS: (CONTINUED)
three months of 2002. These costs are reflected as prepayments in the
accompanying consolidated balance sheet as of December 31, 2001.
Certain of the entities comprising DEPP are participants in Dynegy's cash
management program whereby Dynegy centrally manages the cash requirements of
certain of its affiliates. As of December 31, 2000 and 2001, DEPP's net amount
payable to Dynegy and its affiliates totaled $317.0 million and $229.6 million,
respectively. These balances have no stated interest rate or maturity date. Upon
completion of a successful initial public offering of the partnership,
management intends to repay amounts due to the extent funds are available.
Interest expense has been allocated to DEPP using a formula which considers
DEPP's average payable to affiliates balances and weighted average interest
rates associated with Dynegy's corporate debt. Weighted average interest rates
associated with Dynegy's corporate debt were 7.18%, 7.41% and 7.26% for the
years ended December 31, 1999, 2000 and 2001, respectively.
ChevronTexaco is a major customer of DEPP and owns an approximate 26%
ownership interest in Dynegy, DEPP's parent. During the years ended
December 31, 1999, 2000 and 2001, sales to ChevronTexaco totaled
$743.0 million, $1,062.8 million and $815.5 million, respectively. Sales to
Louis Dreyfus Plastics totaled $411.0 million during the year ended
December 31, 2001. No other customer accounted for more than 10% of total
revenues during 1999, 2000 and 2001. Purchases from ChevronTexaco totaled
$394.9 million, $595.3 million and $453.9 million during 1999, 2000 and 2001,
respectively.
DEPP has transactions in the normal course of business with other Dynegy
affiliates. Such transactions include the following:
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
Revenues:
NGL sales................................... $ 71,926 $ 77,763 $ 45,772
Fractionation fees.......................... 5,456 6,211 7,516
Transportation fees......................... -- -- 83
Storage fees................................ 1,759 330 706
-------- -------- --------
Total revenues from Dynegy affiliates..... $ 79,141 $ 84,304 $ 54,077
======== ======== ========
Cost of sales:
NGL purchases............................... $517,333 $697,335 $552,846
Fuel purchases.............................. 12,682 23,596 20,580
Pipeline transportation costs............... 1,544 2,117 1,895
-------- -------- --------
Total cost of sales from Dynegy
affiliates.............................. $531,559 $723,048 $575,321
======== ======== ========
</Table>
Management believes that related party transactions have been conducted at
prices and terms similar to those available and transacted with unrelated
parties.
11. SEGMENT DISCLOSURES:
DEPP has three reportable operating segments: the Texas Gulf Coast
Facilities, Transportation and Logistics, and Distribution and Marketing
Services. The reportable segments are generally organized according to the type
of services rendered and location of assets. The Texas Gulf Coast Facilities
F-19
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT DISCLOSURES: (CONTINUED)
segment includes DEPP's fractionation, storage and terminalling operations and
comprises the Cedar Bayou fractionator, the Mont Belvieu underground storage
facility and the Galena Park marine terminal, all of which are located along the
Texas Gulf Coast at and adjacent to Mont Belvieu. The Transportation and
Logistics segment includes all of DEPP's NGL transportation assets located
throughout the United States, which include propane distribution terminals,
pipeline injection terminals, barges, railcars and tank trucks. The Distribution
and Marketing Services segment includes (1) refinery services, (2) wholesale
propane marketing, (3) purchasing NGL products from NGL producers and other
sources and (4) selling NGL products to petrochemical manufacturers, refineries
and other marketing companies. Management evaluates segment performance on the
basis of operating margin which includes revenues and cost of sales. The
accounting policies of the segments are the same as those described in
Note 2--Significant Accounting Policies. Affiliate revenues are accounted for as
if the sales were to unaffiliated third parties at what management believes are
prevailing market rates.
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------
TEXAS GULF DISTRIBUTION
COAST TRANSPORTATION AND MARKETING
FACILITIES AND LOGISTICS SERVICES ELIMINATION TOTAL
---------- -------------- ------------- ----------- ----------
Third-party revenues.............. $ 30,460 $ 3,740 $2,435,840 $ -- $2,470,040
Affiliate revenues................ 7,215 -- 71,926 -- 79,141
Intersegment revenues............. 42,272 24,422 204,207 (270,901) --
-------- ------- ---------- --------- ----------
Total revenues.................. 79,947 28,162 2,711,973 (270,901) 2,549,181
Operating margin.................. 31,926 6,758 65,810 -- 104,494
Equity in earnings of an
unconsolidated affilate......... -- 193 -- -- 193
Additions to long-lived assets.... 10,905 36 -- -- 10,941
<Caption>
AS OF DECEMBER 31, 1999
----------------------------------------------------------------------
Total assets. 239,113 73,533 333,716 -- 646,362
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------------
TEXAS GULF DISTRIBUTION
COAST TRANSPORTATION AND MARKETING
FACILITIES AND LOGISTICS SERVICES ELIMINATION TOTAL
---------- -------------- ------------- ----------- ----------
Third-party revenues.............. $ 37,080 $ 16,006 $4,114,067 $ -- $4,167,153
Affiliate revenues................ 6,541 -- 77,763 -- 84,304
Intersegment revenues............. 46,388 31,696 280,762 (358,846) --
-------- -------- ---------- --------- ----------
Total revenues.................. 90,009 47,702 4,472,592 (358,846) 4,251,457
Operating margin.................. 26,004 9,428 68,024 -- 103,456
Equity in earnings of an
unconsolidated affilate......... -- 138 -- -- 138
Additions to long-lived assets.... 10,772 14,253 -- -- 25,025
<Caption>
AS OF DECEMBER 31, 2000
----------------------------------------------------------------------
Total assets. 221,649 97,372 627,734 -- 946,755
</Table>
F-20
<Page>
DYNEGY ENERGY PARTNERS PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT DISCLOSURES: (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------------
TEXAS GULF DISTRIBUTION
COAST TRANSPORTATION AND MARKETING
FACILITIES AND LOGISTICS SERVICES ELIMINATION TOTAL
---------- -------------- ------------- ----------- ----------
Third-party revenues.............. $ 39,481 $ 19,778 $3,774,863 $ -- $3,834,122
Affiliate revenues................ 8,222 83 45,772 -- 54,077
Intersegment revenues............. 47,269 31,394 258,271 (336,934) --
-------- -------- ---------- --------- ----------
Total revenues.................. 94,972 51,255 4,078,906 (336,934) 3,888,199
Operating margin.................. 29,094 9,015 57,816 -- 95,925
Additions to long-lived assets.... 12,012 6,661 -- -- 18,673
<Caption>
AS OF DECEMBER 31, 2001
----------------------------------------------------------------------
Total assets. 226,732 103,072 281,185 -- 610,989
</Table>
F-21
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dynegy DEP GP LLC:
We have audited the accompanying balance sheet of Dynegy DEP GP LLC, as of
February 15, 2002. This financial statement is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Dynegy DEP GP LLC, as of
February 15, 2002, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 2002
F-22
<Page>
DYNEGY DEP GP LLC
BALANCE SHEET--FEBRUARY 15, 2002
<Table>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 980
Investment in Dynegy Energy Partners L.P.................. 20
------
Total assets.......................................... $1,000
======
OWNER'S EQUITY
OWNER'S EQUITY.............................................. $1,000
------
Total owner's equity.................................. $1,000
======
</Table>
The accompanying note is an integral part of this financial statement.
F-23
<Page>
DYNEGY DEP GP LLC
NOTE TO BALANCE SHEET
NATURE OF OPERATIONS:
Dynegy DEP GP LLC (the General Partner), is a Delaware limited liability company
formed on February 15, 2002, to become the general partner of Dynegy Energy
Partners L.P. (the Partnership). The General Partner is an indirect wholly owned
subsidiary of Dynegy Inc. The General Partner owns a 2 percent general partner
interest in the Partnership.
On February 15, 2002, affiliates of Dynegy Inc. contributed $1,000 to the
General Partner in exchange for a 100 percent ownership interest.
The General Partner has invested $20 in the Partnership. There have been no
other transactions involving the General Partner as of February 15, 2002.
F-24
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dynegy Energy Partners L.P.:
We have audited the accompanying balance sheet of Dynegy Energy Partners L.P. as
of February 15, 2002. This financial statement is the responsibility of the
Partnership's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Dynegy Energy Partners L.P. as of
February 15, 2002, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 2002
F-25
<Page>
DYNEGY ENERGY PARTNERS L.P.
BALANCE SHEET--FEBRUARY 15, 2002
<Table>
ASSETS
CURRENT ASSETS:
Cash...................................................... $1,000
------
Total assets.......................................... $1,000
======
PARTNERS' EQUITY
LIMITED PARTNER'S EQUITY.................................... $ 980
GENERAL PARTNER'S EQUITY.................................... 20
------
Total partners' equity................................ $1,000
======
</Table>
The accompanying note is an integral part of this financial statement.
F-26
<Page>
DYNEGY ENERGY PARTNERS L.P.
NOTE TO BALANCE SHEET
1. NATURE OF OPERATIONS:
Dynegy Energy Partners L.P. (the Partnership) is a Delaware limited
partnership formed on February 15, 2002, to acquire certain assets, liabilities
and operations of the natural gas liquids (NGL) business of Dynegy Inc.
(Dynegy). The Partnership's general partner is Dynegy DEP GP LLC.
The Partnership intends to offer common units, representing limited partner
interests, pursuant to a public offering and to concurrently issue common units
and subordinated units, representing additional limited partner interests, to
affiliates of Dynegy.
Dynegy DEP GP LLC, as general partner, contributed $20, and an affiliate of
Dynegy contributed $980, to the Partnership on February 15, 2002. There have
been no other transactions involving the Partnership as of February 15, 2002.
F-27
<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX A
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
DYNEGY ENERGY PARTNERS L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
TABLE OF CONTENTS
<Table>
ARTICLE I
DEFINITIONS
Section 1.1 Definitions................................................. A-1
Section 1.2 Construction................................................ A-16
ARTICLE II
ORGANIZATION
Section 2.1 Formation................................................... A-16
Section 2.2 Name........................................................ A-16
Section 2.3 Registered Office; Registered Agent; Principal Office; Other
Offices..................................................... A-16
Section 2.4 Purpose and Business........................................ A-17
Section 2.5 Powers...................................................... A-17
Section 2.6 Power of Attorney........................................... A-17
Section 2.7 Term........................................................ A-18
Section 2.8 Title to Partnership Assets................................. A-19
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 Limitation of Liability..................................... A-19
Section 3.2 Management of Business...................................... A-19
Section 3.3 Outside Activities of the Limited Partners.................. A-20
Section 3.4 Rights of Limited Partners.................................. A-20
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF
PARTNERSHIP INTERESTS; REDEMPTION OF
PARTNERSHIP INTERESTS
Section 4.1 Certificates................................................ A-20
Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates........... A-21
Section 4.3 Record Holders.............................................. A-22
Section 4.4 Transfer Generally.......................................... A-22
Section 4.5 Registration and Transfer of Limited Partner Interests...... A-22
Section 4.6 Transfer of the General Partner's General Partner
Interest.................................................... A-23
Section 4.7 Transfer of Incentive Distribution Rights................... A-24
Section 4.8 Restrictions on Transfers................................... A-24
Section 4.9 Citizenship Certificates; Non-citizen Assignees............. A-24
Section 4.10 Redemption of Partnership Interests of Non-citizen
Assignees................................................... A-25
</Table>
A-i
<Page>
<Table>
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF
PARTNERSHIP INTERESTS
Section 5.1 Organizational Contributions................................ A-26
Section 5.2 Contributions by the General Partner and its Affiliates..... A-27
Section 5.3 Contributions by Initial Limited Partners and Distributions
to the General Partner...................................... A-27
Section 5.4 Interest and Withdrawal..................................... A-28
Section 5.5 Capital Accounts............................................ A-28
Section 5.6 Issuances of Additional Partnership Securities.............. A-30
Section 5.7 Limitations on Issuance of Additional Partnership
Securities.................................................. A-31
Section 5.8 Conversion of Subordinated Units............................ A-33
Section 5.9 Limited Preemptive Right.................................... A-34
Section 5.10 Splits and Combinations..................................... A-34
Section 5.11 Fully Paid and Non-Assessable Nature of Limited Partner
Interests................................................... A-35
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 Allocations for Capital Account Purposes.................... A-35
Section 6.2 Allocations for Tax Purposes................................ A-42
Section 6.3 Requirement and Characterization of Distributions;
Distributions to Record Holders............................. A-43
Section 6.4 Distributions of Available Cash from Operating Surplus...... A-44
Section 6.5 Distributions of Available Cash from Capital Surplus........ A-45
Section 6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels......................................... A-45
Section 6.7 Special Provisions Relating to the Holders of Subordinated
Units....................................................... A-46
Section 6.8 Special Provisions Relating to the Holders of Incentive
Distribution Rights......................................... A-46
Section 6.9 Entity-Level Taxation....................................... A-47
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 Management.................................................. A-47
Section 7.2 Certificate of Limited Partnership.......................... A-49
Section 7.3 Restrictions on the General Partner's Authority............. A-49
Section 7.4 Reimbursement of the General Partner........................ A-50
Section 7.5 Outside Activities.......................................... A-50
Section 7.6 Loans from the General Partner; Loans or Contributions from
the Partnership; Contracts with Affiliates; Certain
Restrictions on the General Partner......................... A-52
Section 7.7 Indemnification............................................. A-53
Section 7.8 Liability of Indemnitees.................................... A-54
Section 7.9 Resolution of Conflicts of Interest......................... A-55
Section 7.10 Other Matters Concerning the General Partner................ A-56
Section 7.11 Purchase or Sale of Partnership Securities.................. A-57
Section 7.12 Registration Rights of the General Partner and its
Affiliates.................................................. A-57
Section 7.13 Reliance by Third Parties................................... A-59
</Table>
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<Table>
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting...................................... A-59
Section 8.2 Fiscal Year................................................. A-59
Section 8.3 Reports..................................................... A-60
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information................................. A-60
Section 9.2 Tax Elections............................................... A-60
Section 9.3 Tax Controversies........................................... A-60
Section 9.4 Withholding................................................. A-61
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 Admission of Initial Limited Partners....................... A-61
Section 10.2 Admission of Substituted Limited Partner.................... A-61
Section 10.3 Admission of Successor General Partner...................... A-62
Section 10.4 Admission of Additional Limited Partners.................... A-62
Section 10.5 Amendment of Agreement and Certificate of Limited
Partnership................................................. A-62
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner........................... A-62
Section 11.2 Removal of the General Partner.............................. A-64
Section 11.3 Interest of Departing Partner and Successor General
Partner..................................................... A-64
Section 11.4 Termination of Subordination Period, Conversion of
Subordinated Units and Extinguishment of Cumulative Common
Unit Arrearages............................................. A-65
Section 11.5 Withdrawal of Limited Partners.............................. A-66
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution................................................. A-66
Section 12.2 Continuation of the Business of the Partnership After
Dissolution................................................. A-66
Section 12.3 Liquidator.................................................. A-67
Section 12.4 Liquidation................................................. A-67
Section 12.5 Cancellation of Certificate of Limited Partnership.......... A-68
Section 12.6 Return of Contributions..................................... A-68
Section 12.7 Waiver of Partition......................................... A-68
Section 12.8 Capital Account Restoration................................. A-68
</Table>
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<Table>
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT;
MEETINGS; RECORD DATE
Section 13.1 Amendment to be Adopted Solely by the General Partner....... A-68
Section 13.2 Amendment Procedures........................................ A-70
Section 13.3 Amendment Requirements...................................... A-70
Section 13.4 Special Meetings............................................ A-70
Section 13.5 Notice of a Meeting......................................... A-71
Section 13.6 Record Date................................................. A-71
Section 13.7 Adjournment................................................. A-71
Section 13.8 Waiver of Notice; Approval of Meeting; Approval of
Minutes..................................................... A-72
Section 13.9 Quorum...................................................... A-72
Section 13.10 Conduct of a Meeting........................................ A-72
Section 13.11 Action Without a Meeting.................................... A-73
Section 13.12 Voting and Other Rights..................................... A-73
ARTICLE XIV
MERGER
Section 14.1 Authority................................................... A-73
Section 14.2 Procedure for Merger or Consolidation....................... A-74
Section 14.3 Approval by Limited Partners of Merger or Consolidation..... A-74
Section 14.4 Certificate of Merger....................................... A-75
Section 14.5 Effect of Merger............................................ A-75
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 Right to Acquire Limited Partner Interests.................. A-76
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 Addresses and Notices....................................... A-77
Section 16.2 Further Action.............................................. A-78
Section 16.3 Binding Effect.............................................. A-78
Section 16.4 Integration................................................. A-78
Section 16.5 Creditors................................................... A-78
Section 16.6 Waiver...................................................... A-78
Section 16.7 Counterparts................................................ A-78
Section 16.8 Applicable Law.............................................. A-78
Section 16.9 Invalidity of Provisions.................................... A-78
Section 16.10 Consent of Partners......................................... A-78
</Table>
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FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF DYNEGY ENERGY PARTNERS L.P.
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF DYNEGY
ENERGY PARTNERS L.P., dated as of , 2002, is entered into by and among
Dynegy DEP GP LLC, a Delaware limited liability company, as the General Partner,
and DMS LP, Inc., a Delaware corporation, as the Organizational Limited Partner,
together with any other Persons who become Partners in the Partnership or
parties hereto as provided herein. In consideration of the covenants, conditions
and agreements contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS.
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"ACQUISITION" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or business
of another Person for the purpose of increasing the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such transaction.
"ADDITIONAL BOOK BASIS" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent that Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value
of such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
(ii) If Carrying Value that constitutes Additional Book Basis is
reduced as a result of a Book-Down Event and the Carrying Value of other
property is increased as a result of such Book-Down Event, an allocable
portion of any such increase in Carrying Value shall be treated as
Additional Book Basis; provided that the amount treated as Additional
Book Basis pursuant hereto as a result of such Book-Down Event shall not
exceed the amount by which the Aggregate Remaining Net Positive
Adjustments after such Book-Down Event exceeds the remaining Additional
Book Basis attributable to all of the Partnership's Adjusted Property
after such Book-Down Event (determined without regard to the application
of this clause (ii) to such Book-Down Event).
"ADDITIONAL BOOK BASIS DERIVATIVE ITEMS" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's Adjusted
Property as of the beginning of any taxable period exceeds the Aggregate
Remaining Net Positive Adjustments as of the beginning of such period (the
"Excess Additional Book Basis"), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same ratio to the
amount of Additional Book Basis Derivative Items determined without regard to
this sentence as the Excess Additional Book Basis bears to the Additional Book
Basis as of the beginning of such period.
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"ADDITIONAL LIMITED PARTNER" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"ADJUSTED CAPITAL ACCOUNT" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and deductions that, as of the end
of such fiscal year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions
that, as of the end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of this Agreement
or otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made (other than
increases as a result of a minimum gain chargeback pursuant to
Section 6.1(d)(i) or 6.1(d)(ii)). The foregoing definition of Adjusted Capital
Account is intended to comply with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
The "Adjusted Capital Account" of a Partner in respect of a General Partner
Interest, a Common Unit, a Subordinated Unit or an Incentive Distribution Right
or any other specified interest in the Partnership shall be the amount which
such Adjusted Capital Account would be if such General Partner Interest, Common
Unit, Subordinated Unit, Incentive Distribution Right or other interest in the
Partnership were the only interest in the Partnership held by such Partner from
and after the date on which such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other interest was first
issued.
"ADJUSTED OPERATING SURPLUS" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in Working
Capital Borrowings with respect to such period and (ii) any net reduction in
cash reserves for Operating Expenditures with respect to such period not
relating to an Operating Expenditure made with respect to such period, and
(b) plus (i) any net decrease in Working Capital Borrowings with respect to such
period, and (ii) any net increase in cash reserves for Operating Expenditures
with respect to such period required by any debt instrument for the repayment of
principal, interest or premium. Adjusted Operating Surplus does not include that
portion of Operating Surplus included in clause (a)(i) of the definition of
Operating Surplus.
"ADJUSTED PROPERTY" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"AGGREGATE REMAINING NET POSITIVE ADJUSTMENTS" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"AGREED ALLOCATION" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"AGREED VALUE" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. The General Partner shall, in its discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of Contributed
Properties
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contributed to the Partnership in a single or integrated transaction among each
separate property on a basis proportional to the fair market value of each
Contributed Property.
"AGREEMENT" means this First Amended and Restated Agreement of Limited
Partnership of Dynegy Energy Partners L.P., as it may be amended, supplemented
or restated from time to time.
"ASSIGNEE" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under this
Agreement and who has executed and delivered a Transfer Application as required
by this Agreement, but who has not been admitted as a Substituted Limited
Partner.
"ASSOCIATE" means, when used to indicate a relationship with any Person,
(a) any corporation or organization of which such Person is a director, officer
or partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
"AVAILABLE CASH" means, with respect to any Quarter ending prior to the
Liquidation Date:
(a) the sum of (i) all cash and cash equivalents of the Partnership
Group on hand at the end of such Quarter, and (ii) all additional cash and
cash equivalents of the Partnership Group on hand on the date of
determination of Available Cash with respect to such Quarter resulting from
Working Capital Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves that are necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the General Partner
may not establish cash reserves pursuant to (iii) above if the effect of
such reserves would be that the Partnership is unable to distribute the
Minimum Quarterly Distribution on all Common Units, plus any Cumulative
Common Unit Arrearage on all Common Units, with respect to such Quarter;
and, provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such Quarter but
on or before the date of determination of Available Cash with respect to
such Quarter shall be deemed to have been made, established, increased or
reduced, for purposes of determining Available Cash, within such Quarter if
the General Partner so determines.
Notwithstanding the foregoing, "AVAILABLE CASH" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"BOOK BASIS DERIVATIVE ITEMS" means any item of income, deduction, gain or
loss included in the determination of Net Income or Net Loss that is computed
with reference to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an Adjusted Property).
"BOOK-DOWN EVENT" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"BOOK-TAX DISPARITY" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property
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and Adjusted Property will be reflected by the difference between such Partner's
Capital Account balance as maintained pursuant to Section 5.5 and the
hypothetical balance of such Partner's Capital Account computed as if it had
been maintained strictly in accordance with federal income tax accounting
principles.
"BOOK-UP EVENT" means an event which triggers a positive adjustment to the
Capital Accounts of the Partners pursuant to Section 5.5(d).
"BUSINESS DAY" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States of America or
the State of Texas shall not be regarded as a Business Day.
"CAPITAL ACCOUNT" means the capital account maintained for a Partner
pursuant to Section 5.5. The "CAPITAL ACCOUNT" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, an Incentive
Distribution Right or any other Partnership Interest shall be the amount which
such Capital Account would be if such General Partner Interest, Common Unit,
Subordinated Unit, Incentive Distribution Right or other Partnership Interest
were the only interest in the Partnership held by such Partner from and after
the date on which such General Partner Interest, Common Unit, Subordinated Unit,
Incentive Distribution Right or other Partnership Interest was first issued.
"CAPITAL CONTRIBUTION" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement or the Contribution Agreement, or any payment made by
the General Partner to the Partnership described in Section 5.2(c).
"CAPITAL IMPROVEMENT" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets (including, without limitation,
fractionation facilities, storage facilities transportation and logistics
assets, and related assets), in each case if such addition, improvement,
acquisition or construction is made to increase the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of the
Partnership Group existing immediately prior to such addition, improvement,
acquisition or construction.
"CAPITAL SURPLUS" has the meaning assigned to such term in Section 6.3(a).
"CARRYING VALUE" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the Partners' and
Assignees' Capital Accounts in respect of such Contributed Property, and
(b) with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"CAUSE" means a court of competent jurisdiction has entered a final,
non-appealable judgment finding the General Partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity as a general
partner of the Partnership.
"CERTIFICATE" means a certificate (i) substantially in the form of
Exhibit A to this Agreement, (ii) issued in global form in accordance with the
rules and regulations of the Depositary or (iii) in such other form as may be
adopted by the General Partner in its discretion, issued by the Partnership
evidencing ownership of one or more Common Units or a certificate, in such form
as may be adopted by the General Partner in its discretion, issued by the
Partnership evidencing ownership of one or more other Partnership Securities.
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"CERTIFICATE OF LIMITED PARTNERSHIP" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State of
Delaware as such Certificate of Limited Partnership may be amended, supplemented
or restated from time to time.
"CITIZENSHIP CERTIFICATION" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"CLAIM" has the meaning assigned to such term in Section 7.12(c).
"CLOSING DATE" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"CLOSING PRICE" has the meaning assigned to such term in Section 15.1(a).
"CODE" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
any successor law.
"COMBINED INTEREST" has the meaning assigned to such term in
Section 11.3(a).
"COMMISSION" means the United States Securities and Exchange Commission.
"COMMON UNIT" means a Partnership Security representing a fractional part of
the Partnership Interests of all Limited Partners and Assignees and of the
General Partner, and having the rights and obligations specified with respect to
Common Units in this Agreement. The term "Common Unit" does not refer to a
Subordinated Unit prior to its conversion into a Common Unit pursuant to the
terms hereof.
"COMMON UNIT ARREARAGE" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed with
respect to a Common Unit in respect of such Quarter pursuant to
Section 6.4(a)(i).
"CONFLICTS COMMITTEE" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are not
(a) security holders, officers or employees of the General Partner,
(b) officers, directors or employees of any Affiliate of the General Partner or
(c) holders of any ownership interest in the Partnership Group other than Common
Units and who also meet the independence standards required to serve on an audit
committee of a board of directors by the National Securities Exchange on which
the Common Units are listed for trading.
"CONTRIBUTED PROPERTY" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership. Once the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no longer constitute a
Contributed Property, but shall be deemed an Adjusted Property.
"CONTRIBUTION AGREEMENT" means that certain Contribution, Conveyance and
Assumption Agreement, dated as of the Closing Date, among the General Partner,
the Partnership, the Operating Partnership and certain other parties, together
with the additional conveyance documents and instruments contemplated or
referenced thereunder.
"CUMULATIVE COMMON UNIT ARREARAGE" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of
(a) the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5
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with respect to an Initial Common Unit (including any distributions to be made
in respect of the last of such Quarters).
"CURATIVE ALLOCATION" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"CURRENT MARKET PRICE" has the meaning assigned to such term in
Section 15.1(a).
"DELAWARE ACT" means the Delaware Revised Uniform Limited Partnership Act, 6
Del. C. Section 17-101, et seq., as amended, supplemented or restated from time
to time, and any successor to such statute.
"DEPARTING PARTNER" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"DEPOSITARY" means, with respect to any Units issued in global form, The
Depository Trust Company and its successors and permitted assigns.
"ECONOMIC RISK OF LOSS" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"ELIGIBLE CITIZEN" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes to
do business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"EVENT OF WITHDRAWAL" has the meaning assigned to such term in
Section 11.1(a).
"FINAL SUBORDINATED UNITS" has the meaning assigned to such term in
Section 6.1(d)(x).
"FIRST LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"FIRST TARGET DISTRIBUTION" means $0.4875 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on June 30,
2002, it means the product of $0.4875 multiplied by a fraction of which the
numerator is the number of days in such period, and of which the denominator is
90), subject to adjustment in accordance with Sections 6.6 and 6.9.
"FULLY DILUTED BASIS" means, when calculating the number of Outstanding
Units for any period, a basis that includes, in addition to the Outstanding
Units, all Partnership Securities and options, rights, warrants and appreciation
rights relating to an equity interest in the Partnership (a) that are
convertible into or exercisable or exchangeable for Units that are senior to or
pari passu with the Subordinated Units, (b) whose conversion, exercise or
exchange price is less than the Current Market Price on the date of such
calculation, and (c) that may be converted into or exercised or exchanged for
such Units during the Quarter following the end of the last Quarter contained in
the period for which the calculation is being made without the satisfaction of
any contingency beyond the control of the holder other than the payment of
consideration and the compliance with administrative mechanics applicable to
such conversion, exercise or exchange; provided that for purposes of determining
the number of Outstanding Units on a Fully Diluted Basis when calculating
whether the Subordination Period has ended or Subordinated Units are entitled to
convert into Common Units pursuant to Section 5.8, such Partnership Securities,
options, rights, warrants and appreciation rights shall be deemed to have been
Outstanding Units only for the four Quarters that comprise the last four
Quarters of the measurement period; provided, further, that if consideration
will be paid to any Group Member in connection with such conversion, exercise or
exchange, the number of Units to be included in such calculation shall be that
number equal to the difference between (i) the number of Units issuable upon
such conversion, exercise or exchange and (ii) the number of Units which such
consideration would purchase at the Current Market Price.
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"GENERAL PARTNER" means Dynegy DEP GP LLC and its successors and permitted
assigns as general partner of the Partnership.
"GENERAL PARTNER INTEREST" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced by
Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General Partner
to comply with the terms and provisions of this Agreement.
"GROUP" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation made
to 10 or more Persons) or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, Partnership Securities.
"GROUP MEMBER" means a member of the Partnership Group.
"HOLDER" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
"INCENTIVE DISTRIBUTION RIGHT" means a non-voting Limited Partner Interest
issued to the General Partner in connection with the transfer of all of its
interest in the Operating Partnership and Dynegy Operating GP LLC pursuant to
Section 5.2, which Partnership Interest will confer upon the holder thereof only
the rights and obligations specifically provided in this Agreement with respect
to Incentive Distribution Rights (and no other rights otherwise available to or
other obligations of a holder of a Partnership Interest). Notwithstanding
anything in this Agreement to the contrary, the holder of an Incentive
Distribution Right shall not be entitled to vote such Incentive Distribution
Right on any Partnership matter except as may otherwise be required by law.
"INCENTIVE DISTRIBUTIONS" means any amount of cash distributed to the
holders of the Incentive Distribution Rights pursuant to Sections 6.4(a)(v),
(vi) and (vii) and 6.4(b)(iii), (iv) and (v).
"INDEMNIFIED PERSONS" has the meaning assigned to such term in
Section 7.12(c).
"INDEMNITEE" means (a) the General Partner, (b) any Departing Partner,
(c) any Person who is or was an Affiliate of the General Partner or any
Departing Partner, (d) any Person who is or was a member, partner, officer,
director, employee, agent or trustee of any Group Member, the General Partner or
any Departing Partner or any Affiliate of any Group Member, the General Partner
or any Departing Partner, and (e) any Person who is or was serving at the
request of the General Partner or any Departing Partner or any Affiliate of the
General Partner or any Departing Partner as an officer, director, employee,
member, partner, agent, fiduciary or trustee of another Person; provided, that a
Person shall not be an Indemnitee by reason of providing, on a fee-for-services
basis, trustee, fiduciary or custodial services.
"INITIAL COMMON UNITS" means the Common Units sold in the Initial Offering.
"INITIAL LIMITED PARTNERS" means the General Partner and the Underwriters,
in each case upon being admitted to the Partnership in accordance with
Section 10.1.
"INITIAL OFFERING" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"INITIAL UNIT PRICE" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth on
the cover page of the prospectus included as part of the Registration Statement
and first issued at or after the time the Registration Statement first became
effective or (b) with respect to any other class or series of Units, the price
per Unit at which such class or series of
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Units is initially sold by the Partnership, as determined by the General
Partner, in each case adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination of
Units.
"INTERIM CAPITAL TRANSACTIONS" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or refundings
of indebtedness and sales of debt securities (other than Working Capital
Borrowings and other than for items purchased on open account in the ordinary
course of business) by any Group Member; (b) sales of equity interests by any
Group Member (including the Common Units sold to the Underwriters pursuant to
the exercise of their over-allotment option); and (c) sales or other voluntary
or involuntary dispositions of any assets of any Group Member other than
(i) sales or other dispositions of inventory, accounts receivable and other
assets in the ordinary course of business, and (ii) sales or other dispositions
of assets as part of normal retirements or replacements.
"ISSUE PRICE" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"LIMITED PARTNER" means, unless the context otherwise requires, (a) the
Organizational Limited Partner prior to its withdrawal from the Partnership,
each Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Departing Partner upon the change of its status from
General Partner to Limited Partner pursuant to Section 11.3 or (b) solely for
purposes of Articles V, VI, VII and IX, each Assignee; provided, however, that
when the term "Limited Partner" is used herein in the context of any vote or
other approval, including without limitation Articles XIII and XIV, such term
shall not, solely for such purpose, include any holder of an Incentive
Distribution Right except as may otherwise be required by law.
"LIMITED PARTNER INTEREST" means the ownership interest of a Limited Partner
or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is entitled as provided
in this Agreement, together with all obligations of such Limited Partner or
Assignee to comply with the terms and provisions of this Agreement; provided,
however, that when the term "Limited Partner Interest" is used herein in the
context of any vote or other approval, including without limitation Articles
XIII and XIV, such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right except as may otherwise be required by law.
"LIQUIDATION DATE" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time period
during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"LIQUIDATOR" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"MERGER AGREEMENT" has the meaning assigned to such term in Section 14.1.
"MINIMUM QUARTERLY DISTRIBUTION" means $0.4375 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on June 30,
2002, it means the product of $0.4375 multiplied by a fraction of which the
numerator is the number of days in such period and of which the denominator is
90), subject to adjustment in accordance with Sections 6.6 and 6.9.
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"NATIONAL SECURITIES EXCHANGE" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"NET AGREED VALUE" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the time
of distribution, in either case, as determined under Section 752 of the Code.
"NET INCOME" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 5.5(b) and shall
not include any items specially allocated under Section 6.1(d); provided that
the determination of the items that have been specially allocated under
Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not in this
Agreement.
"NET LOSS" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 5.5(b) and shall not
include any items specially allocated under Section 6.1(d); provided that the
determination of the items that have been specially allocated under
Section 6.1(d) shall be made as if Section 6.1(d)(xii) were not in this
Agreement.
"NET POSITIVE ADJUSTMENTS" means, with respect to any Partner, the excess,
if any, of the total positive adjustments over the total negative adjustments
made to the Capital Account of such Partner pursuant to Book-Up Events and
Book-Down Events.
"NET TERMINATION GAIN" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership after
the Liquidation Date. The items included in the determination of Net Termination
Gain shall be determined in accordance with Section 5.5(b) and shall not include
any items of income, gain or loss specially allocated under Section 6.1(d).
"NET TERMINATION LOSS" means, for any taxable year, the sum, if negative, of
all items of income, gain, loss or deduction recognized by the Partnership after
the Liquidation Date. The items included in the determination of Net Termination
Loss shall be determined in accordance with Section 5.5(b) and shall not include
any items of income, gain or loss specially allocated under Section 6.1(d).
"NON-CITIZEN ASSIGNEE" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.9.
"NONRECOURSE BUILT-IN GAIN" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated to
the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
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"NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction or
expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(b), are attributable to a Nonrecourse
Liability.
"NONRECOURSE LIABILITY" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"NOTICE OF ELECTION TO PURCHASE" has the meaning assigned to such term in
Section 15.1(b).
"OMNIBUS AGREEMENT" means that Omnibus Agreement, dated as of the Closing
Date, among Dynegy Inc., the General Partner, the Partnership, the Operating
Partnership and certain other parties.
"OPERATING EXPENDITURES" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
repayment of Working Capital Borrowings, debt service payments and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness other than Working Capital Borrowings shall not constitute
Operating Expenditures; and
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or
(iii) distributions to Partners. Where capital expenditures are made in part
for Acquisitions or for Capital Improvements and in part for other purposes,
the General Partner's good faith allocation between the amounts paid for
each shall be conclusive.
"OPERATING PARTNERSHIP" means Dynegy Operating Partners L.P., a Delaware
limited partnership, and any successors thereto.
"OPERATING PARTNERSHIP AGREEMENT" means the Amended and Restated Partnership
Agreement of the Operating Partnership, as it may be amended, supplemented or
restated from time to time.
"OPERATING SURPLUS" means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication,
(a) the sum of (i) $20.0 million plus all cash and cash equivalents of
the Partnership Group on hand as of the close of business on the Closing
Date, (ii) all cash receipts of the Partnership Group for the period
beginning on the Closing Date and ending with the last day of such period,
other than cash receipts from Interim Capital Transactions (except to the
extent specified in Section 6.5) and (iii) all cash receipts of the
Partnership Group after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period resulting
from Working Capital Borrowings, less
(b) the sum of (i) Operating Expenditures for the period beginning on
the Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating Surplus, within
such period if the General Partner so determines.
Notwithstanding the foregoing, "OPERATING SURPLUS" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
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"OPINION OF COUNSEL" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"OPTION CLOSING DATE" means the date or dates on which any Common Units are
sold by the Partnership to the Underwriters upon exercise of the Over-Allotment
Option.
"ORGANIZATIONAL LIMITED PARTNER" means DMS LP, Inc. in its capacity as the
organizational limited partner of the Partnership pursuant to this Agreement.
"OUTSTANDING" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than the General Partner
or its Affiliates) beneficially owns 20% or more of any Outstanding Partnership
Securities of any class then Outstanding, all Partnership Securities owned by
such Person or Group shall not be voted on any matter and shall not be
considered to be Outstanding when sending notices of a meeting of Limited
Partners to vote on any matter (unless otherwise required by law), calculating
required votes, determining the presence of a quorum or for other similar
purposes under this Agreement, except that Common Units so owned shall be
considered to be Outstanding for purposes of Section 11.1(b)(iv) (such Common
Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided, further, that the
foregoing limitation shall not apply (i) to any Person or Group who acquired 20%
or more of any Outstanding Partnership Securities of any class then Outstanding
directly from the General Partner or its Affiliates, (ii) to any Person or Group
who acquired 20% or more of any Outstanding Partnership Securities of any class
then Outstanding directly or indirectly from a Person or Group described in
clause (i) provided that the General Partner shall have notified such Person or
Group in writing that such limitation shall not apply, or (iii) to any Person or
Group who acquired 20% or more of any Partnership Securities issued by the
Partnership with the prior approval of the board of directors of the General
Partner; provided further, that the provisions contained herein may be amended
by the general partner as provided in Section 13.1 hereof.
"OVER-ALLOTMENT OPTION" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"PARITY UNITS" means Common Units and all other Units of any other class or
series that have the right (i) to receive distributions of Available Cash from
Operating Surplus pursuant to each of subclauses (a)(i) and (a)(ii) of
Section 6.4 in the same order of priority with respect to the participation of
Common Units in such distributions or (ii) to participate in allocations of Net
Termination Gain pursuant to Section 6.1(c)(i)(B) in the same order of priority
with the Common Units, in each case regardless of whether the amounts or value
so distributed or allocated on each Parity Unit equals the amount or value so
distributed or allocated on each Common Unit. Units whose participation in such
(i) distributions of Available Cash from Operating Surplus and (ii) allocations
of Net Termination Gain are subordinate in order of priority to such
distributions and allocations on Common Units shall not constitute Parity Units
even if such Units are convertible under certain circumstances into Common Units
or Parity Units.
"PARTNER NONRECOURSE DEBT" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"PARTNER NONRECOURSE DEDUCTIONS" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
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"PARTNERS" means the General Partner and the Limited Partners.
"PARTNERSHIP" means Dynegy Energy Partners L.P., a Delaware limited
partnership, and any successors thereto.
"PARTNERSHIP GROUP" means the Partnership, the Operating Partnership and any
Subsidiary of any such entity, treated as a single consolidated entity.
"PARTNERSHIP INTEREST" means an interest in the Partnership, which shall
include the General Partner Interest and Limited Partner Interests.
"PARTNERSHIP MINIMUM GAIN" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"PARTNERSHIP SECURITY" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation rights
relating to an equity interest in the Partnership), including without
limitation, Common Units, Subordinated Units and Incentive Distribution Rights.
"PERCENTAGE INTEREST" means as of any date of determination (a) as to the
General Partner (in its capacity as General Partner without reference to any
Limited Partner Interests held by it), 2.0%, (b) as to any Unitholder or
Assignee holding Units, the product obtained by multiplying (i) 98% less the
percentage applicable to paragraph (c) by (ii) the quotient obtained by dividing
(A) the number of Units held by such Unitholder or Assignee by (B) the total
number of all Outstanding Units, and (c) as to the holders of additional
Partnership Securities issued by the Partnership in accordance with
Section 5.6, the percentage established as a part of such issuance. The
Percentage Interest with respect to an Incentive Distribution Right shall at all
times be zero.
"PERSON" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"PER UNIT CAPITAL AMOUNT" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"PRO RATA" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative Percentage
Interests, (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their relative Percentage Interests
and (c) when modifying holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in accordance with
the relative number of Incentive Distribution Rights held by each such holder.
"PURCHASE DATE" means the date determined by the General Partner as the date
for purchase of all Outstanding Units of a certain class (other than Units owned
by the General Partner and its Affiliates) pursuant to Article XV.
"QUARTER" means, unless the context requires otherwise, a fiscal quarter,
or, with respect to the first fiscal quarter after the Closing Date, the portion
of such fiscal quarter after the Closing Date, of the Partnership.
"RECAPTURE INCOME" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"RECORD DATE" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled
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to vote by ballot or give approval of Partnership action in writing without a
meeting or entitled to exercise rights in respect of any lawful action of
Limited Partners or (b) the identity of Record Holders entitled to receive any
report or distribution or to participate in any offer.
"RECORD HOLDER" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a particular
Business Day, or with respect to other Partnership Securities, the Person in
whose name any such other Partnership Security is registered on the books which
the General Partner has caused to be kept as of the opening of business on such
Business Day.
"REDEEMABLE INTERESTS" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-1
(Registration No. 333- ) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Initial Offering.
"REMAINING NET POSITIVE ADJUSTMENTS" means as of the end of any taxable
period, (i) with respect to the Unitholders holding Common Units or Subordinated
Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding
Common Units or Subordinated Units as of the end of such period over (b) the sum
of those Partners' Share of Additional Book Basis Derivative Items for each
prior taxable period, (ii) with respect to the General Partner (as holder of the
General Partner Interest), the excess of (a) the Net Positive Adjustments of the
General Partner as of the end of such period over (b) the sum of the General
Partner's Share of Additional Book Basis Derivative Items with respect to the
General Partner Interest for each prior taxable period, and (iii) with respect
to the holders of Incentive Distribution Rights, the excess of (a) the Net
Positive Adjustments of the holders of Incentive Distribution Rights as of the
end of such period over (b) the sum of the Share of Additional Book Basis
Derivative Items of the holders of the Incentive Distribution Rights for each
prior taxable period.
"REQUIRED ALLOCATIONS" means (a) any limitation imposed on any allocation of
Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and
(b) any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
"RESIDUAL GAIN" OR "RESIDUAL LOSS" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"RESTRICTED BUSINESS" has the meaning assigned to such term in the Omnibus
Agreement.
"SECOND LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"SECOND TARGET DISTRIBUTION" means $0.5625 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on June 30,
2002, it means the product of $0.5625 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 90), subject to adjustment in accordance with Sections 6.6 and
6.9.
"SECURITIES ACT" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"SHARE OF ADDITIONAL BOOK BASIS DERIVATIVE ITEMS" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or Subordinated Units,
the amount that bears the same ratio to such
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Additional Book Basis Derivative Items as the Unitholders' Remaining Net
Positive Adjustments as of the end of such period bears to the Aggregate
Remaining Net Positive Adjustments as of that time, (ii) with respect to the
General Partner (as holder of the General Partner Interest), the amount that
bears the same ratio to such additional Book Basis Derivative Items as the
General Partner's Remaining Net Positive Adjustments as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustment as of that time,
and (iii) with respect to the Partners holding Incentive Distribution Rights,
the amount that bears the same ratio to such Additional Book Basis Derivative
Items as the Remaining Net Positive Adjustments of the Partners holding the
Incentive Distribution Rights as of the end of such period bears to the
Aggregate Remaining Net Positive Adjustments as of that time.
"SPECIAL APPROVAL" means approval by a majority of the members of the
Conflicts Committee.
"SUBORDINATED UNIT" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Subordinated Units in this
Agreement. The term "Subordinated Unit" as used herein does not include a Common
Unit or Parity Unit. A Subordinated Unit that is convertible into a Common Unit
or a Parity Unit shall not constitute a Common Unit or Parity Unit until such
conversion occurs.
"SUBORDINATION PERIOD" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after June 30, 2007 in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units and
any other Outstanding Units that are senior or equal in right of
distribution to the Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution (or
portion thereof for the first fiscal quarter after the Closing Date) on all
Outstanding Common Units and Subordinated Units and any other Outstanding
Units that are senior or equal in right of distribution to the Subordinated
Units during such periods and (B) the Adjusted Operating Surplus generated
during each of the three consecutive, non-overlapping four-quarter periods
immediately preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the Common Units and Subordinated Units and
any other Units that are senior or equal in right of distribution to the
Subordinated Units that were Outstanding during such periods on a Fully
Diluted Basis, plus the related distribution on the General Partner
Interest, during such periods and (ii) there are no Cumulative Common Unit
Arrearages; and
(b) the date on which the General Partner is removed as general partner
of the Partnership upon the requisite vote by holders of Outstanding Units
under circumstances where Cause does not exist and Units held by the General
Partner and its Affiliates are not voted in favor of such removal.
"SUBSIDIARY" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of such Person or
a combination thereof, (b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned, directly or
indirectly, at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or (c) any other Person
(other than a corporation or a partnership) in which such Person, one or more
Subsidiaries of such Person, or a combination thereof, directly or indirectly,
at the date of
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determination, has (i) at least a majority ownership interest or (ii) the power
to elect or direct the election of a majority of the directors or other
governing body of such Person.
"SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"SURVIVING BUSINESS ENTITY" has the meaning assigned to such term in
Section 14.2(b).
"THIRD LIQUIDATION TARGET AMOUNT" has the meaning assigned to such term in
Section 6.1(c)(i)(F).
"THIRD TARGET DISTRIBUTION" means $0.6875 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on June 30,
2002, it means the product of $0.6875 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of which the
denominator is 90), subject to adjustment in accordance with Sections 6.6 and
6.9.
"TRADING DAY" has the meaning assigned to such term in Section 15.1(a).
"TRANSFER" has the meaning assigned to such term in Section 4.4(a).
"TRANSFER AGENT" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time to
time by the Partnership to act as registrar and transfer agent for the Common
Units; provided that if no Transfer Agent is specifically designated for any
other Partnership Securities, the General Partner shall act in such capacity.
"TRANSFER APPLICATION" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"UNDERWRITER" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"UNDERWRITING AGREEMENT" means the Underwriting Agreement dated , 2002
among the Underwriters, the Partnership, the General Partner, the Operating
Partnership and [Dynegy Midstream GP, Inc.], Inc. providing for the purchase of
Common Units by such Underwriters.
"UNIT" means a Partnership Security that is designated as a "Unit" and shall
include Common Units and Subordinated Units but shall not include (i) a General
Partner Interest or (ii) Incentive Distribution Rights.
"UNITHOLDERS" means the holders of Units.
"UNIT MAJORITY" means, during the Subordination Period, at least a majority
of the Outstanding Common Units (excluding Common Units owned by the General
Partner and its affiliates) voting as a class and at least a majority of the
Outstanding Subordinated Units voting as a class, and thereafter, at least a
majority of the Outstanding Common Units.
"UNPAID MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"UNREALIZED GAIN" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 5.5(d)) over
(b) the Carrying Value of such property as of such date (prior to any adjustment
to be made pursuant to Section 5.5(d) as of such date).
"UNREALIZED LOSS" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 5.5(d)).
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"UNRECOVERED CAPITAL" means at any time, with respect to a Unit, the Initial
Unit Price less the sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any distributions of
cash (or the Net Agreed Value of any distributions in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of an Initial Common Unit, adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination of
such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"WITHDRAWAL OPINION OF COUNSEL" has the meaning assigned to such term in
Section 11.1(b).
"WORKING CAPITAL BORROWINGS" means borrowings used solely for working
capital purposes or to pay distributions to Partners made pursuant to a credit
facility or other arrangement to the extent such borrowings are required to be
reduced to a relatively small amount each year (or for the year in which the
Initial Offering is consummated, the 12-month period beginning on the Closing
Date) for an economically meaningful period of time.
Section 1.2 CONSTRUCTION.
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural and
vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) the term "include" or "includes" means
includes, without limitation, and "including" means including, without
limitation.
ARTICLE II
ORGANIZATION
Section 2.1 FORMATION.
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the original Agreement of Limited
Partnership of Dynegy Energy Partners L.P. in its entirety. This amendment and
restatement shall become effective on the date of this Agreement. Except as
expressly provided to the contrary in this Agreement, the rights, duties
(including fiduciary duties), liabilities and obligations of the Partners and
the administration, dissolution and termination of the Partnership shall be
governed by the Delaware Act. All Partnership Interests shall constitute
personal property of the owner thereof for all purposes and a Partner has no
interest in specific Partnership property.
Section 2.2 NAME.
The name of the Partnership shall be "Dynegy Energy Partners L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner in its sole discretion,
including the name of the General Partner. The words "Limited Partnership,"
"L.P.," "Ltd." or similar words or letters shall be included in the
Partnership's name where necessary for the purpose of complying with the laws of
any jurisdiction that so requires. The General Partner in its discretion may
change the name of the Partnership at any time and from time to time and shall
notify the Limited Partners of such change in the next regular communication to
the Limited Partners.
Section 2.3 REGISTERED OFFICE; REGISTERED AGENT; PRINCIPAL OFFICE; OTHER
OFFICES
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at 1209 Orange Street,
Wilmington, Delaware 19801, and the registered agent for service of process on
the Partnership in the State of Delaware at such registered
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office shall be The Corporation Trust Company. The principal office of the
Partnership shall be located at 1000 Louisiana, Suite 5800, Houston, Texas 77002
or such other place as the General Partner may from time to time designate by
notice to the Limited Partners. The Partnership may maintain offices at such
other place or places within or outside the State of Delaware as the General
Partner deems necessary or appropriate. The address of the General Partner shall
be 1000 Louisiana, Suite 5800, Houston, Texas 77002 or such other place as the
General Partner may from time to time designate by notice to the Limited
Partners.
Section 2.4 PURPOSE AND BUSINESS.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a partner of the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a partner of the Operating Partnership pursuant to the Operating
Partnership Agreement or otherwise, (b) engage directly in, or enter into or
form any corporation, partnership, joint venture, limited liability company or
other arrangement to engage indirectly in, any business activity that the
Operating Partnership is permitted to engage in by the Operating Partnership
Agreement or that its subsidiaries are permitted to engage in by their limited
liability company or partnership agreements and, in connection therewith, to
exercise all of the rights and powers conferred upon the Partnership pursuant to
the agreements relating to such business activity, (c) engage directly in, or
enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in, any business
activity that is approved by the General Partner and which lawfully may be
conducted by a limited partnership organized pursuant to the Delaware Act and,
in connection therewith, to exercise all of the rights and powers conferred upon
the Partnership pursuant to the agreements relating to such business activity;
provided, however, that the General Partner reasonably determines, as of the
date of the acquisition or commencement of such activity, that such activity
(i) generates "qualifying income" (as such term is defined pursuant to
Section 7704 of the Code) or a Subsidiary or a Partnership activity that
generates qualifying income or (ii) enhances the operations of an activity of
the Operating Partnership, and (d) do anything necessary or appropriate to the
foregoing, including the making of capital contributions or loans to a Group
Member. The General Partner has no obligation or duty to the Partnership, the
Limited Partners or the Assignees to propose or approve, and in its discretion
may decline to propose or approve, the conduct by the Partnership of any
business.
Section 2.5 POWERS.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in
Section 2.4 and for the protection and benefit of the Partnership.
Section 2.6 POWER OF ATTORNEY.
(a) Each Limited Partner and each Assignee hereby constitutes and
appoints the General Partner and, if a Liquidator shall have been selected
pursuant to Section 12.3, the Liquidator (and any successor to the
Liquidator by merger, transfer, assignment, election or otherwise) and each
of their authorized officers and attorneys-in-fact, as the case may be, with
full power of substitution, as his true and lawful agent and
attorney-in-fact, with full power and authority in his name, place and
stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that
the General Partner or the Liquidator deems necessary or appropriate to
form, qualify or continue the existence or qualification of the
Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and
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in all other jurisdictions in which the Partnership may conduct business
or own property; (B) all certificates, documents and other instruments
that the General Partner or the Liquidator deems necessary or appropriate
to reflect, in accordance with its terms, any amendment, change,
modification or restatement of this Agreement; (C) all certificates,
documents and other instruments (including conveyances and a certificate
of cancellation) that the General Partner or the Liquidator deems
necessary or appropriate to reflect the dissolution and liquidation of
the Partnership pursuant to the terms of this Agreement; (D) all
certificates, documents and other instruments relating to the admission,
withdrawal, removal or substitution of any Partner pursuant to, or other
events described in, Article IV, X, XI or XII; (E) all certificates,
documents and other instruments relating to the determination of the
rights, preferences and privileges of any class or series of Partnership
Securities issued pursuant to Section 5.6; and (F) all certificates,
documents and other instruments (including agreements and a certificate
of merger) relating to a merger or consolidation of the Partnership
pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given
by the Partners hereunder or is consistent with the terms of this
Agreement or is necessary or appropriate, in the discretion of the
General Partner or the Liquidator, to effectuate the terms or intent of
this Agreement; provided, that when required by Section 13.3 or any other
provision of this Agreement that establishes a percentage of the Limited
Partners or of the Limited Partners of any class or series required to
take any action, the General Partner and the Liquidator may exercise the
power of attorney made in this Section 2.6(a)(ii) only after the
necessary vote, consent or approval of the Limited Partners or of the
Limited Partners of such class or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with
Article XIII or as may be otherwise expressly provided for in this
Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, and it shall survive and, to the
maximum extent permitted by law, not be affected by the subsequent death,
incompetency, disability, incapacity, dissolution, bankruptcy or termination
of any Limited Partner or Assignee and the transfer of all or any portion of
such Limited Partner's or Assignee's Partnership Interest and shall extend
to such Limited Partner's or Assignee's heirs, successors, assigns and
personal representatives. Each such Limited Partner or Assignee hereby
agrees to be bound by any representation made by the General Partner or the
Liquidator acting in good faith pursuant to such power of attorney; and each
such Limited Partner or Assignee, to the maximum extent permitted by law,
hereby waives any and all defenses that may be available to contest, negate
or disaffirm the action of the General Partner or the Liquidator taken in
good faith under such power of attorney. Each Limited Partner or Assignee
shall execute and deliver to the General Partner or the Liquidator, within
15 days after receipt of the request therefor, such further designation,
powers of attorney and other instruments as the General Partner or the
Liquidator deems necessary to effectuate this Agreement and the purposes of
the Partnership.
Section 2.7 TERM.
The term of the Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and shall continue in
existence until the dissolution of the Partnership in accordance with the
provisions of Article XII. The existence of the Partnership as a
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separate legal entity shall continue until the cancellation of the Certificate
of Limited Partnership as provided in the Delaware Act.
Section 2.8 TITLE TO PARTNERSHIP ASSETS.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner, one or more of its Affiliates or one or more nominees, as
the General Partner may determine. The General Partner hereby declares and
warrants that any Partnership assets for which record title is held in the name
of the General Partner or one or more of its Affiliates or one or more nominees
shall be held by the General Partner or such Affiliate or nominee for the use
and benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use reasonable
efforts to cause record title to such assets (other than those assets in respect
of which the General Partner determines that the expense and difficulty of
conveyancing makes transfer of record title to the Partnership impracticable) to
be vested in the Partnership as soon as reasonably practicable; provided,
further, that, prior to the withdrawal or removal of the General Partner or as
soon thereafter as practicable, the General Partner shall use reasonable efforts
to effect the transfer of record title to the Partnership and, prior to any such
transfer, will provide for the use of such assets in a manner satisfactory to
the General Partner. All Partnership assets shall be recorded as the property of
the Partnership in its books and records, irrespective of the name in which
record title to such Partnership assets is held.
ARTICLE III
RIGHTS OF LIMITED PARTNERS
Section 3.1 LIMITATION OF LIABILITY.
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
Section 3.2 MANAGEMENT OF BUSINESS.
No Limited Partner or Assignee, in its capacity as such, shall participate
in the operation, management or control (within the meaning of the Delaware Act)
of the Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the Partnership. Any
action taken by any Affiliate of the General Partner or any officer, director,
employee, manager, member, general partner, agent or trustee of the General
Partner or any of its Affiliates, or any officer, director, employee, manager,
member, general partner, agent or trustee of a Group Member, in its capacity as
such, shall not be deemed to be participation in the control of the business of
the Partnership by a limited partner of the Partnership (within the meaning of
Section 17-303(a) of the Delaware Act) and shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners or Assignees under this
Agreement.
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Section 3.3 OUTSIDE ACTIVITIES OF THE LIMITED PARTNERS.
Subject to the provisions of Section 7.5 and the Omnibus Agreement, which
shall continue to be applicable to the Persons referred to therein, regardless
of whether such Persons shall also be Limited Partners or Assignees, any Limited
Partner or Assignee shall be entitled to and may have business interests and
engage in business activities in addition to those relating to the Partnership,
including business interests and activities in direct competition with the
Partnership Group. Neither the Partnership nor any of the other Partners or
Assignees shall have any rights by virtue of this Agreement in any business
ventures of any Limited Partner or Assignee.
Section 3.4 RIGHTS OF LIMITED PARTNERS.
(a) In addition to other rights provided by this Agreement or by
applicable law, and except as limited by Section 3.4(b), each Limited
Partner shall have the right, for a purpose reasonably related to such
Limited Partner's interest as a limited partner in the Partnership, upon
reasonable written demand and at such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash
and a description and statement of the Net Agreed Value of any other
Capital Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner;
and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners
and Assignees, for such period of time as the General Partner deems
reasonable, (i) any information that the General Partner reasonably believes
to be in the nature of trade secrets or (ii) other information the
disclosure of which the General Partner in good faith believes (A) is not in
the best interests of the Partnership Group, (B) could damage the
Partnership Group or (C) that any Group Member is required by law or by
agreement with any third party to keep confidential (other than agreements
with Affiliates of the Partnership the primary purpose of which is to
circumvent the obligations set forth in this Section 3.4).
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
Section 4.1 CERTIFICATES.
Upon the Partnership's issuance of Common Units or Subordinated Units to any
Person, the Partnership shall issue one or more Certificates in the name of such
Person evidencing the number of
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such Units being so issued. In addition, (a) upon the General Partner's request,
the Partnership shall issue to it one or more Certificates in the name of the
General Partner evidencing its interests in the Partnership and (b) upon the
request of any Person owning Incentive Distribution Rights or any other
Partnership Securities other than Common Units or Subordinated Units, the
Partnership shall issue to such Person one or more certificates evidencing such
Incentive Distribution Rights or other Partnership Securities other than Common
Units or Subordinated Units. Certificates shall be executed on behalf of the
Partnership by the Chairman of the Board, President or any Vice President and
the Secretary or any Assistant Secretary of the General Partner. No Common Unit
Certificate shall be valid for any purpose until it has been countersigned by
the Transfer Agent; provided, however, that if the General Partner elects to
issue Common Units in global form, the Common Unit Certificates shall be valid
upon receipt of a certificate from the Transfer Agent certifying that the Common
Units have been duly registered in accordance with the directions of the
Partnership and the Underwriters. Subject to the requirements of
Section 6.7(b), the Partners holding Certificates evidencing Subordinated Units
may exchange such Certificates for Certificates evidencing Common Units on or
after the date on which such Subordinated Units are converted into Common Units
pursuant to the terms of Section 5.8.
Section 4.2 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES.
(a) If any mutilated Certificate is surrendered to the Transfer Agent,
the appropriate officers of the General Partner on behalf of the Partnership
shall execute, and the Transfer Agent shall countersign and deliver in
exchange therefor, a new Certificate evidencing the same number and type of
Partnership Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall
countersign a new Certificate in place of any Certificate previously issued
if the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to
the Partnership, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the
Partnership has notice that the Certificate has been acquired by a
purchaser for value in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety
or sureties and with fixed or open penalty as the Partnership may
reasonably direct, in its sole discretion, to indemnify the Partnership,
the Partners, the General Partner and the Transfer Agent against any
claim that may be made on account of the alleged loss, destruction or
theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within
a reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by
the Certificate is registered before the Partnership, the General Partner or
the Transfer Agent receives such notification, the Limited Partner or
Assignee shall be precluded from making any claim against the Partnership,
the General Partner or the Transfer Agent for such transfer or for a new
Certificate.
(c) As a condition to the issuance of any new Certificate under this
Section 4.2, the Partnership may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the
Transfer Agent) reasonably connected therewith.
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Section 4.3 RECORD HOLDERS.
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of whether
the Partnership shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or requirement of
any National Securities Exchange on which such Partnership Interests are listed
for trading. Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent of any of the
foregoing) is acting as nominee, agent or in some other representative capacity
for another Person in acquiring and/or holding Partnership Interests, as between
the Partnership on the one hand, and such other Persons on the other, such
representative Person (a) shall be the Partner or Assignee (as the case may be)
of record and beneficially, (b) must execute and deliver a Transfer Application
and (c) shall be bound by this Agreement and shall have the rights and
obligations of a Partner or Assignee (as the case may be) hereunder and as, and
to the extent, provided for herein.
Section 4.4 TRANSFER GENERALLY.
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which a
General Partner assigns its General Partner Interest to another Person who
becomes a General Partner, by which the holder of a Limited Partner Interest
assigns such Limited Partner Interest to another Person who is or becomes a
Limited Partner or an Assignee, and includes a sale, assignment, gift,
pledge, encumbrance, hypothecation, mortgage, exchange or any other
disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this
Article IV. Any transfer or purported transfer of a Partnership Interest not
made in accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any member of the General Partner of any or all of the
membership interests of the General Partner.
Section 4.5 REGISTRATION AND TRANSFER OF LIMITED PARTNER INTERESTS.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as
it may prescribe and subject to the provisions of Section 4.5(b), the
Partnership will provide for the registration and transfer of Limited
Partner Interests. The Transfer Agent is hereby appointed registrar and
transfer agent for the purpose of registering Common Units and transfers of
such Common Units as herein provided. The Partnership shall not recognize
transfers of Certificates evidencing Limited Partner Interests unless such
transfers are effected in the manner described in this Section 4.5. Upon
surrender of a Certificate for registration of transfer of any Limited
Partner Interests evidenced by a Certificate, and subject to the provisions
of Section 4.5(b), the appropriate officers of the General Partner on behalf
of the Partnership shall execute and deliver, and in the case of Common
Units, the Transfer Agent shall countersign and deliver, in the name of the
holder or the designated transferee or transferees, as required pursuant to
the holder's instructions, one or more new Certificates evidencing the same
aggregate number and type of Limited Partner Interests as was evidenced by
the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall
not recognize any transfer of Limited Partner Interests until the
Certificates evidencing such Limited Partner Interests are surrendered for
registration of transfer and such Certificates are accompanied by a Transfer
Application duly executed by the transferee (or the transferee's
attorney-in-fact duly authorized in writing). No charge shall be imposed by
the Partnership for such transfer; provided, that as a condition to the
issuance of any new Certificate under this Section 4.5, the Partnership
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may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed with respect thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests
and the admission of any new Limited Partner shall not constitute an
amendment to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to
Section 10.2, the Record Holder of a Limited Partner Interest shall be an
Assignee in respect of such Limited Partner Interest. Limited Partners may
include custodians, nominees or any other individual or entity in its own or
any representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested
admission as a Substituted Limited Partner, (ii) agreed to comply with and
be bound by and to have executed this Agreement, (iii) represented and
warranted that such transferee has the right, power and authority and, if an
individual, the capacity to enter into this Agreement, (iv) granted the
powers of attorney set forth in this Agreement and (v) given the consents
and approvals and made the waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any
time to transfer their Subordinated Units and Common Units (whether issued
upon conversion of the Subordinated Units or otherwise) to one or more
Persons.
Section 4.6 TRANSFER OF THE GENERAL PARTNER'S GENERAL PARTNER INTEREST.
(a) Subject to Section 4.6(c) below, prior to June 30, 2012, the General
Partner shall not transfer all or any part of its General Partner Interest
to a Person unless such transfer (i) has been approved by the prior written
consent or vote of the holders of at least a majority of the Outstanding
Common Units (excluding Common Units held by the General Partner and its
Affiliates) or (ii) is of all, but not less than all, of its General Partner
Interest to (A) an Affiliate of the General Partner (other than an
individual) or (B) another Person (other than an individual) in connection
with the merger or consolidation of the General Partner with or into another
Person (other than an individual) or the transfer by the General Partner of
all or substantially all of its assets to another Person (other than an
individual).
(b) Subject to Section 4.6(c) below, on or after June 30, 2012, the
General Partner may transfer all or any of its General Partner Interest
without Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to
another Person shall be permitted unless (i) the transferee agrees to assume
the rights and duties of the General Partner under this Agreement and to be
bound by the provisions of this Agreement, (ii) the Partnership receives an
Opinion of Counsel that such transfer would not result in the loss of
limited liability of any Limited Partner or of any limited partner of the
Operating Partnership or cause the Partnership or the Operating Partnership
to be treated as an association taxable as a corporation or otherwise to be
taxed as an entity for federal income tax purposes (to the extent not
already so treated or taxed) and (iii) such transferee also agrees to
purchase all (or the appropriate portion thereof, if applicable) of the
partnership or membership interest of the General Partner as the general
partner or managing member, if any, of each other Group Member. In the case
of a transfer pursuant to and in compliance with this Section 4.6, the
transferee or successor (as the case may be) shall, subject to compliance
with the terms of Section 10.3, be admitted to the Partnership as the
General Partner immediately prior to the transfer of the Partnership
Interest, and the business of the Partnership shall continue without
dissolution.
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Section 4.7 TRANSFER OF INCENTIVE DISTRIBUTION RIGHTS.
Prior to June 30, 2012, a holder of Incentive Distribution Rights may
transfer any or all of the Incentive Distribution Rights held by such holder
without any consent of the Unitholders (a) to an Affiliate of such holder (other
than an individual) or (b) to another Person (other than an individual) in
connection with (i) the merger or consolidation of such holder of Incentive
Distribution Rights with or into such other Person or (ii) the transfer by such
holder of all or substantially all of its assets to such other Person or
(iii) the sale of all or substantially all of the equity interests of such
holder to such other Person. Any other transfer of the Incentive Distribution
Rights prior to June 30, 2012, shall require the prior approval of holders of at
least a majority of the Outstanding Common Units (excluding Common Units held by
the General Partner and its Affiliates). On or after June 30, 2012, the General
Partner or any other holder of Incentive Distribution Rights may transfer any or
all of its Incentive Distribution Rights without Unitholder approval.
Notwithstanding anything herein to the contrary, no transfer of Incentive
Distribution Rights to another Person shall be permitted unless the transferee
agrees to be bound by the provisions of this Agreement.
Section 4.8 RESTRICTIONS ON TRANSFERS.
(a) Except as provided in Section 4.8(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership
Interests shall be made if such transfer would (i) violate the then
applicable federal or state securities laws or rules and regulations of the
Commission, any state securities commission or any other governmental
authority with jurisdiction over such transfer, (ii) terminate the existence
or qualification of the Partnership or the Operating Partnership under the
laws of the jurisdiction of its formation, or (iii) cause the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not already so treated or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that
such restrictions are necessary to avoid a significant risk of the
Partnership or the Operating Partnership becoming taxable as a corporation
or otherwise to be taxed as an entity for federal income tax purposes. The
restrictions may be imposed by making such amendments to this Agreement as
the General Partner may determine to be necessary or appropriate to impose
such restrictions; provided, however, that any amendment that the General
Partner believes, in the exercise of its reasonable discretion, could result
in the delisting or suspension of trading of any class of Limited Partner
Interests on the principal National Securities Exchange on which such class
of Limited Partner Interests is then traded must be approved, prior to such
amendment being effected, by the holders of at least a majority of the
Outstanding Limited Partner Interests of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) Nothing contained in this Article IV, or elsewhere in this
Agreement, shall preclude the settlement of any transactions involving
Partnership Interests entered into through the facilities of any National
Securities Exchange on which such Partnership Interests are listed for
trading.
Section 4.9 CITIZENSHIP CERTIFICATES; NON-CITIZEN ASSIGNEES.
(a) If any Group Member is or becomes subject to any federal, state or
local law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee, the
General Partner may request any Limited Partner or Assignee to furnish to
the General Partner, within 30 days after receipt of such request, an
executed Citizenship Certification or such other information concerning his
nationality, citizenship or other related status (or, if the Limited
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Partner or Assignee is a nominee holding for the account of another Person,
the nationality, citizenship or other related status of such Person) as the
General Partner may request. If a Limited Partner or Assignee fails to
furnish to the General Partner within the aforementioned 30-day period such
Citizenship Certification or other requested information or if upon receipt
of such Citizenship Certification or other requested information the General
Partner determines, with the advice of counsel, that a Limited Partner or
Assignee is not an Eligible Citizen, the Partnership Interests owned by such
Limited Partner or Assignee shall be subject to redemption in accordance
with the provisions of Section 4.10. In addition, the General Partner may
require that the status of any such Partner or Assignee be changed to that
of a Non-citizen Assignee and, thereupon, the General Partner shall be
substituted for such Non-citizen Assignee as the Limited Partner in respect
of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner
Interests other than those of Non-citizen Assignees are cast, either for,
against or abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall
have no right to receive a distribution in kind pursuant to Section 12.4 but
shall be entitled to the cash equivalent thereof, and the Partnership shall
provide cash in exchange for an assignment of the Non-citizen Assignee's
share of the distribution in kind. Such payment and assignment shall be
treated for Partnership purposes as a purchase by the Partnership from the
Non-citizen Assignee of his Limited Partner Interest (representing his right
to receive his share of such distribution in kind).
(d) At any time after he can and does certify that he has become an
Eligible Citizen, a Non-citizen Assignee may, upon application to the
General Partner, request admission as a Substituted Limited Partner with
respect to any Limited Partner Interests of such Non-citizen Assignee not
redeemed pursuant to Section 4.10, and upon his admission pursuant to
Section 10.2, the General Partner shall cease to be deemed to be the Limited
Partner in respect of the Non-citizen Assignee's Limited Partner Interests.
Section 4.10 REDEMPTION OF PARTNERSHIP INTERESTS OF NON-CITIZEN
ASSIGNEES.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.9(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his
Partnership Interests to a Person who is an Eligible Citizen and who
furnishes a Citizenship Certification to the General Partner prior to the
date fixed for redemption as provided below, redeem the Partnership Interest
of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited
Partner or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail,
postage prepaid. The notice shall be deemed to have been given when so
mailed. The notice shall specify the Redeemable Interests, the date fixed
for redemption, the place of payment, that payment of the redemption
price will be made upon surrender of the Certificate evidencing the
Redeemable Interests and that on and after the date fixed for redemption
no further allocations or distributions to which the Limited Partner or
Assignee would otherwise be entitled in respect of the Redeemable
Interests will accrue or be made.
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(ii) The aggregate redemption price for Redeemable Interests shall be
an amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Limited Partner
Interests of the class to be so redeemed multiplied by the number of
Limited Partner Interests of each such class included among the
Redeemable Interests. The redemption price shall be paid, in the
discretion of the General Partner, in cash or by delivery of a promissory
note of the Partnership in the principal amount of the redemption price,
bearing interest at the rate of 10% annually and payable in three equal
annual installments of principal together with accrued interest,
commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or
Assignee, at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Interests, duly endorsed in blank
or accompanied by an assignment duly executed in blank, the Limited
Partner or Assignee or his duly authorized representative shall be
entitled to receive the payment therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.10 shall also be applicable to
Limited Partner Interests held by a Limited Partner or Assignee as nominee
of a Person determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the recipient of a notice
of redemption from transferring his Limited Partner Interest before the
redemption date if such transfer is otherwise permitted under this
Agreement. Upon receipt of notice of such a transfer, the General Partner
shall withdraw the notice of redemption, provided the transferee of such
Limited Partner Interest certifies to the satisfaction of the General
Partner in a Citizenship Certification delivered in connection with the
Transfer Application that he is an Eligible Citizen. If the transferee fails
to make such certification, such redemption shall be effected from the
transferee on the original redemption date.
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 ORGANIZATIONAL CONTRIBUTIONS.
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $20.00, for a certain interest in the Partnership and has been
admitted as a General Partner of the Partnership, and the Organizational Limited
Partner made an initial Capital Contribution to the Partnership in the amount of
$980.00. As of the Closing Date, the interest of the Organizational Limited
Partner shall be redeemed as provided in the Contribution Agreement; the initial
Capital Contributions of each Partner shall thereupon be refunded; and the
Organizational Limited Partner shall cease to be a Limited Partner of the
Partnership. Ninety-eight percent of any interest or other profit that may have
resulted from the investment or other use of such initial Capital Contributions
shall be allocated and distributed to the Organizational Limited Partner, and
the balance thereof shall be allocated and distributed to the General Partner.
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Section 5.2 CONTRIBUTIONS BY THE GENERAL PARTNER AND ITS AFFILIATES.
(a) On the Closing Date and pursuant to the Contribution Agreement, (i)
the General Partner shall contribute to the Partnership, as a Capital
Contribution, all of its interest in the Operating Partnership and Dynegy
Operating GP LLC in exchange for (A) the continuation of its General Partner
Interest, subject to all of the rights, privileges and duties of the General
Partner under this Agreement, (B) the Incentive Distribution Rights and
(C) the assumption by the Partnership of $4.3 million of indebtedness of the
General Partner and (ii) Dynegy DEP LP LLC shall contribute to the
Partnership its limited partner interest in the Operating Partnership in
exchange for (A) 8,750,000 Subordinated Units and (B) the assumption by the
Partnership of $120.7 million of indebtedness of Dynegy DEP LP LLC.
(b) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the Common Units issued in the
Initial Offering and other than the issuance of the Common Units issued
pursuant to the Over-Allotment Option and other than Common Units purchased
by the General Partner to the extent the Over-Allotment Option is not
exercised), the General Partner shall be required to make additional Capital
Contributions equal to 2/98ths of any amount contributed to the Partnership
by the Limited Partners in exchange for such additional Limited Partner
Interests. Except as set forth in the immediately preceding sentence and
Article XII, the General Partner shall not be obligated to make any
additional Capital Contributions to the Partnership.
(c) Any payment made to the Partnership Group by the General Partner or
its Affiliates pursuant to Section of the Omnibus Agreement shall be
treated for purposes of this Agreement as a Capital Contribution by the
General Partner to the Partnership.
Section 5.3 CONTRIBUTIONS BY INITIAL LIMITED PARTNERS AND DISTRIBUTIONS TO
THE GENERAL PARTNER.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to
the Issue Price per Initial Common Unit, multiplied by the number of Common
Units specified in the Underwriting Agreement to be purchased by such
Underwriter at the Closing Date. In exchange for such Capital Contributions
by the Underwriters, the Partnership shall issue Common Units to each
Underwriter on whose behalf such Capital Contribution is made in an amount
equal to the quotient obtained by dividing (i) the cash contribution to the
Partnership by or on behalf of such Underwriter by (ii) the Issue Price per
Initial Common Unit.
(b) Upon the exercise of the Over-Allotment Option and pursuant to the
Underwriting Agreement, each Underwriter shall contribute to the Partnership
cash in an amount equal to the Issue Price per Initial Common Unit,
multiplied by the number of Common Units specified in the Underwriting
Agreement to be purchased by such Underwriter at the Option Closing Date. In
exchange for such Capital Contributions by the Underwriters, the Partnership
shall issue Common Units to each Underwriter on whose behalf such Capital
Contribution is made in an amount equal to the quotient obtained by dividing
(i) the cash contributions to the Partnership by or on behalf of such
Underwriter by (ii) the Issue Price per Initial Common Unit.
(c) No Limited Partner Interests will be issued or issuable as of or at
the Closing Date other than (i) the Common Units issuable pursuant to
subparagraph (a) hereof in aggregate number equal to 7,650,000, (ii) the
"Additional Units" as such term is used in the Underwriting Agreement in an
aggregate number up to 1,100,000 issuable upon exercise of the
Over-Allotment Option pursuant to subparagraph (b) hereof or to Dynegy DEP
LP LLC to the extent the Over-Allotment Option is not exercised, (iii) the
8,750,000 Subordinated Units issuable to the Dynegy DEP LP LLC pursuant to
Section 5.2 hereof, and (iii) the Incentive Distribution Rights.
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Section 5.4 INTEREST AND WITHDRAWAL.
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent, if any, that distributions made pursuant to
this Agreement or upon termination of the Partnership may be considered as such
by law and then only to the extent provided for in this Agreement. Except to the
extent expressly provided in this Agreement, no Partner or Assignee shall have
priority over any other Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
Section 17-502(b) of the Delaware Act.
Section 5.5 CAPITAL ACCOUNTS.
(a) The Partnership shall maintain for each Partner (or a beneficial
owner of Partnership Interests held by a nominee in any case in which the
nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable
to the General Partner in its sole discretion) owning a Partnership Interest
a separate Capital Account with respect to such Partnership Interest in
accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions made to the Partnership with respect to such Partnership
Interest pursuant to this Agreement and (ii) all items of Partnership income
and gain (including, without limitation, income and gain exempt from tax)
computed in accordance with Section 5.5(b) and allocated with respect to
such Partnership Interest pursuant to Section 6.1, and decreased by (x) the
amount of cash or Net Agreed Value of all actual and deemed distributions of
cash or property made with respect to such Partnership Interest pursuant to
this Agreement and (y) all items of Partnership deduction and loss computed
in accordance with Section 5.5(b) and allocated with respect to such
Partnership Interest pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of income, gain,
loss or deduction which is to be allocated pursuant to Article VI and is to
be reflected in the Partners' Capital Accounts, the determination,
recognition and classification of any such item shall be the same as its
determination, recognition and classification for federal income tax
purposes (including, without limitation, any method of depreciation, cost
recovery or amortization used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership or any
other Subsidiary that is classified as a partnership for federal income
tax purposes.
(ii) All fees and other expenses incurred by the Partnership to
promote the sale of (or to sell) a Partnership Interest that can neither
be deducted nor amortized under Section 709 of the Code, if any, shall,
for purposes of Capital Account maintenance, be treated as an item of
deduction at the time such fees and other expenses are incurred and shall
be allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(m), the computation of all items of income,
gain, loss and deduction shall be made without regard to any election
under Section 754 of the Code which may be made by the Partnership and,
as to those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of
the Code, without regard to the fact that such items are not includable
in gross income or are neither currently deductible nor capitalized for
federal income tax purposes. To the extent an adjustment to the adjusted
tax basis of any Partnership asset pursuant to Section 734(b) or 743(b)
of the Code is
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required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the amount of
such adjustment in the Capital Accounts shall be treated as an item of
gain or loss.
(iv) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis
of such property as of such date of disposition were equal in amount to
the Partnership's Carrying Value with respect to such property as of such
date.
(v) In accordance with the requirements of Section 704(b) of the
Code, any deductions for depreciation, cost recovery or amortization
attributable to any Contributed Property shall be determined as if the
adjusted basis of such property on the date it was acquired by the
Partnership were equal to the Agreed Value of such property. Upon an
adjustment pursuant to Section 5.5(d) to the Carrying Value of any
Partnership property subject to depreciation, cost recovery or
amortization, any further deductions for such depreciation, cost recovery
or amortization attributable to such property shall be determined (A) as
if the adjusted basis of such property were equal to the Carrying Value
of such property immediately following such adjustment and (B) using a
rate of depreciation, cost recovery or amortization derived from the same
method and useful life (or, if applicable, the remaining useful life) as
is applied for federal income tax purposes; provided, however, that, if
the asset has a zero adjusted basis for federal income tax purposes,
depreciation, cost recovery or amortization deductions shall be
determined using any reasonable method that the General Partner may
adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is
placed in service and shall be allocated among the Partners pursuant to
Section 6.1. Any restoration of such basis pursuant to Section 48(q)(2)
of the Code shall, to the extent possible, be allocated in the same
manner to the Partners to whom such deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest shall succeed to a pro
rata portion of the Capital Account of the transferor relating to the
Partnership Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to
Section 5.8 by a holder thereof (other than a transfer to an Affiliate
unless the General Partner elects to have this subparagraph
5.5(c)(ii) apply), the Capital Account maintained for such Person with
respect to its Subordinated Units or converted Subordinated Units will
(A) first, be allocated to the Subordinated Units or converted
Subordinated Units to be transferred in an amount equal to the product of
(x) the number of such Subordinated Units or converted Subordinated Units
to be transferred and (y) the Per Unit Capital Amount for a Common Unit,
and (B) second, any remaining balance in such Capital Account will be
retained by the transferor, regardless of whether it has retained any
Subordinated Units or converted Subordinated Units. Following any such
allocation, the transferor's Capital Account, if any, maintained with
respect to the retained Subordinated Units or converted Subordinated
Units, if any, will have a balance equal to the amount allocated under
clause (B) hereinabove, and the transferee's Capital Account established
with respect to the transferred Subordinated Units or converted
Subordinated Units will have a balance equal to the amount allocated
under clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership
Interests for cash or Contributed Property or the conversion of the General
Partner's Combined Interest to Common Units pursuant to Section 11.3(b), the
Capital Account of
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all Partners and the Carrying Value of each Partnership property immediately
prior to such issuance shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership
property, as if such Unrealized Gain or Unrealized Loss had been recognized
on an actual sale of each such property immediately prior to such issuance
and had been allocated to the Partners at such time pursuant to Section 6.1
in the same manner as any item of gain or loss actually recognized during
such period would have been allocated. In determining such Unrealized Gain
or Unrealized Loss, the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash equivalents)
immediately prior to the issuance of additional Partnership Interests shall
be determined by the General Partner using such reasonable method of
valuation as it may adopt; provided, however, that the General Partner, in
arriving at such valuation, must take fully into account the fair market
value of the Partnership Interests of all Partners at such time. The General
Partner shall allocate such aggregate value among the assets of the
Partnership (in such manner as it determines in its discretion to be
reasonable) to arrive at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property (other than a
distribution of cash that is not in redemption or retirement of a
Partnership Interest), the Capital Accounts of all Partners and the
Carrying Value of all Partnership property shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss attributable
to such Partnership property, as if such Unrealized Gain or Unrealized
Loss had been recognized in a sale of such property immediately prior to
such distribution for an amount equal to its fair market value, and had
been allocated to the Partners, at such time, pursuant to Section 6.1 in
the same manner as any item of gain or loss actually recognized during
such period would have been allocated. In determining such Unrealized
Gain or Unrealized Loss the aggregate cash amount and fair market value
of all Partnership assets (including, without limitation, cash or cash
equivalents) immediately prior to a distribution shall (A) in the case of
an actual distribution which is not made pursuant to Section 12.4 or in
the case of a deemed distribution, be determined and allocated in the
same manner as that provided in Section 5.5(d)(i) or (B) in the case of a
liquidating distribution pursuant to Section 12.4, be determined and
allocated by the Liquidator using such reasonable method of valuation as
it may adopt.
Section 5.6 ISSUANCES OF ADDITIONAL PARTNERSHIP SECURITIES.
(a) Subject to Section 5.7, the Partnership may issue additional
Partnership Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership purpose at any
time and from time to time to such Persons for such consideration and on
such terms and conditions as shall be established by the General Partner in
its sole discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes,
or one or more series of any such classes, with such designations,
preferences, rights, powers and duties (which may be senior to existing
classes and series of Partnership Securities), as shall be fixed by the
General Partner in the exercise of its sole discretion, including (i) the
right to share Partnership profits and losses or items thereof; (ii) the
right to share in Partnership distributions; (iii) rights upon dissolution
and liquidation of the Partnership; (iv) whether, and the terms and
conditions upon which, the Partnership may redeem the Partnership Security;
(v) whether such Partnership Security is issued with the privilege of
conversion or exchange and, if so, the terms and conditions of such
conversion or exchange; (vi) the terms and conditions upon which each
Partnership Security will be issued, evidenced by certificates and assigned
or transferred; and (vii) the right, if any, of each
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such Partnership Security to vote on Partnership matters, including matters
relating to the relative rights, preferences and privileges of such
Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this
Section 5.6, (ii) the conversion of the General Partner Interest or any
Incentive Distribution Rights into Units pursuant to the terms of this
Agreement, (iii) the admission of Additional Limited Partners and (iv) all
additional issuances of Partnership Securities. The General Partner is
further authorized and directed to specify the relative rights, powers and
duties of the holders of the Units or other Partnership Securities being so
issued. The General Partner shall do all things necessary to comply with the
Delaware Act and is authorized and directed to do all things it deems to be
necessary or advisable in connection with any future issuance of Partnership
Securities or in connection with the conversion of the General Partner
Interest or any Incentive Distribution Rights into Units pursuant to the
terms of this Agreement, including compliance with any statute, rule,
regulation or guideline of any federal, state or other governmental agency
or any National Securities Exchange on which the Units or other Partnership
Securities are listed for trading.
Section 5.7 LIMITATIONS ON ISSUANCE OF ADDITIONAL PARTNERSHIP SECURITIES.
Except as otherwise specified in this Section 5.7, the issuance of
Partnership Securities pursuant to Section 5.6 shall be subject to the following
restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue
(and shall not issue any options, rights, warrants or appreciation rights
relating to) an aggregate of more than additional Parity Units without
the prior approval of the holders of a Unit Majority. In applying this
limitation, there shall be excluded Common Units and other Parity Units
issued (A) in connection with the Underwriting Agreement, (B) in accordance
with Sections 5.7(b) and 5.7(c), (C) upon conversion of Subordinated Units
pursuant to Section 5.8, (D) upon conversion of the General Partner Interest
or any Incentive Distribution Rights pursuant to Section 11.3(b),
(D) pursuant to the employee benefit plans of the General Partner, the
Partnership or any other Group Member, (E) upon a conversion or exchange of
Parity Units issued after the date hereof into Common Units or other Parity
Units; provided that the total amount of Available Cash required to pay the
aggregate Minimum Quarterly Distribution on all Common Units and all Parity
Units does not increase as a result of this conversion or exchange and
(F) in the event of a combination or subdivision of Common Units.
(b) During the Subordination Period, the Partnership may also issue an
unlimited number of Parity Units without the prior approval of the
Unitholders, if such issuance occurs (i) in connection with an Acquisition
or a Capital Improvement or (ii) within 365 days of, and the net proceeds
from such issuance are used to repay debt incurred in connection with, an
Acquisition or a Capital Improvement, in each case where such Acquisition or
Capital Improvement involves assets that, if acquired by the Partnership as
of the date that is one year prior to the first day of the Quarter in which
such Acquisition is to be consummated or such Capital Improvement is to be
completed, would have resulted, on a pro forma basis, in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) with
respect to each of the four most recently completed Quarters (on a
pro forma basis as described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by
the Partnership on a per-Unit basis (for all Outstanding Units)
(excluding Adjusted Operating Surplus attributable to the Acquisition
or Capital Improvement) with respect to each of such four most
recently completed Quarters.
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The General Partner's good faith determination that such an increase would
have resulted shall be conclusive. If the issuance of Parity Units with
respect to an Acquisition or Capital Improvement occurs within the first
four full Quarters after the Closing Date, then Adjusted Operating Surplus
as used in clauses (A) (subject to the succeeding sentence) and (B) above
shall be calculated (i) for each Quarter, if any, that commenced after the
Closing Date for which actual results of operations are available, based on
the actual Adjusted Operating Surplus of the Partnership generated with
respect to such Quarter, and (ii) for each other Quarter, on a pro forma
basis consistent with the procedures, as applicable, set forth in
Appendix D to the Registration Statement. Furthermore, the amount in
clause (A) shall be determined on a pro forma basis assuming that (1) all of
the Parity Units to be issued in connection with or within 365 days of such
Acquisition or Capital Improvement had been issued and outstanding, (2) all
indebtedness for borrowed money to be incurred or assumed in connection with
such Acquisition or Capital Improvement (other than any such indebtedness
that is to be repaid with the proceeds of such issuance of Parity Units) had
been incurred or assumed, in each case as of the commencement of such
four-Quarter period, (3) the personnel expenses that would have been
incurred by the Partnership in the operation of the acquired assets are the
personnel expenses for employees to be retained by the Partnership in the
operation of the acquired assets, and (4) the non-personnel costs and
expenses are computed on the same basis as those incurred by the Partnership
in the operation of the Partnership's business at similarly situated
Partnership facilities.
(c) During the Subordination Period, without the prior approval of the
holders of a Unit Majority, the Partnership shall not issue any additional
Partnership Securities (or options, rights, warrants or appreciation rights
related thereto) (i) that are entitled in any Quarter to receive in respect
of the Subordination Period any distribution of Available Cash from
Operating Surplus before the Common Units and any Parity Units have received
(or amounts have been set aside for payment of) the Minimum Quarterly
Distribution and any Cumulative Common Unit Arrearage for such Quarter or
(ii) that are entitled to allocations in respect of the Subordination Period
of Net Termination Gain before the Common Units and any Parity Units have
been allocated Net Termination Gain pursuant to Section 6.1(c)(i)(B).
(d) During the Subordination Period, without the prior approval of the
Unitholders, the Partnership may issue additional Partnership Securities (or
options, rights, warrants or appreciation rights related thereto) (i) that
are not entitled in any Quarter during the Subordination Period to receive
any distributions of Available Cash from Operating Surplus until after the
Common Units and any Parity Units have received (or amounts have been set
aside for payment of) the Minimum Quarterly Distribution and any Cumulative
Common Unit Arrearage for such Quarter and (ii) that are not entitled to
allocations in respect of the Subordination Period of Net Termination Gain
before the Common Units and Parity Units have been allocated Net Termination
Gain pursuant to Section 6.1(c)(i)(B), even if (A) the amount of Available
Cash from Operating Surplus to which each such Partnership Security is
entitled to receive after the Minimum Quarterly Distribution and any
Cumulative Common Unit Arrearage have been paid or set aside for payment on
the Common Units exceeds the Minimum Quarterly Distribution, (B) the amount
of Net Termination Gain to be allocated to such Partnership Security after
Net Termination Gain has been allocated to any Common Units and Parity Units
pursuant to Section 6.1(c)(i)(B) exceeds the amount of such Net Termination
Gain to be allocated to each Common Unit or Parity Unit or (C) the holders
of such additional Partnership Securities have the right to require the
Partnership or its Affiliates to repurchase such Partnership Securities at a
discount, par or a premium.
(e) During the Subordination Period, the Partnership may also issue an
unlimited number of Parity Units without the approval of the Unitholders, if
the proceeds from such issuance are used exclusively to repay indebtedness
of a Group Member where the aggregate amount of distributions that would
have been paid with respect to such newly issued Units or Partnership
Securities, plus
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the related distributions on the General Partner Interest in respect of the
four-Quarter period ending prior to the first day of the Quarter in which
the issuance is to be consummated (assuming such additional Units or
Partnership Securities had been Outstanding throughout such period and that
distributions equal to the distributions that were actually paid on the
Outstanding Units during the period were paid on such additional Units or
Partnership Securities) did not exceed the interest costs actually incurred
during such period on the indebtedness that is to be repaid (or, if such
indebtedness was not outstanding throughout the entire period, would have
been incurred had such indebtedness been outstanding for the entire period).
In the event that the Partnership is required to pay a prepayment penalty in
connection with the repayment of such indebtedness, for purposes of the
foregoing test the number of Parity Units issued to repay such indebtedness
shall be deemed increased by the number of Parity Units that would need to
be issued to pay such penalty.
(f) No fractional Units shall be issued by the Partnership.
Section 5.8 CONVERSION OF SUBORDINATED UNITS.
(a) A total of 2,187,500 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in
respect of any Quarter ending on or after June 30, 2005 in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units
with respect to each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units
during such periods;
(ii) the Adjusted Operating Surplus generated during each of the
three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units, Subordinated Units and any other
Units that are senior or equal in right of distribution to the
Subordinated Units that were Outstanding during such periods on a Fully
Diluted Basis, plus the related distribution on the General Partner
Interest in the Partnership, during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero.
(b) An additional 2,187,500 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis immediately after the
distribution of Available Cash to Partners pursuant to Section 6.3(a) in
respect of any Quarter ending on or after June 30, 2006, in respect of which
(i) distributions under Section 6.4 in respect of all Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units
with respect to each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the Outstanding
Common Units and Subordinated Units and any other Outstanding Units that
are senior or equal in right of distribution to the Subordinated Units
during such periods;
(ii) the Adjusted Operating Surplus generated during each of the
three consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units, Subordinated
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Units and any other Units that are senior or equal in right of
distribution to the Subordinated Units that were Outstanding during such
periods on a Fully Diluted Basis, plus the related distribution on the
General Partner Interest during such periods; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units
is zero;
provided, however, that the conversion of Subordinated Units pursuant to
this Section 5.8(b) may not occur until at least one year following the
conversion of Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated
Units shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b)
at a time when there shall be more than one holder of Subordinated Units,
then, unless all of the holders of Subordinated Units shall agree to a
different allocation, the Subordinated Units that are to be converted into
Common Units shall be allocated among the holders of Subordinated Units pro
rata based on the number of Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units
pursuant to Section 5.8(a) and (b) shall convert into Common Units on a
one-for-one basis immediately after the distribution of Available Cash to
Partners pursuant to Section 6.3(a) in respect of the final Quarter of the
Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units
on a one-for-one basis as set forth in, and pursuant to the terms of,
Section 11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
Section 5.9 LIMITED PREEMPTIVE RIGHT.
Except as provided in this Section 5.9 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether unissued, held in the treasury or
hereafter created. The General Partner shall have the right, which it may from
time to time assign in whole or in part to any of its Affiliates, to purchase
Partnership Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons other than the
General Partner and its Affiliates, to the extent necessary to maintain the
Percentage Interests of the General Partner and its Affiliates equal to that
which existed immediately prior to the issuance of such Partnership Securities.
Section 5.10 SPLITS AND COMBINATIONS.
(a) Subject to Sections 5.10(d), 6.6 and 6.9 (dealing with adjustments
of distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any
Common Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a
number of Units (including the number of Subordinated Units that may convert
prior to the end of the Subordination Period and the number of additional
Parity Units that may be issued pursuant to Section 5.7 without a Unitholder
vote) are proportionately adjusted retroactive to the beginning of the
Partnership.
(b) Whenever such a distribution, subdivision or combination of
Partnership Securities is declared, the General Partner shall select a
Record Date as of which the distribution, subdivision or combination shall
be effective and shall send notice thereof at least 20 days prior to such
Record Date to each Record Holder as of a date not less than 10 days prior
to the date of such
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notice. The General Partner also may cause a firm of independent public
accountants selected by it to calculate the number of Partnership Securities
to be held by each Record Holder after giving effect to such distribution,
subdivision or combination. The General Partner shall be entitled to rely on
any certificate provided by such firm as conclusive evidence of the accuracy
of such calculation.
(c) Promptly following any such distribution, subdivision or
combination, the Partnership may issue Certificates to the Record Holders of
Partnership Securities as of the applicable Record Date representing the new
number of Partnership Securities held by such Record Holders, or the General
Partner may adopt such other procedures as it may deem appropriate to
reflect such changes. If any such combination results in a smaller total
number of Partnership Securities Outstanding, the Partnership shall require,
as a condition to the delivery to a Record Holder of such new Certificate,
the surrender of any Certificate held by such Record Holder immediately
prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any
distribution, subdivision or combination of Units. If a distribution,
subdivision or combination of Units would result in the issuance of
fractional Units but for the provisions of Section 5.7(e) and this
Section 5.10(d), each fractional Unit shall be rounded to the nearest whole
Unit (and a 0.5 Unit shall be rounded to the next higher Unit).
Section 5.11 FULLY PAID AND NON-ASSESSABLE NATURE OF LIMITED PARTNER
INTERESTS.
All Limited Partner Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be fully paid and non-assessable Limited
Partner Interests in the Partnership, except as such non-assessability may be
affected by Section 17-607 of the Delaware Act.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
Section 6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 5.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
(a) Net Income. After giving effect to the special allocations set forth
in Section 6.1(d), Net Income for each taxable year and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable year shall be allocated as follows:
(i) First, 100% to the General Partner, in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to
Section 6.1(b)(iii) for all previous taxable years until the aggregate
Net Income allocated to the General Partner pursuant to this
Section 6.1(a)(i) for the current taxable year and all previous taxable
years is equal to the aggregate Net Losses allocated to the General
Partner pursuant to Section 6.1(b)(iii) for all previous taxable years;
(ii) Second, 2% to the General Partner, in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to
Section 6.1(b)(ii) for all previous taxable years and 98% to the
Unitholders, in accordance with their respective Percentage Interests,
until the aggregate Net Income allocated to such Partners pursuant to
this Section 6.1(a)(ii) for the current taxable year and all previous
taxable years is equal to the aggregate Net Losses allocated to such
Partners pursuant to Section 6.1(b)(ii) for all previous taxable years;
and
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(iii) Third, 2% to the General Partner, and 98% to the Unitholders,
Pro Rata.
(b) Net Losses. After giving effect to the special allocations set forth
in Section 6.1(d), Net Losses for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Losses
for such taxable period shall be allocated as follows:
(i) First, 2% to the General Partner, and 98% to the Unitholders, Pro
Rata, until the aggregate Net Losses allocated pursuant to this
Section 6.1(b)(i) for the current taxable year and all previous taxable
years is equal to the aggregate Net Income allocated to such Partners
pursuant to Section 6.1(a)(iii) for all previous taxable years, provided
that the Net Losses shall not be allocated pursuant to this
Section 6.1(b)(i) to the extent that such allocation would cause any
Unitholder to have a deficit balance in its Adjusted Capital Account at
the end of such taxable year (or increase any existing deficit balance in
its Adjusted Capital Account);
(ii) Second, 2% to the General Partner, and 98% to the Unitholders,
Pro Rata; provided, that Net Losses shall not be allocated pursuant to
this Section 6.1(b)(ii) to the extent that such allocation would cause
any Unitholder to have a deficit balance in its Adjusted Capital Account
at the end of such taxable year (or increase any existing deficit balance
in its Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same
manner as such Net Termination Gain or Net Termination Loss is allocated
hereunder. All allocations under this Section 6.1(c) shall be made after
Capital Account balances have been adjusted by all other allocations
provided under this Section 6.1 and after all distributions of Available
Cash provided under Sections 6.4 and 6.5 have been made; provided, however,
that solely for purposes of this Section 6.1(c), Capital Accounts shall not
be adjusted for distributions made pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of
the Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the
total deficit balances in the Capital Accounts of all Partners, until
each such Partner has been allocated Net Termination Gain equal to
any such deficit balance in its Capital Account;
(B) Second, 98% to all Unitholders holding Common Units, Pro
Rata, and 2% to the General Partner, until the Capital Account in
respect of each Common Unit then Outstanding is equal to the sum of
(1) its Unrecovered Capital plus (2) the Minimum Quarterly
Distribution for the Quarter during which the Liquidation Date
occurs, reduced by any distribution pursuant to
Section 6.4(a)(i) or (b)(i) with respect to such Common Unit for such
Quarter (the amount determined pursuant to this clause (2) is
hereinafter defined as the "Unpaid MQD") plus (3) any then existing
Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is
deemed to be recognized) prior to the expiration of the Subordination
Period, 98% to all Unitholders holding Subordinated Units, Pro Rata,
and 2% to the General Partner, until the Capital
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Account in respect of each Subordinated Unit then Outstanding equals
the sum of (1) its Unrecovered Capital, determined for the taxable
year (or portion thereof) to which this allocation of gain relates,
plus (2) the Minimum Quarterly Distribution for the Quarter during
which the Liquidation Date occurs, reduced by any distribution
pursuant to Section 6.4(a)(iii) with respect to such Subordinated
Unit for such Quarter;
(D) Fourth, 98% to all Unitholders, Pro Rata, and 2% to the
General Partner, until the Capital Account in respect of each Common
Unit then Outstanding is equal to the sum of (1) its Unrecovered
Capital, plus (2) the Unpaid MQD, plus (3) any then existing
Cumulative Common Unit Arrearage, plus (4) the excess of (aa) the
First Target Distribution less the Minimum Quarterly Distribution for
each Quarter of the Partnership's existence over (bb) the cumulative
per Unit amount of any distributions of Available Cash that is deemed
to be Operating Surplus made pursuant to Sections 6.4(a)(iv) and
6.4(b)(ii) (the sum of (1) plus (2) plus (3) plus (4) is hereinafter
defined as the "First Liquidation Target Amount");
(E) Fifth, 85% to all Unitholders, Pro Rata, 13% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the First Liquidation
Target Amount, plus (2) the excess of (aa) the Second Target
Distribution less the First Target Distribution for each Quarter of
the Partnership's existence over (bb) the cumulative per Unit amount
of any distributions of Available Cash that is deemed to be Operating
Surplus made pursuant to Sections 6.4(a)(v) and 6.4(b)(iii) (the sum
of (1) plus (2) is hereinafter defined as the "Second Liquidation
Target Amount");
(F) Sixth, 75% to all Unitholders, Pro Rata, 23% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until the Capital Account in respect of each Common Unit
then Outstanding is equal to the sum of (1) the Second Liquidation
Target Amount, plus (2) the excess of (aa) the Third Target
Distribution less the Second Target Distribution for each Quarter of
the Partnership's existence over (bb) the cumulative per Unit amount
of any distributions of Available Cash that is deemed to be Operating
Surplus made pursuant to Sections 6.4(a)(vi)and 6.4(b)(iv) (the sum
of (1) plus (2) is hereinafter defined as the "Third Liquidation
Target Amount"); and
(G) Finally, any remaining amount 50% to all Unitholders, Pro
Rata, 48% to the holders of the Incentive Distribution Rights, Pro
Rata, and 2% to the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is
deemed to be recognized) prior to the conversion of the last
Outstanding Subordinated Unit, 98% to the Unitholders holding
Subordinated Units, Pro Rata, and 2% to the General Partner, until
the Capital Account in respect of each Subordinated Unit then
Outstanding has been reduced to zero;
(B) Second, 98% to all Unitholders holding Common Units, Pro
Rata, and 2% to the General Partner, until the Capital Account in
respect of each Common Unit then Outstanding has been reduced to
zero; and
(C) Third, the balance, if any, 100% to the General Partner.
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(iii) If, immediately prior to the allocation of any Net Termination
Gain or Net Termination Loss pursuant to Section 6.1(c)(i) and (ii), the
cumulative amount of Capital Contributions by the General Partner to the
Partnership described in Section 5.2(c) exceeds the cumulative amount of
items allocated to the General Partner pursuant to Section 6.1(d)(xiii),
items of loss and deduction shall be allocated to the General Partner,
immediately prior to any allocation pursuant to Section 6.1(c)(i) and
(ii), in an amount equal to such excess. In the event the amount of
Partnership losses and deductions available to make the allocation
described in the previous sentence is less than the amount required to
satisfy such allocation, Net Termination Gain that would otherwise be
allocated to the General Partner pursuant to Sections 6.1(c)(i)(B), (D),
(E), (F) or (G), in an amount equal to such shortfall, shall be allocated
to the Unitholders holding Common Units instead.
(d) SPECIAL ALLOCATIONS. Notwithstanding any other provision of this
Section 6.1, the following special allocations shall be made for such
taxable period:
(i) PARTNERSHIP MINIMUM GAIN CHARGEBACK. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-2(j)(2)(i), or any successor provision. For purposes of this
Section 6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant
to this Section 6.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This
Section 6.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and
shall be interpreted consistently therewith.
(ii) CHARGEBACK OF PARTNER NONRECOURSE DEBT MINIMUM
GAIN. Notwithstanding the other provisions of this Section 6.1 (other
than Section 6.1(d)(i)), except as provided in Treasury Regulation
Section 1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse
Debt Minimum Gain during any Partnership taxable period, any Partner with
a share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain
for such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704-2(j)(2)(ii), or any successor provisions. For purposes of this
Section 6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant
to this Section 6.1(d), other than Section 6.1(d)(i) and other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii), with respect
to such taxable period. This Section 6.1(d)(ii) is intended to comply
with the chargeback of items of income and gain requirement in Treasury
Regulation Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
(iii) PRIORITY ALLOCATIONS.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to
Section 12.4) to any Unitholder with respect to its Units for a
taxable year is greater (on a per Unit basis) than the amount of cash
or the Net Agreed Value of property distributed to the other
Unitholders with respect to their Units (on a per Unit basis), then
(1) each Unitholder receiving such greater cash or property
distribution shall be allocated gross income in an amount equal to
the product of (aa) the amount by which the distribution (on a per
Unit basis) to such
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Unitholder exceeds the distribution (on a per Unit basis) to the
Unitholders receiving the smallest distribution and (bb) the number
of Units owned by the Unitholder receiving the greater distribution;
and (2) the General Partner shall be allocated gross income in an
aggregate amount equal to 1/98th of the sum of the amounts allocated
in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain
for the taxable period, if any, shall be allocated 100% to the
holders of Incentive Distribution Rights, Pro Rata, until the
aggregate amount of such items allocated to the holders of Incentive
Distribution Rights pursuant to this paragraph 6.1(d)(iii)(B) for the
current taxable year and all previous taxable years is equal to the
cumulative amount of all Incentive Distributions made to the holders
of Incentive Distribution Rights from the Closing Date to a date
45 days after the end of the current taxable year.
(iv) QUALIFIED INCOME OFFSET. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an amount
and manner sufficient to eliminate, to the extent required by the
Treasury Regulations promulgated under Section 704(b) of the Code, the
deficit balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to
Section 6.1(d)(i) or (ii).
(v) GROSS INCOME ALLOCATIONS. In the event any Partner has a
deficit balance in its Capital Account at the end of any Partnership
taxable period in excess of the sum of (A) the amount such Partner is
required to restore pursuant to the provisions of this Agreement and
(B) the amount such Partner is deemed obligated to restore pursuant to
Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Partner
shall be specially allocated items of Partnership gross income and gain
in the amount of such excess as quickly as possible; provided, that an
allocation pursuant to this Section 6.1(d)(v) shall be made only if and
to the extent that such Partner would have a deficit balance in its
Capital Account as adjusted after all other allocations provided for in
this Section 6.1 have been tentatively made as if this
Section 6.1(d)(v) were not in this Agreement.
(vi) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must
be allocated in a different ratio to satisfy the safe harbor requirements
of the Treasury Regulations promulgated under Section 704(b) of the Code,
the General Partner is authorized, upon notice to the other Partners, to
revise the prescribed ratio to the numerically closest ratio that does
satisfy such requirements.
(vii) PARTNER NONRECOURSE DEDUCTIONS. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner that bears
the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance
with Treasury Regulation Section 1.704-2(i). If more than one Partner
bears the Economic Risk of Loss with respect to a Partner Nonrecourse
Debt, such Partner Nonrecourse Deductions attributable thereto shall be
allocated between or among such Partners in accordance with the ratios in
which they share such Economic Risk of Loss.
(viii) NONRECOURSE LIABILITIES. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse
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Built-in Gain shall be allocated among the Partners in accordance with
their respective Percentage Interests.
(ix) CODE SECTION 754 ADJUSTMENTS. To the extent an adjustment to
the adjusted tax basis of any Partnership asset pursuant to
Section 734(b) or 743(c) of the Code is required, pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in
determining Capital Accounts, the amount of such adjustment to the
Capital Accounts shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases
such basis), and such item of gain or loss shall be specially allocated
to the Partners in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of
the Treasury Regulations.
(x) ECONOMIC UNIFORMITY. At the election of the General Partner
with respect to any taxable period ending upon, or after, the termination
of the Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking
into account allocations pursuant to Section 6.1(d)(iii), shall be
allocated 100% to each Partner holding Subordinated Units that are
Outstanding as of the termination of the Subordination Period ("Final
Subordinated Units") in the proportion of the number of Final
Subordinated Units held by such Partner to the total number of Final
Subordinated Units then Outstanding, until each such Partner has been
allocated an amount of gross income or gain which increases the Capital
Account maintained with respect to such Final Subordinated Units to an
amount equal to the product of (A) the number of Final Subordinated Units
held by such Partner and (B) the Per Unit Capital Amount for a Common
Unit. The purpose of this allocation is to establish uniformity between
the Capital Accounts underlying Final Subordinated Units and the Capital
Accounts underlying Common Units held by Persons other than the General
Partner and its Affiliates immediately prior to the conversion of such
Final Subordinated Units into Common Units. This allocation method for
establishing such economic uniformity will only be available to the
General Partner if the method for allocating the Capital Account
maintained with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to Section 5.5(c)(ii) does not
otherwise provide such economic uniformity to the Final Subordinated
Units.
(xi) CURATIVE ALLOCATION.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be
taken into account in making the Agreed Allocations so that, to the
extent possible, the net amount of items of income, gain, loss and
deduction allocated to each Partner pursuant to the Required
Allocations and the Agreed Allocations, together, shall be equal to
the net amount of such items that would have been allocated to each
such Partner under the Agreed Allocations had the Required
Allocations and the related Curative Allocation not otherwise been
provided in this Section 6.1. Notwithstanding the preceding sentence,
Required Allocations relating to (1) Nonrecourse Deductions shall not
be taken into account except to the extent that there has been a
decrease in Partnership Minimum Gain and (2) Partner Nonrecourse
Deductions shall not be taken into account except to the extent that
there has been a decrease in Partner Nonrecourse Debt Minimum Gain.
Allocations pursuant to this Section 6.1(d)(xi)(A) shall only be made
with respect to Required Allocations to the extent the General
Partner reasonably determines that such allocations will otherwise be
inconsistent with the economic agreement among the Partners. Further,
allocations pursuant to this Section 6.1(d)(xi)(A) shall be deferred
with respect to allocations pursuant to clauses (1) and (2) hereof to
the extent the General Partner reasonably determines that such
allocations are likely to be offset by subsequent Required
Allocations.
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(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of
Section 6.1(d)(xi)(A) in whatever order is most likely to minimize
the economic distortions that might otherwise result from the
Required Allocations, and (2) divide all allocations pursuant to
Section 6.1(d)(xi)(A) among the Partners in a manner that is likely
to minimize such economic distortions.
(xii) CORRECTIVE ALLOCATIONS. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event or any
recognition of a Net Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof), the General Partner
shall allocate additional items of gross income and gain away from
the holders of Incentive Distribution Rights to the Unitholders and
the General Partner, or additional items of deduction and loss away
from the Unitholders and the General Partner to the holders of
Incentive Distribution Rights, to the extent that the Additional Book
Basis Derivative Items allocated to the Unitholders or the General
Partner exceed their Share of Additional Book Basis Derivative Items.
For this purpose, the Unitholders and the General Partner shall be
treated as being allocated Additional Book Basis Derivative Items to
the extent that such Additional Book Basis Derivative Items have
reduced the amount of income that would otherwise have been allocated
to the Unitholders or the General Partner under the Partnership
Agreement (e.g., Additional Book Basis Derivative Items taken into
account in computing cost of goods sold would reduce the amount of
book income otherwise available for allocation among the Partners).
Any allocation made pursuant to this Section 6.1(d)(xii)(A) shall be
made after all of the other Agreed Allocations have been made as if
this Section 6.1(d)(xii) were not in this Agreement and, to the
extent necessary, shall require the reallocation of items that have
been allocated pursuant to such other Agreed Allocations.
(B) In the case of any negative adjustments to the Capital
Accounts of the Partners resulting from a Book-Down Event or from the
recognition of a Net Termination Loss, such negative adjustment
(1) shall first be allocated, to the extent of the Aggregate
Remaining Net Positive Adjustments, in such a manner, as reasonably
determined by the General Partner, that to the extent possible the
aggregate Capital Accounts of the Partners will equal the amount
which would have been the Capital Account balance of the Partners if
no prior Book-Up Events had occurred, and (2) any negative adjustment
in excess of the Aggregate Remaining Net Positive Adjustments shall
be allocated pursuant to Section 6.1(c) hereof.
(C) In making the allocations required under this
Section 6.1(d)(xii), the General Partner, in its sole discretion, may
apply whatever conventions or other methodology it deems reasonable
to satisfy the purpose of this Section 6.1(d)(xii).
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Section 6.2 ALLOCATIONS FOR TAX PURPOSES.
(a) Except as otherwise provided herein, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated
among the Partners in the same manner as its correlative item of "book"
income, gain, loss or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated
for federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the Partners in the manner
provided under Section 704(c) of the Code that takes into account the
variation between the Agreed Value of such property and its adjusted
basis at the time of contribution; and (B) any item of Residual Gain or
Residual Loss attributable to a Contributed Property shall be allocated
among the Partners in the same manner as its correlative item of "book"
gain or loss is allocated pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall
(1) first, be allocated among the Partners in a manner consistent with
the principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and
(2) second, in the event such property was originally a Contributed
Property, be allocated among the Partners in a manner consistent with
Section 6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or
loss is allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to
(i) adopt such conventions as it deems appropriate in determining the amount
of depreciation, amortization and cost recovery deductions; (ii) make
special allocations for federal income tax purposes of income (including,
without limitation, gross income) or deductions; and (iii) amend the
provisions of this Agreement as appropriate (x) to reflect the proposal or
promulgation of Treasury Regulations under Section 704(b) or Section 704(c)
of the Code or (y) otherwise to preserve or achieve uniformity of the
Limited Partner Interests (or any class or classes thereof). The General
Partner may adopt such conventions, make such allocations and make such
amendments to this Agreement as provided in this Section 6.2(c) only if such
conventions, allocations or amendments would not have a material adverse
effect on the Partners, the holders of any class or classes of Limited
Partner Interests issued and Outstanding or the Partnership, and if such
allocations are consistent with the principles of Section 704 of the Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate
derived from the depreciation or amortization method and useful life applied
to the Partnership's common basis of such property, despite any
inconsistency of such approach with Treasury Regulation
Section 1.167(c)-l(a)(6) or any successor regulations thereto. If the
General Partner determines that such reporting position cannot reasonably be
taken, the General Partner may adopt depreciation and amortization
conventions under which all purchasers acquiring Limited Partner Interests
in the same month would receive depreciation and amortization deductions,
based upon the same applicable rate as if they had purchased a direct
interest in the Partnership's property. If the General Partner chooses not
to utilize such aggregate method, the
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General Partner may use any other reasonable depreciation and amortization
conventions to preserve the uniformity of the intrinsic tax characteristics
of any Limited Partner Interests that would not have a material adverse
effect on the Limited Partners or the Record Holders of any class or classes
of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this
Section 6.2, be characterized as Recapture Income in the same proportions
and to the same extent as such Partners (or their predecessors in interest)
have been allocated any deductions directly or indirectly giving rise to the
treatment of such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by
the Partnership for federal income tax purposes and allocated to the
Partners in accordance with the provisions hereof shall be determined
without regard to any election under Section 754 of the Code which may be
made by the Partnership; provided, however, that such allocations, once
made, shall be adjusted as necessary or appropriate to take into account
those adjustments permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction shall for
federal income tax purposes, be determined on an annual basis and prorated
on a monthly basis and shall be allocated to the Partners as of the opening
of the New York Stock Exchange on the first Business Day of each month;
provided, however, that (i) such items for the period beginning on the
Closing Date and ending on the last day of the month in which the Option
Closing Date or the expiration of the Over-allotment Option occurs shall be
allocated to the Partners as of the opening of the New York Stock Exchange
on the first Business Day of the next succeeding month; and provided,
further, that gain or loss on a sale or other disposition of any assets of
the Partnership or any other extraordinary item of income or loss realized
and recognized other than in the ordinary course of business, as determined
by the General Partner in its sole discretion, shall be allocated to the
Partners as of the opening of the New York Stock Exchange on the first
Business Day of the month in which such gain or loss is recognized for
federal income tax purposes. The General Partner may revise, alter or
otherwise modify such methods of allocation as it determines necessary or
appropriate in its sole discretion, to the extent permitted or required by
Section 706 of the Code and the regulations or rulings promulgated
thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under
the provisions of this Article VI shall instead be made to the beneficial
owner of Limited Partner Interests held by a nominee in any case in which
the nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable
to the General Partner in its sole discretion.
Section 6.3 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS;
DISTRIBUTIONS TO RECORD HOLDERS.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on June 30, 2002, an amount equal to 100% of Available Cash
with respect to such Quarter shall, subject to Section 17-607 of the
Delaware Act, be distributed in accordance with this Article VI by the
Partnership to the Partners as of the Record Date selected by the General
Partner in its reasonable discretion. All amounts of Available Cash
distributed by the Partnership on any date from any source shall be deemed
to be Operating Surplus until the sum of all amounts of Available Cash
theretofore distributed by the Partnership to the Partners pursuant to
Section 6.4 equals the Operating Surplus from the Closing Date through the
close of the immediately preceding Quarter. Any remaining amounts of
Available Cash distributed by the Partnership on such date shall, except as
otherwise provided in Section 6.5, be deemed to be "Capital Surplus." All
distributions required to be made under this Agreement shall be made subject
to Section 17-607 of the Delaware Act.
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(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii) of the definition of Available Cash, shall be applied
and distributed solely in accordance with, and subject to the terms and
conditions of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by
the Partnership on behalf of, or amounts withheld with respect to, all or
less than all of the Partners, as a distribution of Available Cash to such
Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid
by the Partnership, directly or through the Transfer Agent or through any
other Person or agent, only to the Record Holder of such Partnership
Interest as of the Record Date set for such distribution. Such payment shall
constitute full payment and satisfaction of the Partnership's liability in
respect of such payment, regardless of any claim of any Person who may have
an interest in such payment by reason of an assignment or otherwise.
Section 6.4 DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS.
(a) During Subordination Period. Available Cash with respect to any
Quarter within the Subordination Period that is deemed to be Operating
Surplus pursuant to the provisions of Section 6.3 or 6.5 shall, subject to
Section 17-607 of the Delaware Act, be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 98% to the Unitholders holding Common Units, Pro Rata, and
2% to the General Partner, until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Minimum
Quarterly Distribution for such Quarter;
(ii) Second, 98% to the Unitholders holding Common Units, Pro Rata,
and 2% to the General Partner, until there has been distributed in
respect of each Common Unit then Outstanding an amount equal to the
Cumulative Common Unit Arrearage existing with respect to such Quarter;
(iii) Third, 98% to the Unitholders holding Subordinated Units, Pro
Rata, and 2% to the General Partner, until there has been distributed in
respect of each Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(iv) Fourth, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 85% to all Unitholders, Pro Rata, 13% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(vi) Sixth, 75% to all Unitholders, Pro Rata, 23% to the holders of
the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(vii) Thereafter, 50% to all Unitholders, Pro Rata, 48% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner;
PROVIDED, HOWEVER, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target
Distribution have been reduced to zero pursuant to the
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second sentence of Section 6.6(a), the distribution of Available Cash that
is deemed to be Operating Surplus with respect to any Quarter will be made
solely in accordance with Section 6.4(a)(vii).
(b) After Subordination Period. Available Cash with respect to any
Quarter after the Subordination Period that is deemed to be Operating
Surplus pursuant to the provisions of Section 6.3 or 6.5, subject to
Section 17-607 of the Delaware Act, shall be distributed as follows, except
as otherwise required by Section 5.6(b) in respect of additional Partnership
Securities issued pursuant thereto:
(i) First, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for
such Quarter;
(ii) Second, 98% to all Unitholders, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 85% to all Unitholders, Pro Rata, and 13% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(iv) Fourth, 75% to all Unitholders Pro Rata, and 23% to the holders
of the Incentive Distribution Rights, Pro Rata, and 2% to the General
Partner, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(v) Thereafter, 50% to all Unitholders, Pro Rata, and 48% to the
holders of the Incentive Distribution Rights, Pro Rata, and 2% to the
General Partner;
PROVIDED, HOWEVER, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target
Distribution have been reduced to zero pursuant to the second sentence of
Section 6.6(a), the distribution of Available Cash that is deemed to be
Operating Surplus with respect to any Quarter will be made solely in
accordance with Section 6.4(b)(v).
Section 6.5 DISTRIBUTIONS OF AVAILABLE CASH FROM CAPITAL SURPLUS.
Available Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall, subject to Section 17-607 of the Delaware
Act, be distributed, unless the provisions of Section 6.3 require otherwise, 98%
to all Unitholders, Pro Rata, and 2% to the General Partner, until a
hypothetical holder of a Common Unit acquired on the Closing Date has received
with respect to such Common Unit, during the period since the Closing Date
through such date, distributions of Available Cash that are deemed to be Capital
Surplus in an aggregate amount equal to the Initial Unit Price. Available Cash
that is deemed to be Capital Surplus shall then be distributed 98% to all
Unitholders holding Common Units, Pro Rata, and 2% to the General Partner, until
there has been distributed in respect of each Common Unit then Outstanding an
amount equal to the Cumulative Common Unit Arrearage. Thereafter, all Available
Cash shall be distributed as if it were Operating Surplus and shall be
distributed in accordance with Section 6.4.
Section 6.6 ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET
DISTRIBUTION LEVELS.
(a) The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution, Third Target Distribution, Common Unit
Arrearages and Cumulative Common Unit
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Arrearages shall be proportionately adjusted in the event of any
distribution, combination or subdivision (whether effected by a distribution
payable in Units or otherwise) of Units or other Partnership Securities in
accordance with Section 5.10. In the event of a distribution of Available
Cash that is deemed to be from Capital Surplus, the then applicable Minimum
Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, shall be adjusted
proportionately downward to equal the product obtained by multiplying the
otherwise applicable Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution, as
the case may be, by a fraction of which the numerator is the Unrecovered
Capital of the Common Units immediately after giving effect to such
distribution and of which the denominator is the Unrecovered Capital of the
Common Units immediately prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution and Third Target Distribution, shall also be
subject to adjustment pursuant to Section 6.9.
Section 6.7 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF SUBORDINATED
UNITS.
(a) Except with respect to the right to vote on or approve matters
requiring the vote or approval of a percentage of the holders of Outstanding
Common Units and the right to participate in allocations of income, gain,
loss and deduction and distributions made with respect to Common Units, the
holder of a Subordinated Unit shall have all of the rights and obligations
of a Unitholder holding Common Units hereunder; provided, however, that
immediately upon the conversion of Subordinated Units into Common Units
pursuant to Section 5.8, the Unitholder holding a Subordinated Unit shall
possess all of the rights and obligations of a Unitholder holding Common
Units hereunder, including the right to vote as a Common Unitholder and the
right to participate in allocations of income, gain, loss and deduction and
distributions made with respect to Common Units; provided, however, that
such converted Subordinated Units shall remain subject to the provisions of
Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into
a Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer
its converted Subordinated Units to a Person which is not an Affiliate of
the holder until such time as the General Partner determines, based on
advice of counsel, that a converted Subordinated Unit should have, as a
substantive matter, like intrinsic economic and federal income tax
characteristics, in all material respects, to the intrinsic economic and
federal income tax characteristics of an Initial Common Unit. In connection
with the condition imposed by this Section 6.7(b), the General Partner may
take whatever reasonable steps are required to provide economic uniformity
to the converted Subordinated Units in preparation for a transfer of such
converted Subordinated Units, including the application of Sections
5.5(c)(ii) and 6.1(d)(x); provided, however, that no such steps may be taken
that would have a material adverse effect on the Unitholders holding Common
Units represented by Common Unit Certificates.
Section 6.8 SPECIAL PROVISIONS RELATING TO THE HOLDERS OF INCENTIVE
DISTRIBUTION RIGHTS.
Notwithstanding anything to the contrary set forth in this Agreement, the
holders of the Incentive Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a Limited Partner
pursuant to Articles III and VII and (ii) have a Capital Account as a Partner
pursuant to Section 5.5 and all other provisions related thereto and (b) shall
not (i) be entitled to vote on any matters requiring the approval or vote of the
holders of Outstanding Units, (ii) be entitled to any distributions other than
as provided in Sections 6.4(a)(v), (vi) and (vii), 6.4(b)(iii), (iv) and (v),
and 12.4 or (iii) be allocated items of income, gain, loss or deduction other
than as specified in this Article VI.
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Section 6.9 ENTITY-LEVEL TAXATION.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes a Group Member to
be treated as an association taxable as a corporation or otherwise subjects a
Group Member to entity-level taxation for federal, state or local income tax
purposes, the then applicable Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution, shall be
adjusted to equal the product obtained by multiplying (a) the amount thereof by
(b) one minus the sum of (i) the highest marginal federal corporate (or other
entity, as applicable) income tax rate of the Group Member for the taxable year
of the Group Member in which such Quarter occurs (expressed as a percentage)
plus (ii) the effective overall state and local income tax rate (expressed as a
percentage) applicable to the Group Member for the calendar year next preceding
the calendar year in which such Quarter occurs (after taking into account the
benefit of any deduction allowable for federal income tax purposes with respect
to the payment of state and local income taxes), but only to the extent of the
increase in such rates resulting from such legislation or interpretation. Such
effective overall state and local income tax rate shall be determined for the
taxable year next preceding the first taxable year during which the Group Member
is taxable for federal income tax purposes as an association taxable as a
corporation or is otherwise subject to entity-level taxation by determining such
rate as if the Group Member had been subject to such state and local taxes
during such preceding taxable year.
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1 MANAGEMENT.
(a) The General Partner shall conduct, direct and manage all activities
of the Partnership. Except as otherwise expressly provided in this
Agreement, all management powers over the business and affairs of the
Partnership shall be exclusively vested in the General Partner, and no
Limited Partner or Assignee shall have any management power over the
business and affairs of the Partnership. In addition to the powers now or
hereafter granted a general partner of a limited partnership under
applicable law or which are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to Section 7.3,
shall have full power and authority to do all things and on such terms as
it, in its sole discretion, may deem necessary or appropriate to conduct the
business of the Partnership, to exercise all powers set forth in
Section 2.5 and to effectuate the purposes set forth in Section 2.4,
including the following:
(i) the making of any expenditures, the lending or borrowing of
money, the assumption or guarantee of, or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness, including indebtedness that is convertible into Partnership
Securities, and the incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership
or the merger or other combination of the Partnership with or into
another Person (the matters described in this clause (iii) being subject,
however, to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on
hand) for any purpose consistent with the terms of this Agreement,
including the financing of the conduct of the operations of the
Partnership Group; subject to Section 7.6(a), the lending of funds to
other
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Persons (including the Operating Partnership), the repayment of
obligations of the Partnership Group and the making of capital
contributions to any member of the Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the
contract to have no recourse against the General Partner or its assets
other than its interest in the Partnership, even if same results in the
terms of the transaction being less favorable to the Partnership than
would otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms
of employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited
or general partnerships, joint ventures, corporations, limited liability
companies or other relationships (including the acquisition of interests
in, and the contributions of property to, the Operating Partnership from
time to time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations
of the Partnership, including the bringing and defending of actions at
law or in equity and otherwise engaging in the conduct of litigation and
the incurring of legal expense and the settlement of claims and
litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited
Partner Interests from, or requesting that trading be suspended on, any
such exchange (subject to any prior approval that may be required under
Section 4.8);
(xiii) unless restricted or prohibited by Section 5.7, the purchase,
sale or other acquisition or disposition of Partnership Securities, or
the issuance of additional options, rights, warrants and appreciation
rights relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the
Partnership's participation in the Operating Partnership or any other
subsidiary of the Partnership as a member or partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and the Assignees and each other Person who
may acquire an interest in Partnership Securities hereby (i) approves,
ratifies and confirms the execution, delivery and performance by the parties
thereto of the Operating Partnership Agreement, the Underwriting Agreement,
the Omnibus Agreement, the Contribution Agreement and the other agreements
described in or filed as exhibits to the Registration Statement that are
related to the transactions contemplated by the Registration Statement;
(ii) agrees that the General Partner (on its own or through any officer of
the Partnership) is authorized to execute, deliver and perform the
agreements referred to in clause (i) of this sentence and the other
agreements, acts, transactions and matters described in or
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contemplated by the Registration Statement on behalf of the Partnership
without any further act, approval or vote of the Partners or the Assignees
or the other Persons who may acquire an interest in Partnership Securities;
and (iii) agrees that the execution, delivery or performance by the General
Partner, any Group Member or any Affiliate of any of them, of this Agreement
or any agreement authorized or permitted under this Agreement (including the
exercise by the General Partner or any Affiliate of the General Partner of
the rights accorded pursuant to Article XV), shall not constitute a breach
by the General Partner of any duty that the General Partner may owe the
Partnership or the Limited Partners or any other Persons under this
Agreement (or any other agreements) or of any duty stated or implied by law
or equity.
Section 7.2 CERTIFICATE OF LIMITED PARTNERSHIP.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act. The General Partner shall use all reasonable efforts to cause to
be filed such other certificates or documents as may be determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate for the formation, continuation, qualification and operation of a
limited partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware or any other state in which the Partnership
may elect to do business or own property. To the extent that such action is
determined by the General Partner in its sole discretion to be reasonable and
necessary or appropriate, the General Partner shall file amendments to and
restatements of the Certificate of Limited Partnership and do all things to
maintain the Partnership as a limited partnership (or a partnership or other
entity in which the limited partners have limited liability) under the laws of
the State of Delaware or of any other state in which the Partnership may elect
to do business or own property. Subject to the terms of Section 3.4(a), the
General Partner shall not be required, before or after filing, to deliver or
mail a copy of the Certificate of Limited Partnership, any qualification
document or any amendment thereto to any Limited Partner.
Section 7.3 RESTRICTIONS ON THE GENERAL PARTNER'S AUTHORITY.
(a) The General Partner may not, without written approval of the
specific act by holders of all of the Outstanding Limited Partner Interests
or by other written instrument executed and delivered by holders of all of
the Outstanding Limited Partner Interests subsequent to the date of this
Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the
Partnership; (ii) possessing Partnership property, or assigning any rights
in specific Partnership property, for other than a Partnership purpose;
(iii) admitting a Person as a Partner; (iv) amending this Agreement in any
manner; or (v) transferring its interest as a general partner of the
Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may
not sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions (including by way of merger, consolidation or other
combination) or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Partnership without the approval of holders of a Unit Majority; provided
however that this provision shall not preclude or limit the General
Partner's ability to mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of the assets of the Partnership or the
Operating Partnership and shall not apply to any forced sale of any or all
of the assets of the Partnership or the Operating Partnership pursuant to
the foreclosure of, or other realization upon, any such encumbrance. Without
the approval of holders of a Unit Majority, the General Partner shall not,
on behalf of the Partnership, (i) consent to any amendment to the Operating
Partnership Agreement or, except as expressly permitted by Section 7.9(d),
take any action permitted to be taken by a partner of the Operating
Partnership, in either case, that would
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adversely affect the Limited Partners (including any particular class of
Partnership Interests as compared to any other class of Partnership
Interests) in any material respect or (ii) except as permitted under
Sections 4.6, 11.1 and 11.2, elect or cause the Partnership to elect a
successor general partner of the Partnership.
Section 7.4 REIMBURSEMENT OF THE GENERAL PARTNER.
(a) Except as provided in this Section 7.4 and elsewhere in this
Agreement, the General Partner shall not be compensated for its services as
a general partner or managing member of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments
it makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person including Affiliates of
the General Partner to perform services for the Partnership or for the
General Partner in the discharge of its duties to the Partnership), and
(ii) all other necessary or appropriate expenses allocable to the
Partnership or otherwise reasonably incurred by the General Partner in
connection with operating the Partnership's business (including expenses
allocated to the General Partner by its Affiliates). The General Partner
shall determine the expenses that are allocable to the Partnership in any
reasonable manner determined by the General Partner in its sole discretion.
Reimbursements pursuant to this Section 7.4 shall be in addition to any
reimbursement to the General Partner as a result of indemnification pursuant
to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion
and without the approval of the Limited Partners (who shall have no right to
vote in respect thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Partnership
Securities or options to purchase Partnership Securities), or cause the
Partnership to issue Partnership Securities in connection with, or pursuant
to, any employee benefit plan, employee program or employee practice
maintained or sponsored by the General Partner or any of its Affiliates, in
each case for the benefit of employees of the General Partner, any Group
Member or any Affiliate, or any of them, in respect of services performed,
directly or indirectly, for the benefit of the Partnership Group. The
Partnership agrees to issue and sell to the General Partner or any of its
Affiliates any Partnership Securities that the General Partner or such
Affiliates are obligated to provide to any employees pursuant to any such
employee benefit plans, employee programs or employee practices. Expenses
incurred by the General Partner in connection with any such plans, programs
and practices (including the net cost to the General Partner or such
Affiliates of Partnership Securities purchased by the General Partner or
such Affiliates from the Partnership to fulfill options or awards under such
plans, programs and practices) shall be reimbursed in accordance with
Section 7.4(b). Any and all obligations of the General Partner under any
employee benefit plans, employee programs or employee practices adopted by
the General Partner as permitted by this Section 7.4(c) shall constitute
obligations of the General Partner hereunder and shall be assumed by any
successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner's General Partner
Interest pursuant to Section 4.6.
Section 7.5 OUTSIDE ACTIVITIES.
(a) After the Closing Date, the General Partner, for so long as it is
the General Partner of the Partnership (i) agrees that its sole business
will be to act as a general partner or managing member, as the case may be,
of the Partnership and any other partnership or limited liability company of
which the Partnership or the Operating Partnership is, directly or
indirectly, a partner or member and to undertake activities that are
ancillary or related thereto (including being a
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limited partner in the Partnership), (ii) except to the extent permitted in
the Omnibus Agreement, shall not engage in any business or activity or incur
any debts or liabilities except in connection with or incidental to (A) its
performance as general partner of one or more Group Members or as described
in or contemplated by the Registration Statement, (B) the acquiring, owning
or disposing of debt or equity securities in any Group Member or (C) the
operation, maintenance and administration of the Retained Assets and the
businesses conducted by or related to them and (iii) except to the extent
permitted in the Omnibus Agreement, shall not, and shall cause its
Affiliates not to, engage in any Restricted Business.
(b) Dynegy Inc. and certain of its Affiliates have entered into the
Omnibus Agreement with the General Partner, the Partnership and the
Operating Partnership, which agreement sets forth certain restrictions on
the ability of Dynegy Inc. and its Affiliates to engage in Restricted
Businesses.
(c) Except as specifically restricted by Section 7.5(a) and the Omnibus
Agreement, each Indemnitee (other than the General Partner) shall have the
right to engage in businesses of every type and description and other
activities for profit and to engage in and possess an interest in other
business ventures of any and every type or description, whether in
businesses engaged in or anticipated to be engaged in by any Group Member,
independently or with others, including business interests and activities in
direct competition with the business and activities of any Group Member, and
none of the same shall constitute a breach of this Agreement or any duty
express or implied by law to any Group Member or any Partner or Assignee.
Neither any Group Member, any Limited Partner nor any other Person shall
have any rights by virtue of this Agreement, the Operating Partnership
Agreement or the partnership relationship established hereby or thereby in
any business ventures of any Indemnitee.
(d) Subject to the terms of Section 7.5(a), Section 7.5(b),
Section 7.5(c) and the Omnibus Agreement, but otherwise notwithstanding
anything to the contrary in this Agreement, (i) the engaging in competitive
activities by any Indemnitees (other than the General Partner) in accordance
with the provisions of this Section 7.5 is hereby approved by the
Partnership and all Partners, (ii) it shall be deemed not to be a breach of
the General Partner's fiduciary duty or any other obligation of any type
whatsoever of the General Partner for the Indemnitees (other than the
General Partner) to engage in such business interests and activities in
preference to or to the exclusion of the Partnership and (iii) except as set
forth in the Omnibus Agreement, the General Partner and the Indemnitees
shall have no obligation to present business opportunities to the
Partnership.
(e) The General Partner and any of its Affiliates may acquire Units or
other Partnership Securities in addition to those acquired on the Closing
Date and, except as otherwise provided in this Agreement, shall be entitled
to exercise all rights of the General Partner or Limited Partner, as
applicable, relating to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 7.5(a) and
Section 7.5(e) with respect to the General Partner shall not include any
Group Member or any Subsidiary of the Group Member.
(g) Anything in this Agreement to the contrary notwithstanding, to the
extent that provisions of Sections 7.7, 7.8, 7.9, 7.10 or other Sections of
this Agreement purport or are interpreted to have the effect of restricting
the fiduciary duties that might otherwise, as a result of Delaware or other
applicable law, be owed by the General Partner to the Partnership and its
Limited Partners, or to constitute a waiver or consent by the Limited
Partners to any such restriction, such provisions shall be inapplicable and
have no effect in determining whether the General Partner has complied with
its fiduciary duties in connection with determinations made by it under this
Section 7.5.
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Section 7.6 LOANS FROM THE GENERAL PARTNER; LOANS OR CONTRIBUTIONS FROM THE
PARTNERSHIP; CONTRACTS WITH AFFILIATES; CERTAIN RESTRICTIONS ON THE GENERAL
PARTNER.
(a) The General Partner or any of its Affiliates may lend to any Group
Member, and any Group Member may borrow from the General Partner or any of
its Affiliates, funds needed or desired by the Group Member for such periods
of time and in such amounts as the General Partner may determine; provided,
however, that in any such case the lending party may not charge the
borrowing party interest at a rate greater than the rate that would be
charged the borrowing party or impose terms less favorable to the borrowing
party than would be charged or imposed on the borrowing party by unrelated
lenders on comparable loans made on an arm's-length basis (without reference
to the lending party's financial abilities or guarantees). The borrowing
party shall reimburse the lending party for any costs (other than any
additional interest costs) incurred by the lending party in connection with
the borrowing of such funds. For purposes of this Section 7.6(a) and
Section 7.6(b), the term "Group Member" shall include any Affiliate of a
Group Member that is controlled by the Group Member. No Group Member may
lend funds to the General Partner or any of its Affiliates (other than
another Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided,
however, that the Partnership may not charge the Group Member interest at a
rate less than the rate that would be charged to the Group Member (without
reference to the General Partner's financial abilities or guarantees) by
unrelated lenders on comparable loans. The foregoing authority shall be
exercised by the General Partner in its sole discretion and shall not create
any right or benefit in favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with
any of its Affiliates to, render services to a Group Member or to the
General Partner in the discharge of its duties as General Partner of the
Partnership. Any services rendered to a Group Member by the General Partner
or any of its Affiliates shall be on terms that are fair and reasonable to
the Partnership; provided, however, that the requirements of this
Section 7.6(c) shall be deemed satisfied as to (i) any transaction approved
by Special Approval, (ii) any transaction, the terms of which are no less
favorable to the Partnership Group than those generally being provided to or
available from unrelated third parties or (iii) any transaction that, taking
into account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership Group), is equitable to the Partnership
Group. The provisions of Section 7.4 shall apply to the rendering of
services described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and
applicable law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that
are fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 7.6(e) shall be deemed to be satisfied as to
(i) the transactions effected pursuant to Sections 5.2 and 5.3, the
Contribution Agreement and any other transactions described in or
contemplated by the Registration Statement, (ii) any transaction approved by
Special Approval, (iii) any transaction, the terms of which are no less
favorable to the Partnership than those generally being provided to or
available from unrelated third parties, or (iv) any transaction that, taking
into account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the
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Partnership), is equitable to the Partnership. With respect to any
contribution of assets to the Partnership in exchange for Partnership
Securities, the Conflicts Committee, in determining whether the appropriate
number of Partnership Securities are being issued, may take into account,
among other things, the fair market value of the assets, the liquidated and
contingent liabilities assumed, the tax basis in the assets, the extent to
which tax-only allocations to the transferor will protect the existing
partners of the Partnership against a low tax basis, and such other factors
as the Conflicts Committee deems relevant under the circumstances.
(f) The General Partner and its Affiliates will have no obligation to
permit any Group Member to use any facilities or assets of the General
Partner and its Affiliates, except as may be provided in contracts entered
into from time to time specifically dealing with such use, nor shall there
be any obligation on the part of the General Partner or its Affiliates to
enter into such contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of
the conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
Section 7.7 INDEMNIFICATION.
(a) To the fullest extent permitted by law but subject to the
limitations expressly provided in this Agreement, all Indemnitees shall be
indemnified and held harmless by the Partnership from and against any and
all losses, claims, damages, liabilities, joint or several, expenses
(including legal fees and expenses), judgments, fines, penalties, interest,
settlements or other amounts arising from any and all claims, demands,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, in which any Indemnitee may be involved, or is threatened to
be involved, as a party or otherwise, by reason of its status as an
Indemnitee; provided, that in each case the Indemnitee acted in good faith
and in a manner that such Indemnitee reasonably believed to be in, or (in
the case of a Person other than the General Partner) not opposed to, the
best interests of the Partnership and, with respect to any criminal
proceeding, had no reasonable cause to believe its conduct was unlawful;
provided, further, no indemnification pursuant to this Section 7.7 shall be
available to the General Partner with respect to its obligations incurred
pursuant to the Underwriting Agreement, the Omnibus Agreement or the
Contribution Agreement (other than obligations incurred by the General
Partner on behalf of the Partnership). The termination of any action, suit
or proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere, or its equivalent, shall not create a presumption that the
Indemnitee acted in a manner contrary to that specified above. Any
indemnification pursuant to this Section 7.7 shall be made only out of the
assets of the Partnership, it being agreed that the General Partner shall
not be personally liable for such indemnification and shall have no
obligation to contribute or loan any monies or property to the Partnership
to enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal
fees and expenses) incurred by an Indemnitee who is indemnified pursuant to
Section 7.7(a) in defending any claim, demand, action, suit or proceeding
shall, from time to time, be advanced by the Partnership prior to the final
disposition of such claim, demand, action, suit or proceeding upon receipt
by the Partnership of any undertaking by or on behalf of the Indemnitee to
repay such amount if it shall be determined that the Indemnitee is not
entitled to be indemnified as authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in
addition to any other rights to which an Indemnitee may be entitled under
any agreement, pursuant to any vote of the holders of Outstanding Limited
Partner Interests, as a matter of law or otherwise, both as to actions in
the Indemnitee's capacity as an Indemnitee and as to actions in any other
capacity (including any capacity under the Underwriting Agreement), and
shall continue as to an Indemnitee who has
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ceased to serve in such capacity and shall inure to the benefit of the
heirs, successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the
General Partner, its Affiliates and such other Persons as the General
Partner shall determine, against any liability that may be asserted against
or expense that may be incurred by such Person in connection with the
Partnership's activities or such Person's activities on behalf of the
Partnership, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit
plan whenever the performance by it of its duties to the Partnership also
imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable
law shall constitute "fines" within the meaning of Section 7.7(a); and
action taken or omitted by it with respect to any employee benefit plan in
the performance of its duties for a purpose reasonably believed by it to be
in the interest of the participants and beneficiaries of the plan shall be
deemed to be for a purpose which is in, or not opposed to, the best
interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to
personal liability by reason of the indemnification provisions set forth in
this Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in
part under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right
of any past, present or future Indemnitee to be indemnified by the
Partnership, nor the obligations of the Partnership to indemnify any such
Indemnitee under and in accordance with the provisions of this Section 7.7
as in effect immediately prior to such amendment, modification or repeal
with respect to claims arising from or relating to matters occurring, in
whole or in part, prior to such amendment, modification or repeal,
regardless of when such claims may arise or be asserted.
Section 7.8 LIABILITY OF INDEMNITEES.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, no Indemnitee shall be liable for monetary damages to the
Partnership, the Limited Partners, the Assignees or any other Persons who
have acquired interests in the Partnership Securities, for losses sustained
or liabilities incurred as a result of any act or omission if such
Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth
in Section 7.1(a), the General Partner may exercise any of the powers
granted to it by this Agreement and perform any of the duties imposed upon
it hereunder either directly or by or through its agents, and the General
Partner shall not be responsible for any misconduct or negligence on the
part of any such agent appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the
Partnership or to the Partners, the General Partner and any other Indemnitee
acting in connection with the Partnership's business or affairs shall not
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be liable to the Partnership or to any Partner for its good faith reliance
on the provisions of this Agreement. The provisions of this Agreement, to
the extent that they restrict or otherwise modify the duties and liabilities
of an Indemnitee otherwise existing at law or in equity, are agreed by the
Partners to replace such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect
the limitations on the liability to the Partnership, the Limited Partners,
the General Partner, and the Partnership's and General Partner's directors,
officers and employees under this Section 7.8 as in effect immediately prior
to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise
or be asserted.
Section 7.9 RESOLUTION OF CONFLICTS OF INTEREST.
(a) Unless otherwise expressly provided in this Agreement or the
Operating Partnership Agreement, whenever a potential conflict of interest
exists or arises between the General Partner or any of its Affiliates, on
the one hand, and the Partnership, the Operating Partnership, any Partner or
any Assignee, on the other, any resolution or course of action by the
General Partner or its Affiliates in respect of such conflict of interest
shall be permitted and deemed approved by all Partners, and shall not
constitute a breach of this Agreement, of the Operating Partnership
Agreement, of any agreement contemplated herein or therein, or of any duty
stated or implied by law or equity, if the resolution or course of action
is, or by operation of this Agreement is deemed to be, fair and reasonable
to the Partnership. The General Partner shall be authorized but not required
in connection with its resolution of such conflict of interest to seek
Special Approval of such resolution. Any such approval shall be subject to
the presumption that, in making its decision, the Conflicts Committee acted
on an informed basis, in good faith, and in the honest belief that the
action taken was in the best interests of the Partnership, and in any
proceeding brought by any Unitholder or by or on behalf of such Unitholder
or any other Unitholders or the Partnership challenging such approval, the
Person bringing or prosecuting such proceeding shall have the burden of
overcoming such presumption. Any conflict of interest and any resolution of
such conflict of interest shall be conclusively deemed fair and reasonable
to the Partnership if such conflict of interest or resolution is
(i) approved by Special Approval, (ii) on terms no less favorable to the
Partnership than those generally being provided to or available from
unrelated third parties or (iii) fair to the Partnership, taking into
account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership). The General Partner may also adopt a
resolution or course of action that has not received Special Approval. The
General Partner (including the Conflicts Committee in connection with
Special Approval) shall be authorized in connection with its determination
of what is "fair and reasonable" to the Partnership and in connection with
its resolution of any conflict of interest to consider (A) the relative
interests of any party to such conflict, agreement, transaction or situation
and the benefits and burdens relating to such interest; (B) any customary or
accepted industry practices and any customary or historical dealings with a
particular Person; (C) any applicable generally accepted accounting
practices or principles; and (D) such additional factors as the General
Partner (including the Conflicts Committee) determines in its sole
discretion to be relevant, reasonable or appropriate under the
circumstances. In any proceeding brought by any Unitholder by or on behalf
of such Unitholder or any other Unitholders or the Partnership alleging that
such a resolution by the General Partner (and not by the Conflicts
Committee, whose resolution shall be conclusive as provided above) is not
fair to the Partnership, such Unitholder shall have the burden of proof of
overcoming such conclusion. Nothing contained in this Agreement, however, is
intended to nor shall it be construed to require the General Partner
(including the Conflicts Committee) to consider the interests of any Person
other than the
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Partnership. In the absence of bad faith by the General Partner, the
resolution, action or terms so made, taken or provided by the General
Partner with respect to such matter shall not constitute a breach of this
Agreement or any other agreement contemplated herein or a breach of any
standard of care or duty imposed herein or therein or, to the extent
permitted by law, under the Delaware Act or any other law, rule or
regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion,"
that it deems "necessary or appropriate" or "necessary or advisable" or
under a grant of similar authority or latitude, except as otherwise provided
herein, the General Partner or such Affiliate shall be entitled to consider
only such interests and factors as it desires and shall have no duty or
obligation to give any consideration to any interest of, or factors
affecting, the Partnership, the Operating Partnership, any Limited Partner
or any Assignee, (ii) it may make such decision in its sole discretion
(regardless of whether there is a reference to "sole discretion" or
"discretion") unless another express standard is provided for, or (iii) in
"good faith" or under another express standard, the General Partner or such
Affiliate shall act under such express standard and shall not be subject to
any other or different standards imposed by this Agreement, the Operating
Partnership Agreement, any other agreement contemplated hereby or under the
Delaware Act or any other law, rule or regulation. In addition, any actions
taken by the General Partner or such Affiliate consistent with the standards
of "reasonable discretion" set forth in the definitions of Available Cash or
Operating Surplus shall not constitute a breach of any duty of the General
Partner to the Partnership or the Limited Partners. The General Partner
shall have no duty, express or implied, to sell or otherwise dispose of any
asset of the Partnership Group other than in the ordinary course of
business. No borrowing by any Group Member or the approval thereof by the
General Partner shall be deemed to constitute a breach of any duty of the
General Partner to the Partnership or the Limited Partners by reason of the
fact that the purpose or effect of such borrowing is directly or indirectly
to (A) enable distributions to the General Partner or its Affiliates
(including in their capacities as Limited Partners) to exceed 2% of the
total amount distributed to all partners or (B) hasten the expiration of the
Subordination Period or the conversion of any Subordinated Units into Common
Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such
transaction, arrangement or resolution shall be considered in the context of
all similar or related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of
the Partnership as a partner or member of a Group Member, to approve of
actions by the general partner or managing member of such Group Member
similar to those actions permitted to be taken by the General Partner
pursuant to this Section 7.9.
Section 7.10 OTHER MATTERS CONCERNING THE GENERAL PARTNER.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond,
debenture or other paper or document believed by it to be genuine and to
have been signed or presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons
as to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
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(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly
authorized officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement
contemplated by this Agreement and to make any decision pursuant to the
authority prescribed in this Agreement, so long as such action is reasonably
believed by the General Partner to be in, or not inconsistent with, the best
interests of the Partnership.
Section 7.11 PURCHASE OR SALE OF PARTNERSHIP SECURITIES.
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities; provided that, except as permitted pursuant to
Section 4.10, the General Partner may not cause any Group Member to purchase
Subordinated Units during the Subordination Period. As long as Partnership
Securities are held by any Group Member, such Partnership Securities shall not
be considered Outstanding for any purpose, except as otherwise provided herein.
The General Partner or any Affiliate of the General Partner may also purchase or
otherwise acquire and sell or otherwise dispose of Partnership Securities for
its own account, subject to the provisions of Articles IV and X.
Section 7.12 REGISTRATION RIGHTS OF THE GENERAL PARTNER AND ITS
AFFILIATES.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an
Affiliate of the General Partner at the date hereof notwithstanding that it
may later cease to be an Affiliate of the General Partner) holds Partnership
Securities that it desires to sell and (ii) Rule 144 of the Securities Act
(or any successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership
Securities (the "Holder") to dispose of the number of Partnership Securities
it desires to sell at the time it desires to do so without registration
under the Securities Act, then upon the request of the General Partner or
any of its Affiliates, the Partnership shall file with the Commission as
promptly as practicable after receiving such request, and use all reasonable
efforts to cause to become effective and remain effective for a period of
not less than six months following its effective date or such shorter period
as shall terminate when all Partnership Securities covered by such
registration statement have been sold, a registration statement under the
Securities Act registering the offering and sale of the number of
Partnership Securities specified by the Holder; provided, however, that the
Partnership shall not be required to effect more than three registrations
pursuant to this Section 7.12(a); and provided further, however, that if the
Conflicts Committee determines in its good faith judgment that a
postponement of the requested registration for up to six months would be in
the best interests of the Partnership and its Partners due to a pending
transaction, investigation or other event, the filing of such registration
statement or the effectiveness thereof may be deferred for up to six months,
but not thereafter. In connection with any registration pursuant to the
immediately preceding sentence, the Partnership shall promptly prepare and
file (x) such documents as may be necessary to register or qualify the
securities subject to such registration under the securities laws of such
states as the Holder shall reasonably request; provided, however, that no
such qualification shall be required in any jurisdiction where, as a result
thereof, the Partnership would become subject to general service of process
or to taxation or qualification to do business as a foreign corporation or
partnership doing business in such jurisdiction solely as a result of such
registration, and (y) such documents as may be necessary to apply for
listing or to list the Partnership Securities subject to such registration
on such National Securities Exchange as the Holder shall reasonably request,
and do any and all other acts and things that may reasonably be necessary or
advisable to enable the Holder to consummate a public sale of such
Partnership Securities in such states. Except as set forth in
Section 7.12(c), all
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costs and expenses of any such registration and offering (other than the
underwriting discounts and commissions) shall be paid by the Partnership,
without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of
the Partnership for cash (other than an offering relating solely to an
employee benefit plan), the Partnership shall use all reasonable efforts to
include such number or amount of securities held by the Holder in such
registration statement as the Holder shall request. If the proposed offering
pursuant to this Section 7.12(b) shall be an underwritten offering, then, in
the event that the managing underwriter or managing underwriters of such
offering advise the Partnership and the Holder in writing that in their
opinion the inclusion of all or some of the Holder's Partnership Securities
would adversely and materially affect the success of the offering, the
Partnership shall include in such offering only that number or amount, if
any, of securities held by the Holder which, in the opinion of the managing
underwriter or managing underwriters, will not so adversely and materially
affect the offering. Except as set forth in Section 7.12(c), all costs and
expenses of any such registration and offering (other than the underwriting
discounts and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(c) If underwriters are engaged in connection with any registration
referred to in this Section 7.12, the Partnership shall provide
indemnification, representations, covenants, opinions and other assurance to
the underwriters in form and substance reasonably satisfactory to such
underwriters. Further, in addition to and not in limitation of the
Partnership's obligation under Section 7.7, the Partnership shall, to the
fullest extent permitted by law, indemnify and hold harmless the Holder, its
officers, directors and each Person who controls the Holder (within the
meaning of the Securities Act) and any agent thereof (collectively,
"Indemnified Persons") against any losses, claims, demands, actions, causes
of action, assessments, damages, liabilities (joint or several), costs and
expenses (including interest, penalties and reasonable attorneys' fees and
disbursements), resulting to, imposed upon, or incurred by the Indemnified
Persons, directly or indirectly, under the Securities Act or otherwise
(hereinafter referred to in this Section 7.12(c) as a "claim" and in the
plural as "claims") based upon, arising out of or resulting from any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which any Partnership Securities were
registered under the Securities Act or any state securities or Blue Sky
laws, in any preliminary prospectus (if used prior to the effective date of
such registration statement), or in any summary or final prospectus or in
any amendment or supplement thereto (if used during the period the
Partnership is required to keep the registration statement current), or
arising out of, based upon or resulting from the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading; provided,
however, that the Partnership shall not be liable to any Indemnified Person
to the extent that any such claim arises out of, is based upon or results
from an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, such preliminary, summary or
final prospectus or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Partnership by or on
behalf of such Indemnified Person specifically for use in the preparation
thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General
Partner's Affiliates) after it ceases to be a Partner of the Partnership,
during a period of two years subsequent to the effective date of such
cessation and for so long thereafter as is required for the Holder to sell
all of the Partnership Securities with respect to which it has requested
during such two-year period inclusion in a registration statement otherwise
filed or that a registration statement be filed; provided, however, that the
Partnership shall not be required to file successive registration statements
covering the same Partnership
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Securities for which registration was demanded during such two-year period.
The provisions of Section 7.12(c) shall continue in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this
Section 7.12 shall (i) specify the Partnership Securities intended to be
offered and sold by the Person making the request, (ii) express such
Person's present intent to offer such shares for distribution,
(iii) describe the nature or method of the proposed offer and sale of
Partnership Securities, and (iv) contain the undertaking of such Person to
provide all such information and materials and take all action as may be
required in order to permit the Partnership to comply with all applicable
requirements in connection with the registration of such Partnership
Securities.
Section 7.13 RELIANCE BY THIRD PARTIES.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General Partner
to act on behalf of and in the name of the Partnership has full power and
authority to encumber, sell or otherwise use in any manner any and all assets of
the Partnership and to enter into any authorized contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the General Partner
or any such officer as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such Person to contest,
negate or disaffirm any action of the General Partner or any such officer in
connection with any such dealing. In no event shall any Person dealing with the
General Partner or any such officer or its representatives be obligated to
ascertain that the terms of the Agreement have been complied with or to inquire
into the necessity or expedience of any act or action of the General Partner or
any such officer or its representatives. Each and every certificate, document or
other instrument executed on behalf of the Partnership by the General Partner or
its representatives shall be conclusive evidence in favor of any and every
Person relying thereon or claiming thereunder that (a) at the time of the
execution and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person executing and delivering
such certificate, document or instrument was duly authorized and empowered to do
so for and on behalf of the Partnership and (c) such certificate, document or
instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 RECORDS AND ACCOUNTING.
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partners any information required to be provided pursuant to
Section 3.4(a). Any books and records maintained by or on behalf of the
Partnership in the regular course of its business, including the record of the
Record Holders and Assignees of Units or other Partnership Securities, books of
account and records of Partnership proceedings, may be kept on, or be in the
form of, computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided, that the books
and records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with U.S. GAAP.
Section 8.2 FISCAL YEAR.
The fiscal year of the Partnership shall be a fiscal year ending
December 31.
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Section 8.3 REPORTS.
(a) As soon as practicable, but in no event later than 120 days after
the close of each fiscal year of the Partnership, the General Partner shall
cause to be mailed or made available to each Record Holder of a Unit as of a
date selected by the General Partner in its discretion, an annual report
containing financial statements of the Partnership for such fiscal year of
the Partnership, presented in accordance with U.S. GAAP, including a balance
sheet and statements of operations, Partnership equity and cash flows, such
statements to be audited by a firm of independent public accountants
selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the
General Partner shall cause to be mailed or made available to each Record
Holder of a Unit, as of a date selected by the General Partner in its
discretion, a report containing unaudited financial statements of the
Partnership and such other information as may be required by applicable law,
regulation or rule of any National Securities Exchange on which the Units
are listed for trading, or as the General Partner determines to be necessary
or appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 TAX RETURNS AND INFORMATION.
The Partnership shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax reporting
purposes with respect to a taxable year shall be furnished to them within
90 days of the close of the calendar year in which the Partnership's taxable
year ends. The classification, realization and recognition of income, gain,
losses and deductions and other items shall be on the accrual method of
accounting for federal income tax purposes.
Section 9.2 TAX ELECTIONS.
(a) The Partnership shall make the election under Section 754 of the
Code in accordance with applicable regulations thereunder, subject to the
reservation of the right to seek to revoke any such election upon the
General Partner's determination that such revocation is in the best
interests of the Limited Partners. Notwithstanding any other provision
herein contained, for the purposes of computing the adjustments under
Section 743(b) of the Code, the General Partner shall be authorized (but not
required) to adopt a convention whereby the price paid by a transferee of a
Limited Partner Interest will be deemed to be the lowest quoted closing
price of the Limited Partner Interests on any National Securities Exchange
on which such Limited Partner Interests are traded during the calendar month
in which such transfer is deemed to occur pursuant to Section 6.2(g) without
regard to the actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in
organizing the Partnership ratably over a sixty-month period as provided in
Section 709 of the Code.
(c) Except as otherwise provided herein, the General Partner shall
determine whether the Partnership should make any other elections permitted
by the Code.
Section 9.3 TAX CONTROVERSIES.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
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resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing any
or all things reasonably required by the General Partner to conduct such
proceedings.
Section 9.4 WITHHOLDING.
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required or elects to withhold and pay over to any taxing
authority any amount resulting from the allocation or distribution of income to
any Partner or Assignee (including, without limitation, by reason of
Section 1446 of the Code), the amount withheld may at the discretion of the
General Partner be treated by the Partnership as a distribution of cash pursuant
to Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
ADMISSION OF PARTNERS
Section 10.1 ADMISSION OF INITIAL LIMITED PARTNERS.
Upon the issuance by the Partnership of Common Units, Subordinated Units and
Incentive Distribution Rights to the General Partner, the Limited Partner and
the Underwriters as described in Section 5.3 in connection with the Initial
Offering, the General Partner shall admit such parties to the Partnership as
Initial Limited Partners in respect of the Common Units, Subordinated Units or
Incentive Distribution Rights issued to them.
Section 10.2 ADMISSION OF SUBSTITUTED LIMITED PARTNER.
By transfer of a Limited Partner Interest in accordance with Article IV, the
transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and in
the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the authority
to convey to a purchaser or other transferee who does not execute and deliver a
Transfer Application (a) the right to negotiate such Certificate to a purchaser
or other transferee and (b) the right to transfer the right to request admission
as a Substituted Limited Partner to such purchaser or other transferee in
respect of the transferred Limited Partner Interests. Each transferee of a
Limited Partner Interest (including any nominee holder or an agent acquiring
such Limited Partner Interest for the account of another Person) who executes
and delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Limited Partner Interests so transferred to
such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given or
withheld in the General Partner's discretion, and (y) when any such admission is
shown on the books and records of the Partnership. If such consent is withheld,
such transferee shall be an Assignee. An Assignee shall have an interest in the
Partnership equivalent to that of a Limited Partner with respect to allocations
and distributions, including liquidating distributions, of the Partnership. With
respect to voting rights attributable to Limited Partner Interests that are held
by Assignees, the General Partner shall be deemed to be the Limited Partner with
respect thereto and shall, in exercising the voting rights in respect of such
Limited Partner Interests on any matter, vote such Limited Partner Interests at
the written direction of the Assignee who is the Record Holder of such Limited
Partner Interests. If no such written direction is received, such Limited
Partner Interests will not be voted. An Assignee shall have no other rights of a
Limited Partner.
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Section 10.3 ADMISSION OF SUCCESSOR GENERAL PARTNER.
A successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner Interest pursuant to
Section 4.6 who is proposed to be admitted as a successor General Partner shall
be admitted to the Partnership as the General Partner, effective immediately
prior to the withdrawal or removal of the predecessor or transferring General
Partner, pursuant to Section 11.1 or 11.2 or the transfer of the General Partner
Interest pursuant to Section 4.6, provided, however, that no such successor
shall be admitted to the Partnership until compliance with the terms of
Section 4.6 has occurred and such successor has executed and delivered such
other documents or instruments as may be required to effect such admission. Any
such successor shall, subject to the terms hereof, carry on the business of the
members of the Partnership Group without dissolution.
Section 10.4 ADMISSION OF ADDITIONAL LIMITED PARTNERS.
(a) A Person (other than the General Partner, an Initial Limited Partner
or a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the
General Partner
(i) evidence of acceptance in form satisfactory to the General
Partner of all of the terms and conditions of this Agreement, including
the power of attorney granted in Section 2.6, and
(ii) such other documents or instruments as may be required in the
discretion of the General Partner to effect such Person's admission as an
Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no
Person shall be admitted as an Additional Limited Partner without the
consent of the General Partner, which consent may be given or withheld in
the General Partner's discretion. The admission of any Person as an
Additional Limited Partner shall become effective on the date upon which the
name of such Person is recorded as such in the books and records of the
Partnership, following the consent of the General Partner to such admission.
Section 10.5 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED
PARTNERSHIP.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement and,
if required by law, the General Partner shall prepare and file an amendment to
the Certificate of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted pursuant to
Section 2.6.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 WITHDRAWAL OF THE GENERAL PARTNER.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each
such event herein referred to as an "Event of Withdrawal");
(i) The General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners;
(ii) The General Partner transfers all of its rights as General
Partner pursuant to Section 4.6;
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(iii) The General Partner is removed pursuant to Section 11.2;
(iv) The General Partner (A) makes a general assignment for the
benefit of creditors; (B) files a voluntary bankruptcy petition for
relief under Chapter 7 of the United States Bankruptcy Code; (C) files a
petition or answer seeking for itself a liquidation, dissolution or
similar relief (but not a reorganization) under any law; (D) files an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against the General Partner in a
proceeding of the type described in clauses (A)-(C) of this
Section 11.1(a)(iv); or (E) seeks, consents to or acquiesces in the
appointment of a trustee (but not a debtor-in-possession), receiver or
liquidator of the General Partner or of all or any substantial part of
its properties;
(v) A final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or
against the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General
Partner of revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation; (B) in the event
the General Partner is a partnership or a limited liability company, the
dissolution and commencement of winding up of the General Partner;
(C) in the event the General Partner is acting in such capacity by virtue
of being a trustee of a trust, the termination of the trust; (D) in the
event the General Partner is a natural person, his death or adjudication
of incompetency; and (E) otherwise in the event of the termination of the
General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing General Partner shall give notice to
the Limited Partners within 30 days after such occurrence. The Partners
hereby agree that only the Events of Withdrawal described in this
Section 11.1 shall result in the withdrawal of the General Partner from the
Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the
period beginning on the Closing Date and ending at 12:00 midnight, Eastern
Standard Time, on June 30, 2012, the General Partner voluntarily withdraws
by giving at least 90 days' advance notice of its intention to withdraw to
the Limited Partners; provided that prior to the effective date of such
withdrawal, the withdrawal is approved by Unitholders holding at least a
majority of the Outstanding Common Units (excluding Common Units held by the
General Partner and its Affiliates) and the General Partner delivers to the
Partnership an Opinion of Counsel ("Withdrawal Opinion of Counsel") that
such withdrawal (following the selection of the successor General Partner)
would not result in the loss of the limited liability of any Limited Partner
or any Group Member or cause any Group Member to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not previously treated as
such); (ii) at any time after 12:00 midnight, Eastern Standard Time, on
June 30, 2012, the General Partner voluntarily withdraws by giving at least
90 days' advance notice to the Unitholders, such withdrawal to take effect
on the date specified in such notice; (iii) at any time that the General
Partner ceases to be the General Partner pursuant to
Section 11.1(a)(ii) or is removed pursuant to Section 11.2; or
(iv) notwithstanding clause (i) of this sentence, at any time that the
General Partner voluntarily withdraws by giving at least 90 days' advance
notice of its intention to withdraw to the Limited Partners, such withdrawal
to take effect on the date specified in the notice, if at the time such
notice is given one Person and its Affiliates (other than the General
Partner and its Affiliates) own beneficially or of record or control at
least 50% of the Outstanding Units. The withdrawal of the General Partner
from the Partnership upon
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the occurrence of an Event of Withdrawal shall also constitute the
withdrawal of the General Partner as general partner or managing member, to
the extent applicable, of the other Group Members. If the General Partner
gives a notice of withdrawal pursuant to Section 11.1(a)(i), the holders of
a Unit Majority, may, prior to the effective date of such withdrawal, elect
a successor General Partner. The Person so elected as successor General
Partner shall automatically become the successor general partner or managing
member, to the extent applicable, of the other Group Members of which the
General Partner is a general partner or a managing member. If, prior to the
effective date of the General Partner's withdrawal, a successor is not
selected by the Unitholders as provided herein or the Partnership does not
receive a Withdrawal Opinion of Counsel, the Partnership shall be dissolved
in accordance with Section 12.1. Any successor General Partner elected in
accordance with the terms of this Section 11.1 shall be subject to the
provisions of Section 10.3.
Section 11.2 REMOVAL OF THE GENERAL PARTNER.
The General Partner may be removed if such removal is approved by the
Unitholders holding at least 66 2/3% of the Outstanding Units (including Units
held by the General Partner and its Affiliates). Any such action by such holders
for removal of the General Partner must also provide for the election of a
successor General Partner by the Unitholders holding a majority of the
outstanding Common Units voting as a class and a majority of the outstanding
Subordinated Units voting as a class (including Units held by the General
Partner and its Affiliates). Such removal shall be effective immediately
following the admission of a successor General Partner pursuant to
Section 10.3. The removal of the General Partner shall also automatically
constitute the removal of the General Partner as general partner or managing
member, to the extent applicable, of the other Group Members of which the
General Partner is a general partner or a managing member. If a Person is
elected as a successor General Partner in accordance with the terms of this
Section 11.2, such Person shall, upon admission pursuant to Section 10.3,
automatically become a successor general partner or managing member, to the
extent applicable, of the other Group Members of which the General Partner is a
general partner or a managing member. The right of the holders of Outstanding
Units to remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.3. The percentage of the Outstanding Units required to
remove the General Partner may be amended by the general partner as described in
Section 13.1 hereof.
Section 11.3 INTEREST OF DEPARTING PARTNER AND SUCCESSOR GENERAL PARTNER.
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or
(ii) removal of the General Partner by the holders of Outstanding Units
under circumstances where Cause does not exist, if the successor General
Partner is elected in accordance with the terms of Section 11.1 or 11.2, the
Departing Partner shall have the option, exercisable prior to the effective
date of the departure of such Departing Partner, to require its successor to
purchase its General Partner Interest and its general partner interest (or
equivalent interest) in the other Group Members and all of its Incentive
Distribution Rights (collectively, the "Combined Interest") in exchange for
an amount in cash equal to the fair market value of such Combined Interest,
such amount to be determined and payable as of the effective date of its
departure. If the General Partner is removed by the Unitholders under
circumstances where Cause exists or if the General Partner withdraws under
circumstances where such withdrawal violates this Agreement, and if a
successor General Partner is elected in accordance with the terms of
Section 11.1 or 11.2, such successor shall have the option, exercisable
prior to the effective date of the departure of such Departing Partner, to
purchase the Combined Interest for such fair market value of such Combined
Interest of the Departing Partner. In either event, the Departing Partner
shall be entitled to receive all reimbursements due such Departing Partner
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pursuant to Section 7.4, including any employee-related liabilities
(including severance liabilities), incurred in connection with the
termination of any employees employed by the Departing Partner for the
benefit of the Partnership or the other Group Members.
For purposes of this Section 11.3(a), the fair market value of the
Departing Partner's Combined Interest shall be determined by agreement
between the Departing Partner and its successor or, failing agreement within
30 days after the effective date of such Departing Partner's departure, by
an independent investment banking firm or other independent expert selected
by the Departing Partner and its successor, which, in turn, may rely on
other experts, and the determination of which shall be conclusive as to such
matter. If such parties cannot agree upon one independent investment banking
firm or other independent expert within 45 days after the effective date of
such departure, then the Departing Partner shall designate an independent
investment banking firm or other independent expert, the Departing Partner's
successor shall designate an independent investment banking firm or other
independent expert, and such firms or experts shall mutually select a third
independent investment banking firm or independent expert, which third
independent investment banking firm or other independent expert shall
determine the fair market value of the Combined Interest of the Departing
Partner. In making its determination, such third independent investment
banking firm or other independent expert may consider the then current
trading price of Units on any National Securities Exchange on which Units
are then listed, the value of the Partnership's assets, the rights and
obligations of the Departing Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common
Units pursuant to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 11.3(a), without reduction
in such Partnership Interest (but subject to proportionate dilution by
reason of the admission of its successor). Any successor General Partner
shall indemnify the Departing Partner (or its transferee) as to all debts
and liabilities of the Partnership arising on or after the date on which the
Departing Partner (or its transferee) becomes a Limited Partner. For
purposes of this Agreement, conversion of the Combined Interest of the
Departing Partner to Common Units will be characterized as if the Departing
Partner (or its transferee) contributed its Combined Interest to the
Partnership in exchange for the newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the
terms of Section 11.1 or 11.2 and the option described in Section 11.3(a) is
not exercised by the party entitled to do so, the successor General Partner
shall, at the effective date of its admission to the Partnership, contribute
to the Partnership cash in the amount equal to 2/98ths of the Net Agreed
Value of the Partnership's assets on such date. In such event, such
successor General Partner shall, subject to the following sentence, be
entitled to 2% of all Partnership allocations and distributions to which the
Departing Partner was entitled. In addition, the successor General Partner
shall cause this Agreement to be amended to reflect that, from and after the
date of such successor General Partner's admission, the successor General
Partner's interest in all Partnership distributions and allocations shall be
2%.
Section 11.4 TERMINATION OF SUBORDINATION PERIOD, CONVERSION OF
SUBORDINATED UNITS AND EXTINGUISHMENT OF CUMULATIVE COMMON UNIT ARREARAGES.
Notwithstanding any provision of this Agreement, if the General Partner is
removed as general partner of the Partnership under circumstances where Cause
does not exist and Units held by the General Partner and its Affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and automatically convert into
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Common Units on a one-for-one basis and (ii) all Cumulative Common Unit
Arrearages on the Common Units will be extinguished.
Section 11.5 WITHDRAWAL OF LIMITED PARTNERS.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Limited Partner
Interest becomes a Record Holder of the Limited Partner Interest so transferred,
such transferring Limited Partner shall cease to be a Limited Partner with
respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 DISSOLUTION.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General Partner
is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be
dissolved and such successor General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its
affairs shall be wound up, upon:
(a) an Event of Withdrawal of the General Partner as provided in
Section 11.1(a) (other than Section 11.1(a)(ii)), unless a successor is
elected and an Opinion of Counsel is received as provided in
Section 11.1(b) or 11.2 and such successor is admitted to the Partnership
pursuant to Section 10.3;
(b) an election to dissolve the Partnership by the General Partner that
is approved by the holders of a Unit Majority;
(c) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(d) the sale of all or substantially all of the assets and properties of
the Partnership Group.
Section 12.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP AFTER
DISSOLUTION.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within 180 days thereafter,
the holders of a Unit Majority may elect to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in this
Agreement by forming a new limited partnership on terms identical to those set
forth in this Agreement and having as the successor General partner a Person
approved by the holders of a Unit Majority. Unless such an election is made
within the applicable time period as set forth above, the Partnership shall
conduct only activities necessary to wind up its affairs. If such an election is
so made, then:
(i) the reconstituted Partnership shall continue unless earlier
dissolved in accordance with this Article XII;
(ii) if the successor General Partner is not the former General
Partner, then the interest of the former General Partner shall be treated
in the manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and
the Certificate of Limited Partnership and to enter into and, as
necessary, to file a new partnership agreement
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and certificate of limited partnership, and the successor General Partner
may for this purpose exercise the powers of attorney granted the General
Partner pursuant to Section 2.6; provided, that the right of the holders
of a Unit Majority to approve a successor General Partner and to
reconstitute and to continue the business of the Partnership shall not
exist and may not be exercised unless the Partnership has received an
Opinion of Counsel that (x) the exercise of the right would not result in
the loss of limited liability of any Limited Partner and (y) neither the
Partnership, the reconstituted limited partnership nor the Operating
Partnership or any other Group Member would be treated as an association
taxable as a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of such right to continue.
Section 12.3 LIQUIDATOR.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be entitled
to receive such compensation for its services as may be approved by holders of
at least a majority of the Outstanding Common Units and Subordinated Units
voting as a single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days' prior notice and may be
removed at any time, with or without cause, by notice of removal approved by
holders of at least a majority of the Outstanding Common Units and Subordinated
Units voting as a single class. Upon dissolution, removal or resignation of the
Liquidator, a successor and substitute Liquidator (who shall have and succeed to
all rights, powers and duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of at least a majority of the Outstanding
Common Units and Subordinated Units voting as a single class. The right to
approve a successor or substitute Liquidator in the manner provided herein shall
be deemed to refer also to any such successor or substitute Liquidator approved
in the manner herein provided. Except as expressly provided in this
Article XII, the Liquidator approved in the manner provided herein shall have
and may exercise, without further authorization or consent of any of the parties
hereto, all of the powers conferred upon the General Partner under the terms of
this Agreement (but subject to all of the applicable limitations, contractual
and otherwise, upon the exercise of such powers, other than the limitation on
sale set forth in Section 7.3(b)) to the extent necessary or desirable in the
good faith judgment of the Liquidator to carry out the duties and functions of
the Liquidator hereunder for and during such period of time as shall be
reasonably required in the good faith judgment of the Liquidator to complete the
winding up and liquidation of the Partnership as provided for herein.
Section 12.4 LIQUIDATION.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to Section 17-804 of the Delaware Act and the following:
(a) The assets may be disposed of by public or private sale or by
distribution in kind to one or more Partners on such terms as the Liquidator
and such Partner or Partners may agree. If any property is distributed in
kind, the Partner receiving the property shall be deemed for purposes of
Section 12.4(c) to have received cash equal to its fair market value; and
contemporaneously therewith, appropriate cash distributions must be made to
the other Partners. The Liquidator may, in its absolute discretion, defer
liquidation or distribution of the Partnership's assets for a reasonable
time if it determines that an immediate sale or distribution of all or some
of the Partnership's assets would be impractical or would cause undue loss
to the Partners. The Liquidator may, in its absolute discretion, distribute
the Partnership's assets, in whole or in part, in kind if it determines that
a sale would be impractical or would cause undue loss to the Partners.
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(b) Liabilities of the Partnership include amounts owed to the
Liquidator as compensation for serving in such capacity (subject to the
terms of Section 12.3) and amounts to Partners otherwise than in respect of
their distribution rights under Article VI. With respect to any liability
that is contingent, conditional or unmatured or is otherwise not yet due and
payable, the Liquidator shall either settle such claim for such amount as it
thinks appropriate or establish a reserve of cash or other assets to provide
for its payment. When paid, any unused portion of the reserve shall be
distributed as additional liquidation proceeds.
(c) All property and all cash in excess of that required to discharge
liabilities as provided in Section 12.4(b) shall be distributed to the
Partners in accordance with, and to the extent of, the positive balances in
their respective Capital Accounts, as determined after taking into account
all Capital Account adjustments (other than those made by reason of
distributions pursuant to this Section 12.4(c)) for the taxable year of the
Partnership during which the liquidation of the Partnership occurs (with
such date of occurrence being determined pursuant to Treasury Regulation
Section 1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the
end of such taxable year (or, if later, within 90 days after said date of
such occurrence).
Section 12.5 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP.
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the Partnership,
the Partnership shall be terminated and the Certificate of Limited Partnership
and all qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such other
actions as may be necessary to terminate the Partnership shall be taken.
Section 12.6 RETURN OF CONTRIBUTIONS.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners or Unitholders, or any portion thereof, it being expressly understood
that any such return shall be made solely from Partnership assets.
Section 12.7 WAIVER OF PARTITION.
To the maximum extent permitted by law, each Partner hereby waives any right
to partition of the Partnership property.
Section 12.8 CAPITAL ACCOUNT RESTORATION.
No Limited Partner shall have any obligation to restore any negative balance
in its Capital Account upon liquidation of the Partnership. The General Partner
shall be obligated to restore any negative balance in its Capital Account upon
liquidation of its interest in the Partnership by the end of the taxable year of
the Partnership during which such liquidation occurs, or, if later, within
90 days after the date of such liquidation.
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 AMENDMENT TO BE ADOPTED SOLELY BY THE GENERAL PARTNER.
Each Partner agrees that the General Partner, without the approval of any
Partner or Assignee, may amend any provision of this Agreement and execute,
swear to, acknowledge, deliver, file and record whatever documents may be
required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
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(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure
that the Group Members will not be treated as associations taxable as
corporations or otherwise taxed as entities for federal income tax purposes;
(d) a change that, in the discretion of the General Partner, (i) does
not adversely affect the Limited Partners (including any particular class of
Partnership Interests as compared to other classes of Partnership Interests)
in any material respect, (ii) is necessary or advisable to (A) satisfy any
requirements, conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or judicial
authority or contained in any federal or state statute (including the
Delaware Act) or (B) facilitate the trading of the Units (including the
division of any class or classes of Outstanding Units into different classes
to facilitate uniformity of tax consequences within such classes of Units)
or comply with any rule, regulation, guideline or requirement of any
National Securities Exchange on which the Units are or will be listed for
trading, compliance with any of which the General Partner determines in its
discretion to be in the best interests of the Partnership and the Limited
Partners, (iii) is necessary or advisable in connection with action taken by
the General Partner pursuant to Section 5.10 or (iv) is required to effect
the intent expressed in the Registration Statement or the intent of the
provisions of this Agreement or is otherwise contemplated by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and
any changes that, in the discretion of the General Partner, are necessary or
advisable as a result of a change in the fiscal year or taxable year of the
Partnership including, if the General Partner shall so determine, a change
in the definition of "Quarter" and the dates on which distributions are to
be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to
prevent the Partnership, or the General Partner or its directors, officers,
trustees or agents from in any manner being subjected to the provisions of
the Investment Company Act of 1940, as amended, the Investment Advisers Act
of 1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, regardless of whether
such are substantially similar to plan asset regulations currently applied
or proposed by the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to be made by
the General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity, in connection with the conduct by the Partnership of
activities permitted by the terms of Section 2.4;
(k) a merger or conveyance pursuant to Section 14.3(d);
(l) an amendment to Section 11.2 that would reduce the percentage of the
Outstanding Units required for the Unitholders to remove the General
Partner; provided, however, that once
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such required percentage has been reduced, it may be further reduced by the
general partner but such required percentage may not be increased without a
vote of the Unitholders; provided further, however, that no such amendment
may provide that any class of Units may vote separately as a class to remove
the General Partner.
(m) an amendment to the definition of "Outstanding" contained in Section
1.1 hereof to increase from 20% or more the percentage of Outstanding
Partnership Securities, that if at any time acquired by any Person or Group,
shall not be voted on any matter and shall not be considered to be
Outstanding for the other purposes described in such definition; provided,
however, that once such percentage has been increased, it may be further
increased by the general partner, but such required percentage may not be
reduced without a vote of the Unitholders; or
(n) any other amendments substantially similar to the foregoing.
Section 13.2 AMENDMENT PROCEDURES.
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner which consent may be given or withheld in its sole discretion. A
proposed amendment shall be effective upon its approval by the holders of a Unit
Majority, unless a greater or different percentage is required under this
Agreement or by Delaware law. Each proposed amendment that requires the approval
of the holders of a specified percentage of Outstanding Units shall be set forth
in a writing that contains the text of the proposed amendment. If such an
amendment is proposed, the General Partner shall seek the written approval of
the requisite percentage of Outstanding Units or call a meeting of the
Unitholders to consider and vote on such proposed amendment. The General Partner
shall notify all Record Holders upon final adoption of any such proposed
amendments.
Section 13.3 AMENDMENT REQUIREMENTS.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no
provision of this Agreement that establishes a percentage of Outstanding
Units (including Units deemed owned by the General Partner) required to take
any action shall be amended, altered, changed, repealed or rescinded in any
respect that would have the effect of reducing such voting percentage unless
such amendment is approved by the written consent or the affirmative vote of
holders of Outstanding Units whose aggregate Outstanding Units constitute
not less than the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no
amendment to this Agreement may (i) enlarge the obligations of any Limited
Partner without its consent, unless such shall be deemed to have occurred as
a result of an amendment approved pursuant to Section 13.3(c), (ii) enlarge
the obligations of, restrict in any way any action by or rights of, or
reduce in any way the amounts distributable, reimbursable or otherwise
payable to, the General Partner or any of its Affiliates without its
consent, which consent may be given or withheld in its sole discretion,
(iii) change Section 12.1(b), or (iv) change the term of the Partnership or,
except as set forth in Section 12.1(b), give any Person the right to
dissolve the Partnership.
(c) Except as provided in Section 14.3, and without limitation of the
General Partner's authority to adopt amendments to this Agreement without
the approval of any Partners or Assignees as contemplated in Section 13.1,
any amendment that would have a material adverse effect on the rights or
preferences of any class of Partnership Interests in relation to other
classes of Partnership Interests must be approved by the holders of not less
than a majority of the Outstanding Partnership Interests of the class
affected.
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 13.1 and except as otherwise provided by
Section 14.3(b), no amendments shall become
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effective without the approval of the holders of at least 90% of the
Outstanding Units voting as a single class unless the Partnership obtains an
Opinion of Counsel to the effect that such amendment will not affect the
limited liability of any Limited Partner under applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Units.
Section 13.4 SPECIAL MEETINGS.
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XIII. Special meetings of the
Limited Partners may be called by the General Partner or by Limited Partners
owning 20% or more of the Outstanding Units of the class or classes for which a
meeting is proposed. Limited Partners shall call a special meeting by delivering
to the General Partner one or more requests in writing stating that the signing
Limited Partners wish to call a special meeting and indicating the general or
specific purposes for which the special meeting is to be called. Within 60 days
after receipt of such a call from Limited Partners or within such greater time
as may be reasonably necessary for the Partnership to comply with any statutes,
rules, regulations, listing agreements or similar requirements governing the
holding of a meeting or the solicitation of proxies for use at such a meeting,
the General Partner shall send a notice of the meeting to the Limited Partners
either directly or indirectly through the Transfer Agent. A meeting shall be
held at a time and place determined by the General Partner on a date not less
than 10 days nor more than 60 days after the mailing of notice of the meeting.
Limited Partners shall not vote on matters that would cause the Limited Partners
to be deemed to be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Limited Partners' limited
liability under the Delaware Act or the law of any other state in which the
Partnership is qualified to do business.
Section 13.5 NOTICE OF A MEETING.
Notice of a meeting called pursuant to Section 13.4 shall be given to the
Record Holders of the class or classes of Units for which a meeting is proposed
in writing by mail or other means of written communication in accordance with
Section 16.1. The notice shall be deemed to have been given at the time when
deposited in the mail or sent by other means of written communication.
Section 13.6 RECORD DATE.
For purposes of determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners or to give approvals without a meeting
as provided in Section 13.11 the General Partner may set a Record Date, which
shall not be less than 10 nor more than 60 days before (a) the date of the
meeting (unless such requirement conflicts with any rule, regulation, guideline
or requirement of any National Securities Exchange on which the Units are listed
for trading, in which case the rule, regulation, guideline or requirement of
such exchange shall govern) or (b) in the event that approvals are sought
without a meeting, the date by which Limited Partners are requested in writing
by the General Partner to give such approvals.
Section 13.7 ADJOURNMENT.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XIII.
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Section 13.8 WAIVER OF NOTICE; APPROVAL OF MEETING; APPROVAL OF MINUTES.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if it had occurred at a meeting
duly held after regular call and notice, if a quorum is present either in person
or by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
Section 13.9 QUORUM.
The holders of a majority of the Outstanding Units of the class or classes
for which a meeting has been called (including Outstanding Units deemed owned by
the General Partner) represented in person or by proxy shall constitute a quorum
at a meeting of Limited Partners of such class or classes unless any such action
by the Limited Partners requires approval by holders of a greater percentage of
such Units, in which case the quorum shall be such greater percentage. At any
meeting of the Limited Partners duly called and held in accordance with this
Agreement at which a quorum is present, the act of Limited Partners holding
Outstanding Units that in the aggregate represent a majority of the Outstanding
Units entitled to vote and be present in person or by proxy at such meeting
shall be deemed to constitute the act of all Limited Partners, unless a greater
or different percentage is required with respect to such action under the
provisions of this Agreement, in which case the act of the Limited Partners
holding Outstanding Units that in the aggregate represent at least such greater
or different percentage shall be required. The Limited Partners present at a
duly called or held meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
Limited Partners to leave less than a quorum, if any action taken (other than
adjournment) is approved by the required percentage of Outstanding Units
specified in this Agreement (including Outstanding Units deemed owned by the
General Partner). In the absence of a quorum any meeting of Limited Partners may
be adjourned from time to time by the affirmative vote of holders of at least a
majority of the Outstanding Units entitled to vote at such meeting (including
Outstanding Units deemed owned by the General Partner) represented either in
person or by proxy, but no other business may be transacted, except as provided
in Section 13.7.
Section 13.10 CONDUCT OF A MEETING.
The General Partner shall have full power and authority concerning the
manner of conducting any meeting of the Limited Partners or solicitation of
approvals in writing, including the determination of Persons entitled to vote,
the existence of a quorum, the satisfaction of the requirements of
Section 13.4, the conduct of voting, the validity and effect of any proxies and
the determination of any controversies, votes or challenges arising in
connection with or during the meeting or voting. The General Partner shall
designate a Person to serve as chairman of any meeting and shall further
designate a Person to take the minutes of any meeting. All minutes shall be kept
with the records of the Partnership maintained by the General Partner. The
General Partner may make such other regulations consistent with applicable law
and this Agreement as it may deem advisable concerning the conduct of any
meeting of the Limited Partners or solicitation of approvals in writing,
including regulations in regard to the appointment of proxies, the appointment
and duties of inspectors of votes and approvals, the submission and examination
of proxies and other evidence of the right to vote, and the revocation of
approvals in writing.
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Section 13.11 ACTION WITHOUT A MEETING.
If authorized by the General Partner, any action that may be taken at a
meeting of the Limited Partners may be taken without a meeting if an approval in
writing setting forth the action so taken is signed by Limited Partners owning
not less than the minimum percentage of the Outstanding Units (including Units
deemed owned by the General Partner) that would be necessary to authorize or
take such action at a meeting at which all the Limited Partners were present and
voted (unless such provision conflicts with any rule, regulation, guideline or
requirement of any National Securities Exchange on which the Units are listed
for trading, in which case the rule, regulation, guideline or requirement of
such exchange shall govern). Prompt notice of the taking of action without a
meeting shall be given to the Limited Partners who have not approved in writing.
The General Partner may specify that any written ballot submitted to Limited
Partners for the purpose of taking any action without a meeting shall be
returned to the Partnership within the time period, which shall be not less than
20 days, specified by the General Partner. If a ballot returned to the
Partnership does not vote all of the Units held by the Limited Partners, the
Partnership shall be deemed to have failed to receive a ballot for the Units
that were not voted. If approval of the taking of any action by the Limited
Partners is solicited by any Person other than by or on behalf of the General
Partner, the written approvals shall have no force and effect unless and until
(a) they are deposited with the Partnership in care of the General Partner,
(b) approvals sufficient to take the action proposed are dated as of a date not
more than 90 days prior to the date sufficient approvals are deposited with the
Partnership and (c) an Opinion of Counsel is delivered to the General Partner to
the effect that the exercise of such right and the action proposed to be taken
with respect to any particular matter (i) will not cause the Limited Partners to
be deemed to be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Limited Partners' limited
liability, and (ii) is otherwise permissible under the state statutes then
governing the rights, duties and liabilities of the Partnership and the
Partners.
Section 13.12 VOTING AND OTHER RIGHTS.
(a) Only those Record Holders of the Units on the Record Date set
pursuant to Section 13.6 (and also subject to the limitations contained in
the definition of "Outstanding") shall be entitled to notice of, and to vote
at, a meeting of Limited Partners or to act with respect to matters as to
which the holders of the Outstanding Units have the right to vote or to act.
All references in this Agreement to votes of, or other acts that may be
taken by, the Outstanding Units shall be deemed to be references to the
votes or acts of the Record Holders of such Outstanding Units.
(b) With respect to Units that are held for a Person's account by
another Person (such as a broker, dealer, bank, trust company or clearing
corporation, or an agent of any of the foregoing), in whose name such Units
are registered, such other Person shall, in exercising the voting rights in
respect of such Units on any matter, and unless the arrangement between such
Persons provides otherwise, vote such Units in favor of, and at the
direction of, the Person who is the beneficial owner, and the Partnership
shall be entitled to assume it is so acting without further inquiry. The
provisions of this Section 13.12(b) (as well as all other provisions of this
Agreement) are subject to the provisions of Section 4.3.
ARTICLE XIV
MERGER
Section 14.1 AUTHORITY.
The Partnership may merge or consolidate with one or more corporations,
limited liability companies, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including a
general partnership or limited partnership, formed under the laws of the State
of Delaware or any other state of the United States of America, pursuant to a
written agreement of merger or consolidation ("Merger Agreement") in accordance
with this Article XIV.
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Section 14.2 PROCEDURE FOR MERGER OR CONSOLIDATION.
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the General Partner. If the General Partner shall
determine, in the exercise of its discretion, to consent to the merger or
consolidation, the General Partner shall approve the Merger Agreement, which
shall set forth:
(a) the names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) the name and jurisdiction of formation or organization of the
business entity that is to survive the proposed merger or consolidation (the
"Surviving Business Entity");
(c) the terms and conditions of the proposed merger or consolidation;
(d) the manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged or converted solely for, or into, cash, property or general
or limited partner interests, rights, securities or obligations of the
Surviving Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and
(ii) in the case of securities represented by certificates, upon the
surrender of such certificates, which cash, property or general or limited
partner interests, rights, securities or obligations of the Surviving
Business Entity or any general or limited partnership, corporation, trust or
other entity (other than the Surviving Business Entity), or evidences
thereof, are to be delivered;
(e) a statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) the effective time of the merger, which may be the date of the
filing of the certificate of merger pursuant to Section 14.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall be
fixed no later than the time of the filing of the certificate of merger and
stated therein); and
(g) such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General Partner.
Section 14.3 APPROVAL BY LIMITED PARTNERS OF MERGER OR CONSOLIDATION.
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of Limited Partners, whether at a special meeting or by
written consent, in either case in accordance with the requirements of
Article XIII. A copy or a summary of the Merger Agreement shall be included
in or enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a
Unit Majority unless the Merger Agreement contains any provision that, if
contained in an amendment to this Agreement, the provisions of this
Agreement or the Delaware Act would require for its approval the vote or
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consent of a greater percentage of the Outstanding Units or of any class of
Limited Partners, in which case such greater percentage vote or consent
shall be required for approval of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote
or consent of the Limited Partners, and at any time prior to the filing of
the certificate of merger pursuant to Section 14.4, the merger or
consolidation may be abandoned pursuant to provisions therefor, if any, set
forth in the Merger Agreement.
(d) Notwithstanding anything else contained in this Article XIV or in
this Agreement, the General Partner is permitted, in its discretion, without
Limited Partner approval, to merge the Partnership or any Group Member into,
or convey all of the Partnership's assets to, another limited liability
entity which shall be newly formed and shall have no assets, liabilities or
operations at the time of such Merger other than those it receives from the
Partnership or other Group Member if (i) the General Partner has received an
Opinion of Counsel that the merger or conveyance, as the case may be, would
not result in the loss of the limited liability of any Limited Partner or
any Group Member or cause the Partnership or any Group Member to be treated
as an association taxable as a corporation or otherwise to be taxed as an
entity for federal income tax purposes (to the extent not previously treated
as such), (ii) the sole purpose of such merger or conveyance is to effect a
mere change in the legal form of the Partnership into another limited
liability entity and (iii) the governing instruments of the new entity
provide the Limited Partners and the General Partner with the same rights
and obligations as are herein contained.
Section 14.4 CERTIFICATE OF MERGER.
Upon the required approval by the General Partner and the Unitholders of a
Merger Agreement, a certificate of merger shall be executed and filed with the
Secretary of State of the State of Delaware in conformity with the requirements
of the Delaware Act.
Section 14.5 EFFECT OF MERGER.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real,
personal and mixed, and all debts due to any of those business entities
and all other things and causes of action belonging to each of those
business entities, shall be vested in the Surviving Business Entity and
after the merger or consolidation shall be the property of the Surviving
Business Entity to the extent they were of each constituent business
entity;
(ii) the title to any real property vested by deed or otherwise in
any of those constituent business entities shall not revert and is not in
any way impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests
in property of any of those constituent business entities shall be
preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity and may be
enforced against it to the same extent as if the debts, liabilities and
duties had been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall
not be deemed to result in a transfer or assignment of assets or liabilities
from one entity to another.
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ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS.
(a) Notwithstanding any other provision of this Agreement, if at any
time the General Partner and its Affiliates hold more than 80% of the total
Limited Partner Interests of any class then Outstanding, the General Partner
shall then have the right, which right it may assign and transfer in whole
or in part to the Partnership or any Affiliate of the General Partner,
exercisable in its sole discretion, to purchase all, but not less than all,
of such Limited Partner Interests of such class then Outstanding held by
Persons other than the General Partner and its Affiliates, at the greater of
(x) the Current Market Price as of the date three days prior to the date
that the notice described in Section 15.1(b) is mailed and (y) the highest
price paid by the General Partner or any of its Affiliates for any such
Limited Partner Interest of such class purchased during the 90-day period
preceding the date that the notice described in Section 15.1(b) is mailed.
As used in this Agreement, (i) "Current Market Price" as of any date of any
class of Limited Partner Interests means the average of the daily Closing
Prices (as hereinafter defined) per Limited Partner Interest of such class
for the 20 consecutive Trading Days (as hereinafter defined) immediately
prior to such date; (ii) "Closing Price" for any day means the last sale
price on such day, regular way, or in case no such sale takes place on such
day, the average of the closing bid and asked prices on such day, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted for trading
on the principal National Securities Exchange (other than the Nasdaq Stock
Market) on which such Limited Partner Interests of such class are listed or
admitted to trading or, if such Limited Partner Interests of such class are
not listed or admitted to trading on any National Securities Exchange (other
than the Nasdaq Stock Market), the last quoted price on such day or, if not
so quoted, the average of the high bid and low asked prices on such day in
the over-the-counter market, as reported by the Nasdaq Stock Market or such
other system then in use, or, if on any such day such Limited Partner
Interests of such class are not quoted by any such organization, the average
of the closing bid and asked prices on such day as furnished by a
professional market maker making a market in such Limited Partner Interests
of such class selected by the General Partner, or if on any such day no
market maker is making a market in such Limited Partner Interests of such
class, the fair value of such Limited Partner Interests on such day as
determined reasonably and in good faith by the General Partner; and
(iii) "Trading Day" means a day on which the principal National Securities
Exchange on which such Limited Partner Interests of any class are listed or
admitted to trading is open for the transaction of business or, if Limited
Partner Interests of a class are not listed or admitted to trading on any
National Securities Exchange, a day on which banking institutions in New
York City generally are open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Limited Partner
Interests granted pursuant to Section 15.1(a), the General Partner shall
deliver to the Transfer Agent notice of such election to purchase (the
"Notice of Election to Purchase") and shall cause the Transfer Agent to mail
a copy of such Notice of Election to Purchase to the Record Holders of
Limited Partner Interests of such class (as of a Record Date selected by the
General Partner) at least 10, but not more than 60, days prior to the
Purchase Date. Such Notice of Election to Purchase shall also be published
for a period of at least three consecutive days in at least two daily
newspapers of general circulation printed in the English language and
published in the Borough of Manhattan, New York. The Notice of Election to
Purchase shall specify the Purchase Date and the price (determined in
accordance with Section 15.1(a)) at which Limited Partner Interests will be
purchased and state that the General Partner, its Affiliate or the
Partnership, as the case may be, elects to purchase such Limited Partner
Interests, upon surrender of Certificates representing such Limited Partner
A-76
<Page>
Interests in exchange for payment, at such office or offices of the Transfer
Agent as the Transfer Agent may specify, or as may be required by any
National Securities Exchange on which such Limited Partner Interests are
listed or admitted to trading. Any such Notice of Election to Purchase
mailed to a Record Holder of Limited Partner Interests at his address as
reflected in the records of the Transfer Agent shall be conclusively
presumed to have been given regardless of whether the owner receives such
notice. On or prior to the Purchase Date, the General Partner, its Affiliate
or the Partnership, as the case may be, shall deposit with the Transfer
Agent cash in an amount sufficient to pay the aggregate purchase price of
all of such Limited Partner Interests to be purchased in accordance with
this Section 15.1. If the Notice of Election to Purchase shall have been
duly given as aforesaid at least 10 days prior to the Purchase Date, and if
on or prior to the Purchase Date the deposit described in the preceding
sentence has been made for the benefit of the holders of Limited Partner
Interests subject to purchase as provided herein, then from and after the
Purchase Date, notwithstanding that any Certificate shall not have been
surrendered for purchase, all rights of the holders of such Limited Partner
Interests (including any rights pursuant to Articles IV, V, VI, and
XII) shall thereupon cease, except the right to receive the purchase price
(determined in accordance with Section 15.1(a)) for Limited Partner
Interests therefor, without interest, upon surrender to the Transfer Agent
of the Certificates representing such Limited Partner Interests, and such
Limited Partner Interests shall thereupon be deemed to be transferred to the
General Partner, its Affiliate or the Partnership, as the case may be, on
the record books of the Transfer Agent and the Partnership, and the General
Partner or any Affiliate of the General Partner, or the Partnership, as the
case may be, shall be deemed to be the owner of all such Limited Partner
Interests from and after the Purchase Date and shall have all rights as the
owner of such Limited Partner Interests (including all rights as owner of
such Limited Partner Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an
Outstanding Limited Partner Interest subject to purchase as provided in this
Section 15.1 may surrender his Certificate evidencing such Limited Partner
Interest to the Transfer Agent in exchange for payment of the amount
described in Section 15.1(a), therefor, without interest thereon.
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 ADDRESSES AND NOTICES.
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a Partner or Assignee under this Agreement shall be in
writing and shall be deemed given or made when delivered in person or when sent
by first class United States mail or by other means of written communication to
the Partner or Assignee at the address described below. Any notice, payment or
report to be given or made to a Partner or Assignee hereunder shall be deemed
conclusively to have been given or made, and the obligation to give such notice
or report or to make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report to the Record
Holder of such Partnership Securities at his address as shown on the records of
the Transfer Agent or as otherwise shown on the records of the Partnership,
regardless of any claim of any Person who may have an interest in such
Partnership Securities by reason of any assignment or otherwise. An affidavit or
certificate of making of any notice, payment or report in accordance with the
provisions of this Section 16.1 executed by the General Partner, the Transfer
Agent or the mailing organization shall be prima facie evidence of the giving or
making of such notice, payment or report. If any notice, payment or report
addressed to a Record Holder at the address of such Record Holder appearing on
the books and records of the Transfer Agent or the Partnership is returned by
the United States Postal Service marked to indicate that the United States
Postal Service is unable to deliver it, such notice, payment or report and any
subsequent notices, payments and reports shall be deemed to have been
A-77
<Page>
duly given or made without further mailing (until such time as such Record
Holder or another Person notifies the Transfer Agent or the Partnership of a
change in his address) if they are available for the Partner or Assignee at the
principal office of the Partnership for a period of one year from the date of
the giving or making of such notice, payment or report to the other Partners and
Assignees. Any notice to the Partnership shall be deemed given if received by
the General Partner at the principal office of the Partnership designated
pursuant to Section 2.3. The General Partner may rely and shall be protected in
relying on any notice or other document from a Partner, Assignee or other Person
if believed by it to be genuine.
Section 16.2 FURTHER ACTION.
The parties shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or appropriate to
achieve the purposes of this Agreement.
Section 16.3 BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 16.4 INTEGRATION.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
Section 16.5 CREDITORS.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
Section 16.6 WAIVER.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
Section 16.7 COUNTERPARTS.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
Section 16.8 APPLICABLE LAW.
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
Section 16.9 INVALIDITY OF PROVISIONS.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 16.10 CONSENT OF PARTNERS.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be bound
by the results of such action.
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<Page>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
<Table>
GENERAL PARTNER:
DYNEGY DEP GP LLC
By: -------------------------------------------
Name:
Title:
ORGANIZATIONAL LIMITED PARTNER:
DMS LP, INC.
By: -------------------------------------------
Name:
Title:
LIMITED PARTNERS:
All Limited Partners now and hereafter admitted
as Limited Partners of the Partnership, pursuant
to powers of attorney now and hereafter executed
in favor of, and granted and delivered to the
General Partner.
DYNEGY DEP GP LLC
By: -------------------------------------------
Name:
Title:
</Table>
A-79
<Page>
EXHIBIT A
TO THE FIRST AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
DYNEGY ENERGY PARTNERS L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS IN
DYNEGY ENERGY PARTNERS L.P.
<Table>
<Caption>
No. Common Units
</Table>
In accordance with Section 4.1 of the First Amended and Restated Agreement
of Limited Partnership of Dynegy Energy Partners L.P., as amended, supplemented
or restated from time to time (the "PARTNERSHIP AGREEMENT"), Dynegy Energy
Partners L.P., a Delaware limited partnership (the "PARTNERSHIP"), hereby
certifies that ____________ (the "HOLDER") is the registered owner of Common
Units representing limited partner interests in the Partnership (the "COMMON
UNITS") transferable on the books of the Partnership, in person or by duly
authorized attorney, upon surrender of this Certificate properly endorsed and
accompanied by a properly executed application for transfer of the Common Units
represented by this Certificate. The rights, preferences and limitations of the
Common Units are set forth in, and this Certificate and the Common Units
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Partnership Agreement. Copies of the Partnership
Agreement are on file at, and will be furnished without charge on delivery of
written request to the Partnership at, the principal office of the Partnership
located at 1000 Louisiana, Suite 5800, Houston, Texas 77002. Capitalized terms
used herein but not defined shall have the meanings given them in the
Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in the
Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid far any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
<Table>
------------------------------------
Dated: Dynegy Energy Partners L.P.
Dynegy DEP GP LLC, its General
Partner
Countersigned and Registered by: By:
------------------------------------
- --------------------------------------------- By:
as Transfer Agent and Registrar
------------------------------------
Name:
------------------------------------
------------------------------------
By: By:
Authorized Signature Secretary
</Table>
A-80
<Page>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as follows according to applicable laws or
regulations:
<Table>
<Caption>
TEN COM-- as tenants in common UNIF GIFT/TRANSFERS MIN ACT
TEN ENT-- as tenants by the Custodian
entireties
(Cust) (Minor)
JT TEN-- as joint tenants with under Uniform Gifts/Transfers to CD Minors Act
right of survivorship and (State)
not as tenants in common
</Table>
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
DYNEGY ENERGY PARTNERS L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF
DYNEGY ENERGY PARTNERS L.P.
You have acquired an interest in Dynegy Energy Partners L.P., 1000
Louisiana, Suite 5800, Houston Texas 77002, whose taxpayer identification number
is 23-3096839. The Internal Revenue Service has issued Dynegy Energy Partners
L.P. the following tax shelter registration
number: ____________.
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT OR OTHER TAX BENEFIT OR REPORT ANY INCOME
BY REASON OF YOUR INVESTMENT IN DYNEGY ENERGY PARTNERS L.P.
You must report the registration number as well as the name and taxpayer
identification number of Dynegy Energy Partners L.P. on Form 8271. FORM 8271
MUST BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN DYNEGY
ENERGY PARTNERS L.P.
If you transfer your interest in Dynegy Energy Partners L.P. to another
person, you are required by the Internal Revenue Service to keep a list
containing (a) that person's name, address and taxpayer identification number,
(b) the date on which you transferred the interest and (c) the name, address and
tax shelter registration number of Dynegy Energy Partners L.P. If you do not
want to keep such a list, you must (1) send the information specified above to
the Partnership, which will keep the list for this tax shelter, and (2) give a
copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could result
in the imposition of a penalty under Section 6707(b) or 6708(a) of the Internal
Revenue Code of 1986, as amended, unless such failure is shown to be due to
reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
A-81
<Page>
FOR VALUE RECEIVED, ________________ hereby assigns, conveys, sells and
transfers unto
<Table>
<Caption>
- -------------------------------------------- --------------------------------------------
(Please print or typewrite name (Please insert Social Security or other
and address of Assignee) identifying number of Assignee)
Common Units representing limited partner interests evidenced by this Certificate, subject
to the Partnership Agreement, and does hereby irrevocably constitute and appoint as its
attorney-in-fact with full power of substitution to transfer the same on the books of Dynegy
Energy Partners L.P.
Date: NOTE: The signature to any endorsement hereon
must correspond with the name as
written upon the face of this
Certificate in every particular,
without alteration, enlargement or
change.
SIGNATURE(S) MUST BE GUARANTEED BY A MEMBER --------------------------------------------
FIRM OF THE NATIONAL ASSOCIATION OF (Signature)
SECURITIES DEALERS, INC. OR BY A COMMERCIAL
BANK OR TRUST COMPANY SIGNATURE(S) GUARANTEED
--------------------------------------------
(Signature)
</Table>
- ------------------------
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership, unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Partnership will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer application
in order for such transferee to obtain registration of the transfer of the
Common Units.
A-82
<Page>
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("ASSIGNEE") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Dynegy Energy Partners L.P. (the
"PARTNERSHIP"), as amended, supplemented or restated to the date hereof (the
"PARTNERSHIP AGREEMENT"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as the Assignee's attorney-in-fact to execute, swear to, acknowledge
and file any document, including, without limitation, the Partnership Agreement
and any amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the powers of attorney provided for in the
Partnership Agreement, and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not defined
herein have the meanings assigned to such terms in the Partnership Agreement.
Date: _________________
<Table>
<Caption>
- -------------------------------------------- --------------------------------------------
Social Security or other identifying number Signature of Assignee
- -------------------------------------------- --------------------------------------------
Purchase Price including commissions, if any Name and Address of Assignee
</Table>
Type of Entity (check one):
<Table>
<Caption>
/ / Individual / / Partnership / / Corporation
/ / Trust / / Other (specify)
</Table>
Nationality (check one):
<Table>
<Caption>
/ / U.S. Citizen, Resident or Domestic Entity
/ / Foreign Corporation / / Non-resident Alien
</Table>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"CODE"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
A-83
<Page>
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
____________.
3. My home address is ____________________________________.
B. Partnership, Corporation or Other Interestholder
1. ____________ is not a foreign corporation, foreign partnership, foreign
trust (Name of Interestholder) or foreign estate (as those terms are
defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
____________.
3. The interestholder's office address and place of incorporation (if
applicable) is ____________.
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete and, if applicable, I further declare that I have authority to sign
this document on behalf of:
<Table>
<Caption>
----------------------------
Name of Interestholder
----------------------------
Signature and Date
----------------------------
Title (if applicable)
</Table>
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-84
<Page>
APPENDIX B
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("ASSIGNEE") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Dynegy Energy Partners L.P. (the
"PARTNERSHIP"), as amended, supplemented or restated to the date hereof (the
"PARTNERSHIP AGREEMENT"), (b) represents and warrants that the Assignee has all
right, power and authority and, if an individual, the capacity necessary to
enter into the Partnership Agreement, (c) appoints the General Partner of the
Partnership and, if a Liquidator shall be appointed, the Liquidator of the
Partnership as the Assignee's attorney-in-fact to execute, swear to, acknowledge
and file any document, including, without limitation, the Partnership Agreement
and any amendment thereto and the Certificate of Limited Partnership of the
Partnership and any amendment thereto, necessary or appropriate for the
Assignee's admission as a Substituted Limited Partner and as a party to the
Partnership Agreement, (d) gives the powers of attorney provided for in the
Partnership Agreement, and (e) makes the waivers and gives the consents and
approvals contained in the Partnership Agreement. Capitalized terms not defined
herein have the meanings assigned to such terms in the Partnership Agreement.
<Table>
Date:
Social Security or other identifying number of Assignee Signature of Assignee
Purchase Price including commissions, if any Name and Address of Assignee
</Table>
<Table>
Type of Entity (check one):
/ / Individual / / Partnership / / Corporation
/ / Trust / / Other (specify)
Nationality (check one):
/ / U.S. citizen, Resident or Domestic / / Non-resident Alien
Entity
/ / Foreign Corporation
</Table>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"CODE"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income
taxation.
2. My U.S. taxpayer identification number (Social Security Number)
is .
3. My home address is .
B-1
<Page>
B. Partnership, Corporation or Other Interestholder
1. is not a foreign corporation, foreign
partnership, foreign trust (Name of Interestholder) or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
.
3. The interestholder's office address and place of incorporation
(if applicable) is .
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and, to the best of my knowledge and belief, it is true, correct
and complete and, if applicable, I further declare that I have authority to sign
this document on behalf of:
------------------------------------
Name of Interestholder
------------------------------------
Signature and Date
------------------------------------
Title (if applicable)
NOTE: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
B-2
<Page>
APPENDIX C
GLOSSARY OF TERMS
ADJUSTED OPERATING SURPLUS: For any period, operating surplus generated
during that period is adjusted to:
(a) decrease operating surplus by:
(1) any net increase in working capital borrowings during that
period; and
(2) any net reduction in cash reserves for operating expenditures
during that period not relating to an operating expenditure made during
that period; and
(b) increase operating surplus by:
(1) any net decrease in working capital borrowings during that
period; and
(2) any net increase in cash reserves for operating expenditures
during that period required by any debt instrument for the repayment of
principal, interest or premium.
Adjusted operating surplus does not include that portion of operating
surplus included in clause (a) (1) or the definition of operating surplus.
AVAILABLE CASH: For any quarter ending prior to liquidation:
(a) the sum of:
(1) all cash and cash equivalents of Dynegy Energy Partners and its
subsidiaries on hand at the end of that quarter; and
(2) all additional cash and cash equivalents of Dynegy Energy
Partners and its subsidiaries on hand on the date of determination of
available cash for that quarter resulting from working capital borrowings
made after the end of that quarter;
(b) less the amount of cash reserves that is necessary or appropriate in
the reasonable discretion of our general partner to:
(1) provide for the proper conduct of the business of Dynegy Energy
Partners and its subsidiaries (including reserves for future capital
expenditures and for future credit needs of Dynegy Energy Partners and
its subsidiaries) after that quarter;
(2) comply with applicable law or any debt instrument or other
agreement or obligation to which Dynegy Energy Partners or any of its
subsidiaries is a party or its assets are subject; and
(3) provide funds for minimum quarterly distributions and cumulative
common unit arrearages for any one or more of the next four quarters;
PROVIDED, HOWEVER, that our general partner may not establish cash reserves for
distributions to the subordinated units unless our general partner has
determined that in its judgment the establishment of reserves will not prevent
Dynegy Energy Partners from distributing the minimum quarterly distribution on
all common units and any cumulative common unit arrearages thereon for the next
four quarters; and
PROVIDED, FURTHER, that disbursements made by Dynegy Energy Partners or any of
its subsidiaries or cash reserves established, increased or reduced after the
end of that quarter but on or before the date of determination of available cash
for that quarter shall be deemed to have been made, established,
C-1
<Page>
increased or reduced, for purposes of determining available cash, within that
quarter if our general partner so determines.
BARREL: One barrel of petroleum products equals 42 U.S. gallons.
CAPITAL ACCOUNT: The capital account maintained for a partner under the
partnership agreement. The capital account of a partner for a common unit, a
subordinated unit, an incentive distribution right or any other partnership
interest will be the amount which that capital account would be if that common
unit, subordinated unit, incentive distribution right or other partnership
interest were the only interest in Dynegy Energy Partners held by a partner.
CAPITAL SURPLUS: All available cash distributed by us from any source will
be treated as distributed from operating surplus until the sum of all available
cash distributed since the closing of the initial public offering equals the
operating surplus as of the end of the quarter before that distribution. Any
excess available cash will be deemed to be capital surplus.
CLOSING PRICE: The last sale price on a day, regular way, or in case no
sale takes place on that day, the average of the closing bid and asked prices on
that day, regular way. In either case, as reported in the principal consolidated
transaction reporting system for securities listed or admitted to trading on the
principal national securities exchange on which the units of that class are
listed or admitted to trading. If the units of that class are not listed or
admitted to trading on any national securities exchange, the last quoted price
on that day. If no quoted price exists, the average of the high bid and low
asked prices on that day in the over-the-counter market, as reported by the
Nasdaq Stock Market or any other system then in use. If on any day the units of
that class are not quoted by any organization of that type, the average of the
closing bid and asked prices on that day as furnished by a professional market
maker making a market in the units of the class selected by our general partner.
If on that day no market maker is making a market in the units of that class,
the fair value of the units on that day as determined reasonably and in good
faith by our general partner.
COMMON UNIT ARREARAGE: The amount by which the minimum quarterly
distribution for a quarter during the subordination period exceeds the
distribution of available cash from operating surplus actually made for that
quarter on a common unit, cumulative for that quarter and all prior quarters
during the subordination period.
CURRENT MARKET PRICE: For any class of units listed or admitted to trading
on any national securities exchange as of any date, the average of the daily
closing prices for the 20 consecutive trading days immediately prior to that
date.
DEBUTANIZER: A fractionation tower which separates butanes from heavier NGL
components.
DEISOBUTANIZER: A fractionation tower which separates isobutane from normal
butane.
DEPROPANIZER: A fractionation tower which separates propane from heavier
NGL components.
ETHANE-PROPANE MIX: One of the five component NGL products produced from
the fractionation of mixed NGLs, typically 80% ethane 20% propane.
FERC: Federal Energy Regulatory Commission.
FRACTIONATION: The process of separating mixed NGLs into NGL products by a
process known as fractional distillation.
FRACTIONATOR: A processing unit that separates a mixed stream of NGLs into
component products by fractionation.
C-2
<Page>
INCENTIVE DISTRIBUTION RIGHTS: A non-voting limited partner interest issued
to our general partner confering upon it the right to receive increasing
percentages, up to 48%, of the cash we distribute in excess of $0.4375 per unit
each quarter.
INTERIM CAPITAL TRANSACTIONS: The following transactions if they occur
prior to liquidation:
(a) borrowings, refinancings or refundings of indebtedness and sales of
debt securities (other than for working capital borrowings and other than
for items purchased on open account in the ordinary course of business) by
Dynegy Energy Partners or any of its subsidiaries;
(b) sales of equity interests by Dynegy Energy Partners or any of its
subsidiaries;
(c) sales or other voluntary or involuntary dispositions of any assets
of Dynegy Energy Partners or any of its subsidiaries (other than sales or
other dispositions of inventory, accounts receivable and other assets in the
ordinary course of business, and sales or other dispositions of assets as a
part of normal retirements or replacements).
MIXED NGLS: Hydrocarbon streams produced by gas plants or refineries that
contain commingled components of ethane, propane, butane and natural gasoline.
NGLS: Natural gas liquids, which consist primarily of ethane, propane,
normal butane, isobutane and natural gasoline, and are by-products of the
production of natural gas and the refining of crude oil.
NGL PRODUCTS: The resulting products after the fractionation of mixed NGLs;
ethane, propane, normal butane, isobutane and natural gasoline.
OPERATING EXPENDITURES: All expenditures of Dynegy Energy Partners and our
subsidiaries, including, but not limited to, taxes, reimbursements of our
general partner, repayment of working capital borrowings, debt service payments
and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness, other than working capital borrowings will not constitute
operating expenditures.
(b) Operating expenditures will not include:
(1) capital expenditures made for acquisitions or for capital
improvements;
(2) payment of transaction expenses relating to interim capital
transactions; or
(3) distributions to partners.
OPIS: Oil Price Information Service.
OPERATING SURPLUS: For any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of
(1) $20.0 million plus all the cash of Dynegy Energy Partners and its
subsidiaries on hand as of the closing date of our initial public
offering;
(2) all cash receipts of Dynegy Energy Partners and our subsidiaries
for the period beginning on the closing date of our initial public
offering and ending with the last day of that period, other than cash
receipts from interim capital transactions; and
(3) all cash receipts of Dynegy Energy Partners and our subsidiaries
after the end of that period but on or before the date of determination
of operating surplus for the period resulting from working capital
borrowings; less
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<Page>
(b) the sum of:
(1) operating expenditures for the period beginning on the closing
date of our initial public offering and ending with the last day of that
period; and
(2) the amount of cash reserves that is necessary or advisable in the
reasonable discretion of our general partner to provide funds for future
operating expenditures; provided however, that disbursements made
(including contributions to a member of Dynegy Energy Partners Gas
Liquids and our subsidiaries or disbursements on behalf of a member of
Dynegy Energy Partners and our subsidiaries) or cash reserves
established, increased or reduced after the end of that period but on or
before the date of determination of available cash for that period shall
be deemed to have been made, established, increased or reduced for
purposes of determining operating surplus, within that period if our
general partner so determines.
PURITY ETHANE: a highly concentrated form of ethane, typically containing
at least 95% ethane.
REFINING BLEND STOCKS: NGLs products such as butane, natural gasoline or
other manufactured additives that are components used in the manufacture of
motor gasoline and other transportation fuels.
SUBORDINATION PERIOD: The subordination period will generally extend from
the closing of the initial public offering until the first to occur of:
(a) the first day of any quarter beginning after June 30, 2007 for
which:
(1) distributions of available cash from operating surplus on each of
the outstanding common units and subordinated units equaled or exceeded
the sum of the minimum quarterly distribution on all of the outstanding
common units and subordinated units for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;
(2) the adjusted operating surplus generated during each of the three
consecutive, non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distribution on all of the common units and subordinated units that were
outstanding during those periods on a fully-diluted basis, and the
related distribution on our general partner interests in Dynegy Energy
Partners and the operating partnership; and
(3) there are no outstanding cumulative common units arrearages.
(b) the date on which our general partner is removed as general partner
of Dynegy Energy Partners upon the requisite vote by the limited partners
under circumstances where cause does not exist and units held by our general
partner and its affiliates are not voted in favor of the removal.
TERMINALLING: services associated with the receipt, delivery or throughput
of mixed NGLs, NGL products or chemical products to or from pipelines, barges,
ships, rail or truck.
WORKING CAPITAL BORROWINGS: Borrowings exclusively for working capital
purposes made pursuant to a credit facility or other arrangement to the extent
such borrowings are required to be reduced to a relatively small amount each
year for an economically meaningful period of time.
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<Page>
APPENDIX D
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of Pro Forma Available Cash from
Operating Surplus and should be read in conjunction with "Cash Available for
Distribution," the Dynegy Energy Partners Predecessor Financial Statements, and
the Dynegy Energy Partners L.P. Unaudited Pro Forma Financial Statements.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2001
------------------
(IN THOUSANDS)
Pro forma net income........................................ $ 41,529
Add:
Pro forma depreciation and amortization................... 18,578
Pro forma net interest expense............................ 8,617
-----------
Pro forma EBITDA(a)....................................... $ 68,724
Less:
Pro forma net interest expense............................ 8,617
Pro forma maintenance capital expenditures................ 11,172
-----------
Pro forma available cash from operating surplus(b)(c)(d).... $ 48,935
===========
</Table>
- ------------------------
(a) EBITDA is defined as net income plus depreciation and amortization expense
and interest expense.
(b) The pro forma adjustments in the pro forma financial statements are based
upon currently available information and certain estimates and assumptions.
The pro forma financial statements do not purport to present the financial
position or results of operations of Dynegy Energy Partners had the
transactions to be effected at the closing of this offering actually been
completed as of the date indicated. Furthermore, the pro forma financial
statements are based on accrual accounting concepts whereas available cash
from operating surplus is defined in the partnership agreement on a cash
accounting basis. As a consequence, the amount of pro forma cash available
from operating surplus shown above should be viewed as a general indication
of the amounts of available cash from operating surplus that may in fact
have been generated by Dynegy Energy Partners had it been formed in earlier
periods.
(c) Pro forma available cash from operating surplus has not been reduced to
reflect expected incremental direct general and administrative expenses of
approximately $1.4 million, primarily related to the operation of our
partnership as a separate public entity. Estimated incremental expenses
relating to the operation of our partnership as a separate legal entity
include costs associated with tax return preparation, audit fees, annual and
quarterly reports to unitholders, investor relations and incremental
insurance requirements.
(d) The amount of available cash from operating surplus needed to distribute the
minimum quarterly distribution for one quarter and for four quarters on the
common units and subordinated units to
D-1
<Page>
be outstanding immediately after this offering and on the 2% general partner
interest is approximately:
<Table>
<Caption>
FOUR QUARTERS ONE QUARTER
------------- -----------
(DOLLARS IN THOUSANDS)
Common units............................................... $ 15,312 $ 3,828
Subordinated units......................................... 15,312 3,828
General partner............................................ 624 156
----------- -----------
Total.................................................... $ 31,248 $ 7,812
=========== ===========
</Table>
The pro forma amounts reflected above would have been sufficient to cover
the minimum quarterly distribution during 2001 on all of the common units,
the subordinated units and the related distribution on the 2% general
partner interest.
D-2
<Page>
[LOGO]
8,750,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
--------------
PROSPECTUS
, 2002
---------------------
LEHMAN BROTHERS
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee, the NASD filing fee and the
NYSE filing fee, the amounts set forth below are estimates.
<Table>
SEC Registration fee........................................ $16,905
NASD filing fee............................................. 18,875
NYSE listing fee............................................ *
Printing and engraving expenses............................. *
Fees and expenses of legal counsel.......................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
-------
Total................................................... $ *
</Table>
- ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The section of the prospectus entitled "The Partnership
Agreement--Indemnification" is incorporated herein by this reference. Reference
is made to Section of the Underwriting Agreement filed as Exhibit 1.1 to
the registration statement. Subject to any terms, conditions or restrictions set
forth in the Partnership Agreement, Section 17-108 of the Delaware Revised
Uniform Limited Partnership Act empowers a Delaware limited partnership to
indemnify and hold harmless any partner or other person from and against all
claims and demands whatsoever.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Dynegy Energy Partners L.P. issued to Dynegy DEP GP LLC limited partner
interests in the partnership in connection with the formation of the partnership
in February 2002 in an offering exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended. There have been no other sales of
unregistered securities within the past three years.
ITEM 16. EXHIBITS
The following documents are filed as exhibits to this registration
statement:
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
1.1* -- Form of Underwriting Agreement
3.1 -- Certificate of Limited Partnership of Dynegy Energy
Partners L.P.
3.2 -- Form of Amended and Restated Agreement of Limited
Partnership of Dynegy Energy Partners L.P. (included as
Appendix A to the Prospectus)
3.3* -- Certificate of Limited Partnership of Dynegy Operating
Partners L.P.
3.4* -- Form of Amended and Restated Agreement of Limited
Partnership of Dynegy Operating Partners L.P.
</Table>
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<Page>
ITEM 16. EXHIBITS (CONTINUED)
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
3.5 -- Certificate of Formation of Dynegy DEP GP LLC
3.6* -- Form of Limited Liability Company Agreement of Dynegy DEP
GP LLC
5.1* -- Opinion of Vinson & Elkins L.L.P. as to the legality of the
securities being registered
8.1* -- Opinion of Vinson & Elkins L.L.P relating to tax matters
10.1* -- Form of Credit Facility
10.2* -- Form of Contribution, Conveyance and Assumption Agreement
10.3* -- Form of Guarantee Facility by Dynegy Holdings Inc. in favor
of Dynegy Liquids Marketing and Trade
10.4* -- Form of Dynegy Energy Partners Long-Term Incentive Plan
10.5* -- Form of Omnibus Agreement
10.6* -- Form of Raw and Finished Products Purchase and Sale
Agreement between Dynegy Liquids Marketing and Trade and
Dynegy Midstream Services, Limited Partnership
10.7* -- Form of Raw Product Gathering Agreement between Dynegy
Liquids Marketing and Trade and Dynegy Midstream Services,
Limited Partnership
10.8* -- Form of Product Storage Agreement between Dynegy Midstream
Services, Limited Partnership and Dynegy Liquids Marketing
and Trade
10.9* -- Form of Fractionation Agreement between Dynegy Midstream
Services, Limited Partnership and Dynegy Liquids Marketing
and Trade
10.10+ -- Master Natural Gas Liquids Purchase Agreement dated as of
September 1, 1996, between Warren Petroleum Company,
Limited Partnership and Chevron U.S.A. Inc.
10.11+ -- Feedstock Sale and Refinery Product Purchase Agreements,
dated as of September 1, 1996, between Chevron Products
Company and Warren Petroleum Company, Limited Partnership.
10.12+ -- Refinery Product Sale Agreement (Hawaii), dated as of
September 1, 1996, between Warren Petroleum Company,
Limited Partnership and Chevron Products Company.
10.13+ -- CCC Product Sale and Purchase Agreement, dated as of
September 1, 1996, between Warren Petroleum Company,
Limited Partnership and Chevron Chemical Company.
10.14+ -- CCC/WPC Services Agreement, dated as of September 1, 1996,
between Chevron Chemical Company and Warren Petroleum
Company, Limited Partnership.
10.15+ -- Operating Agreement, dated as of September 1, 1996, between
Warren Petroleum Company, Limited Partnership and Chevron
Pipe Line Company.
10.16+ -- Galena Park Services Agreement, dated as of September 1,
1996, between Chevron Products Company and Midstream
Combination Corp.
10.17* -- Natural Gas Liquids Purchase Agreement effective
February 1, 2002 between Dynegy Liquids Marketing and
Trade, Texaco Exploration and Production Inc. and Texaco
Natural Gas Inc.
21.1* -- List of subsidiaries
</Table>
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<Page>
ITEM 16. EXHIBITS (CONTINUED)
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
23.1 -- Consent of Arthur Andersen LLP
23.2* -- Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 5.1)
23.3* -- Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 8.1)
24.1 -- Powers of Attorney (included on the signature page)
</Table>
- ------------------------
* To be filed by amendment
+ Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q
for the Quarterly Period ended September 30, 1996, of NGC Corporation,
Commission File No. 1-11156
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
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<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on February 22, 2002.
<Table>
DYNEGY ENERGY PARTNERS L.P.
By: DYNEGY DEP GP LLC
its General Partner
By: /s/ STEPHEN A. FURBACHER
--------------------------------------
Name: Stephen A. Furbacher
Title: CHIEF EXECUTIVE OFFICER AND CHIEF
OPERATING OFFICER
</Table>
Each person whose signature appears below appoints Stephen A. Furbacher and
Terry D. Jones, and each of them, any of whom may act without the joinder of the
other, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any Registration Statement
(including any amendment thereto) for this offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and
to file the same, with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or would do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them of their or
his substitute and substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEPHEN A. FURBACHER Chief Executive Officer, Chief
--------------------------------- Operating Officer and Director February 22, 2002
Stephen A. Furbacher (Principal Executive Officer)
/s/ MICHAEL R. MOTT
--------------------------------- Chief Financial Officer (Principal February 22, 2002
Michael R. Mott Financial and Accounting Officer)
/s/ STEPHEN W. BERGSTROM
--------------------------------- Director February 22, 2002
Stephen W. Bergstrom
/s/ ROBERT D. DOTY, JR.
--------------------------------- Director February 22, 2002
Robert D. Doty, Jr.
</Table>
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