Filed Pursuant to Rule 424(b)(5)
Registration No. 333-102778
333-102778-01
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 21, 2003)
(ENTERPRISE PRODUCTS PARTNERS L.P. LOGO)
ENTERPRISE PRODUCTS PARTNERS L.P.
15,000,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
- --------------------------------------------------------------------------------
We are offering to sell 15,000,000 common units, including an aggregate of 9,000
common units to be offered to four members of our senior management team. Our
common units trade on the New York Stock Exchange under the symbol "EPD." The
last reported sales price of our common units on the New York Stock Exchange on
April 29, 2004 was $21.00 per common unit.
INVESTING IN OUR COMMON UNITS INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE S-20 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 2 OF THE ACCOMPANYING
PROSPECTUS.
<Table>
<Caption>
PER COMMON UNIT TOTAL
--------------- ------------
Public offering price..................................... $21.0000 $315,000,000
Underwriting discount..................................... $ 0.8925 $ 13,387,500
Proceeds to Enterprise Products Partners (before
expenses)............................................... $20.1075 $301,612,500
</Table>
- ---------------
We have granted the underwriters a 30-day option to purchase up to an additional
2,250,000 common units on the same terms and conditions as set forth above to
cover over-allotments of common units, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the common units on or about May 5, 2004.
- --------------------------------------------------------------------------------
Joint Book-Running Managers
LEHMAN BROTHERS UBS INVESTMENT BANK
---------------------
CITIGROUP
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY
A.G. EDWARDS
WACHOVIA SECURITIES
SANDERS MORRIS HARRIS
---------------------
KEYBANC CAPITAL MARKETS JP MORGAN
April 29, 2004
[ENTERPRISE PRODUCTS PARTNERS SYSTEM MAP, GULFTERRA SYSTEM MAP
AND COMBINED COMPANY SYSTEM MAP APPEAR HERE]
This document is in two parts. The first part is this prospectus
supplement, which describes the terms of this offering of common units. The
second part is the accompanying prospectus, which gives more general
information, some of which may not apply to the common units. If the description
of the common unit offering varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement or the accompanying prospectus. We have
not authorized anyone to provide you with additional or different information.
We are not making an offer to sell these securities in any state where the offer
is not permitted. You should not assume that the information contained in this
prospectus supplement or the accompanying prospectus is accurate as of any date
other than the date on the front of these documents or that any information we
have incorporated by reference is accurate as of any date other than the date of
the document incorporated by reference. Our business, financial condition,
results of operations and prospects may have changed since these dates.
TABLE OF CONTENTS
<Table>
PROSPECTUS SUPPLEMENT
Summary..................................................... S-1
Risk Factors................................................ S-20
Use of Proceeds............................................. S-35
Price Range of Common Units and Distributions............... S-36
Capitalization.............................................. S-37
Business and Properties..................................... S-39
Management.................................................. S-44
Tax Consequences............................................ S-48
Underwriting................................................ S-50
Incorporation of Documents by Reference..................... S-54
Legal Matters............................................... S-54
Experts..................................................... S-54
Index to Unaudited Pro Forma Financial Statements........... F-1
PROSPECTUS
About This Prospectus....................................... iii
Our Company................................................. 1
Risk Factors................................................ 2
Use of Proceeds............................................. 10
Ratio of Earnings to Fixed Charges.......................... 10
Description of Debt Securities.............................. 11
Description of Our Common Units............................. 25
Cash Distribution Policy.................................... 27
Description of Our Partnership Agreement.................... 34
Tax Consequences............................................ 39
Selling Unitholders......................................... 52
Plan of Distribution........................................ 52
Where You Can Find More Information......................... 53
Forward-Looking Statements.................................. 54
Legal Matters............................................... 54
Experts..................................................... 54
</Table>
i
SUMMARY
This summary highlights information from this prospectus supplement and the
accompanying prospectus to help you understand the common units. It does not
contain all of the information that is important to you. You should read
carefully the entire prospectus supplement, the accompanying prospectus, the
documents incorporated by reference and the other documents to which we refer
for a more complete understanding of this offering. You should read "Risk
Factors" beginning on page S-20 of this prospectus supplement and on page 2 of
the accompanying prospectus for more information about important risks that you
should consider before buying common units in this offering.
The information presented in this prospectus supplement assumes that the
underwriters do not exercise their over-allotment option. All references in this
prospectus supplement and the accompanying prospectus to number of units,
earnings per unit or unit price give effect to our two-for-one unit split on May
15, 2002. "Our," "we," "us" and "Enterprise" as used in this prospectus
supplement and the accompanying prospectus refer solely to Enterprise Products
Partners L.P. and its wholly-owned subsidiaries, and do not refer to GulfTerra
Energy Partners, L.P. "GulfTerra" as used in this prospectus supplement refers
to GulfTerra Energy Partners, L.P. and its wholly-owned subsidiaries, and "El
Paso Corporation" as used in this prospectus supplement refers to El Paso
Corporation and its wholly-owned subsidiaries. References to the "combined
company" in this prospectus supplement mean Enterprise Products Partners L.P.
and its wholly-owned subsidiaries following the closing of our recently
announced merger with GulfTerra and related transactions.
Unless otherwise indicated, pro forma financial results presented in this
prospectus supplement give effect to the completion of our recently announced
merger with GulfTerra, the concurrent purchase from El Paso Corporation of the
related South Texas midstream assets and this offering. For a complete
description of the adjustments we have made to arrive at the pro forma financial
measures that we present in this prospectus supplement, please read our
unaudited pro forma financial statements included elsewhere in this prospectus
supplement.
ENTERPRISE PRODUCTS PARTNERS L.P.
We are a leading North American midstream energy company that provides a
wide range of services to producers and consumers of natural gas and natural gas
liquids, or NGLs. NGLs are used by the petrochemical and refining industries to
produce plastics, motor gasoline and other industrial and consumer products and
also are used as residential, agricultural and industrial fuels. Our existing
asset platform in the Gulf Coast region of the United States, combined with our
Mid-America and Seminole pipeline systems acquired in 2002, creates the only
integrated natural gas and NGL transportation, fractionation, processing,
storage and import/export network in North America. We provide integrated
services to our customers and generate fee-based cash flow from multiple sources
along our natural gas and NGL "value chain." Our principal executive offices are
located at 2727 North Loop West, Houston, Texas 77008, and our phone number is
(713) 880-6500.
On December 15, 2003, we entered into a series of agreements with El Paso
Corporation and GulfTerra Energy Partners, L.P. pursuant to which:
- we purchased a 50% membership interest in GulfTerra's general partner for
$425 million;
- we agreed to merge with GulfTerra; and
- we agreed to purchase from El Paso Corporation approximately $150 million
of midstream assets located in South Texas and related inventories that
are closely related to GulfTerra's operations.
GulfTerra is a master limited partnership formerly known as El Paso Energy
Partners, L.P. and is principally engaged in the midstream energy sector.
GulfTerra's common units are traded on the New York Stock Exchange under the
symbol "GTM."
For the year ended December 31, 2003, we had revenues of $5.3 billion,
operating income of $248.1 million and net income of $104.5 million. On a pro
forma basis for the year ended December 31, 2003, we had revenues of $7.2
billion, operating income of $582.8 million and net income of $275.5 million.
S-1
OUR BUSINESS SEGMENTS
Pipelines. Our Pipelines segment includes approximately 14,000 miles of
NGL, petrochemical and natural gas pipelines located primarily in the Rocky
Mountain, Mid-Continent and Gulf Coast regions of the United States. This
segment also includes our storage and import/export terminalling businesses.
Fractionation. Our Fractionation segment includes eight NGL fractionators,
the largest commercial isomerization complex in the United States and four
propylene fractionation facilities. NGL fractionators separate mixed NGL streams
produced as by-products of natural gas production and crude oil refining into
discrete NGL products: ethane, propane, isobutane, normal butane and natural
gasoline. Our isomerization complex converts normal butane into isobutane. Our
propylene fractionators separate refinery-sourced propane/propylene mix into
propane, propylene and mixed butane.
Processing. Our Processing segment is comprised of our natural gas
processing business and related NGL marketing activities. At the core of our
natural gas processing business are 12 gas plants, located primarily in south
Louisiana, that process raw natural gas into a product that meets pipeline and
industry specifications by removing NGLs and impurities. In connection with our
processing businesses, we receive a portion of the NGL production from our gas
plants. This equity NGL production, together with the NGLs we purchase, supports
the NGL marketing activities included in this operating segment.
Octane Enhancement and Other. Our Octane Enhancement segment consists of a
66.6% equity investment in Belvieu Environmental Fuels L.P., or BEF, which owns
a facility that produces motor gasoline additives used to enhance octane. Our
Other segment consists primarily of fee-based marketing services and unallocated
cost of services that support our operations and business activities.
GULFTERRA'S BUSINESS SEGMENTS
Natural Gas Pipelines and Plants. GulfTerra owns or has interests in
natural gas pipeline systems extending over 15,500 miles. These pipeline systems
include natural gas gathering systems onshore in Alabama, Colorado, Louisiana,
Mississippi, New Mexico and Texas and offshore in some of the most active
drilling and development regions in the Gulf of Mexico. GulfTerra also owns
interests in five processing and treating plants in New Mexico, Texas and
Colorado.
Oil and NGL Logistics. GulfTerra owns over 1,000 miles of intrastate NGL
gathering and transportation pipelines and four fractionation plants in Texas,
owns interests in three offshore oil pipeline systems, which extend over 340
miles, is constructing the 390-mile Cameron Highway Oil Pipeline, owns a 3.3
million barrel, or MMBbl, propane storage business in Mississippi and owns or
leases NGL storage facilities in Louisiana and Texas with aggregate capacity of
approximately 21.3 MMBbls.
Natural Gas Storage. GulfTerra owns two salt dome natural gas storage
facilities in Mississippi that have a combined current working capacity of 13.5
billion cubic feet, or Bcf, and are capable of delivering in excess of 1.2
billion cubic feet per day, or Bcf/d, of natural gas into five interstate
pipeline systems. In addition, GulfTerra has the exclusive right to use a
natural gas storage facility in Wharton County, Texas under an operating lease
that expires in January 2008. This facility has a working gas capacity of 6.4
Bcf and a maximum withdrawal capacity of 800 million cubic feet per day, or
MMcf/d, of natural gas.
Platform Services. GulfTerra has interests in seven multi-purpose offshore
hub platforms in the Gulf of Mexico and is constructing the Marco Polo tension
leg platform. These platforms were specifically designed to be used as deepwater
hubs and production handling and pipeline maintenance facilities. Many of
GulfTerra's offshore natural gas and oil pipelines utilize these platforms.
Other Assets. GulfTerra owns interests in four oil and natural gas
properties located in waters offshore of Louisiana. Production is gathered,
transported, and processed through GulfTerra's pipeline systems and platform
facilities, and sold to various third parties and subsidiaries of El Paso
Corporation.
S-2
OUR REASONS FOR THE MERGER
The board of directors of our general partner considered various factors in
pursuing the proposed merger with GulfTerra and the related transactions,
including the following:
- Significant increases to the diversity and scale of our operations. We
believe that the merger will enable us to have a more balanced business
mix and to expand our geographic presence to areas where we currently
have no significant operations, such as the San Juan and Permian Basins.
- Greater cash flow stability. After the merger, we believe that a higher
percentage of our income will be generated from fee-based businesses.
Additionally, GulfTerra's operations currently benefit from higher
natural gas prices, and are expected to provide a natural hedge to our
NGL business, which generally benefits from lower or stable natural gas
prices.
- Incremental growth opportunities. GulfTerra has significant organic
growth projects, and the combination of our operations with GulfTerra's
operations is expected to provide incremental growth opportunities.
- Potential cost savings. We expect that the annual operating costs of the
combined company will be lower than the aggregate pro forma historical
costs of our company and GulfTerra, and we expect that the combined
company will have annual interest expense savings.
- Long-term accretion to distributable cash flow per unit to our
unitholders. In connection with the proposed merger, we agreed, subject
to the terms of our partnership agreement, to increase our quarterly cash
distribution on our common units to at least $0.395 per unit, or $1.58
per unit on an annual basis, commencing with the first regular quarterly
distribution after the merger closes. Our unitholders are expected to
benefit from accretion to distributable cash flow per unit, which is the
basis for the contracted distribution increase. Additionally, the
accretion to distributable cash flow per unit could allow us to further
increase future distributions to our unitholders.
BUSINESS STRATEGY OF THE COMBINED COMPANY
The business strategy of the combined company will be to:
- capitalize on expected increases in natural gas, NGL and oil production
resulting from development activities in the Rocky Mountain region and in
the deepwater and continental shelf areas of the Gulf of Mexico;
- maintain a balanced and diversified portfolio of midstream energy assets
and expand this asset base through organic development projects and
accretive acquisitions of complementary midstream energy assets;
- share capital costs and risks through joint ventures or alliances with
strategic partners that will provide the raw materials for these projects
or purchase the projects' end products; and
- increase fee-based cash flows by investing in pipelines and other
fee-based businesses and de-emphasize commodity-based activities.
COMPETITIVE STRENGTHS OF THE COMBINED COMPANY
We believe that the combined company will have the following competitive
strengths:
Large-Scale, Integrated Platform of Assets in Strategic Locations. The
proposed merger will further expand our integrated natural gas and NGL
transportation, fractionation, processing, storage and import/export network in
North America. The operations of the combined company will be strategically
located to serve the major supply basins for NGL-rich natural gas, the major NGL
storage hubs in North America and international markets. We believe that the
combined company's location in these markets will provide better access to
natural gas, NGL and petrochemical supply volumes, anticipated demand growth and
business expansion opportunities. The geographic presence of the combined
company will be strengthened in areas where we currently have no significant
operations, such as the San Juan and Permian Basins.
S-3
Strategic Platform for Continued Expansion and Distribution Growth. We
believe that GulfTerra has significant development opportunities, and that the
combination of our operations and GulfTerra's operations will provide the
combined company with incremental growth opportunities for both onshore and
offshore projects. Many of the combined company's assets will have additional
capacity that can accommodate increased volumes at low incremental cost. We
expect that taking advantage of these growth opportunities will increase the
combined company's cash flow from operations and result in accretion to
distributable cash flow per unit.
Enhanced Access to Capital. We believe that the combined company will have
a lower cost of capital than many of its competitors, which will enable it to
compete more effectively in acquiring assets and expanding its systems. In
December 2002, we amended our partnership agreement to eliminate our general
partner's right to receive 50% of cash distributions with respect to that
portion of quarterly cash distributions that exceed $0.392 per unit. When our
quarterly cash distribution exceeds $0.392 per unit, we believe our unitholders
will enjoy an advantage over unitholders of many other publicly traded
partnerships because cash that would have been distributed to our general
partner will remain available for distribution to our unitholders.
Relationships with Major Oil, Natural Gas and Petrochemical
Companies. Both we and GulfTerra have long-term relationships with many of our
suppliers and customers, and we believe that the combined company will continue
to benefit from these relationships. The combined company will jointly own
facilities with many of its customers who will either provide raw materials to
or consume the end products from the combined company's facilities. These joint
venture partners include major oil, natural gas and petrochemical companies,
including BP, Burlington Resources, ChevronTexaco, Dow Chemical, Duke Energy
Field Services, El Paso Corporation, ExxonMobil, Marathon and Shell.
Cash-Flow Stability Through Fee-Based Businesses and Balanced Asset
Mix. The combined company's cash flow will be derived primarily from fee-based
businesses that will not be directly affected by volatility in energy commodity
prices. We expect that the diversified asset portfolio of the combined company
will provide operating income from a broader range of sources than our current
operations. Additionally, GulfTerra's operations currently benefit from higher
natural gas prices and will provide a natural hedge to our NGL business, which
generally benefits from stable or lower natural gas prices.
Operating Cost Advantage. We believe that the combined company's operating
costs, especially for its large-scale facilities, will be competitive with, or
lower than, those associated with the combined company's competitors. We expect
that the combined company's annual operating costs will be lower than our and
GulfTerra's aggregate historical costs and expect that the combined company will
achieve annual interest expense savings through its strategy for management of
its debt obligations.
Experienced Operator and Management Team whose Interests are Aligned with
Those of Our Unitholders. Both we and GulfTerra have historically operated our
largest natural gas processing and fractionation facilities and most of our
pipelines. As the leading provider of NGL-related services, we have established
a reputation in the industry as a reliable and cost-effective operator. After
the closing of the merger, affiliates of Dan L. Duncan, our co-founder and the
chairman of our general partner, will own a 90.1% membership interest in our
general partner, and El Paso Corporation will own a 9.9% membership interest in
our general partner. In addition, after giving effect to this offering and the
merger, Mr. Duncan and his affiliates will collectively own an approximate 35.4%
limited partner interest in us. The persons whom we expect will serve as senior
executive officers of the combined company, Dan L. Duncan, O.S. Andras and
Robert G. Phillips, average more than 35 years of industry experience.
S-4
THE OFFERING
Common units offered.......... 15,000,000 common units; or
17,250,000 common units if the underwriters
exercise their over-allotment option in full.
Units outstanding after this
offering...................... 229,661,604 common units, or 231,911,604 common
units if the underwriters exercise their
over-allotment option in full; and
4,413,549 Class B special units.
Use of proceeds............... We will use the net proceeds from this
offering, including our general partner's
proportionate capital contribution (1) to repay
in full our $225 million interim term loan and
(2) to temporarily reduce borrowings under our
revolving credit facilities. Affiliates of
Lehman Brothers Inc. and Wachovia Capital
Markets, LLC, underwriters for this offering,
are lenders to us under this $225 million
interim term loan and will be repaid with a
portion of the net proceeds from this offering.
Affiliates of some of the underwriters for this
offering are lenders under our revolving credit
facilities. Please read "Underwriting."
Cash distributions............ Under our partnership agreement, we must
distribute all of our cash on hand as of 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.
On February 11, 2004, we paid a quarterly cash
distribution for the fourth quarter of 2003 of
$0.3725 per unit, or $1.49 per unit on an
annualized basis. On April 19, 2004, our
general partner declared a quarterly cash
distribution for the first quarter of 2004 of
$0.3725 per unit, or $1.49 per unit on an
annualized basis. The distribution will be paid
on May 12, 2004 to unitholders of record at the
close of business on April 30, 2004. We do not
expect that holders of units purchased in this
offering will be entitled to receive this
distribution.
When quarterly cash distributions exceed $0.253
per unit in any quarter, our general partner
receives a higher percentage of the cash
distributed in excess of that amount, in
increasing percentages up to 25% if the
quarterly cash distributions exceed $0.3085 per
unit. For a description of our cash
distribution policy, please read "Cash
Distribution Policy" in the accompanying
prospectus.
We have agreed, subject to the terms of our
partnership agreement, to increase the
quarterly cash distribution for the first
regular quarterly distribution after the
closing of the merger to at least $0.395 per
unit, or $1.58 per unit on an annualized basis.
Estimated ratio of taxable
income to distributions....... We estimate that if you own the common units
you purchase in this offering through December
31, 2006, you will be allocated, on a
cumulative basis, an amount of federal taxable
income for that period that will be less than
10% of the cash distributed with respect to
that period. We expect this estimate to remain
the same following the GulfTerra merger. Please
read "Tax Consequences" in this prospectus
supplement for the basis of this estimate.
New York Stock Exchange
symbol........................ EPD
S-5
RISK FACTORS
There are risks associated with the merger and the related transactions,
risks associated with the combined company's business and risks associated with
our business. You should consider carefully the risk factors beginning on page
S-20 of this prospectus supplement and beginning on page 2 of the accompanying
prospectus before making a decision to purchase our common units.
THE MERGER AND RELATED TRANSACTIONS
Under the definitive agreements relating to the merger, the merger is to
occur in several interrelated transactions described below. Step One occurred on
December 15, 2003, concurrent with the announcement of the proposed merger and
related transactions. With respect to Step Two and Step Three, we have entered
into binding agreements subject to certain standard conditions. Please read
"-- Conditions to the Effectiveness of the Merger and Related Transactions."
Step One: Acquisition of 50% Membership Interest in GulfTerra's General
Partner. On December 15, 2003, we purchased a 50% membership interest in
GulfTerra's general partner for $425 million from El Paso Corporation, resulting
in GulfTerra's general partner now being 50% owned by El Paso Corporation and
50% owned by us. Our interest in GulfTerra's general partner entitles us to
receive, subject to the terms of GulfTerra's general partner's limited liability
company agreement, quarterly distributions equal to 50% of all available cash
held by GulfTerra's general partner. At GulfTerra's current distribution rate of
$2.84 per unit annually, GulfTerra's general partner is entitled to receive
annual distributions of approximately $85 million. Our 50% membership interest
in GulfTerra's general partner would entitle us to receive approximately $42.5
million annually, assuming that no portion of such annual cash distribution is
retained by GulfTerra's general partner under its limited liability company
agreement to establish cash reserves. El Paso Corporation serves as the managing
member of the GulfTerra general partner, and our rights are limited to
protective consent rights on specified material transactions affecting GulfTerra
or its general partner or the rights and preferences associated with our
membership interest in GulfTerra's general partner. We will continue to own this
50% membership interest in GulfTerra's general partner even if the merger does
not close.
We financed the $425 million Step One purchase through a combination of a
$225 million interim term loan and $200 million borrowed under our 364-day
revolving credit facility. The net proceeds from this offering will be used to
repay in full this interim term loan and to temporarily reduce borrowings under
our revolving credit facilities. Affiliates of Lehman Brothers Inc. and Wachovia
Capital Markets, LLC, underwriters for this offering, are lenders to us under
the $225 million interim term loan and will be repaid with the net proceeds of
this offering. Affiliates of some of the underwriters for this offering are
lenders under our revolving credit facilities. Please read "Underwriting."
S-6
The following organizational chart depicts our current organizational
structure and our ownership immediately after giving effect to this offering.
(GRAPH)
- ---------------
(1) Includes units held by affiliates of Enterprise Products Company, or EPCO,
and assumes the conversion of all 4,413,549 of our Class B special units
into an equal number of our common units following approval of the
conversion by our unitholders.
(2) The ownership of limited partner interests in GulfTerra is as of March 31,
2004.
(3) Does not include any of GulfTerra's common units that may be issued upon
conversion of GulfTerra's 35 remaining Series F1 convertible units and 80
Series F2 convertible units prior to the closing of the merger.
The table below shows the current ownership of our common units and the
ownership of our common units after giving effect to this offering.
<Table>
<Caption>
CURRENT OWNERSHIP OWNERSHIP AFTER THE OFFERING
--------------------------------- ---------------------------------
UNITS PERCENTAGE INTEREST UNITS PERCENTAGE INTEREST
----------- ------------------- ----------- -------------------
Public common units....... 56,040,981 25.1% 71,040,981 29.7%
EPCO common units(1)...... 122,034,172 54.6% 122,034,172 51.1%
Shell common units........ 41,000,000 18.3% 41,000,000 17.2%
General partner
interest................ -- 2.0% -- 2.0%
----------- ----- ----------- -----
Total................... 219,075,153 100.0% 234,075,153 100.0%
=========== ===== =========== =====
</Table>
- ---------------
(1) Includes common units held by affiliates of EPCO and assumes the conversion
of all 4,413,549 of our Class B special units into an equal number of our
common units following approval of the conversion by our unitholders.
Step Two: The Merger and Related Transactions. Immediately prior to the
closing of the merger, El Paso Corporation will contribute its 50% membership
interest in GulfTerra's general partner to our general partner in exchange for a
9.9% membership interest in our general partner and $370 million in cash from
our general partner. Our general partner will then make a capital contribution
of that 50% membership interest in
S-7
GulfTerra's general partner to us (without increasing its interest in our
earnings or cash distributions). In addition, we will purchase from El Paso
Corporation all 10,937,500 outstanding GulfTerra Series C Units and 2,876,620
GulfTerra common units for $500 million, none of which will be converted into
the right to receive our common units in the merger. We expect to finance this
purchase initially through a short-term acquisition term loan and with
borrowings under our revolving credit facilities. The purchase price of
approximately $36.19 per unit is equal to 90% of the average closing prices of
the GulfTerra common units on the New York Stock Exchange for the 20 trading
days ending on December 12, 2003 (the last full trading day before the proposed
merger was announced). Under the merger agreement, the remaining 7,433,425
GulfTerra common units owned by El Paso Corporation will be converted into the
right to receive 13,454,499 Enterprise common units.
Pursuant to the merger agreement, a subsidiary of our company will merge
with and into GulfTerra. GulfTerra will survive the merger and become our
wholly-owned subsidiary, and GulfTerra's outstanding common units, other than
the common units purchased by us prior to the merger, will be converted into the
right to receive our common units. Each GulfTerra common unitholder will be
entitled to receive 1.81 of our common units for each GulfTerra common unit that
the unitholder owns at the effective time of the merger. Instead of receiving
fractional common units, GulfTerra common unitholders will receive cash from us
in an amount determined under the merger agreement. We have agreed, subject to
the terms of our partnership agreement, to increase our quarterly cash
distribution on our common units to at least $0.395 per unit, or $1.58 per unit
on an annual basis, commencing with the first regular quarterly distribution
after the merger closes.
The following organizational chart depicts our organizational and ownership
structure after giving effect to this offering and to Step Two of the merger
transaction.
(GRAPH)
- ---------------
(1) Includes common units held by affiliates of EPCO and assumes the conversion
of all 4,413,549 of our Class B special units into an equal number of our
common units following approval of the conversion by our unitholders. Also
includes 409,965 of our common units that will be issued upon conversion of
GulfTerra common units owned by Mr. Duncan and his affiliates in connection
with the merger.
S-8
(2) Does not include any of our common units that may be issued upon conversion
of GulfTerra's remaining 35 Series F1 convertible units and 80 Series F2
convertible units. Pursuant to an assumption agreement to be entered into
between us and GulfTerra at the effective time of the merger, we will assume
all of GulfTerra's obligations with respect to the outstanding Series F
convertible units that have not been converted or expired.
The table below shows the ownership of our common units after giving effect
to this offering and the merger.
<Table>
<Caption>
UNITS PERCENTAGE INTEREST
----------- -------------------
Public common units(1)................................. 161,777,226 46.8%
EPCO common units(2)................................... 122,444,137 35.4%
Shell common units..................................... 41,000,000 11.9%
El Paso Corporation common units....................... 13,454,499 3.9%
General partner interest............................... -- 2.0%
----------- -----
Total................................................ 338,675,862 100.0%
=========== =====
</Table>
- ---------------
(1) Gives effect to the issuance of approximately 104.6 million of our common
units in the merger. A maximum of 117.6 million of our common units could be
issued in the merger if, prior to the closing of the merger, (1) all
outstanding options to purchase 1,159,500 of GulfTerra's common units are
exercised, and (2) the maximum number of GulfTerra's common units are issued
in connection with the conversion of all of GulfTerra's remaining
outstanding Series F convertible units.
(2) Includes common units held by affiliates of EPCO and assumes the conversion
of all 4,413,549 of our Class B special units into an equal number of our
common units following approval of the conversion by our unitholders. Also
includes 409,965 of our common units that will be issued upon conversion of
GulfTerra common units owned by Mr. Duncan and his affiliates in connection
with the merger.
Step Three: Acquisition of South Texas Midstream Assets from El Paso
Corporation. In connection with the proposed merger, we entered into a purchase
and sale agreement with El Paso Corporation to acquire 100% of the equity
interests in two El Paso Corporation subsidiaries for $150 million, plus the
value of inventory then outstanding. We anticipate that this acquisition will be
financed initially through a short-term acquisition term loan and with
borrowings under our revolving credit facilities. Through our purchase of these
equity interests, we will acquire nine cryogenic natural gas processing plants,
one natural gas gathering pipeline, one natural gas treating plant and one small
natural gas liquids connecting pipeline. These plants are located in South Texas
and have historically been associated with and are integral to GulfTerra's Texas
intrastate natural gas pipeline system. The closing of this purchase is
effectively conditioned upon, and is expected to occur immediately following,
the closing of the merger. The closing of the merger, however, is not
conditioned upon the closing of this purchase, provided that neither party
breaches its obligation to close this purchase under the purchase and sale
agreement. We refer to the assets that we will acquire from El Paso Corporation
as the South Texas midstream assets.
Transactions Following the Merger. We further agreed with El Paso
Corporation that, for a period of three years following the closing of the
merger:
- at the request of GulfTerra, El Paso Corporation will provide support
services to GulfTerra similar to those provided by El Paso Corporation
before the closing of the merger, and GulfTerra will reimburse El Paso
Corporation for 110% of its direct costs of such services (excluding any
overhead costs); and
- El Paso Corporation will pay us annual transition support payments in
amounts of $18 million, $15 million and $12 million for the first, second
and third years of such period, respectively.
MANAGEMENT OF THE COMBINED COMPANY
Information regarding our current management and the management of the
combined company is set forth under "Management" beginning on page S-44 of this
prospectus supplement.
S-9
CONDITIONS TO THE EFFECTIVENESS OF THE MERGER AND RELATED TRANSACTIONS
Completion of the merger and the related transactions is expected to occur
during the second half of 2004, but is subject to the conditions described
below.
Approval by Our Unitholders. The issuance of our common units to the
holders of GulfTerra's common units in the merger is subject to the approval of
our unitholders. The board of directors of our general partner and the audit and
conflicts committee of that board have unanimously approved and adopted the
merger agreement, approved the issuance of our common units pursuant to the
merger agreement, determined that these transactions are advisable and in the
best interests of our company and our unitholders, and recommended that our
unitholders vote to approve the issuance of our common units pursuant to the
merger agreement. We expect to hold a special meeting of our unitholders in the
third quarter of 2004 at which our unitholders will vote on the issuance of our
common units pursuant to the merger agreement. Dan L. Duncan, our co-founder and
the chairman of our general partner, and affiliates of Mr. Duncan will
collectively own 51.1% of our outstanding common units following this offering
and have agreed with GulfTerra, so long as the board of directors of our general
partner does not withdraw its recommendation of the merger, to vote all of our
common units that they own in favor of the issuance of our common units pursuant
to the merger agreement. Additionally, these persons have granted a proxy to
GulfTerra that allows an officer of GulfTerra to vote their common units in
favor of the issuance of our common units pursuant to the merger agreement. The
common units owned by these persons represent a number of votes sufficient to
approve the issuance of our common units pursuant to the merger agreement.
Approval by GulfTerra Unitholders. The completion of the merger is also
subject to the approval of the holders of a majority of each of the outstanding
common units and Series C Units of GulfTerra, voting as separate classes. The
board of directors of GulfTerra's general partner and the audit and conflicts
committee of that board have unanimously approved and adopted the merger
agreement, determined that it is advisable and in the best interests of
GulfTerra and GulfTerra's common unitholders and recommended that the GulfTerra
unitholders vote to approve and adopt the merger agreement. GulfTerra expects to
hold a special meeting of its unitholders in the third quarter of 2004 at which
they will vote on approval and adoption of the merger agreement. At March 31,
2004, El Paso Corporation owned approximately 17.3% of the GulfTerra common
units and 100% of the GulfTerra Series C Units. El Paso Corporation has agreed
with us to vote all of its GulfTerra common units and all of its GulfTerra
Series C Units in favor of the approval and adoption of the merger agreement.
Additionally, El Paso Corporation has granted a proxy to us that allows one of
our officers to vote all of such common units and Series C Units in favor of the
approval and adoption of the merger agreement.
Other Conditions. The completion of the merger is also subject to
customary regulatory approvals, including under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. We and GulfTerra made the required filings with the
Federal Trade Commission, or FTC, and the Antitrust Division of the Department
of Justice, or DOJ, relating to the merger on January 21, 2004, but we are not
permitted to complete the merger until the applicable waiting periods have
expired or otherwise terminated. On February 20, 2004, Enterprise and GulfTerra
received a request for additional information and documentary material from the
FTC. Enterprise and GulfTerra are currently responding to the FTC's request. We
or GulfTerra may receive additional requests for information concerning the
proposed merger and related transactions from the FTC.
In addition, we anticipate that the FTC may require that, as a prerequisite
for obtaining approval of the proposed merger, we divest our interests in the
Manta Ray, Nautilus, Nemo, Neptune, Starfish and Stingray pipelines, which are
located in the Gulf of Mexico, or similarly located GulfTerra pipelines that the
FTC may deem to be competitive with those pipelines. In addition, the FTC may
require us to divest certain of our or GulfTerra's storage assets located near
Hattiesburg, Mississippi.
In addition to the conditions described above, the transaction agreements
contain many other conditions that, if not satisfied or waived, would result in
the merger not occurring. Please read "Risk Factors -- Risks Related to the
Merger and Related Transactions" beginning on page S-20 of this prospectus
supplement for a discussion of some of these conditions and for a discussion of
the risks associated with the merger. The
S-10
transaction agreements are filed as exhibits to our Current Reports on Form 8-K
filed with the SEC on December 15, 2003 and April 21, 2004, and are incorporated
by reference into this prospectus supplement.
OUR OTHER RECENT DEVELOPMENTS
FIRST QUARTER UNAUDITED RESULTS
The following table sets forth our summarized results of operations for the
periods indicated:
<Table>
<Caption>
FOR THE THREE MONTHS ENDED
------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2003 2003 2004
--------- ------------ ---------
(DOLLARS IN MILLIONS,
EXCEPT PER UNIT AMOUNTS)
INCOME STATEMENT DATA:
Revenue..................................................... $1,481.6 $1,419.4 $1,704.9
Costs and expenses.......................................... 1,398.2 1,356.0 1,631.0
Equity earnings from unconsolidated affiliates.............. 1.6 2.7 13.4
-------- -------- --------
Operating income............................................ 85.0 66.1 87.3
Other income (expenses), net................................ (39.1) (31.8) (31.2)
Provision for taxes......................................... (3.1) (0.6) (1.6)
Minority interest........................................... (2.3) 0.5 (3.0)
Cumulative effect of change in accounting principle......... 7.0
-------- -------- --------
Net income.................................................. $ 40.5 $ 34.2 $ 58.5
======== ======== ========
Fully diluted earnings per unit............................. $ 0.19 $ 0.13 $ 0.23
======== ======== ========
EBITDA...................................................... $ 113.2 $ 99.9 $ 123.3
======== ======== ========
Gross operating margin by segment:
Pipelines................................................. $ 71.9 $ 72.3 $ 83.0
Fractionation............................................. 29.0 37.3 30.3
Processing................................................ 30.0 4.6 18.1
Octane Enhancement........................................ (3.4) (4.8) (1.3)
Other..................................................... (1.0) (0.4) (0.4)
-------- -------- --------
Total gross operating margin................................ $ 126.5 $ 109.0 $ 129.7
======== ======== ========
OPERATING DATA (IN MBPD, EXCEPT AS NOTED)
Pipelines:
Major NGL and petrochemical pipelines.................. 1,313 1,357 1,423
Natural gas pipelines (BBtu/d)......................... 1,034 1,005 1,075
Fractionation:
NGL fractionation...................................... 235 241 229
Isomerization.......................................... 80 70 60
Propylene fractionation................................ 60 56 54
Processing:
Fee-based natural gas processing (MMcf/d).............. 65 324 362
Equity NGL production.................................. 54 66 64
Octane enhancement........................................ 3 7 5
</Table>
Please read "Non-GAAP Financial Measures" on pages S-17 through S-19 for an
explanation of our gross operating margin and a reconciliation of gross
operating margin to operating income, which is the financial measure calculated
and presented in accordance with GAAP that is the most directly comparable to
gross operating margin, and for an explanation of EBITDA and a reconciliation of
EBITDA to net income and operating activities cash flows, which are the
financial measures calculated and presented in accordance with GAAP that are the
most directly comparable to EBITDA.
S-11
As of March 31, 2004, our total debt balance was approximately $2.2
billion. Our debt as of March 31, 2004, pro forma for the application of the
proceeds from this offering, was approximately $1.9 billion.
INTEREST EXPENSE HEDGING PROGRAM
In the first quarter of 2004, we entered into interest rate hedging
arrangements in anticipation of entering into permanent debt financing for the
proposed GulfTerra merger. On April 23, 2004, we terminated these arrangements
and, on April 27, we received approximately $104.5 million in cash. This amount
will be included in distributable cash flow in the second quarter of 2004 and
will increase net income for book and tax purposes over the life of the future
planned debt issuances.
AMENDMENT TO AGREEMENT WITH EL PASO CORPORATION
On April 19, 2004, we and El Paso Corporation agreed to amend certain terms
of the merger agreement. In the original transaction, in connection with the
merger, El Paso Corporation was to contribute its 50% membership interest in
GulfTerra's general partner to our general partner, in exchange for a 50%
membership interest in our general partner. Under the amended transaction, El
Paso Corporation will still contribute its 50% membership interest in
GulfTerra's general partner to our general partner, but in exchange will receive
a 9.9% membership interest in our general partner and $370 million in cash. The
remaining 90.1% membership interest in the Enterprise general partner will
continue to be owned by affiliates of EPCO. The funds for the $370 million
payment to El Paso Corporation will be provided by affiliates of EPCO.
El Paso Corporation, through its 9.9% membership interest in our general
partner, will have protective veto rights on certain transactions, such as any
merger of our general partner, any merger involving and resulting in a change of
control of us and the incurrence of indebtedness by our general partner. In
addition, commencing six months after the closing of the merger, or earlier in
certain circumstances, El Paso Corporation will have the right for three years
to contribute all of this general partner interest to our general partner in
return for Enterprise common units owned by our general partner (which it may
acquire from an affiliate of EPCO), an equivalent cash amount or a combination
of cash and common units. Following the expiration of this right, the affiliates
of EPCO that own the 90.1% membership interest in our general partner can
require El Paso Corporation to contribute all of its general partner interest to
our general partner. For more information concerning the specific terms of the
agreements with El Paso Corporation, please read our Current Report on Form 8-K
filed with the SEC on April 21, 2004, which is incorporated by reference into
this prospectus supplement.
DISTRIBUTION REINVESTMENT PLAN
Our distribution reinvestment plan, or DRIP, enables our limited partners
to reinvest all or a portion of the quarterly cash distributions they receive
from their common units in our company. We received reinvested cash
distributions from affiliates of EPCO of approximately $25 million, $30 million
and $20 million for the second, third and fourth quarters of 2003, respectively.
Additionally, Dan L. Duncan has committed to reinvest cash distributions of $30
million per quarter over the next four quarters in the DRIP.
In connection with the payment of our February 11, 2004 quarterly cash
distribution, we issued 1,033,510 common units under our DRIP from which we
received net proceeds of approximately $22 million, including our general
partner's $0.5 million capital contribution to maintain its 2% general partner
interest in us. The proceeds from the reinvested distributions were used to
reduce outstanding indebtedness.
S-12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth, for the periods and at the dates indicated,
summary historical financial and operating data for Enterprise and GulfTerra.
The selected historical income statement and balance sheet data for the three
years in the period ended December 31, 2003 are derived from and should be read
in conjunction with Enterprise's and GulfTerra's audited financial statements
that are incorporated by reference into this prospectus supplement.
The summary pro forma adjusted financial statements of Enterprise show the
pro forma effect of (i) the proposed merger with GulfTerra through Step Three of
this transaction; (ii) the completion of this offering and the receipt from
Enterprise's general partner of its related proportionate capital contribution;
and (iii) the application of the $307 million in net proceeds from this offering
to repay in full the $225 million outstanding under our interim term loan and
the application of the $82 million remaining proceeds from this offering to
temporarily reduce the indebtedness outstanding under our revolving credit
facilities. The proposed merger with GulfTerra involves the following three
steps:
- Step One. On December 15, 2003, we purchased a 50% membership interest
in GulfTerra's general partner for $425 million. GulfTerra's general
partner owns a 1% general partner interest in GulfTerra. This investment
is accounted for using the equity method and is already recorded in
Enterprise's historical balance sheet at December 31, 2003. This
transaction is referred to as Step One of the proposed merger and will
remain in effect even if the remainder of the proposed merger and post-
merger transactions, which are referred to as Step Two and Step Three, do
not occur.
- Step Two. If all necessary regulatory and unitholder approvals are
received and the other merger agreement conditions are either fulfilled
or waived and the following steps are consummated, we will own 100% of
the limited and general partner interests in GulfTerra. At that time, the
proposed merger will be accounted for using the purchase method, and
GulfTerra will be a consolidated subsidiary of Enterprise. Step Two of
the proposed merger includes the following transactions:
- El Paso Corporation's exchange of its remaining 50% membership
interest in GulfTerra's general partner for a cash payment by our
general partner of $370 million (which will not be funded or
reimbursed by us) and a 9.9% membership interest in our general
partner, and the subsequent capital contribution by our general
partner of such 50% membership interest in GulfTerra's general partner
to us (without increasing our general partner's interest in our
earnings or cash distributions).
- Our purchase of 10,937,500 GulfTerra Series C units and 2,876,620
GulfTerra common units owned by El Paso Corporation for $500 million.
- The exchange of each remaining GulfTerra common unit for 1.81
Enterprise common units, resulting in the issuance of approximately
104.6 million of our common units to GulfTerra unitholders.
- Step Three. Immediately after Step Two is completed, we expect to
acquire the South Texas midstream assets from El Paso Corporation for
$150 million plus the value of then outstanding inventory.
We anticipate that Steps Two and Three of the merger will be financed
initially with a short-term acquisition term loan and with borrowings under our
revolving credit facilities.
Our pro forma adjustments give effect to the sale of 15,000,000 of our
common units to the public in this offering at an offering price of $21.00 per
unit. Net proceeds from this offering, including our general partner's
proportionate net capital contribution of $6 million, are $307 million after
deducting applicable underwriting discounts, commissions and offering expenses
of $14.3 million. The net proceeds from this offering, including our general
partner's proportionate net capital contribution, will be used to repay in full
our $225 million interim term loan and to temporarily reduce borrowings under
our revolving credit facilities. Please read "Use of Proceeds."
S-13
The unaudited pro forma condensed statement of consolidated operations for
the year ended December 31, 2003 assumes the merger-related transactions all
occurred on January 1, 2003. The unaudited pro forma condensed consolidated
balance sheet shows the financial effects of the merger and related transactions
as if they had occurred on December 31, 2003. As noted earlier, Step One of the
proposed merger is already included in the December 31, 2003 historical balance
sheet of Enterprise.
The non-generally accepted accounting principle, or non-GAAP, financial
measures of gross operating margin and earnings before interest, income taxes,
depreciation and amortization, which we refer to as "EBITDA," are presented in
the summary historical and pro forma financial data for Enterprise. In a
supplemental section titled "Non-GAAP Financial Measures," we have provided the
necessary explanations and reconciliations for Enterprise's non-GAAP financial
measures.
S-14
SUMMARY HISTORICAL AND PRO FORMA
FINANCIAL AND OPERATING DATA OF ENTERPRISE
<Table>
<Caption>
FOR YEAR ENDED
CONSOLIDATED HISTORICAL DECEMBER 31, 2003
------------------------------ -----------------------
FOR YEAR ENDED DECEMBER 31, STEP THREE ADJUSTED
------------------------------ ENTERPRISE ENTERPRISE
2001 2002 2003 PRO FORMA PRO FORMA
-------- -------- -------- ---------- ----------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER UNIT AMOUNTS)
INCOME STATEMENT DATA:
Revenues........................................ $3,154.4 $3,584.8 $5,346.4 $ 7,153.0 $ 7,153.0
Costs and expenses:
Operating costs and expenses.................. 2,862.6 3,382.8 5,046.8 6,474.1 6,474.1
Selling, general and administrative........... 30.4 42.9 37.5 93.5 93.5
-------- -------- -------- --------- ---------
Total costs and expenses.................... 2,893.0 3,425.7 5,084.3 6,567.6 6,567.6
-------- -------- -------- --------- ---------
Equity in income (loss) of unconsolidated
affiliates.................................... 25.4 35.2 (14.0) (2.6) (2.6)
-------- -------- -------- --------- ---------
Operating income................................ 286.8 194.3 248.1 582.8 582.8
-------- -------- -------- --------- ---------
Other income (expense):
Interest expense.............................. (52.4) (101.6) (140.8) (273.8) (269.6)
Other, net.................................... 10.3 7.3 6.4 (28.5) (28.5)
-------- -------- -------- --------- ---------
Total other income (expense)................ (42.1) (94.3) (134.4) (302.3) (298.1)
-------- -------- -------- --------- ---------
Income before provision for income taxes and
minority interest............................. 244.7 100.0 113.7 280.5 284.7
Provision for income taxes...................... (1.6) (5.3) (5.3) (5.3)
-------- -------- -------- --------- ---------
Income before minority interest................. 244.7 98.4 108.4 275.2 279.4
Minority interest............................... (2.5) (2.9) (3.9) (3.9) (3.9)
-------- -------- -------- --------- ---------
Net income...................................... $ 242.2 $ 95.5 $ 104.5 $ 271.3 $ 275.5
======== ======== ======== ========= =========
BASIC EARNINGS PER UNIT:
Net income per unit............................. $ 1.70 $ 0.55 $ 0.42 $ 0.78 $ 0.75
======== ======== ======== ========= =========
DILUTED EARNINGS PER UNIT:
Net income per unit............................. $ 1.39 $ 0.48 $ 0.41 $ 0.76 $ 0.73
======== ======== ======== ========= =========
DISTRIBUTIONS TO LIMITED PARTNERS:
Per common unit................................. $ 1.19 $ 1.36 $ 1.47
======== ======== ========
BALANCE SHEET DATA:
Total assets.................................... $2,424.7 $4,230.3 $4,802.8 $10,565.1 $10,564.1
Total debt...................................... 855.3 2,246.5 2,139.5 4,734.6 4,427.6
Total partners' equity.......................... 1,146.9 1,200.9 1,705.9 4,613.8 4,919.8
OTHER FINANCIAL DATA:
Cash flows from operating activities............ $ 283.3 $ 329.8 $ 424.7
Cash flows used in investing activities......... 491.2 1,708.3 657.0
Cash flows from financing activities............ 279.5 1,260.3 248.9
Distributions received from unconsolidated
affiliates.................................... 45.1 57.7 31.9
Equity in income (loss) of unconsolidated
affiliates.................................... 25.4 35.3 (14.0)
Gross operating margin.......................... 375.9 332.4 410.4 $ 887.3 $ 887.3
EBITDA.......................................... 345.8 284.8 366.4 771.0 771.0
Commodity hedging income (losses)............... 101.3 (51.3) (0.6)
OPERATING DATA (IN MBPD, EXCEPT AS NOTED):
Pipelines:
Major NGL and petrochemical pipelines......... 453 1,352 1,343
Natural gas pipelines (BBtu/d)................ 1,349 1,201 1,032
Fractionation:
NGL fractionation............................. 204 235 227
Isomerization................................. 80 84 77
Propylene fractionation....................... 31 55 57
Processing -- equity NGL production............. 63 73 56
Octane Enhancement.............................. 5 5 4
</Table>
S-15
SUMMARY HISTORICAL
FINANCIAL AND OPERATING DATA OF GULFTERRA
<Table>
<Caption>
CONSOLIDATED HISTORICAL
------------------------------
FOR YEAR ENDED DECEMBER 31,
------------------------------
2001 2002 2003
-------- -------- --------
(DOLLARS IN MILLIONS,
EXCEPT PER UNIT AMOUNTS)
CONSOLIDATED STATEMENTS OF INCOME DATA:
Operating revenues........................................ $ 193.4 $ 457.4 $ 871.5
Operating expenses........................................ 134.9 296.6 557.0
-------- -------- --------
Operating income.......................................... 58.5 160.8 314.5
-------- -------- --------
Other income (expense):
Equity in income (loss) of unconsolidated affiliates... 8.5 13.6 11.4
Interest expense....................................... (41.5) (81.1) (127.8)
Loss due to early redemptions of debt.................. (2.4) (36.9)
Other, net............................................. 28.6 1.6 0.2
-------- -------- --------
Total other income (expense)........................... (4.4) (68.3) (153.1)
-------- -------- --------
Income from continuing operations......................... $ 54.1 $ 92.5 $ 161.4
======== ======== ========
BASIC AND DILUTED EARNINGS PER UNIT:
Income from continuing operations per common unit......... $ 0.35 $ 0.80 $ 1.30
======== ======== ========
DISTRIBUTIONS TO LIMITED PARTNERS:
Per common unit........................................... $ 2.31 $ 2.60 $ 2.76
======== ======== ========
BALANCE SHEET DATA:
Total assets.............................................. $1,357.4 $3,130.9 $3,321.6
Total debt................................................ 820.0 1,906.3 1,811.8
Total partners' equity.................................... 500.7 949.9 1,252.6
OTHER FINANCIAL DATA:
Cash flows from operating activities...................... $ 87.4 $ 176.0 $ 268.2
Cash flows used in investing activities................... 499.7 1,215.4 287.2
Cash flows from financing activities...................... 405.1 1,062.4 13.4
OPERATING DATA (IN MBPD, EXCEPT AS NOTED):
Natural gas pipelines and plants (Gross MDth/d)........... 2,344 5,302 7,685
Oil pipelines............................................. 168 154 172
NGL logistics............................................. 63 72 89
Natural gas platform volumes (Gross MDth/d)............... 189 151 271
Oil platform volumes...................................... 5,463 4,736 4,601
</Table>
S-16
NON-GAAP FINANCIAL MEASURES
We include in this prospectus supplement the non-GAAP financial measures of
gross operating margin and EBITDA for Enterprise, and provide reconciliations of
these non-GAAP financial measures to their most directly comparable financial
measure or measures calculated and presented in accordance with GAAP.
GROSS OPERATING MARGIN
We define gross operating margin as operating income before: (1)
depreciation and amortization expense; (2) operating lease expenses for which we
do not have the cash payment obligation; (3) gains and losses on the sale of
assets; and (4) selling, general and administrative expenses. We view gross
operating margin as an important performance measure of the core profitability
of our operations. This measure forms the basis of our internal financial
reporting and is used by our senior management in deciding how to allocate
capital resources among business segments. We believe that investors benefit
from having access to the same financial measures that our management uses. The
GAAP measure most directly comparable to gross operating margin is operating
income.
EBITDA
EBITDA is defined as net income plus interest expense, provision for income
taxes and depreciation and amortization expense. EBITDA is used as a
supplemental financial measure by our management and by external users of
financial statements such as investors, commercial banks, research analysts and
ratings agencies, to assess:
- the financial performance of our assets without regard to financing
methods, capital structures or historical costs basis;
- the ability of our assets to generate cash sufficient to pay interest
cost and support its indebtedness;
- our operating performance and return on capital as compared to those of
other companies in the midstream energy sector, without regard to
financing and capital structure;
- the viability of projects and the overall rates of return on alternative
investment opportunities.
EBITDA should not be considered an alternative to net income, operating
income, cash flow from operating activities or any other measure of financial
performance presented in accordance with GAAP. This non-GAAP financial measure
is not intended to represent GAAP-based cash flows. We have reconciled our
historical and pro forma EBITDA amounts to our consolidated net income and
historical EBITDA amounts further to operating activities cash flows.
S-17
ENTERPRISE NON-GAAP RECONCILIATIONS
The following table presents a reconciliation of our non-GAAP financial
measures of total gross operating margin to the GAAP financial measure of
operating income and a reconciliation of the non-GAAP financial measure of
EBITDA to the GAAP financial measures of net income and of operating activities
cash flows, on a historical and pro forma as adjusted basis, as applicable, for
each of the periods indicated:
<Table>
<Caption>
CONSOLIDATED HISTORICAL FOR YEAR ENDED
------------------------ DECEMBER 31, 2003
FOR YEAR ENDED -----------------------
DECEMBER 31, STEP THREE ADJUSTED
------------------------ ENTERPRISE ENTERPRISE
2001 2002 2003 PRO FORMA PRO FORMA
------ ------ ------ ---------- ----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
Reconciliation of Non-GAAP "Total Gross Operating
Margin" to GAAP "Operating Income"
Operating Income................................... $286.8 $194.4 $248.1 $582.8 $582.8
Adjustments to reconcile Operating Income to
Total Gross Operating Margin:
Depreciation and amortization in operating
costs and expenses.......................... 48.8 86.0 115.7 220.6 220.6
Retained lease expense, net in operating costs
and expenses................................ 10.4 9.1 9.1 9.1 9.1
Gain on sale of assets in operating costs and
expenses.................................... (0.4) (18.7) (18.7)
Selling, general and administrative costs..... 30.3 42.9 37.5 93.5 93.5
------ ------ ------ ------ ------
Total Gross Operating Margin....................... $375.9 $332.4 $410.4 $887.3 $887.3
====== ====== ====== ====== ======
Reconciliation of Non-GAAP "EBITDA" to GAAP "Net
Income" and GAAP "Operating Activities Cash
Flows"
Net Income......................................... $242.2 $ 95.5 $104.5 $271.3 $275.5
Adjustments to derive EBITDA:
Interest expense.............................. 52.5 101.6 140.8 273.8 269.6
Provision for income taxes.................... 1.6 5.3 5.3 5.3
Depreciation and amortization (excluding
amortization component in interest
expenses)................................... 51.1 86.1 115.8 220.6 220.6
------ ------ ------ ------ ------
EBITDA............................................. 345.8 284.8 366.4 $771.0 $771.0
====== ======
Interest expense................................. (52.5) (101.6) (140.8)
Amortization in interest expense................. 0.8 8.8 12.6
Provision for income taxes....................... (1.6) (5.3)
Provision for impairment charge.................. 1.2
Earnings from unconsolidated affiliates.......... (25.4) (35.3) 14.0
Distributions from unconsolidated affiliates..... 45.1 57.7 31.9
Loss (gain) on sale of assets.................... (0.4)
Operating lease expense paid by EPCO (excluding
minority interest portion).................... 10.3 9.0 9.0
Other expenses paid by EPCO...................... 0.4
Minority interest................................ 2.5 3.0 3.9
Deferred income tax expense...................... 2.1 10.5
Changes in fair market value of financial
instruments................................... (5.7) 10.2
Net effect of changes in operating accounts...... (37.2) 92.7 120.9
------ ------ ------
Operating Activities Cash Flows.................... $283.3 $329.8 $424.7
====== ====== ======
</Table>
S-18
The following is a reconciliation of Enterprise's Non-GAAP financial
measures of gross operating margin and EBITDA as presented on page S-11 to their
respective GAAP measures:
<Table>
<Caption>
FOR THE THREE MONTHS ENDED
------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2003 2003 2004
--------- ------------ ---------
(DOLLARS IN MILLIONS)
Reconciliation of Non-GAAP "Total Gross Operating Margin" to
GAAP "Operating Income"
Operating income............................................ $ 85.0 $ 66.1 $ 87.3
Adjustments to reconcile Operating Income to Total Gross
Operating Margin:
Depreciation and amortization in operating costs and
expenses............................................... 27.7 31.9 30.5
Operating lease expense paid by EPCO...................... 2.3 2.3 2.3
Loss on sale of assets.................................... 0.1 0.1
Selling, general and administrative expenses.............. 11.5 8.6 9.5
------ ------ ------
Total gross operating margin................................ $126.5 $109.0 $129.7
====== ====== ======
Reconciliation of Non-GAAP "EBITDA" to GAAP "Net Income" and
GAAP "Operating Activities Cash Flows"
Net income.................................................. $ 40.5 $ 34.2 $ 58.5
Adjustments to derive EBITDA:
Interest expense.......................................... 41.9 33.1 32.6
Provision for income taxes................................ 3.1 0.7 1.6
Depreciation and amortization (excluding amortization
component in interest expense)......................... 27.7 31.9 30.6
------ ------ ------
EBITDA...................................................... $113.2 $ 99.9 $123.3
====== ====== ======
</Table>
S-19
RISK FACTORS
An investment in our common units involves risks. You should consider
carefully the risk factors included below and under the caption "Risk Factors"
beginning on page 2 of the accompanying prospectus, together with all of the
other information included in, or incorporated by reference into, this
prospectus supplement, when evaluating an investment in our common units. If any
of these risks were to occur, our business, financial condition or results of
operations could be materially adversely affected. In that case, the trading
price of our common units could decline, and you could lose all or part of your
investment.
RISKS RELATED TO THE MERGER AND THE RELATED TRANSACTIONS
Discussed below are some of the risks associated with our pending merger
with GulfTerra and the related transactions.
THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT MAY NOT BE CONSUMMATED.
The merger agreement contains conditions that, if not satisfied or waived,
would result in the merger not occurring. These conditions include:
- approval by our unitholders of the issuance of our common units pursuant
to the merger agreement;
- approval and adoption of the merger agreement by GulfTerra's unitholders;
- the expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976;
- the continued accuracy of the representations and warranties contained in
the merger agreement and the parent company agreement;
- the closing of the purchase of specified GulfTerra securities from
subsidiaries of El Paso Corporation, which in turn is conditioned upon,
among other things, neither party breaching its obligations to close the
acquisition of the South Texas midstream assets;
- the performance by each party of its obligations under the merger
agreement, the parent company agreement and the purchase and sale
agreement;
- the absence of any decree, order, injunction or law that prohibits the
merger or makes the merger unlawful;
- the receipt of legal opinions from counsel for each of us and GulfTerra
as to the treatment of the merger for U.S. federal income tax purposes;
and
- the receipt of legal opinions from counsel for each of us, GulfTerra and
El Paso Corporation as to non-contravention with respect to selected
material agreements.
In addition, we and GulfTerra can agree to terminate the merger agreement
at any time without completing the merger, even after unitholder approvals have
been obtained. Further, we or GulfTerra could terminate the merger agreement
without the other party's agreement and without completing the merger if:
- the merger is not completed by March 31, 2005, other than due to a breach
of the merger agreement by the terminating party;
- the conditions to the merger cannot be satisfied;
- the necessary approval of the unitholders of a party is not obtained at
its respective unitholder meeting; or
- any legal prohibition to completing the merger has become final and
non-appealable.
Our purchase of the South Texas midstream assets is expected to occur
immediately following the closing of the merger. These assets have historically
been associated with and are integral to GulfTerra's Texas intrastate pipeline
system. Even if the merger closes, the purchase of these assets may not occur,
which
S-20
could require the combined company to find substitute resources to support its
Texas intrastate pipeline system or to enter into agreements with El Paso
Corporation for the use of these plants. This could result in the combined
company incurring unanticipated costs and not realizing a portion of its
potential cost savings from the proposed merger.
If the merger is not completed, we will continue to own the 50% membership
interest in GulfTerra's general partner that we purchased at the time the merger
agreement was signed, and our investment will be subject to significant risks,
including the following:
- El Paso Corporation owns the remaining 50% membership interest in, and
serves as the managing member of, GulfTerra's general partner, and our
rights are limited to protective consent rights on specified material
transactions affecting GulfTerra or its general partner or the rights and
preferences associated with our membership interest in GulfTerra's
general partner. If the merger does not occur, we will not control
GulfTerra's general partner, and the performance of our investment in
GulfTerra will be substantially dependent on the decisions of El Paso
Corporation; and
- El Paso Corporation is not obligated to repurchase this interest from us
if the merger does not close. Furthermore, because El Paso Corporation
serves as managing member of GulfTerra's general partner until the merger
occurs and because of contractual restrictions on our right to sell our
membership interest, we might not be able to sell our membership
interest, or we might not be able to sell our membership interest for the
price we paid for it if the merger does not occur.
Finally, our 50% membership interest in GulfTerra's general partner
entitles us to receive quarterly distributions equal to 50% of all available
cash held by GulfTerra's general partner. Available cash consists of GulfTerra's
general partner's cash and cash equivalents on hand less an amount of cash
reserves that are necessary to provide for the proper conduct of the business
and to comply with applicable law and the terms of agreements to which it is a
party. To the extent that GulfTerra's general partner incurs expenses and
obligations, the amount of cash available for distribution to us in respect of
our 50% membership interest in GulfTerra's general partner will decrease.
Moreover, GulfTerra's general partner's most significant asset is the 1% general
partner interest it owns in GulfTerra. This interest entitles GulfTerra's
general partner to receive its share of quarterly distributions of cash, which
increases when both common unitholders are paid a minimum quarterly distribution
and certain target distribution levels are achieved. If GulfTerra's
distributable cash flow decreases, the amount distributable to GulfTerra's
general partner and, thus, the amount of available cash held by GulfTerra's
general partner and available for distribution to us, could decline.
WHILE THE MERGER AGREEMENT IS IN EFFECT, WE MAY LOSE OPPORTUNITIES TO ENTER
INTO DIFFERENT BUSINESS COMBINATION TRANSACTIONS WITH OTHER PARTIES ON MORE
FAVORABLE TERMS, AND WE MAY BE LIMITED IN OUR ABILITY TO PURSUE OTHER
ATTRACTIVE BUSINESS OPPORTUNITIES.
While the merger agreement is in effect, we are prohibited from entering
into or soliciting, initiating or encouraging any inquiries or proposals that
may lead to a proposal, or offer to enter into certain transactions such as a
merger, sale of assets or other business combination, with any other person,
subject to the fiduciary obligations of the board of directors of our general
partner under applicable law. In addition, pursuant to a voting agreement and
proxy, Dan L. Duncan and his affiliates have agreed with GulfTerra, so long as
the board of directors of our general partner does not withdraw its
recommendation of the merger, to vote all of our common units owned by them in
favor of the issuance of our common units pursuant to the merger agreement.
Because Mr. Duncan and his affiliates control a number of votes sufficient to
approve the issuance of our common units pursuant to the merger agreement, we
expect that the voting agreement and proxy will ensure that Enterprise receives
the requisite unitholder approval for the proposed merger. As a result of these
provisions in the merger agreement and the voting agreement and proxy, we may
lose opportunities to enter into more favorable transactions.
Moreover, the merger agreement provides for the payment of $112 million in
break-up fees by us to GulfTerra if: (1) we terminate the merger agreement
because we fail to obtain unitholder approval for the transaction or we cancel
the special meeting at which unitholder consent is to be sought; (2) we
materially and willfully breach our no-solicitation covenant; or (3) a possible
alternative or superior transaction is
S-21
publicly announced and the board of directors of our general partner withdraws
or qualifies its recommendation of the merger transactions. This break-up fee is
intended to provide a financial incentive for us to seek to complete the
proposed merger with GulfTerra rather than to explore alternative transactions
that potentially could be more favorable to our unitholders.
We and GulfTerra have also agreed to refrain from taking certain actions
with respect to our respective businesses and financial affairs pending
completion of the merger or termination of the merger agreement. These
restrictions and the no solicitation provisions described above could be in
effect for an extended period of time if completion of the merger is delayed.
In addition to the economic costs associated with pursuing a merger, our
management is devoting substantial time and other human resources to the
proposed transaction and related matters, which could limit our ability to
pursue other attractive business opportunities, including potential joint
ventures, stand-alone projects and other transactions. If we are unable to
pursue such other attractive business opportunities, then the growth prospects
and the long-term strategic position of our business could be adversely
affected.
WE COULD BE REQUIRED TO DIVEST SIGNIFICANT ASSETS TO COMPLETE THE MERGER.
We cannot complete the merger until the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired or terminated.
As a prerequisite to obtaining FTC approval for the proposed merger, we may be
required to divest certain Enterprise or GulfTerra assets as described under
"Summary -- The Merger and Related Transactions -- Conditions to the
Effectiveness of the Merger and Related Transactions -- Other Conditions." Our
divesting any assets required by the FTC is also a condition to the merger
agreement. GulfTerra is required to divest any assets required by the FTC to the
extent such divestitures are recommended by us, and we are required to divest
any assets required by the FTC to the extent such divestitures, together with
all required GulfTerra divestitures (but excluding the FTC consent decree
assets), do not exceed $150 million. In addition, if such divestitures required
by the FTC exceed $150 million, we and, with our consent, GulfTerra have the
right to comply with such divestiture requirements to consummate the merger.
Divestitures of assets can be time consuming and may delay completion of
the proposed merger. Because there may be a limited number of potential buyers
for the assets subject to divestiture and because potential buyers likely will
be aware of the circumstances of the sale, these assets could be sold at prices
lower than their fair market value or lower than the prices we or GulfTerra paid
for these assets. Asset divestitures could also significantly reduce the value
of the combined company, eliminate potential cost savings opportunities or
lessen the anticipated benefits of the merger.
RISKS RELATED TO THE COMBINED COMPANY'S BUSINESS
In addition to the risk factors contained under "Risk Factors -- Risks
Related to Our Business" beginning on page 2 of the accompanying prospectus,
which relate to Enterprise as a stand-alone company, the following risks will
apply to the combined company following the closing of the merger.
WE MAY NOT BE ABLE TO INTEGRATE SUCCESSFULLY OUR OPERATIONS WITH GULFTERRA'S
OPERATIONS.
Integration of the two previously independent companies will be a complex,
time consuming and costly process. Failure to timely and successfully integrate
these companies may have a material adverse effect on the combined company's
business, financial condition and results of operations. The difficulties of
combining the companies will present challenges to the combined company's
management, including:
- operating a significantly larger combined company with operations in
geographic areas and business lines in which we have not previously
operated;
- managing relationships with new joint venture partners with whom we have
not previously partnered;
- integrating personnel with diverse backgrounds and organizational
cultures;
- experiencing operational interruptions or the loss of key employees,
customers or suppliers;
S-22
- establishing the internal controls and procedures that the combined
company will be required to maintain under the Sarbanes-Oxley Act of
2002; and
- consolidating other corporate and administrative functions.
The combined company will also be exposed to risks that are commonly
associated with transactions similar to the merger, such as unanticipated
liabilities and costs, some of which may be material, and diversion of
management's attention. As a result, the anticipated benefits of the merger may
not be fully realized, if at all.
CHANGES IN THE PRICES OF HYDROCARBON PRODUCTS MAY MATERIALLY ADVERSELY AFFECT
THE RESULTS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION OF THE COMBINED
COMPANY.
The combined company will operate predominantly in the midstream energy
sector which includes gathering, transporting, processing, fractionating and
storing natural gas, NGLs and crude oil. As such, the combined company's results
of operations, cash flows and financial condition may be materially adversely
affected by changes in the prices of these hydrocarbon products and by changes
in the relative price levels among these hydrocarbon products. In general terms,
the prices of natural gas, NGLs, crude oil and other hydrocarbon products are
subject to fluctuations in response to changes in supply, market uncertainty and
a variety of additional factors that are impossible to control. These factors
include:
- the level of domestic production;
- the availability of imported oil and natural gas;
- actions taken by foreign oil and natural gas producing nations;
- the availability of transportation systems with adequate capacity;
- the availability of competitive fuels;
- fluctuating and seasonal demand for oil, natural gas and NGLs; and
- conservation and the extent of governmental regulation of production and
the overall economic environment.
The profitability of the combined company's NGL and natural gas processing
operations will depend upon the spread between NGL product prices and natural
gas prices. A reduction in the spread between NGL product prices and natural gas
prices can result in a reduction in demand for fractionation, processing, NGL
storage and NGL transportation services and, thus, may materially adversely
affect the combined company's results of operations and cash flows. In addition,
a portion of the combined company's natural gas processing activities will be
exposed to commodity price risk associated with the relative price of NGLs to
natural gas under its "keep-whole" natural gas processing contracts. Under
keep-whole agreements, the combined company will take title to NGLs that it
extracts from the natural gas stream and will be obligated to pay market value,
based on natural gas prices, for the energy extracted from the natural gas
stream. When prices for natural gas increase, the cost to the combined company
of making these keep-whole payments will increase, and, where NGL prices do not
experience a commensurate increase, the combined company will realize lower
margins from these transactions. As a result, changes in prices for natural gas
compared to NGLs could have a material adverse affect on the results of
operations, cash flows and financial position of the combined company.
The combined company will also be exposed to natural gas and NGL commodity
price risk under natural gas processing and gathering and NGL fractionation
contracts that provide for the combined company's fee to be calculated based on
a regional natural gas or NGL price index or to be paid in-kind by taking title
to natural gas or NGLs. A decrease in natural gas and NGL prices can result in
lower margins from these contracts which may materially adversely affect the
combined company's results of operations, cash flows and financial position.
S-23
A DECLINE IN THE VOLUME OF NATURAL GAS, NGLS AND CRUDE OIL DELIVERED TO THE
COMBINED COMPANY'S FACILITIES COULD ADVERSELY AFFECT THE RESULTS OF
OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION OF THE COMBINED COMPANY.
The combined company's profitability could be materially impacted by a
decline in the volume of natural gas, NGLs and crude oil transported, gathered
or processed at its facilities. A material decrease in natural gas or crude oil
production or crude oil refining, as a result of depressed commodity prices, a
decrease in exploration and development activities or otherwise, could result in
a decline in the volume of natural gas, NGLs and crude oil handled by the
combined company's facilities.
The crude oil, natural gas and NGLs available to the combined company's
facilities will be derived from reserves produced from existing wells, which
reserves naturally decline over time. To offset this natural decline, the
combined company's facilities will need access to additional reserves.
Additionally, some of the combined company's facilities will be dependent on
reserves that are expected to be produced from newly discovered properties that
are currently being developed.
Exploration and development of new oil and natural gas reserves is capital
intensive, particularly offshore in the Gulf of Mexico. Many economic and
business factors are out of the combined company's control and can adversely
affect the decision by producers to explore for and develop new reserves. These
factors include relatively low oil and natural gas prices, cost and availability
of equipment, regulatory changes, capital budget limitations or the lack of
available capital. For example, a sustained decline in the price of natural gas
and crude oil could result in a decrease in natural gas and crude oil
exploration and development activities in the regions where the combined
company's facilities are located. This could result in a decrease in volumes to
the combined company's offshore platforms, natural gas processing plants,
natural gas, crude oil and NGL pipelines, and NGL fractionators which would have
a material adverse affect on the combined company's results from operations cash
flows and financial position. Additional reserves, if discovered, may not be
developed in the near future or at all.
A REDUCTION IN DEMAND FOR NGL PRODUCTS BY THE PETROCHEMICAL, REFINING OR
HEATING INDUSTRIES COULD MATERIALLY ADVERSELY AFFECT THE COMBINED COMPANY'S
RESULTS OF OPERATIONS, CASH FLOWS AND FINANCIAL POSITION.
A reduction in demand for NGL products by the petrochemical, refining or
heating industries, whether because of general economic conditions, reduced
demand by consumers for the end products made with NGL products, increased
competition from petroleum-based products due to pricing differences, adverse
weather conditions, government regulations affecting prices and production
levels of natural gas or the content of motor gasoline or other reasons, could
materially adversely affect the combined company's results of operations, cash
flows and financial position. For example:
Ethane. If natural gas prices increase significantly in relation to
ethane prices, it may be more profitable for natural gas producers to leave
the ethane in the natural gas stream to be burned as fuel than to extract
the ethane from the mixed NGL stream for sale.
Propane. The demand for propane as a heating fuel is significantly
affected by weather conditions. Unusually warm winters could cause the
demand for propane to decline significantly and could cause a significant
decline in the volumes of propane that the combined company transports.
Isobutane. Any reduction in demand for motor gasoline additives may
reduce demand for isobutane. During periods in which the difference in
market prices between isobutane and normal butane is low or inventory
values are high relative to current prices for normal butane or isobutane,
the combined company's operating margin from selling isobutane could be
reduced.
Propylene. Any downturn in the domestic or international economy
could cause reduced demand for propylene, which could cause a reduction in
the volumes of propylene that the combined company produces and expose the
combined company's investment in inventories of propane/propylene mix to
pricing risk due to requirements for short-term price discounts in the spot
or short-term propylene markets.
S-24
THE COMBINED COMPANY WILL FACE COMPETITION FROM THIRD PARTIES IN ITS MIDSTREAM
BUSINESSES.
Even if reserves exist in the areas accessed by the combined company's
facilities and are ultimately produced, the combined company may not be chosen
by the producers in these areas to gather, transport, process, fractionate,
store or otherwise handle the hydrocarbons that are produced. The combined
company will compete with others, including producers of oil and natural gas,
for any such production on the basis of many factors, including:
- geographic proximity to the production;
- costs of connection;
- available capacity;
- rates; and
- access to markets.
THE COMBINED COMPANY'S DEBT LEVEL MAY LIMIT ITS FUTURE FINANCIAL AND OPERATING
FLEXIBILITY.
As of December 31, 2003, we had approximately $2.1 billion of consolidated
debt outstanding. As of the same date, GulfTerra had approximately $1.8 billion
of consolidated debt. The consolidated balance sheet of the combined company
will have significant leverage. Assuming that this offering and the merger had
been completed on December 31, 2003, the combined company would have had
approximately $4.4 billion of consolidated debt on a pro forma as adjusted
basis. The amount of the combined company's debt could have several important
effects on its future operations, including, among other things:
- a significant portion of the combined company's cash flow from operations
will be dedicated to the payment of principal and interest on outstanding
debt and will not be available for other purposes, including payment of
distributions;
- credit rating agencies may view the combined company's debt level
negatively;
- covenants contained in our and GulfTerra's existing debt arrangements
will require the combined company to continue to meet financial tests
that may adversely affect its flexibility in planning for and reacting to
changes in its business;
- the combined company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general partnership
purposes may be limited;
- the combined company may be at a competitive disadvantage relative to
similar companies that have less debt; and
- the combined company may be more vulnerable to adverse economic and
industry conditions as a result of its significant debt level.
Our public debt indentures currently do not limit the amount of future
indebtedness that we can create, incur, assume or guarantee. Our revolving
credit facilities and the merger agreement, however, restrict our ability to
incur additional debt, though any debt we may incur in compliance with these
restrictions may still be substantial. Likewise, GulfTerra's public debt
indentures, its revolving credit facility and the merger agreement restrict its
ability to incur additional debt; however, any debt that it may incur in
compliance with these restrictions may still be substantial. The incurrence of
additional debt by us or GulfTerra could exacerbate any risks associated with
the liquidity of the combined company.
Each of our and GulfTerra's revolving credit facilities and indentures for
its public debt contain conventional financial covenants and other restrictions.
A breach of any of these restrictions by Enterprise or GulfTerra, as applicable,
could permit the lenders to declare all amounts outstanding under those debt
agreements to be immediately due and payable and, in the case of the credit
facilities, to terminate all commitments to extend further credit.
S-25
The combined company's ability to access the capital markets to raise
capital on favorable terms will be affected by the combined company's debt
level, the amount of its debt maturing in the next several years and current
maturities, and by adverse market conditions resulting from, among other things,
general economic conditions, contingencies and uncertainties that are difficult
to predict and impossible to control. If the combined company is unable to
access the capital markets on favorable terms in the future, it might be forced
to seek extensions for some of its short-term securities or to refinance some of
its debt obligations through bank credit, as opposed to long-term public debt
securities or equity securities. The price and terms upon which the combined
company might receive such extensions or additional bank credit, if at all,
could be more onerous than those contained in existing debt agreements. Any such
arrangements could, in turn, increase the risk that the combined company's
leverage may adversely affect its future financial and operating flexibility and
its ability to pay cash distributions at expected rates.
THE CLOSING OF THE MERGER WILL TRIGGER A REPURCHASE OBLIGATION WITH RESPECT TO
GULFTERRA'S OUTSTANDING SENIOR NOTES AND SENIOR SUBORDINATED NOTES AND WILL
REQUIRE GULFTERRA TO AMEND OR REFINANCE ITS CREDIT FACILITY.
The closing of the merger will constitute a "change of control" under
GulfTerra's indentures for its senior notes and senior subordinated notes. As a
result, GulfTerra (as our wholly-owned subsidiary after the merger) will be
obligated to offer to purchase each holder's senior subordinated notes at 101%
of their principal amount, plus accrued interest. GulfTerra or the combined
company will also be obligated to offer to purchase each holder's senior notes
at 101% of their principal amount, plus accrued interest, unless, among other
things, the change of control (1) does not result in a ratings downgrade of the
GulfTerra senior notes by either Moody's Investors Services or Standard & Poor's
no later than 30 days after the change of control has occurred and (2) less than
$250 million in aggregate principal amount of the GulfTerra senior subordinated
notes are repurchased in response to the same change of control. GulfTerra
currently has $250 million aggregate principal amount of senior notes
outstanding and $847 million aggregate principal amount of senior subordinated
notes outstanding.
In connection with completion of the merger, GulfTerra or the combined
company will need to make an offer to repurchase these notes, or GulfTerra may
seek to amend the indentures to waive the repurchase obligation or otherwise
refinance its senior and senior subordinated notes. If GulfTerra makes an offer
to repurchase the notes, it is possible that holders of a large amount of
GulfTerra's notes may exercise their repurchase right, in which case the
combined company would be required to raise significant amounts of capital in
the short term to fulfill GulfTerra's repurchase obligations. If GulfTerra were
unable to meet its repurchase obligations, it would result in an event of
default under GulfTerra's indentures, which would trigger an event of default
under GulfTerra's credit facility, which includes its revolving credit facility
and senior secured term loan facility.
The closing of the merger will also constitute a "change of control" and,
thus, an event of default under GulfTerra's credit facility. As a result,
GulfTerra must refinance or amend that facility at or before the closing of the
merger. If GulfTerra is unable to refinance that facility, it would have a
material adverse effect on its ability to consummate the merger.
THE COMBINED COMPANY MAY NOT BE ABLE TO FULLY EXECUTE ITS GROWTH STRATEGY IF
IT ENCOUNTERS ILLIQUID CAPITAL MARKETS OR INCREASED COMPETITION FOR QUALIFIED
ASSETS.
The strategy of the combined company contemplates growth through the
development and acquisition of a wide range of midstream and other energy
infrastructure assets while maintaining a strong balance sheet. This strategy
includes constructing and acquiring additional assets and businesses to enhance
the combined company's ability to compete effectively and diversify its asset
portfolio, thereby providing more stable cash flow. Both companies regularly
consider and enter into discussions regarding, and are currently contemplating,
potential joint ventures, stand alone projects or other transactions that they
believe will present opportunities to realize synergies, expand their respective
roles in the energy infrastructure business and increase their respective market
positions.
S-26
The combined company may require substantial new capital to finance the
future development and acquisition of assets and businesses. Limitations on the
combined company's access to capital will impair its ability to execute this
strategy. Expensive capital will limit the combined company's ability to develop
or acquire accretive assets. The combined company may not be able to raise the
necessary funds on satisfactory terms, if at all.
In addition, both companies are experiencing increased competition for the
assets they purchase or contemplate purchasing. Increased competition for a
limited pool of assets could result in the combined company losing to other
bidders more often or acquiring assets at higher prices. Either occurrence would
limit the combined company's ability to fully execute its growth strategy. The
combined company's inability to execute its growth strategy may materially
adversely impact the market price of its securities.
THE COMBINED COMPANY'S GROWTH STRATEGY MAY ADVERSELY AFFECT ITS RESULTS OF
OPERATIONS IF IT DOES NOT SUCCESSFULLY INTEGRATE THE BUSINESSES THAT IT
ACQUIRES OR IF THE COMBINED COMPANY SUBSTANTIALLY INCREASES ITS INDEBTEDNESS
AND CONTINGENT LIABILITIES TO MAKE ACQUISITIONS.
The combined company's ability to successfully execute its growth strategy
is dependent upon making accretive acquisitions. As a result, from time to time,
the combined company will evaluate and acquire assets and businesses that it
believes complement its existing operations. Similar to the risks associated
with integrating Enterprise's operations with GulfTerra's operations, the
combined company may be unable to integrate successfully businesses it acquires
in the future. The combined company may incur substantial expenses or encounter
delays or other problems in connection with its growth strategy that could
negatively impact its results of operations, cash flows and financial condition.
Moreover, acquisitions and business expansions involve numerous risks,
including:
- difficulties in the assimilation of the operations, technologies,
services and products of the acquired companies or business segments;
- inefficiencies and complexities that can arise because of unfamiliarity
with new assets and the businesses associated with them, including with
their markets; and
- diversion of the attention of management and other personnel from
day-to-day business to the development or acquisition of new businesses
and other business opportunities.
If consummated, any acquisition or investment would also likely result in
the incurrence of indebtedness and contingent liabilities and an increase in
interest expense and depreciation, depletion and amortization expenses. As a
result, the combined company's capitalization and results of operations may
change significantly following an acquisition. A substantial increase in the
combined company's indebtedness and contingent liabilities could have a material
adverse effect on its business.
THE COMBINED COMPANY'S OPERATING CASH FLOWS FROM ITS CAPITAL PROJECTS MAY NOT
BE IMMEDIATE.
GulfTerra is engaged in several capital expansion projects and "greenfield"
projects for which significant capital has been expended, and the combined
company's operating cash flow from a particular project may not increase
immediately following its completion. For instance, if the combined company
builds a new pipeline or platform or expands an existing facility, the design,
construction, development and installation may occur over an extended period of
time, and the combined company may not receive any material increase in
operating cash flow from that project until after it is placed in service. If
the combined company experiences unanticipated or extended delays in generating
operating cash flow from these projects, it may be required to reduce or
reprioritize its capital budget, sell non-core assets, access the capital
markets or decrease distributions to unitholders in order to meet its capital
requirements.
THE COMBINED COMPANY'S ACTUAL CONSTRUCTION, DEVELOPMENT AND ACQUISITION COSTS
COULD EXCEED FORECASTED AMOUNTS.
The combined company will have significant expenditures for the
development, construction or other acquisition of energy infrastructure assets,
including some construction and development projects with
S-27
significant technological challenges. For example, underwater operations,
especially those in water depths in excess of 600 feet, are very expensive and
involve much more uncertainty, and risk and if a problem occurs, the solution,
if one exists, may be very expensive and time consuming. Accordingly, there is
an increase in the frequency and amount of cost overruns related to underwater
operations, especially in depths in excess of 600 feet. The combined company may
not be able to complete its projects, whether in deep water or otherwise, at the
costs currently estimated.
THE COMBINED COMPANY MAY BE UNABLE TO CAUSE ITS JOINT VENTURES TO TAKE OR NOT
TO TAKE CERTAIN ACTIONS UNLESS SOME OR ALL OF ITS JOINT VENTURE PARTICIPANTS
AGREE.
We and GulfTerra participate in several joint ventures, and the combined
company will continue that participation after the merger. Due to the nature of
some of these joint ventures, each participant in each of these joint ventures
has made substantial investments in the joint venture and, accordingly, has
required that the relevant organizational documents contain certain features
designed to provide each participant with the opportunity to participate in the
management of the joint venture and to protect its investment in that joint
venture, as well as any other assets which may be substantially dependent on or
otherwise affected by the activities of that joint venture. These participation
and protective features include a corporate governance structure that requires
at least a majority in interest vote to authorize many basic activities and
requires a greater voting interest (sometimes up to 100%) to authorize more
significant activities. Examples of these more significant activities are large
expenditures or contractual commitments, the construction or acquisition of
assets, borrowing money or otherwise raising capital, transactions with
affiliates of a joint venture participant, litigation and transactions not in
the ordinary course of business, among others. Thus, without the concurrence of
joint venture participants with enough voting interests, the combined company
may be unable to cause any of its joint ventures to take or not to take certain
actions, even though those actions may be in the best interest of the particular
joint venture or the combined company.
Moreover, any joint venture owner may sell, transfer or otherwise modify
its ownership interest in a joint venture, whether in a transaction involving
third parties or the other joint venture owners. Any such transaction could
result in the combined company partnering with different or additional parties.
THE INTERRUPTION OF DISTRIBUTIONS TO THE COMBINED COMPANY FROM ITS
SUBSIDIARIES AND JOINT VENTURES MAY AFFECT THE COMBINED COMPANY'S ABILITY TO
SATISFY ITS OBLIGATIONS AND TO MAKE CASH DISTRIBUTIONS TO ITS UNITHOLDERS.
Like our company and GulfTerra, the combined company will be a holding
company with no business operations. The only significant asset of the combined
company will be the equity interests it owns in its subsidiaries and joint
ventures. As a result, the combined company will depend upon the earnings and
cash flow of its subsidiaries and joint ventures and the distribution of that
cash to the combined company in order to meet the combined company's obligations
and to allow it to make distributions to its unitholders.
GulfTerra is party to senior and senior subordinated note indentures under
which approximately $1.1 billion in principal amount of debt securities was
outstanding as of December 31, 2003. These indentures restrict GulfTerra's and
its subsidiaries' ability to make cash distributions. If GulfTerra and the
combined company are not able to effect amendments to these indentures or to
refinance the senior and senior subordinated notes, these restrictions could
significantly limit GulfTerra's ability to distribute cash to Enterprise after
the merger.
In addition, our and GulfTerra's joint venture charter documents typically
vest in its management committee sole discretion regarding the occurrence and
amount of distributions. Some of the joint ventures in which the combined
company will participate have separate credit arrangements that contain various
restrictive covenants. Among other things, those covenants may limit or restrict
the joint venture's ability to make distributions to the combined company under
certain circumstances. Accordingly, the combined company's joint ventures may,
following the merger, be unable to make distributions to the combined company at
current levels or at all.
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A NATURAL DISASTER, CATASTROPHE OR OTHER EVENT COULD RESULT IN SEVERE PERSONAL
INJURY, PROPERTY DAMAGE AND ENVIRONMENTAL DAMAGE, WHICH COULD CURTAIL THE
COMBINED COMPANY'S OPERATIONS AND OTHERWISE MATERIALLY ADVERSELY AFFECT ITS
CASH FLOW.
Some of the combined company's operations will involve risks of personal
injury, property damage and environmental damage, which could curtail the
combined company's operations and otherwise materially adversely affect its cash
flow. For example, natural gas facilities operate at high pressures, sometimes
in excess of 1,100 pounds per square inch. The combined company will also
operate oil and natural gas facilities located underwater in the Gulf of Mexico,
which can involve complexities, such as extreme water pressure. Virtually all of
the combined company's operations will be exposed to potential natural
disasters, including hurricanes, tornadoes, storms, floods and earthquakes.
If one or more facilities that are owned by the combined company or that
deliver oil, natural gas or other products to the combined company are damaged
by severe weather or any other disaster, accident, catastrophe or event, the
combined company's operations could be significantly interrupted. Similar
interruptions could result from damage to production or other facilities that
supply the combined company's facilities or other stoppages arising from factors
beyond its control. These interruptions might involve significant damage to
people, property or the environment, and repairs might take from a week or less
for a minor incident to six months or more for a major interruption.
Additionally, some of the storage contracts that the combined company will be a
party to will obligate it to indemnify its customers for any damage or injury
occurring during the period in which the customers' natural gas is in its
possession. Any event that interrupts the fees generated by the combined
company's energy infrastructure assets, or which causes it to make significant
expenditures not covered by insurance, could reduce the combined company's cash
available for paying its interest obligations as well as unitholder
distributions and, accordingly, adversely affect the market price of the
combined company's securities.
We expect that the combined company will maintain adequate insurance
coverage, although insurance will not cover many types of interruptions that
might occur. As a result of market conditions, premiums and deductibles for
certain insurance policies can increase substantially, and in some instances,
certain insurance may become unavailable or available only for reduced amounts
of coverage. As a result, the combined company may not be able to renew its
existing insurance policies or procure other desirable insurance on commercially
reasonable terms, if at all. If the combined company were to incur a significant
liability for which it were not fully insured, it could have a material adverse
effect on the combined company's financial position and results of operations.
In addition, the proceeds of any such insurance may not be paid in a timely
manner and may be insufficient if such an event were to occur.
AN IMPAIRMENT OF GOODWILL COULD REDUCE THE COMBINED COMPANY'S EARNINGS.
We had recorded only $82.4 million of goodwill on our consolidated balance
sheet as of December 31, 2003. Based on information currently available, we
expect to record approximately $2.6 billion of goodwill or other intangible
assets upon completion of the merger, but that estimate is subject to change.
Please read "Pro Forma Sensitivity Analysis" on page F-17 of this prospectus
supplement. Consequently, following the merger, we expect that approximately
$2.7 billion, representing approximately 25% of the combined company's
consolidated assets on a pro forma basis, may be recorded as goodwill or other
intangible assets. Goodwill is recorded when the purchase price of a business
exceeds the fair market value of the tangible and separately measurable
intangible net assets. GAAP will require the combined company to test goodwill
for impairment on an annual basis or when events or circumstances occur
indicating that goodwill might be impaired. Long-lived assets such as intangible
assets with finite useful lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the combined company were to determine that any of its goodwill
or intangible assets were impaired, it would be required to take an immediate
charge to earnings with a correlative effect on partners' equity and balance
sheet leverage as measured by debt to total capitalization.
S-29
INCREASES IN INTEREST RATES COULD ADVERSELY AFFECT THE COMBINED COMPANY'S
BUSINESS.
In addition to the combined company's exposure to commodity prices, the
combined company will have significant exposure to increases in interest rates.
Assuming that the merger and this offering had been completed on December 31,
2003, the combined company would have approximately $4.4 billion of consolidated
debt on a pro forma basis, of which $2.9 billion would be at fixed interest
rates and $1.5 billion would be at variable interest rates. As a result, the
combined company's results of operations, cash flows and financial condition,
could be materially adversely affected by significant increases in interest
rates. Please read "Pro Forma Sensitivity Analysis" on page F-17 of this
prospectus supplement.
THE USE OF DERIVATIVE FINANCIAL INSTRUMENTS COULD RESULT IN MATERIAL FINANCIAL
LOSSES TO THE COMBINED COMPANY.
Both Enterprise and GulfTerra historically have sought to limit a portion
of the adverse effects resulting from changes in oil and natural gas commodity
prices and interest rates by using financial derivative instruments and other
hedging mechanisms from time to time. To the extent that the combined company
hedges its commodity price and interest rate exposures, it will forego the
benefits it would otherwise experience if commodity prices or interest rates
were to change in its favor. In addition, even though monitored by management,
hedging activities can result in losses. Such losses could occur under various
circumstances, including if a counterparty does not perform its obligations
under the hedge arrangement, the hedge is imperfect, or hedging policies and
procedures are not followed.
THE COMBINED COMPANY'S PIPELINE INTEGRITY PROGRAM MAY IMPOSE SIGNIFICANT COSTS
AND LIABILITIES ON IT.
In December 2003, the U.S. Department of Transportation issued a final rule
requiring pipeline operators to develop integrity management programs to
comprehensively evaluate their pipelines, and take measures to protect pipeline
segments located in what the rule refers to as "high consequence areas." The
final rule resulted from the enactment of the Pipeline Safety Improvement Act of
2002. The final rule is effective as of February 14, 2004. At this time, we
cannot predict the outcome of this rule on the combined company. However, the
combined company will continue Enterprise's and GulfTerra's pipeline integrity
testing programs, which are intended to assess and maintain the integrity of
their pipelines. While the costs associated with the pipeline integrity testing
itself are not large, the results of these tests could cause the combined
company to incur significant and unanticipated capital and operating
expenditures for repairs or upgrades deemed necessary to ensure the continued
safe and reliable operation of its pipelines.
ENVIRONMENTAL COSTS AND LIABILITIES AND CHANGING ENVIRONMENTAL REGULATION
COULD MATERIALLY AFFECT THE COMBINED COMPANY'S CASH FLOW.
The combined company's operations will be subject to extensive federal,
state and local regulatory requirements relating to environmental affairs,
health and safety, waste management and chemical and petroleum products.
Governmental authorities have the power to enforce compliance with applicable
regulations and permits and to subject violators to civil and criminal
penalties, including substantial fines, injunctions or both. Third parties may
also have the right to pursue legal actions to enforce compliance.
The combined company will make expenditures in connection with
environmental matters as part of normal capital expenditure programs. However,
future environmental law developments, such as stricter laws, regulations,
permits or enforcement policies, could significantly increase some costs of the
combined company's operations, including the handling, manufacture, use,
emission or disposal of substances and wastes. Moreover, as with other companies
engaged in similar or related businesses, the combined company's operations will
have some risk of environmental costs and liabilities because it handles
petroleum products.
FEDERAL, STATE OR LOCAL REGULATORY MEASURES COULD MATERIALLY ADVERSELY AFFECT
OUR BUSINESS AND THE BUSINESS OF THE COMBINED COMPANY.
The Federal Energy Regulatory Commission ("FERC") regulates our interstate
natural gas pipelines and interstate NGL and petrochemical pipelines, while
state regulatory agencies regulate our intrastate natural gas
S-30
and NGL pipelines, intrastate storage facilities and gathering lines. This
federal and state regulation extends to such matters as:
- rate structures;
- rates of return on equity;
- recovery of costs;
- the services that our regulated assets are permitted to perform;
- the acquisition, construction and disposition of assets; and
- to an extent, the level of competition in that regulated industry.
Our 2003 Annual Report on Form 10-K, which is incorporated by reference
into this prospectus supplement, contains a general overview of FERC and state
regulation applicable to the combined company's energy infrastructure assets.
This regulatory oversight can affect certain aspects of the combined company's
business and the market for our products and could materially adversely affect
our cash flow. Please read "Business and Properties -- Regulation and
Environmental Matters" in our Annual Report on Form 10-K for the year ended
December 31, 2003.
Under the Natural Gas Act, FERC has authority to regulate our natural gas
companies that provide natural gas pipeline transportation services in
interstate commerce. Its authority to regulate those services includes the rates
charged for the services, terms and conditions of service, certification and
construction of new facilities, the extension or abandonment of services and
facilities, the maintenance of accounts and records, the acquisition and
disposition of facilities, the initiation and discontinuation of services, and
various other matters. Pursuant to FERC's jurisdiction over interstate gas
pipeline rates, existing pipeline rates may be challenged by complaint and
proposed rate increases may be challenged by protest.
FERC also has authority under the Interstate Commerce Act ("ICA") to
regulate the rates, terms, and conditions applied to our interstate pipelines
engaged in the transportation of NGLs and petrochemicals (commonly known as "oil
pipelines"). Pursuant to the ICA, oil pipeline rates can be challenged at FERC
either by protest, when they are initially filed or increased, or by complaint
at any time they remain on file with the jurisdictional agency.
We have interests in offshore natural gas pipeline facilities offshore from
Texas and Louisiana. These facilities are subject to regulation by FERC and
other federal agencies, including the Department of Interior, under the Outer
Continental Shelf Lands Act, and by the Department of Transportation's Office of
Pipeline Safety under the Natural Gas Pipeline Safety Act.
Our intrastate NGL and gas pipelines are subject to regulation by state
regulatory agencies. Our natural gas gathering lines are also subject to
regulation in many states. Our intrastate natural gas pipelines are located in
Louisiana, while our intrastate NGL pipelines are located in Texas and
Louisiana. We also have natural gas underground storage facilities in Louisiana,
Mississippi and Texas. Although state regulation is typically less onerous than
at FERC, proposed and existing rates subject to state regulation are also
subject to challenge by protest and complaint, respectively.
We are subject to ratable take and common purchaser statutes in certain
states where we operate. Ratable take statues generally require gatherers to
take, without undue discrimination, natural gas production that may be tendered
to the gatherer for handling. Similarly, common purchaser statutes generally
require gatherers to purchase without undue discrimination as to source of
supply or producer. These statutes have the effect of restricting our right as
an owner of gathering facilities to decide with whom we contract to purchase or
transport natural gas. Federal law leaves any economic regulation of natural gas
gathering to the states, and some of the states in which we operate have adopted
complaint-based or other limited economic regulation of natural gas gathering
activities. States in which we operate that have adopted some form of
complaint-based regulation, like Texas, generally allow natural gas producers
and shippers to file complaints with state regulators in an effort to resolve
grievances relating to natural gas gathering access and rate discrimination.
S-31
If the proposed merger with GulfTerra is consummated, the combined company
will be subject to increased regulatory oversight by FERC and state regulatory
agencies as certain of GulfTerra's companies, assets and service are regulated
by FERC, including its interstate natural gas pipeline system, interstate
natural gas storage facilities and service provided by its intrastate natural
gas pipelines pursuant to Section 311 of the Natural Gas Policy Act. For
example, High Island Offshore System, L.L.C. ("HIOS"), an interstate natural gas
pipeline owned by GulfTerra, is subject to a pending rate case before FERC.
GulfTerra is seeking to increase its transportation rates, but several parties
have protested the increased rate. FERC has accepted HIOS' tariff sheets
implementing the new rates subject to refund and set certain issues for hearing.
FERC's decision will dictate HIOS' rates, thereby impacting the combined
company's cash flow.
Additionally, in December 1999, GulfTerra Texas (formerly EPGT Texas) filed
a petition with the FERC for approval of its rates for interstate transportation
service pursuant to Section 311 of the NGPA. In June 2002, the FERC issued an
order that required revisions to GulfTerra Texas' proposed maximum rates. The
changes ordered by the FERC involve reductions to rate of return and
depreciation rates, and revisions to the proposed rate design, including a
requirement to state separately rates for gathering service. The FERC also
ordered refunds to customers for the difference, if any, between the originally
proposed levels and the revised rates ordered by the FERC. GulfTerra believes
the amount of any rate refund would be minimal since most transportation
services are discounted from the maximum rate. GulfTerra Texas has established a
reserve for refunds. In July 2002, GulfTerra Texas requested rehearing on
certain issues raised by the FERC's order, including the depreciation rates and
the requirement to state separately a gathering rate. On February 25, 2004, the
FERC issued an order denying GulfTerra Texas' request for rehearing and ordering
GulfTerra Texas to file, within 45 days from the issuance of the order, a
calculation of refunds and a refund plan. Subsequently, the FERC extended that
filing deadline to July 12, 2004. Additionally, the FERC's February 25, 2004
order directed GulfTerra Texas to file a new rate case or justification of
existing rates within three years. GulfTerra Texas has filed a timely request
for rehearing of that requirement, which request is currently pending.
The combined company will also be subject to increased regulatory oversight
by state regulatory agencies. GulfTerra owns significant assets, such as its
interests in gathering systems in Alabama, Colorado, Mississippi, New Mexico and
Texas, that are regulated by state regulatory agencies. GulfTerra also has
intrastate natural gas pipelines regulated by state regulatory agencies in
Alabama and Texas. GulfTerra's NGL gathering and intrastate transportation
pipelines are located in Texas. All of these facilities are regulated to some
degree by state regulatory agencies.
GulfTerra's offshore oil and gas pipelines also are subject to oversight by
FERC and other federal agencies under Outer Continental Shelf Lands Act, and the
Department of Transportation's Office of Pipeline Safety under the Natural Gas
Pipeline Safety Act of 1968.
RISK RELATED TO OUR COMMON UNITS AS A RESULT OF OUR PARTNERSHIP STRUCTURE
In addition to the risks set forth in the accompanying prospectus under
"Risk Factors -- Risks Relating to Our Common Units as a Result of Our
Partnership Structure," the following risk will also apply to an investment in
our common units.
A LARGE NUMBER OF OUR OUTSTANDING COMMON UNITS OR GULFTERRA'S COMMON UNITS MAY
BE SOLD IN THE MARKET FOLLOWING THIS OFFERING, WHICH MAY DEPRESS THE MARKET
PRICE OF OUR COMMON UNITS.
Sales of a substantial number of our common units in the public market
following this offering could cause the market price of our common units to
decline. Upon completion of this offering, a total of approximately 229,661,604
of our common units and 4,413,549 Class B special units, which may become
convertible into an equal number of our common units, will be outstanding. Shell
US Gas & Power LLC, which will own 41,000,000 of our common units following this
offering, representing approximately 17.2% of our outstanding common units after
giving effect to this offering, has publicly announced its intention to reduce
its holdings of our common units on an orderly schedule over a period of years,
taking into account market conditions. Under a registration rights agreement, we
are obligated, subject to certain limitations and
S-32
conditions, to register the common units held by Shell US Gas & Power for
resale. Additionally, after the closing of the merger, El Paso Corporation will
own 13,454,499 of our common units. Six months after the closing of the merger,
or earlier in certain circumstances, El Paso Corporation will have the right for
three years to contribute all of its 9.9% membership interest in our general
partner to our general partner in return for a number of common units equal to
9.9% of the aggregate quarterly distribution paid by us to our general partner
divided by the preceding quarterly distribution per unit paid to the holders of
our common units. Our general partner may elect to deliver Enterprise common
units that it owns (which it may acquire from an affiliate of EPCO), an
equivalent cash amount or a combination of Enterprise common units and cash.
Under a registration rights agreement, we are obligated, subject to certain
limitations and conditions, to register the common units held by El Paso
Corporation for resale. Sales of a substantial number of these units in the
trading markets, whether in a single transaction or series of transactions, or
the possibility that these sales may occur, could reduce the market price of our
outstanding common units. In addition, these sales, or the possibility that
these sales may occur, could make it more difficult for us to sell our common
units in the future.
In addition, an affiliate of Goldman, Sachs & Co., an underwriter in this
offering, beneficially owns 5,512,967 GulfTerra common units, 3,774,200 of which
are being registered pursuant to a registration rights agreement with GulfTerra.
GulfTerra has filed a registration statement with the SEC to register these
GulfTerra common units, but this registration statement has not yet been
declared effective. Once the registration statement is declared effective, the
Goldman, Sachs & Co. affiliate may from time to time sell its GulfTerra common
units, taking into account market conditions. Following the announcement of our
proposed merger with GulfTerra, the trading prices of GulfTerra common units and
Enterprise common units have influenced one another due to market expectations
concerning the likelihood of the consummation of the proposed merger and the
future prospects of the combined company. The Goldman, Sachs & Co. affiliate has
not agreed to a lock-up agreement for its GulfTerra common units in connection
with this offering. Following the effectiveness of the registration statement,
the Goldman, Sachs & Co. affiliate may determine to sell promptly all or a
portion of its GulfTerra common units, to the extent permitted by applicable
rules and regulations. Future sales by the Goldman, Sachs & Co. affiliate of all
or a portion of its GulfTerra common units in the trading markets, whether in a
single transaction or series of transactions, or the possibility that these
sales may occur, could depress the market price of Enterprise's common units.
GulfTerra has outstanding 35 Series F1 convertible units and 80 Series F2
convertible units, all of which are owned by one holder. Subject to certain
limitations, the holder may, upon payment of a conversion price determined by
reference to the market price of GulfTerra's common units at the time of
conversion, convert its Series F convertible units into a maximum of 7,183,261
million GulfTerra common units. The GulfTerra common units to be issued upon
conversion have been registered with the SEC. Following the announcement of our
proposed merger with GulfTerra, the trading prices of GulfTerra common units and
Enterprise common units have influenced one another due to market expectations
concerning the likelihood of the consummation of the proposed merger and the
future prospects of the combined company. If the holder were to dispose of a
substantial portion of the GulfTerra common units it owns or receives upon
conversion of the Series F convertible units in the trading markets, it could
depress the market price of Enterprise's common units.
TAX RISKS RELATED TO OWNING ENTERPRISE COMMON UNITS
Discussed below are federal income tax risks related to the merger and
owning and disposing of common units received in the merger. You are urged to
read "Tax Consequences" in this prospectus supplement and "Tax Consequences" and
"Risk Factors -- Tax Risks to Common Unitholders" in the accompanying prospectus
for a more complete discussion of the federal income tax risks related to owning
and disposing of common units.
THE MERGER MAY RESULT IN INCOME RECOGNITION BY GULFTERRA AND ENTERPRISE
UNITHOLDERS.
As a result of the merger, each Enterprise and GulfTerra common
unitholder's share of nonrecourse liabilities will be recalculated. Each
Enterprise and GulfTerra unitholder will be treated as receiving a deemed cash
distribution equal to the excess, if any, of such unitholder's share of
nonrecourse liabilities immediately
S-33
before the merger and such unitholder's share of nonrecourse liabilities
immediately following the merger. If the amount of the deemed cash distribution
received by a GulfTerra or Enterprise common unitholder exceeds the unitholder's
basis in its partnership interest, such unitholder will recognize gain in an
amount equal to such excess. The application of the rules governing the
allocation of nonrecourse liabilities in the context of the merger is complex
and subject to uncertainty. While Enterprise has agreed to apply these rules, to
the extent permissible, in a manner that minimizes the amount of any net
decrease in the amount of debt allocable to the GulfTerra and Enterprise
unitholders, there can be no assurance that there will not be a net decrease in
the amount of nonrecourse liabilities allocable to a GulfTerra common unitholder
or an Enterprise common unitholder as a result of the merger.
NO RULING HAS BEEN OBTAINED WITH RESPECT TO THE TAX CONSEQUENCES OF THE
MERGER.
While it is anticipated that no gain or loss will be recognized by an
Enterprise unitholder or GulfTerra unitholder as a result of the merger (except
with respect to a net decrease in a unitholder's share of nonrecourse
liabilities discussed below), no ruling has been or will be requested from the
Internal Revenue Service with respect to the tax consequences of the merger.
Instead, Enterprise and GulfTerra are relying on the opinions of their
respective counsel as to the tax consequences of the merger, and counsel's
conclusions may not be sustained if challenged by the Internal Revenue Service.
S-34
USE OF PROCEEDS
Including our general partner's $6 million net capital contribution to be
made in connection with this offering, we will receive net proceeds of
approximately $307 million from the sale of the 15,000,000 common units we are
offering after deducting underwriting discounts and commissions and estimated
offering expenses payable by us. If the underwriters exercise their
over-allotment option in full, we will receive net proceeds of approximately
$353.2 million, including the net capital contribution of $6.9 million from our
general partner.
We will use a portion of the net proceeds from this offering, including our
general partner's proportionate capital contribution, to repay in full our $225
million interim term loan, the proceeds from which were used to pay a portion of
the cost of acquiring the 50% membership interest in GulfTerra's general
partner. The remaining proceeds from this offering of $82 million, and the
proceeds from any exercise of the underwriters' over-allotment option, will be
used to temporarily reduce borrowings under our revolving credit facilities,
which indebtedness also was incurred to pay a portion of the cost of acquiring
our 50% membership interest in GulfTerra's general partner. As of April 29,
2004, our $225 million interim term loan, our multi-year revolving credit
facility and our 364-day revolving credit facility had interest rates of
approximately 1.715%, 1.665% and 1.725%, respectively. Amounts paid on our
revolving credit facilities may be reborrowed from time to time.
Affiliates of Lehman Brothers Inc. and Wachovia Capital Markets, LLC,
underwriters for this offering, are lenders under our $225 million interim term
loan and will be repaid with a portion of the net proceeds from this offering.
Affiliates of some of the underwriters for this offering are lenders under our
revolving credit facilities. Please read "Underwriting."
S-35
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
On April 29, 2004, we had 214,661,604 common units outstanding,
beneficially held by approximately 32,000 holders. Our common units are traded
on the New York Stock Exchange under the symbol "EPD."
The following table sets forth, for the periods indicated, the high and low
sales price ranges for our common units, as reported on the New York Stock
Exchange Composite Transaction Tape, and the amount, record date and payment
date of the quarterly cash distributions paid per common unit. The last reported
sales price of our common units on the New York Stock Exchange on April 29, 2004
was $21.00 per common unit.
<Table>
<Caption>
CASH DISTRIBUTION HISTORY
PRICE RANGES -----------------------------------------------
----------------- PER
HIGH LOW UNIT(1) RECORD DATE PAYMENT DATE
------- ------- ------- ---------------- -----------------
2002
1st Quarter....................... $25.800 $22.945 $0.3350 April 30, 2002 May 10, 2002
2nd Quarter....................... 24.500 16.250 0.3350 July 31, 2002 August 11, 2002
3rd Quarter....................... 22.230 15.000 0.3450 October 31, 2002 November 12, 2002
4th Quarter....................... 19.800 16.410 0.3450 January 31, 2003 February 11, 2003
2003
1st Quarter....................... $21.000 $17.850 $0.3625 April 30, 2003 May 12, 2003
2nd Quarter....................... 24.690 20.620 0.3625 July 31, 2003 August 11, 2003
3rd Quarter....................... 24.100 20.250 0.3725 October 31, 2003 November 12, 2003
4th Quarter....................... 24.980 20.760 0.3725 January 30, 2004 February 11, 2004
2004
1st Quarter....................... $24.720 $21.750 $0.3725(2) April 30, 2004 May 12, 2004
2nd Quarter (through April 29,
2004)........................... 23.840 21.000 -- -- --
</Table>
- ---------------
(1) For each quarter, we paid an identical cash distribution on all outstanding
subordinated units. The remaining outstanding subordinated units converted
into an equal number of common units on August 1, 2003. For quarters
subsequent to the fourth quarter of 2003, holders of our Class B special
units will receive an identical distribution on each Class B special unit.
(2) On April 19, 2004, our general partner declared a quarterly cash
distribution for the first quarter of 2004 of $0.3725 per unit. The
distribution will be paid on May 12, 2004 to unitholders of record at the
close of business on April 30, 2004. We do not expect that holders of units
purchased in this offering will be entitled to receive this distribution.
Under the merger agreement, we have agreed, subject to the terms of our
partnership agreement, to increase the quarterly cash distribution for the first
regular quarterly distribution after the merger closes to at least $0.395 per
unit, or $1.58 per unit on an annualized basis.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2003
on a consolidated historical basis, as adjusted for this offering and on a pro
forma as adjusted basis to give effect to this offering and Steps Two and Three
of the proposed merger with GulfTerra. The historical data in the table is
derived from and should be read in conjunction with our historical financial
statements, including the accompanying notes, incorporated by reference in this
prospectus supplement. The pro forma as adjusted financial information in the
following table gives effect to:
- the issuance of the 15,000,000 common units offered by this prospectus
supplement, our general partner's proportionate capital contribution and
the application of the net proceeds from this offering to repay in full
our $225 million interim term loan and to the use of the remaining
proceeds of $82 million to temporarily reduce borrowings under our
364-day and multi-year revolving credit facilities; and
- the completion of the proposed merger with GulfTerra and our acquisition
of the South Texas midstream assets.
Please read our unaudited pro forma financial statements included elsewhere
in this prospectus supplement for a complete description of the adjustments we
have made to arrive at the pro forma financial measures that we present in the
following table. You should also read our financial statements and notes that
are incorporated by reference in this prospectus supplement for additional
information regarding our capital structure.
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ENTERPRISE HISTORICAL AND PRO FORMA CAPITALIZATION
AS OF DECEMBER 31, 2003
<Table>
<Caption>
PRO FORMA
HISTORICAL AS ADJUSTED AS ADJUSTED
---------- ----------- -----------
(DOLLARS IN MILLIONS)
Cash and cash equivalents................................... $ 44.3 $ 44.3 $ 123.3
======== ======== ========
Long-term borrowings including current portion:
Enterprise amounts:
Interim Term Loan, due the earlier of September 2004 or
the date proposed merger with GulfTerra is
completed............................................ $ 225.0
Acquisition term loans (Step Two and Step Three of
proposed merger)..................................... $ 665.0
364-Day Revolving Credit facility, due October
2004(1).............................................. 70.0
Multi-Year Revolving Credit facility, due November
2005................................................. 115.0 $ 103.0 103.0
Senior Notes A, 8.25% fixed-rate, due March 2005....... 350.0 350.0 350.0
MBFC Loan, 8.70%, fixed-rate, due March 2005........... 54.0 54.0 54.0
Senior Notes B, 7.50% fixed-rate, due February 2011.... 450.0 450.0 450.0
Senior Notes C, 6.375% fixed-rate, due February 2013... 350.0 350.0 350.0
Senior Notes D, 6.875% fixed-rate, due March 2033...... 500.0 500.0 500.0
Seminole Notes, 6.67% fixed-rate, $15 million due each
December, 2004 through 2005.......................... 30.0 30.0 30.0
Unamortized balance of increase in fair value related
to hedging a portion of fixed-rate debt.............. 1.5 1.5 1.5
Unamortized discounts.................................. (6.0) (6.0) (6.0)
GulfTerra amounts:
Revolving credit facility.............................. 382.0
Senior secured term loan due 2007...................... 300.0
Senior notes, 6.25% fixed-rate, due June 2010.......... 250.0
Senior subordinated notes, 10.375% fixed-rate, due June
2009................................................. 175.0
Senior subordinated notes, 8.50% fixed-rate, due June
2010................................................. 255.0
Senior subordinated notes, 8.50% fixed-rate, due
2011................................................. 167.5
Senior subordinated notes, 8.50% fixed-rate, due June
2011................................................. 154.0
Senior subordinated notes, 10.625% fixed-rate, due Dec.
2012................................................. 134.0
Unamortized balance of decrease in fair value related
to hedging a portion of fixed-rate debt.............. (7.4)
Unamortized discounts.................................. 2.6
Unamortized premium.................................... (0.9)
Unamortized balance of estimated increase in fair value
related to assumption of GulfTerra debt upon
completion of Step Two of proposed merger............ 118.3
-------- -------- --------
Total debt obligations................................. 2,139.5 1,832.5 4,427.6
Minority interest........................................... 86.4 86.4 88.2
Partners' equity:
Common units.............................................. 1,582.9 1,882.9 4,693.7
Class B special units..................................... 100.2 100.2 139.2
Series C units............................................
General partner........................................... 34.3 40.3 98.4
Treasury units............................................ (16.5) (16.5) (16.5)
Accumulated other comprehensive income.................... 5.0 5.0 5.0
-------- -------- --------
Total partners' equity................................. 1,705.9 2,011.9 4,919.8
-------- -------- --------
Total capitalization................................... $3,931.8 $3,930.8 $9,435.6
======== ======== ========
</Table>
- ---------------
(1) In the capitalization table, the as adjusted and pro forma as adjusted
columns assume that the $307 million in net proceeds from this offering are
used to repay in full our $225 million interim term loan, to repay $70
million of borrowings under our 364-day revolving credit facility and to
repay $12 million of borrowings under our multi-year revolving credit
facility.
S-38
BUSINESS AND PROPERTIES
OUR BUSINESS AND PROPERTIES
This section summarizes information from our Annual Report on Form 10-K for
the year ended December 31, 2003. For a more detailed discussion of our
business, please read the "Business and Properties" section contained in our
2003 Annual Report on Form 10-K.
Formed in 1998 as a limited partnership, our company is a leading North
American midstream energy company that provides a wide range of services to
producers and consumers of natural gas and NGLs. We provide integrated services
to our customers and generate fee-based cash flow from multiple sources along
our natural gas and NGL "value chain." Our services include the:
- gathering and transmission of raw natural gas from both onshore and
offshore Gulf of Mexico developments;
- processing of raw natural gas into a marketable product that meets
industry quality specifications by removing mixed NGLs and impurities;
- purchase of natural gas for resale to our industrial, utility and
municipal customers;
- transportation of mixed NGLs to fractionation facilities by pipeline;
- fractionation (or separation) of mixed NGLs produced as by-products of
crude oil refining and natural gas production into component NGL
products: ethane, propane, isobutene, normal butane and natural gasoline;
- transportation of NGL products to end-users by pipeline, railcar and
truck;
- import and export of NGL products and petrochemical products through our
dock facilities;
- fractionation of refinery-sourced propane/propylene mix into high purity
propylene, propane and mixed butane;
- transportation of high purity propylene to end-users by pipeline;
- storage of natural gas, mixed NGLs, NGL products and petrochemical
products;
- conversion of normal butane to isobutane through the process of
isomerization;
- production of high-octane additives for motor gasoline from isobutane;
and
- sale of NGLs and petrochemical products we produce and/or purchase for
resale.
In addition to our current strategic position in the Gulf of Mexico, we
have access to major natural gas and NGL supply basins throughout the United
States and Canada, including the Rocky Mountains, the San Juan and Permian
basins, the Mid-Continent region and, through third-party pipeline connections,
north into Canada's Western Sedimentary basin. Our asset platform in the Gulf
Coast region of the United States, combined with our Mid-America and Seminole
pipeline systems, creates the only integrated natural gas and NGL
transportation, fractionation, processing, storage and import/export network in
North America.
OUR BUSINESS SEGMENTS
Our business has five reportable segments:
- Pipelines;
- Fractionation;
- Processing;
S-39
- Octane Enhancement; and
- Other.
PIPELINES
Our Pipelines segment includes approximately 14,000 miles of NGL,
petrochemical and natural gas pipelines located primarily in the Rocky Mountain,
Mid-Continent and Gulf Coast regions of the United States. This segment also
includes our storage and import/export terminalling businesses.
FRACTIONATION
Our Fractionation segment includes eight NGL fractionators, the largest
commercial isomerization complex in the United States and four propylene
fractionation facilities. NGL fractionators separate mixed NGL streams produced
as by-products of natural gas production and crude oil refining into discrete
NGL products: ethane, propane, isobutene, normal butane and natural gasoline.
Our isomerization complex converts normal butane into isobutane. Our propylene
fractionators separate refinery-sourced propane/propylene mix into propane,
propylene and mixed butane.
PROCESSING
Our Processing segment is comprised of our natural gas processing business
and related NGL marketing activities. At the core of our natural gas processing
business are 12 gas plants, located primarily in south Louisiana, that process
raw natural gas into a product that meets pipeline and industry specifications
by removing NGLs and impurities. In connection with our processing businesses,
we receive a portion of the NGL production from these gas plants. This equity
NGL production, together with the NGLs we purchase, supports the NGL marketing
activities included in this operating segment.
South Texas Midstream Assets. At the closing of the merger, we will also
acquire selected natural gas treating and processing plants and related assets
from subsidiaries of El Paso Corporation. These assets are located in Texas and
have historically been associated with and are integral to GulfTerra's Texas
intrastate natural gas pipeline system.
The South Texas midstream assets include nine turbo-expander cryogenic
natural gas processing plants, in which NGLs are extracted from natural gas. The
following table describes the capacities of the cryogenic plants to be acquired:
<Table>
<Caption>
CAPACITY
PLANT NAME (MMCF/D)
- ---------- --------
Armstrong................................................... 250
Delmita..................................................... 135
Gilmore..................................................... 260
Matagorda................................................... 250
San Martin.................................................. 200
Shilling.................................................... 110
Shoup....................................................... 285
Sonora...................................................... 100
Thompsonville............................................... 300
</Table>
In addition to these cryogenic processing plants, we are acquiring the
Brushy Creek treating plant, which removes carbon dioxide from natural gas and
has a capacity of up to 150 MMcf/d of natural gas, and the Delmita natural gas
gathering system, which consists of approximately 294 miles of pipeline and ties
approximately 140 connected wells to the Delmita Cryogenic Processing Plant.
S-40
OCTANE ENHANCEMENT AND OTHER
Our Octane Enhancement segment consists of a 66.7% ownership interest in
Belvieu Environmental Fuels L.P., or BEF, which owns a facility that produces
motor gasoline additives used to enhance octane. Our Other segment consists
primarily of fee-based marketing services and unallocated cost of services that
support its operations and business activities.
GULFTERRA'S BUSINESS AND PROPERTIES
This section summarizes information from GulfTerra's Annual Report on Form
10-K for the year ended December 31, 2003. While we are not incorporating the
report by reference into this prospectus supplement, for a more detailed
discussion of GulfTerra's business, please read the "Business" section contained
in its 2003 Annual Report on Form 10-K.
Formed in 1993, GulfTerra is one of the largest publicly-traded MLPs in
terms of market capitalization. GulfTerra manages a balanced, diversified
portfolio of interests and assets relating to the midstream energy sector, which
involves gathering, transporting, separating, handling, processing,
fractionating and storing natural gas, oil and NGLs. GulfTerra considers this
portfolio, which generates relatively stable cash flows, to be balanced due to
its diversity of geographic locations, business segments, customers and product
lines. GulfTerra's interests and assets include:
- onshore natural gas pipelines and processing facilities in Alabama,
Colorado, Louisiana, Mississippi, New Mexico and Texas;
- offshore oil and natural gas pipelines, platforms, processing facilities
and other energy infrastructure in the Gulf of Mexico, primarily offshore
Louisiana and Texas;
- onshore NGL pipelines and fractionation facilities in Texas; and
- onshore natural gas and NGL storage facilities in Louisiana, Mississippi
and Texas.
GulfTerra is one of the largest natural gas gatherers, based on miles of
pipeline, in the prolific natural gas supply regions offshore in the Gulf of
Mexico and onshore in Texas and the San Juan Basin, which covers a significant
portion of the four corners region of Arizona, Colorado, New Mexico and Utah.
These regions, especially the deeper water regions of the Gulf of Mexico, one of
the United States' fastest growing oil and natural gas producing regions, offer
GulfTerra significant infrastructure growth potential through the acquisition
and construction of pipelines, platforms, processing and storage facilities and
other infrastructure.
GULFTERRA'S BUSINESS SEGMENTS
GulfTerra's business has four reportable segments:
- Natural gas pipelines and plants;
- Oil and NGL logistics;
- Natural gas storage; and
- Platform services.
These segments are strategic business units that provide a variety of
energy related services. For information relating to revenues from external
customers, operating income and total assets of each segment, please read
GulfTerra's historical financial statements filed with the SEC on Enterprise's
Current Report on Form 8-K on April 20, 2004 and incorporated by reference into
this prospectus supplement.
NATURAL GAS PIPELINES AND PLANTS
GulfTerra owns interests in natural gas pipeline systems extending over
15,500 miles, with a combined maximum design capacity (net to GulfTerra's
interest) of over 10.9 billion cubic feet per day, or Bcf/d, of natural gas.
GulfTerra owns or has interests in gathering systems onshore in Alabama,
Colorado, Louisiana,
S-41
Mississippi, New Mexico and Texas, including the San Juan gathering system and
the Texas Intrastate system. In addition to its onshore natural gas pipeline
systems, GulfTerra's offshore natural gas pipeline systems are strategically
located to serve production activities in some of the most active drilling and
development regions in the Gulf of Mexico, including select locations offshore
of Texas, Louisiana and Mississippi, and to provide relatively low cost access
to long-line transmission pipelines that access multiple markets in the eastern
half of the United States.
GulfTerra also owns interests in five processing and treating plants in New
Mexico, Texas and Colorado. These plants have a combined maximum capacity of
over 1.5 Bcf/d of natural gas and 50 thousand barrels per day, or MBbl/d, of
NGL, including the Chaco cryogenic natural gas processing plant, the fifth
largest natural gas processing plant in the United States measured by liquids
produced.
OIL AND NGL LOGISTICS
GulfTerra owns interests in three offshore oil pipeline systems, which
extend over 340 miles and have a combined capacity of approximately 635 MBbl/d
of oil with the addition of pumps and the use of friction reducers, and is
constructing the 390-mile Cameron Highway Oil Pipeline. In addition to being
strategically located in the vicinity of some prolific oil-producing regions in
the Gulf of Mexico, GulfTerra's oil pipeline systems are parallel to and
interconnect with key segments of some of its natural gas pipeline systems and
offshore platforms, which contain separation and handling facilities. This
distinguishes GulfTerra from its competitors by allowing it to provide some
producing properties with a unique single point of contact through which they
may access a wide range of midstream services and assets.
GulfTerra also owns over 1,000 miles of intrastate NGL gathering and
transportation pipelines and four fractionation plants, all located in Texas and
delivering fractionated and unfractionated NGL from South Texas to Houston and
refineries and petrochemical plants along the Texas Gulf Coast. GulfTerra's
fractionation facilities have a combined capacity of approximately 120 MBbl/d.
Additionally, GulfTerra owns a 3.3 million barrel, or MMBbl, propane
storage business in Mississippi and owns or leases NGL storage facilities in
Louisiana and Texas with aggregate capacity of approximately 21.3 MMBbls.
NATURAL GAS STORAGE
GulfTerra owns the Petal and Hattiesburg salt dome natural gas storage
facilities located in Mississippi, which are strategically situated to serve the
Northeast, Mid-Atlantic and Southeast natural gas markets. These two facilities
have a combined current working capacity of 13.5 Bcf, and are capable of
delivering in excess of 1.2 Bcf/d of natural gas into five interstate pipeline
systems: Transco, Destin Pipeline, Gulf South Pipeline, Southern Natural Gas
Pipeline and Tennessee Gas Pipeline. Each of these facilities is capable of
making deliveries at the high rates necessary to satisfy peak requirements in
the electric generation industry.
In addition, GulfTerra has the exclusive right to use the Wilson natural
gas storage facility, which is comprised of 62 acres in Wharton County, Texas,
and consists of four caverns with a working gas capacity of 6.4 Bcf and a
maximum withdrawal capacity of 800 MMcf/d of natural gas.
PLATFORM SERVICES
Offshore platforms are critical components of the offshore infrastructure
in the Gulf of Mexico, supporting drilling and production operations, and
therefore play a key role in the overall development of offshore oil and natural
gas reserves. Platforms are used to:
- interconnect the offshore pipeline grid;
- provide an efficient means to perform pipeline maintenance;
- locate compression, separation, production handling and other facilities;
and
- conduct drilling operations during the initial development phase of an
oil and natural gas property.
S-42
GulfTerra has interests in seven multi-purpose offshore hub platforms in
the Gulf of Mexico and is constructing the Marco Polo tension leg platform.
These platforms were specifically designed to be used as deepwater hubs and
production handling and pipeline maintenance facilities. Through these
facilities, GulfTerra is able to provide a variety of midstream services to
increase deliverability for, and attract new volumes into, its offshore pipeline
systems.
OTHER ASSETS
GulfTerra owns interests in four oil and natural gas properties located in
waters offshore of Louisiana. Production is gathered, transported, and processed
through its pipeline systems and platform facilities, and sold to various third
parties and subsidiaries of El Paso Corporation. GulfTerra has announced that it
intends to continue to concentrate on fee-based operations that traditionally
provide more stable cash flow and de-emphasize its commodity-based activities,
including withdrawal from the oil and natural gas production business by not
acquiring additional properties.
S-43
MANAGEMENT
OUR MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and members of the board of directors of our general partner.
Executive officers and directors are elected for one-year terms.
<Table>
<Caption>
POSITION WITH GENERAL PARTNER
NAME AGE OF COMBINED COMPANY
- ---- -------- -----------------------------
Dan L. Duncan........................ 71 Director and Chairman of the Board
O.S. Andras.......................... 68 Director, President and Chief
Executive Officer
Richard H. Bachmann.................. 51 Executive Vice President, Chief Legal
Officer and Secretary
Michael A. Creel..................... 50 Executive Vice President and Chief
Financial Officer
A.J. Teague.......................... 59 Executive Vice President
William D. Ray....................... 68 Executive Vice President
Charles E. Crain..................... 70 Senior Vice President
W. Ordemann.......................... 44 Senior Vice President
Gil H. Radtke........................ 43 Senior Vice President
James M. Collingsworth............... 49 Senior Vice President
James A. Cisarik..................... 46 Senior Vice President
Lynn L. Bourdon...................... 42 Senior Vice President
Michael J. Knesek.................... 49 Vice President, Controller and
Principal Accounting Officer
W. Randall Fowler.................... 47 Vice President and Treasurer
Dr. Ralph S. Cunningham.............. 63 Director
Lee W. Marshall, Sr.................. 71 Director
Richard S. Snell..................... 61 Director
</Table>
Dan L. Duncan was elected Chairman and a Director of our general partner in
April 1998. Mr. Duncan has served as Chairman of the Board of our predecessor,
EPCO, since 1979.
O.S. Andras was elected President, Chief Executive Officer and a Director
of our general partner in April 1998. Mr. Andras served as President and Chief
Executive Officer of EPCO from 1996 to February 2001 and currently serves as
Vice Chairman of the Board of EPCO.
Richard H. Bachmann was elected Executive Vice President, Chief Legal
Officer and Secretary of our general partner and EPCO in January 1999. Mr.
Bachmann served as a director of our general partner from June 2000 to January
2004.
Michael A. Creel was elected an Executive Vice President of our general
partner and EPCO in February 2001, having served as a Senior Vice President of
our general partner and EPCO since November 1999. In June 2000, Mr. Creel, a
certified public accountant, assumed the role of Chief Financial Officer of our
general partner and EPCO along with his other responsibilities.
A.J. Teague was elected an Executive Vice President of our general partner
in November 1999. From 1998 to 1999 he served as President of Tejas Natural Gas
Liquids, LLC, then a Shell affiliate.
William D. Ray was elected an Executive Vice President of our general
partner in April 1998. Mr. Ray served as EPCO's Executive Vice President of
Supply and Marketing from 1985 to 1998.
Charles E. Crain was elected a Senior Vice President of our general partner
in April 1998. Mr. Crain served as Senior Vice President of Operations for EPCO
from 1991 to 1998.
S-44
William Ordemann joined us as a Vice President of our general partner in
October 1999 and was elected a Senior Vice President in September 2001. From
January 1997 to February 1998, Mr. Ordemann was a Vice President of Shell
Midstream Enterprises, LLC, and from February 1998 to September 1999 was a Vice
President of Tejas Natural Gas Liquids, LLC, both Shell affiliates.
Gil H. Radtke was elected a Senior Vice President of our general partner in
February 2002. Mr. Radtke joined us in connection with our purchase of
Diamond-Koch's storage and propylene fractionation assets in January and
February 2002. Before joining us, Mr. Radtke served as President of the
Diamond-Koch joint venture from 1999 to 2002, where he was responsible for its
storage, propylene fractionation, pipeline and NGL fractionation businesses.
From 1997 to 1999 he was Vice President, Petrochemicals and Storage of
Diamond-Koch.
James M. Collingsworth joined our general partner as a Vice President in
November 2001 and was elected a Senior Vice President in November 2002.
Previously, he served as a board member of Texaco Canada Petroleum Inc. from
July 1998 to October 2001 and was employed by Texaco from 1991 to 2001 in
various management positions, including Senior Vice President of NGL Assets and
Business Services from July 1998 to October 2001.
James A. Cisarik was elected a Senior Vice President of our general partner
in February 2003. Mr. Cisarik joined us in April 2001 when we acquired Acadian
Gas from Shell. His primary responsibility since joining us has been oversight
of the commercial activities of our natural gas businesses, principally those of
Acadian Gas and our Gulf of Mexico natural gas pipeline investments. From
February 1999 through March 2001, Mr. Cisarik was a Senior Vice President of
Coral Energy, LLC, and from 1997 to February 1999 was Vice President, Market
Development of Tejas Energy, LLC, both affiliates of Shell, with
responsibilities in market development for their Texas and Louisiana natural gas
pipeline systems.
Lynn L. Bourdon, III was elected a Senior Vice President of our general
partner on December 10, 2003. His primary responsibility since joining us has
been oversight of all NGL supply and marketing functions. Previously, Mr.
Bourdon served as Senior Vice President and Chief Commercial Officer of Orion
Refining Corporation from July 2001 through November 2003, and was a shareholder
in En*Vantage, Inc., a business investment and energy services company serving
the petrochemicals and energy industries, from September 1999 through July 2001.
He also served as a Senior Vice President of PG&E Corporation for gas
transmission commercial operations from August 1997 through August 1999.
Michael J. Knesek was elected Principal Accounting Officer and a Vice
President of our general partner in August 2000. Since 1990, Mr. Knesek, a
certified public accountant, has been the Controller and a Vice President of
EPCO.
W. Randall Fowler joined us as director of investor relations in January
1999 and was elected to the positions of Treasurer and a Vice President of our
general partner and EPCO in August 2000.
Dr. Ralph S. Cunningham was elected a Director of our general partner in
April 1998. Dr. Cunningham retired in 1997 from CITGO Petroleum Corporation,
where he had served as President and Chief Executive Officer since 1995. Dr.
Cunningham serves as a director of Tetra Technologies, Inc. (a publicly traded
energy services and chemicals company), EnCana Corporation (a Canadian publicly
traded independent oil and natural gas company) and Agrium, Inc. (a Canadian
publicly traded agricultural chemicals company) and was a director of EPCO from
1987 to 1997. Dr. Cunningham serves as Chairman of our Audit and Conflicts
Committee.
Lee W. Marshall, Sr. was elected a Director of our general partner in April
1998. Mr. Marshall has been the Managing Partner and principal owner of Bison
Resources, LLC, (a privately held oil and gas production company) since 1993.
Previously, he held senior management positions with Union Pacific Resources, as
Senior Vice President, Refining, Manufacturing and Marketing, with Wolverine
Exploration Company as Executive Vice President and Chief Financial Officer and
with Tenneco Oil Company as Senior Vice President, Marketing. Mr. Marshall is a
member of our Audit and Conflicts Committee.
S-45
Richard W. Snell was elected a Director of our general partner in June
2000. Mr. Snell was an attorney with the Snell & Smith, P.C. law firm in
Houston, Texas from the founding of the firm in 1993 until May 2000. Since May
2000 he has been a partner with the law firm of Thompson & Knight LLP in
Houston, Texas. Mr. Snell is also a certified public accountant. Mr. Snell is a
member of our Audit and Conflicts Committee.
MANAGEMENT OF THE COMBINED COMPANY
Under the limited liability company agreement of the general partner of the
combined company, Dan L. Duncan, acting through a wholly owned subsidiary, will
have the right to designate not less than five nor more than 10 persons to the
board of directors of the general partner, a majority of whom must be
independent directors under the criteria established by the NYSE.
The following persons will be appointed to the director and officer
positions set forth opposite their names in the table below. We expect that
further appointments will be made in the future.
<Table>
<Caption>
POSITION WITH GENERAL PARTNER
NAME AGE OF COMBINED COMPANY
- ---- --- -----------------------------
Dan L. Duncan......................... 71 Director and Chairman of the Board
O. S. Andras.......................... 68 Director and Vice Chairman of the
Board and Chief Executive Officer
Robert G. Phillips.................... 49 Director and President and Chief
Operating Officer
Dr. Ralph S. Cunningham............... 63 Director*
Lee W. Marshall....................... 71 Director*
Richard S. Snell...................... 61 Director*
W. Matt Ralls......................... 53 Director*
Richard H. Bachmann................... 51 Executive Vice President, Secretary
and Chief Legal Officer
Michael A. Creel...................... 50 Executive Vice President and Chief
Financial Officer
James H. Lytal........................ 46 Executive Vice President
A. James Teague....................... 59 Executive Vice President
Charles E. Crain...................... 70 Senior Vice President
Gil H. Radtke......................... 43 Senior Vice President
</Table>
- ---------------
* Independent directors
Biographical information regarding Messrs. Duncan, Andras, Cunningham,
Marshall, Snell, Bachmann, Creel, Teague, Crain and Radtke is set forth above
under "-- Our Management." Biographical information regarding Messrs. Phillips,
Ralls and Lytal is set forth below.
Robert G. Phillips has served as a Director of GulfTerra's general partner
since August 1998. He has served as Chief Executive Officer for GulfTerra and
its general partner since November 1999 and as Chairman since October 2002. He
served as Executive Vice President from August 1998 to October 1999. Mr.
Phillips has served as President of El Paso Field Services Company since June
1997. He served as President of El Paso Energy Resources Company from December
1996 to June 1997, President of El Paso Field Services Company from April 1996
to December 1996 and Senior Vice President of El Paso Corporation from September
1995 to April 1996. For more than five years prior, Mr. Phillips was Chief
Executive Officer of Eastex Energy, Inc.
W. Matt Ralls has served as a Director of GulfTerra's general partner since
May 2003 and is the Senior Vice President and Chief Financial Officer of
GlobalSantaFe, an international contract drilling company. From 1997 to 2001, he
was Vice President, Chief Financial Officer, and Treasurer of Global Marine,
Inc.
S-46
Previously, he served as Executive Vice President, Chief Financial Officer, and
Director of Kelley Oil and Gas Corporation and as Vice President of Capital
Markets and Corporate Development for The Meridian Resource Corporation before
joining Global Marine. He spent the first 17 years of his career in commercial
banking at the senior management level.
James H. Lytal has served as a Director of GulfTerra's general partner
since August 1994 and as GulfTerra's President and the President of GulfTerra's
general partner since July 1995. He served as Senior Vice President of GulfTerra
and its general partner from August 1994 to June 1995. Prior to joining
GulfTerra, Mr. Lytal served in various capacities in the oil and gas exploration
and production and gas pipeline industries with United Gas Pipeline Company,
Texas Oil and Gas, Inc. and American Pipeline Company.
S-47
TAX CONSEQUENCES
TAX CONSEQUENCES OF AN INVESTMENT IN OUR COMMON UNITS
The tax consequences to you of an investment in common units will depend in
part on your own tax circumstances. For a discussion of the principal federal
income tax considerations associated with our operations and the ownership and
disposition of common units, please read "Tax Consequences" beginning on page 39
of the accompanying prospectus. We recommend that you consult your own tax
advisor about the federal, state, local and foreign tax consequences peculiar to
your circumstances.
We estimate that if you purchase common units in this offering and own them
through December 31, 2006, then you will be allocated, on a cumulative basis, an
amount of federal taxable income for that period that will be less than 10% of
the cash distributed with respect to that period. We expect this estimate to
remain the same following the GulfTerra merger. If you own common units
purchased in this offering for a shorter period, the percentage of federal
taxable income allocated to you may be higher. These estimates are based upon
the assumption that our available cash for distribution will approximate the
amount required to distribute cash to the holders of the common units in an
amount equal to the quarterly distribution of $0.3725 per unit 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 certain tax reporting positions that we have adopted with which the
IRS could disagree. In addition, subsequent issuances of equity securities by us
could also affect the percentage of distributions that will constitute taxable
income. Accordingly, we cannot assure you that the estimates will 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.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our status or the status of the operating partnership as
partnerships for federal income tax purposes or whether our operations generate
"qualifying income" under Section 7704 of the Internal Revenue Code. Instead, we
will rely on the opinion of counsel that, based upon the Internal Revenue Code,
its regulations, published revenue rulings and court decisions and the
representations described below, we and the operating partnership will be
classified as a partnership for federal income tax purposes.
In rendering its opinion, counsel has relied on factual representations
made by us and the general partner. The representations made by us and our
general partner upon which counsel has relied include:
(a) Neither we nor the operating partnership will elect to be treated
as a corporation;
(b) For each taxable year, more than 90% of our gross income will be
income from sources that our counsel has opined or will opine is
"qualifying income" within the meaning of Section 7704(d) of the Internal
Revenue Code; and
(c) The interest rate swaps entered into on March 17, 2004 by our
operating partnership in an aggregate notional amount of $1.85 billion were
(i) properly identified as hedging transactions under applicable treasury
regulations and (ii) entered into in order to hedge interest rate risk with
respect to debt expected to be incurred on or around September 30, 2004 in
connection with the proposed merger with GulfTerra. Enterprise intends to
enter into the financings to which the swap agreements relate in connection
with the proposed merger. In the event the merger and related financings do
not occur within a reasonable period of time around September 30, 2004, our
operating partnership intends to and is capable of entering into financings
similar to those financings to which the swap agreements relate, in an
amount sufficient and within the time period sufficient to assure that the
representation in clause (b) above continues to be accurate, taking into
account the gain recognized on the swap agreements.
For an explanation of the consequences if we fail to meet the "qualifying
income" exception, please see "Tax Consequences -- Partnership Status" in the
accompanying prospectus.
S-48
TAX CONSEQUENCES OF THE MERGER
For U.S. federal income tax purposes, except as described below with
respect to a net decrease in a unitholder's share of nonrecourse liabilities no
gain or loss will be recognized by a GulfTerra unitholder or an Enterprise
unitholder as a result of the merger. The merger will, however, result in the
recalculation of each Enterprise and GulfTerra common unitholder's share of
nonrecourse liabilities. Each Enterprise and GulfTerra unitholder will be
treated as receiving a deemed cash distribution equal to the excess, if any, of
the unitholder's share of nonrecourse liabilities immediately before the merger
and the unitholder's share of the nonrecourse liabilities immediately following
the merger. If the amount of the deemed cash distribution received by a
GulfTerra or Enterprise common unitholder exceeds such unitholder's basis in its
partnership interest, such unitholder will recognize gain in an amount equal to
such excess.
The application of the rules governing the allocation of nonrecourse
liabilities in the context of the merger is complex and subject to uncertainty.
We have agreed to apply these rules, to the extent permissible, in a manner that
minimizes the amount of any net decrease in the amount of nonrecourse
liabilities allocable to the GulfTerra and Enterprise unitholders. We and
GulfTerra do not anticipate that there will be a material decrease in the amount
of nonrecourse liabilities allocable to a GulfTerra common unitholder or an
Enterprise common unitholder as a result of the merger.
S-49
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement,
which we will file with the Commission as an exhibit to a Current Report on Form
8-K and which will be incorporated by reference into this prospectus supplement,
Lehman Brothers Inc. and UBS Securities LLC, as representatives of the
underwriters, and each of the underwriters named below has severally agreed to
purchase from us the respective number of common units opposite its name below:
<Table>
<Caption>
NUMBER OF
UNDERWRITERS COMMON UNITS
- ------------ ------------
Lehman Brothers Inc. ....................................... 2,770,500
UBS Securities LLC.......................................... 1,978,500
Citigroup Global Markets Inc. .............................. 1,582,500
Goldman, Sachs & Co. ....................................... 1,582,500
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 1,582,500
Morgan Stanley & Co. Incorporated........................... 1,582,500
A.G. Edwards & Sons, Inc. .................................. 1,188,500
Wachovia Capital Markets, LLC............................... 1,188,500
Sanders Morris Harris Inc. ................................. 1,187,000
KeyBanc Capital Markets, a Division of McDonald Investments
Inc. ..................................................... 198,000
J.P. Morgan Securities Inc. ................................ 159,000
----------
Total..................................................... 15,000,000
==========
</Table>
Four members of our senior management team will purchase an aggregate of
9,000 common units in this offering directly from the underwriters at a price
equal to the public offering price.
The underwriting agreement provides that the underwriters are obligated to
purchase, subject to certain conditions, all of the common units in the offering
if any are purchased, other than those covered by the over-allotment option
described below. The conditions contained in the underwriting agreement include
the requirements that:
- all the representations and warranties made by us to the underwriters are
true;
- there has been no material adverse change in our condition or in the
financial markets; and
- we deliver to the underwriters customary closing documents.
OVERALLOTMENT OPTION
We have granted to the underwriters a 30-day option after the date of the
underwriting agreement to purchase, in whole or in part, up to an aggregate of
2,250,000 additional common units at the public offering price less underwriting
discounts and commissions. This option may be exercised to cover
over-allotments, if any, made in connection with the offering. To the extent
that the option is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase its pro rata portion of these additional common
units based on the underwriter's percentage underwriting commitment in the
offering as indicated on the preceding table.
COMMISSIONS AND EXPENSES
We have been advised by the underwriters that the underwriters propose to
offer the common units directly to the public at a price to the public set forth
on the cover page of this prospectus supplement and to selected dealers (who may
include the underwriters) at the offering price less a selling concession not in
excess of $0.5425 per unit. The underwriters may allow, and the selected dealers
may reallow, a discount
S-50
from the concession not in excess of $0.10 per unit to other dealers. After the
offering, the underwriters may change the offering price and other selling
terms.
The following table shows the underwriting discounts and commissions we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' over-allotment option to purchase up to
2,250,000 additional common units. The underwriting discounts and commissions
are equal to the public offering price per unit less the amount per unit the
underwriters pay to us to purchase the common units.
<Table>
<Caption>
NO EXERCISE FULL EXERCISE
----------- -------------
Per unit................................................... $0.8925 $0.8925
Total.................................................... $13,387,500 $15,395,625
</Table>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $900,000.
LOCK-UP AGREEMENTS
We, our affiliates that own common units, and the directors and executive
officers of our general partner have agreed that we and they will not offer for
sale, sell, pledge or otherwise dispose of, directly or indirectly, any common
units or any securities convertible into or exchangeable for common units or
sell or grant options, rights or warrants for common units or any securities
convertible into or exchangeable for common units or enter into any derivative
transaction with a similar effect as a sale of common units for a period of 60
days after the date of this prospectus supplement without the prior written
consent of Lehman Brothers Inc. These restrictions do not apply to issuances of
common units or the grant of options to purchase common units under our existing
employee benefits plans, issuances of common units in this offering or issuances
of common units pursuant to the merger agreement, provided that the recipients
of those common units agree to be bound by the restrictions described above.
Lehman Brothers Inc., in its discretion, may release the common 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 common units from lock-up
agreements, Lehman Brothers Inc. will consider, among other factors, the
unitholders' reasons for requesting the release, the number of common units for
which the release is being requested and market conditions at the time.
STABILIZATIONS, SHORT POSITIONS AND PENALTY BIDS
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids for the purpose of pegging, fixing or maintaining the price of the
common units in accordance with Regulation M under the Securities and Exchange
Act of 1934, as amended.
- Over-allotment transactions involve sales by the underwriters of the
common units in excess of the number of common 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 common units
over-allotted by the underwriters is not greater than the number of
common units they may purchase in the over-allotment option. In a naked
short position, the number of common units involved is greater than the
number of common 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.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- 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
S-51
things, the price of common units available for purchase in the open
market as compared to the price at which they may purchase common units
through the over-allotment option. If the underwriters sell more common
units than could be covered by the over-allotment option, a naked short
position, the position can only be closed out by buying common units in
the open market. A naked short position is more likely to be created if
the underwriters are concerned that there could be downward pressure on
the price of the common units in the open market after pricing that could
adversely affect investors who purchase in the offering.
- Penalty bids permit the underwriters 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 the
price that might otherwise exist in the open market. These transactions may be
effected on the NYSE or otherwise and, if commenced, may be discontinued any
time. On the date of this prospectus, Lehman Brothers Inc. purchased 41,000
common units on behalf of the underwriters at a price of $21.00 per common unit.
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.
LISTING
The common units are listed on the NYSE under the symbol "EPD."
INDEMNIFICATION
We, our general partner and our operating partnership have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments the underwriters
may be required to make because of any of those liabilities.
AFFILIATIONS
Some of the underwriters and their affiliates have performed investment
banking, commercial banking and advisory services for us from time to time for
which they have received customary fees and expenses. The underwriters may, from
time to time in the future, engage in transactions with and perform services for
us in the ordinary course of business.
In addition, affiliates of Lehman Brothers Inc. and Wachovia Capital
Markets, LLC are lenders to us under our $225 million interim term loan, the
proceeds from which were used to pay a portion of the cost of acquiring our 50%
membership interest in GulfTerra's general partner. These lenders were granted a
right of first refusal to provide, arrange, place or underwrite the financings
required to repay our $225 million interim term loan. Each of these lenders will
receive a share of the repayment in full by us of amounts outstanding under this
interim term loan from the net proceeds of this offering. In addition,
affiliates of some of the underwriters for this offering are lenders under our
revolving credit facilities.
An affiliate of Goldman, Sachs & Co. owns 5,512,967 GulfTerra common units,
3,774,200 of which are being registered pursuant to a registration rights
agreement with GulfTerra. Once the registration statement registering these
GulfTerra units becomes effective, the Goldman, Sachs & Co. affiliate may
determine to sell promptly all or a portion of its GulfTerra common units, to
the extent permitted by applicable rules and regulations. Please read "Risk
Factors -- Risks Related to Our Common Units as a Result of Our Partnership
Structure -- A large number of our outstanding common units or GulfTerra's
common units may be sold in the market following this offering, which may
depress the market price of our common units."
S-52
NASD CONDUCT RULES
Because the NASD views the common units offered hereby as interests in a
direct participation program, the offering is being made in compliance with Rule
2810 of the NASD Conduct Rules.
ELECTRONIC DISTRIBUTION
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 on the particular underwriter or selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the underwriters on the same basis as other allocations. In addition,
certain of the underwriters or securities dealers may distribute prospectuses
electronically.
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 the prospectus or the registration statement of which this
prospectus supplement 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 in deciding
whether to purchase any of the common units. The underwriters and selling group
members are not responsible for information contained on web sites that they do
not maintain.
S-53
INCORPORATION OF DOCUMENTS BY REFERENCE
The Commission allows us to incorporate by reference into this prospectus
supplement and the accompanying prospectus the information we file with it,
which means that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is considered to
be part of this prospectus supplement and the accompanying prospectus, and later
information that we file with the Commission will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we make with the Commission under section 13(a),
13(c), 14 or 15(d) of the Exchange Act until our offering is completed (other
than information furnished under Item 9 or Item 12 of any Form 8-K that is
listed below or is filed in the future and which is not deemed filed under the
Exchange Act):
- Our Annual Report on Form 10-K for the year ended December 31, 2003,
Commission File No. 1-14323;
- Our Current Reports on Form 8-K filed with the Commission on January 6,
2004, February 10, 2004, March 22, 2004, April 16, 2004, April 20, 2004,
April 21, 2004, April 26, 2004 and April 27, 2004, Commission File Nos.
1-14323; and
- Our Current Report on Form 8-K (containing the description of our common
units, which description amends and restates the description of our
common units contained in the Registration Statement on Form 8-A,
initially filed with the Commission on July 21, 1998) filed with the
Commission on February 10, 2004, Commission File No. 1-14323.
LEGAL MATTERS
Certain legal matters with respect to the common units will be passed upon
for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters with
respect to the common units will be passed upon for the underwriters by Baker
Botts L.L.P., Houston, Texas. Baker Botts L.L.P. performs legal services for us
and our affiliates from time to time unrelated to this offering. Attorneys at
Vinson & Elkins L.L.P. who have participated in the preparation of this
prospectus supplement, the accompanying prospectus, the registration statement
of which they are a part and the related transaction documents beneficially own
approximately 1,000 common units of Enterprise and 1,200 common units of
GulfTerra.
EXPERTS
The (1) consolidated financial statements and the related consolidated
financial statement schedule of Enterprise Products Partners L.P. and
subsidiaries as incorporated in this prospectus supplement, by reference from
Enterprise Products Partners L.P.'s Annual Report on Form 10-K for the year
ended December 31, 2003, and (2) the balance sheet of Enterprise Products GP,
LLC as of December 31, 2003, incorporated in this prospectus supplement by
reference from Exhibit 99.1 to Enterprise Products Partners L.P.'s Current
Report on Form 8-K filed with the Securities and Exchange Commission on March
22, 2004, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports, which are incorporated herein by reference (each such
report expresses an unqualified opinion and the report for Enterprise Products
Partners L.P. includes an explanatory paragraph referring to a change in method
of accounting for goodwill in 2002 and derivative instruments in 2001 as
discussed in Notes 8 and 1, respectively, to Enterprise Products Partners L.P.'s
consolidated financial statements), and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The (1) consolidated financial statements of GulfTerra Energy Partners,
L.P. ("GulfTerra"), (2) the financial statements of Poseidon Oil Pipeline
Company, L.L.C. ("Poseidon") and (3) the combined financial statements of El
Paso Hydrocarbons, L.P. and El Paso NGL Marketing Company, L.P. (the
"Companies") all incorporated in this prospectus supplement by reference to
Enterprise Products Partners L.P.'s Current
S-54
Reports on Form 8-K dated April 20, 2004 for (1) and (2) and April 16, 2004 for
(3), have been so incorporated in reliance on the reports (which (i) report on
the consolidated financial statements of GulfTerra contains an explanatory
paragraph relating to GulfTerra's agreement to merge with Enterprise Products
Partners L.P. as described in Note 2 to the consolidated financial statements,
(ii) report on the financial statements of Poseidon contains an explanatory
paragraph relating to Poseidon's restatement of its prior year financial
statements as described in Note 1 to the financial statements, and (iii) report
on the combined financial statements of the Companies contains an explanatory
paragraph relating to the Companies' significant transactions and relationships
with affiliated entities as described in Note 5 to the combined financial
statements) of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
Information derived from the report of Netherland, Sewell & Associates,
Inc., independent petroleum engineers and geologists, with respect to
GulfTerra's estimated oil and natural gas reserves incorporated in this
prospectus supplement and accompanying base prospectuses by reference to our
Current Report on Form 8-K dated April 20, 2004 has been so incorporated in
reliance on the authority of said firm as experts with respect to such matters
contained in their report.
S-55
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Enterprise Products Partners L.P. Unaudited Pro Forma Consolidated Financial
Statements:
<Table>
Introduction.............................................. F-2
Pro Forma Condensed Statement of Consolidated Operations
for the year ended December 31, 2003................... F-3
Pro Forma Condensed Consolidated Balance Sheet at December
31, 2003............................................... F-5
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements................................... F-7
Pro Forma Sensitivity Analysis............................ F-17
</Table>
F-1
ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
The following unaudited pro forma financial information has been prepared
to assist in the analysis of financial effects of the proposed merger between
Enterprise Products Partners L.P. and GulfTerra Energy Partners, L.P. announced
on December 15, 2003. The pro forma condensed statement of consolidated
operations for the year ended December 31, 2003 assumes the merger-related
transactions (as described on page F-7) all occurred on January 1, 2003. The pro
forma condensed consolidated balance sheet shows the financial effects of the
merger-related transactions as if they had occurred on December 31, 2003 (to the
extent not already recorded). In addition, these pro forma statements also give
effect to the sale of 15,000,000 Enterprise common units in this offering.
Unless the context requires otherwise, references to "we," "us," "our," or
"Enterprise" are intended to mean the consolidated business and operations of
Enterprise Products Partners L.P. References to "GulfTerra" are intended to mean
the consolidated business and operations of GulfTerra Energy Partners, L.P. and
its subsidiaries. References to "El Paso Corporation" are intended to mean El
Paso Corporation, its subsidiaries and affiliates (other than GulfTerra). El
Paso Corporation was the majority owner of GulfTerra's general partner prior to
December 15, 2003 and owns a limited partner interest in GulfTerra.
The unaudited pro forma condensed consolidated financial statements of
Enterprise should be read in conjunction with and are qualified in their
entirety by reference to the notes accompanying such pro forma condensed
consolidated financial statements and with the historical consolidated financial
statements and related notes of Enterprise included in its Annual Report on Form
10-K for the year ended December 31, 2003. The condensed consolidated financial
statements of GulfTerra included herein are qualified in their entirety by
reference to the historical consolidated financial statements and related notes
of GulfTerra included in Enterprise's Current Report on Form 8-K filed with the
Commission on April 20, 2004 and incorporated by reference into this prospectus
supplement. The condensed combined financial statements of El Paso Hydrocarbons,
L.P. and El Paso NGL Marketing Company, L.P. (collectively, the "South Texas
Midstream Assets") included herein are qualified in their entirety by reference
to the historical combined financial statements and related notes of the South
Texas Midstream Assets included in Enterprise's Current Report Form 8-K filed
with the Commission on April 16, 2004 and incorporated by reference into this
prospectus supplement.
The pending merger-related transactions will be accounted for using the
purchase method of accounting. For purposes of this pro forma financial
information, "goodwill" represents potential intangible assets and remaining
goodwill, if any. The estimates of fair value of the acquired assets and
liabilities are based on preliminary assumptions which will be updated and will
change from the amounts shown. Such changes could impact amounts allocated to
goodwill.
The unaudited pro forma condensed financial statements do not give effect
to any divestiture of assets that may be required for governmental approval of
the proposed merger with GulfTerra.
The unaudited pro forma condensed financial statements are based on
assumptions that we believe are reasonable under the circumstances and are
intended for informational purposes only. They are not necessarily indicative of
the financial results that would have occurred if the transactions described
herein had taken place on the dates indicated, nor is it indicative of our
future consolidated results. Please read "Pro Forma Sensitivity Analysis"
beginning on page F-17 for assumptions related to variable interest rates, fair
value estimates and long-term financing options.
F-2
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 (PART 1)
<Table>
<Caption>
STEP TWO
STEP ONE ENTERPRISE
ENTERPRISE STEP ONE ENTERPRISE GULFTERRA STEP TWO PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS (TO PART 2)
---------- ----------- ---------- ---------- ----------- -----------
(AMOUNTS IN MILLIONS, EXCEPT PER UNIT AMOUNTS)
REVENUES................................... $5,346.4 $5,346.4 $871.5 $(26.8)(n) $6,191.1
COSTS AND EXPENSES
Operating costs and expenses............... 5,046.8 5,046.8 557.0 (26.8)(n) 5,528.2
(48.8)(o)
Selling, general and administrative........ 37.5 37.5 48.8(o) 86.3
-------- -------- ------ ------ --------
Total.................................. 5,084.3 5,084.3 557.0 (26.8) 5,614.5
-------- -------- ------ ------ --------
EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED
AFFILIATES............................... (14.0) $34.7(b) 20.7 11.4(o) (2.6)
(34.7)(i)
-------- ----- -------- ------ ------ --------
OPERATING INCOME........................... 248.1 34.7 282.8 314.5 (23.3) 574.0
-------- ----- -------- ------ ------ --------
OTHER INCOME (EXPENSE)
Interest expense........................... (140.8) (6.9)(c) (147.7) (127.8) 13.0(j) (271.0)
(8.5)(k)
Loss due to early redemptions of debt...... (36.9) (36.9)
Earnings from unconsolidated affiliates.... 11.4 (11.4)(o)
Other, net................................. 6.4 6.4 1.1 0.8(m) 8.3
-------- ----- -------- ------ ------ --------
Total.................................. (134.4) (6.9) (141.3) (152.2) (6.1) (299.6)
-------- ----- -------- ------ ------ --------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST.................... 113.7 27.8 141.5 162.3 (29.4) 274.4
PROVISION FOR INCOME TAXES................. (5.3) (5.3) (5.3)
-------- ----- -------- ------ ------ --------
INCOME BEFORE MINORITY INTEREST............ 108.4 27.8 136.2 162.3 (29.4) 269.1
MINORITY INTEREST.......................... (3.9) 0.9(a) (3.0) (0.9) (3.9)
-------- ----- -------- ------ ------ --------
NET INCOME FROM CONTINUING OPERATIONS...... $ 104.5 $28.7 $ 133.2 $161.4 $(29.4) $ 265.2
======== ===== ======== ====== ====== ========
=== ALLOCATION OF NET INCOME:
Limited Partners......................... $ 83.8 $ 230.2
======== ========
General Partner.......................... $ 20.7 $ 35.0
======== ========
BASIC EARNINGS PER UNIT:
Number of units used in denominator...... 199.9 104.6(g) 304.5
======== ====== ========
Net income from continuing operations.... $ 0.42 $ 0.76
======== ========
DILUTED EARNINGS PER UNIT:
Number of units used in denominator...... 206.4 104.6(g) 311.0
======== ====== ========
Net income from continuing operations.... $ 0.41 $ 0.74
======== ========
</Table>
The accompanying notes are an integral part of these unaudited pro forma
condensed financial statements.
F-3
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 (PART 2)
<Table>
<Caption>
STEP TWO SOUTH TEXAS
ENTERPRISE MIDSTREAM STEP THREE ADJUSTMENTS ADJUSTED
PRO FORMA ASSETS STEP THREE ENTERPRISE DUE TO EQUITY ENTERPRISE
(FROM PART 1) HISTORICAL ADJUSTMENTS PRO FORMA OFFERING PRO FORMA
------------- ----------- ----------- ---------- ------------- ----------
(AMOUNTS IN MILLIONS, EXCEPT PER UNIT AMOUNTS)
REVENUES.............................. $6,191.1 $1,430.7 $ (36.9)(s) $7,153.0 $7,153.0
(431.9)(u)
COSTS AND EXPENSES
Operating costs and expenses.......... 5,528.2 1,423.2 (36.9)(s) 6,474.1 6,474.1
(6.0)(t)
(427.2)(u)
(7.2)(v)
Selling, general and administrative... 86.3 7.2(v) 93.5 93.5
-------- -------- --------- -------- --------
Total............................. 5,614.5 1,423.2 (470.1) 6,567.6 6,567.6
-------- -------- --------- -------- --------
EQUITY IN INCOME (LOSS) OF
UNCONSOLIDATED AFFILIATES........... (2.6) (2.6) (2.6)
-------- -------- --------- -------- --------
OPERATING INCOME...................... 574.0 7.5 1.3 582.8 582.8
-------- -------- --------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense...................... (271.0) (2.8)(q) (273.8) $ 4.2(w) (269.6)
Loss due to early redemptions of
debt................................ (36.9) (36.9) (36.9)
Other, net............................ 8.3 0.1 8.4 8.4
-------- -------- --------- -------- ------ --------
Total........................... (299.6) 0.1 (2.8) (302.3) 4.2 (298.1)
-------- -------- --------- -------- ------ --------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST......... 274.4 7.6 (1.5) 280.5 4.2 284.7
PROVISION FOR INCOME TAXES............ (5.3) (5.3) (5.3)
-------- -------- --------- -------- ------ --------
INCOME BEFORE MINORITY INTEREST....... 269.1 7.6 (1.5) 275.2 4.2 279.4
MINORITY INTEREST..................... (3.9) (3.9) (3.9)
-------- -------- --------- -------- ------ --------
NET INCOME FROM CONTINUING
OPERATIONS.......................... $ 265.2 $ 7.6 $ (1.5) $ 271.3 $ 4.2 $ 275.5
======== ======== ========= ======== ====== ========
ALLOCATION OF NET INCOME:
Limited Partners.................... $ 230.2 $ 238.8
======== ========
General Partner..................... $ 35.0 $ 36.7
======== ========
BASIC EARNINGS PER UNIT:
Number of units used in
denominator....................... 304.5 15.0(w) 319.5
======== ====== ========
Net income from continuing
operations........................ $ 0.76 $ 0.75
======== ========
DILUTED EARNINGS PER UNIT:
Number of units used in
denominator....................... 311.0 15.0(w) 326.0
======== ====== ========
Net income from continuing
operations........................ $ 0.74 $ 0.73
======== ========
</Table>
The accompanying notes are an integral part of these unaudited pro forma
condensed financial statements.
F-4
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003 (PART 1)
<Table>
<Caption>
STEP TWO
ENTERPRISE
ENTERPRISE GULFTERRA STEP TWO PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS (TO PART 2)
---------- ---------- ----------- -----------
(AMOUNTS IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................... $ 44.3 $ 30.4 $ 36.1(d) $ 123.3
44.1(e)
500.0(f)
(500.0)(f)
(31.6)(l)
Accounts and notes receivable, net.................. 462.5 158.0 620.5
Inventories......................................... 150.2 150.2
Other current assets................................ 30.2 20.6 17.2(m) 68.0
-------- -------- -------- ---------
Total Current Assets........................... 687.2 209.0 65.8 962.0
PROPERTY, PLANT AND EQUIPMENT, NET.................... 2,963.5 2,894.5 5,858.0
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED
AFFILIATES.......................................... 767.8 175.8 (425.0)(i) 518.6
INTANGIBLE ASSETS, NET................................ 268.9 3.4 272.3
GOODWILL.............................................. 82.4 2,609.6(j) 2,692.0
OTHER ASSETS.......................................... 33.0 38.9 23.1(m) 95.0
-------- -------- -------- ---------
Total Assets................................... $4,802.8 $3,321.6 $2,273.5 $10,397.9
======== ======== ======== =========
LIABILITIES & COMBINED EQUITY
CURRENT LIABILITIES
Current maturities of debt.......................... $ 240.0 $ 3.0 $ 500.0(f) $ 743.0
Accounts payable.................................... 106.4 152.7 259.1
Accrued gas payables and other expenses............. 693.0 26.6 719.6
Other current liabilities........................... 57.5 27.0 84.5
-------- -------- -------- ---------
Total Current Liabilities...................... 1,096.9 209.3 500.0 1,806.2
LONG-TERM DEBT........................................ 1,899.5 1,808.8 $ 118.3(j) 3,826.6
OTHER LONG-TERM LIABILITIES........................... 14.1 49.0 63.1
MINORITY INTEREST..................................... 86.4 1.8 88.2
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY
Limited Partners
Common Units...................................... 1,582.9 898.1 35.7(d) 4,393.7
43.7(e)
2,364.9(f)
(977.5)(f)
445.9(h)
Class B Special Units............................. 100.2 32.8(f) 139.2
6.2(h)
Series C Units.................................... 341.4 (341.4)(f)
General Partner..................................... 34.3 13.2 0.4(d) 92.4
0.4(e)
48.9(f)
9.2(h)
(14.0)(i)
Treasury Units...................................... (16.5) (16.5)
Accumulated Other Comprehensive Income.............. 5.0 5.0
-------- -------- -------- ---------
Total Combined Equity.......................... 1,705.9 1,252.7 1,655.2 4,613.8
-------- -------- -------- ---------
Total Liabilities & Combined Equity............ $4,802.8 $3,321.6 $2,273.5 $10,397.9
======== ======== ======== =========
</Table>
The accompanying notes are an integral part of these unaudited pro forma
condensed financial statements.
F-5
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003 (PART 2)
<Table>
<Caption>
STEP TWO SOUTH TEXAS
ENTERPRISE MIDSTREAM STEP THREE ADJUSTMENTS ADJUSTED
PRO FORMA ASSETS STEP THREE ENTERPRISE DUE TO EQUITY ENTERPRISE
(FROM PART 1) HISTORICAL ADJUSTMENTS PRO FORMA OFFERING PRO FORMA
------------- ----------- ----------- ---------- ------------- ----------
(AMOUNTS IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents....... $ 123.3 $ 165.0(p) $ 123.3 $ 321.3(w) $ 123.3
(165.0)(p) (14.3)(w)
(307.0)(w)
Accounts and notes receivable,
net........................... 620.5 $177.1 (177.1)(u) 620.5 620.5
Inventories..................... 150.2 15.0 165.2 165.2
Other current assets............ 68.0 7.1 (7.1)(u) 68.0 (1.0)(w) 67.0
--------- ------ ------- --------- ------- ---------
Total Current Assets........ 962.0 199.2 (184.2) 977.0 (1.0) 976.0
PROPERTY, PLANT AND EQUIPMENT,
NET............................. 5,858.0 316.3 (164.1)(r) 6,010.2 6,010.2
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES....... 518.6 518.6 518.6
INTANGIBLE ASSETS, NET............ 272.3 272.3 272.3
GOODWILL.......................... 2,692.0 2,692.0 2,692.0
OTHER ASSETS...................... 95.0 95.0 95.0
--------- ------ ------- --------- ------- ---------
Total Assets...................... $10,397.9 $515.5 $(348.3) $10,565.1 $ (1.0) $10,564.1
========= ====== ======= ========= ======= =========
LIABILITIES & COMBINED EQUITY
CURRENT LIABILITIES
Current maturities of debt...... $ 743.0 $ 165.0(p) $ 908.0 $(307.0)(w) $ 601.0
Accounts payable................ 259.1 $177.1 $(177.1)(u) 259.1 259.1
Accrued gas payables and other
expenses...................... 719.6 14.2 (14.2)(u) 719.6 719.6
Other current liabilities....... 84.5 2.6 (2.6)(u) 84.5 84.5
--------- ------ ------- --------- ------- ---------
Total Current Liabilities... 1,806.2 193.9 (28.9) 1,971.2 (307.0) 1,664.2
LONG-TERM DEBT.................... 3,826.6 3,826.6 3,826.6
OTHER LONG-TERM LIABILITIES....... 63.1 2.2 65.3 65.3
MINORITY INTEREST................. 88.2 88.2 88.2
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY
Limited Partners
Common Units.................. 4,393.7 4,393.7 315.0(w) 4,693.7
(14.0)(w)
(1.0)(w)
Class B Special Units......... 139.2 139.2 139.2
General Partner................. 92.4 92.4 6.3(w) 98.4
(0.3)(w)
Treasury Units.................. (16.5) (16.5) (16.5)
Owners' net investment.......... 319.4 (329.1)(r)
9.7(u)
Accumulated Other Comprehensive
Income........................ 5.0 5.0 5.0
--------- ------ ------- --------- ------- ---------
Total Combined Equity....... 4,613.8 319.4 (319.4) 4,613.8 306.0 4,919.8
--------- ------ ------- --------- ------- ---------
Total Liabilities & Combined
Equity................... $10,397.9 $515.5 $(348.3) $10,565.1 $ (1.0) $10,564.1
========= ====== ======= ========= ======= =========
</Table>
The accompanying notes are an integral part of these unaudited pro forma
condensed financial statements.
F-6
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
These unaudited pro forma condensed consolidated financial statements and
underlying pro forma adjustments are based upon currently available information
and certain estimates and assumptions made by Enterprise; therefore, actual
results could materially differ from pro forma information. However, Enterprise
believes the assumptions provide a reasonable basis for presenting the
significant effects of the transactions noted herein. Enterprise believes the
pro forma adjustments give appropriate effect to those assumptions and are
properly applied in the pro forma information. Please read "Pro Forma
Sensitivity Analysis" beginning on page F-17 for assumptions related to variable
interest rates, fair value estimates and long-term financing options.
The proposed merger with GulfTerra is a three-step process outlined as
follows:
- Step One. On December 15, 2003, Enterprise purchased a 50% membership
interest in GulfTerra's general partner for $425 million. GulfTerra's
general partner owns a 1% general partner interest in GulfTerra. This
investment is accounted for using the equity method and is already
recorded in Enterprise's historical balance sheet at December 31, 2003.
This transaction is referred to as Step One of the proposed merger and
will remain in effect even if the remainder of the proposed merger and
post-merger transactions, which are referred to as Step Two and Step
Three, do not occur.
- Step Two. If all necessary regulatory and unitholder approvals are
received and the other merger agreement conditions are either fulfilled
or waived and the following steps are consummated, Enterprise will own
100% of the limited and general partner interests in GulfTerra. At that
time, the proposed merger will be accounted for using the purchase method
and GulfTerra will be a consolidated subsidiary of Enterprise. Step Two
of the proposed merger includes the following transactions:
- El Paso Corporation's exchange of its remaining 50% membership
interest in GulfTerra's general partner for a 9.9% membership interest
in Enterprise's general partner and $370 million in cash from
Enterprise's general partner, and the subsequent capital contribution
by Enterprise's general partner of such 50% membership interest in
GulfTerra's general partner to Enterprise (without increasing
Enterprise's general partner's interest in Enterprise's earnings or
cash distributions).
- Enterprise's purchase of 10,937,500 GulfTerra Series C units and
2,876,620 GulfTerra common units owned by El Paso Corporation for $500
million; and
- The exchange of each remaining GulfTerra common unit for 1.81
Enterprise common units, resulting in the issuance of approximately
104.6 million Enterprise common units to GulfTerra unitholders.
- Step Three. Immediately after Step Two is completed, Enterprise expects
to acquire the South Texas Midstream Assets, which are comprised of nine
cryogenic natural gas processing plants, one natural gas gathering
system, one natural gas treating plant, and a small natural gas liquids
connecting pipeline, from El Paso Corporation for $150 million, plus the
value of then outstanding inventory.
F-7
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total estimated consideration for the proposed merger with GulfTerra
and the purchase of the South Texas Midstream Assets is summarized below
(dollars in millions):
<Table>
STEP ONE TRANSACTIONS (COMPLETED):
Cash payment by Enterprise to El Paso Corporation for 50%
membership interest in GulfTerra's general partner..... $ 425.0
--------
Total Step 1 consideration........................... 425.0
--------
STEP TWO TRANSACTIONS (PROPOSED):
Cash payment by Enterprise to El Paso Corporation or
GulfTerra for equity interests......................... 500.0
Value of 50% membership interest in GulfTerra's general
partner exchanged by El Paso Corporation with
Enterprise's general partner who will subsequently
contribute it to Enterprise............................ 461.3
Value of Enterprise common units to be issued in exchange
for GulfTerra equity interests......................... 2,446.6
Note receivable from El Paso Corporation.................. (40.3)
Transaction and other costs............................... 31.6
--------
Total Step Two consideration......................... 3,399.2
--------
Total Step One and Step Two consideration............ 3,824.2
--------
STEP THREE TRANSACTION (TO BE COMPLETED AFTER STEP TWO IS
COMPLETED):
Purchase of South Texas Midstream Assets from El Paso
Corporation............................................ 165.0
--------
Total consideration.................................. $3,989.2
========
</Table>
The pro forma adjustments we made to the historical financial statements of
Enterprise, GulfTerra and the South Texas Midstream Assets are described as
follows:
PRE-MERGER ADJUSTMENTS:
(a) Reflects the pro forma adjustment to minority interest expense related to
Enterprise's restructuring of the ownership interest of its general partner
from a 1% direct interest in Enterprise and a 1.0101% minority interest in
Enterprise's consolidated operating subsidiary to a 2% direct interest in
Enterprise. The pro forma adjustment removes $0.9 million in minority
interest expense attributable to the general partner's ownership interest
in the earnings of the operating subsidiary during 2003. As a result of
this adjustment, Enterprise's allocation of earnings to its general partner
increases by a similar amount. This transaction occurred in December 2003
immediately prior to the completion of Step One.
STEP ONE ADJUSTMENTS OF PROPOSED MERGER:
(b) Until Step Two of the proposed merger is completed, Enterprise will account
for its investment in GulfTerra's general partner using the equity method.
A preliminary analysis of Enterprise's investment in GulfTerra's general
partner indicates that there is approximately $329 million of excess of
cost over Enterprise's underlying equity in GulfTerra's general partner,
the value of which has been initially attributed to indefinite life other
tangible assets or goodwill.
F-8
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the pro forma adjustment to Enterprise's equity
earnings from unconsolidated affiliates for the year ended December 31,
2003 (dollars in millions):
<Table>
Actual income allocation of GulfTerra to GulfTerra's general
partner of income from continuing operations for 2003..... $69.4
Enterprise ownership interest in GulfTerra's general
partner................................................... 50%
-----
Enterprise pro forma adjustment to equity earnings from
unconsolidated affiliates for GulfTerra's general
partner................................................... $34.7
=====
</Table>
(c) Reflects the pro forma adjustment to interest expense associated with the
$425 million cash purchase consideration which was borrowed by Enterprise
to finance its purchase of a 50% interest in GulfTerra's general partner.
This transaction was financed by $225 million borrowed under an acquisition
term loan and $200 million borrowed under Enterprise's existing revolving
credit facilities. The pro forma adjustment to interest expense is $6.9
million for the year ended December 31, 2003 and is based on the weighted-
average 1.7% variable interest rate Enterprise is currently paying on
borrowings under the Interim Term Loan and its existing revolving credit
facilities. For an analysis of sensitivity of pro forma interest expense to
Enterprise's variable interest rates, please read the discussion titled
"Pro Forma Sensitivity Analysis -- Sensitivity to variable interest rates"
on page F-17. For an analysis of sensitivity of pro forma interest expense
to Enterprise's long-term financing options, please read the discussion
titled "Pro Forma Sensitivity Analysis -- Sensitivity to long-term
financing options" on page F-17.
Enterprise's historical December 31, 2003 balance sheet already reflects
the $425 million investment in GulfTerra's general partner; therefore, no
pro forma adjustment is required.
STEP TWO ADJUSTMENTS OF PROPOSED MERGER:
(d) Reflects the pro forma adjustments attributable to the assumed exercise of
1,116,000 GulfTerra common unit options outstanding at December 31, 2003
that are already vested or will vest immediately prior to the completion of
Step Two of the proposed merger. For pro forma purposes, we have assumed
that GulfTerra will receive the exercise price associated with these
options and issue new common units. The pro forma balance sheet adjustments
reflect the receipt of $36.1 million in proceeds received in connection
with the assumed exercise of these options and a corresponding increase in
partners' equity, including GulfTerra's general partner's proportionate
contribution of $0.4 million.
(e) In May 2003, GulfTerra issued 80 Series F convertible units in a registered
offering to a large institutional investor. Each Series F convertible unit
is comprised of two separate detachable units -- a Series F1 convertible
unit and a Series F2 convertible unit -- that have identical terms except
for vesting and termination dates and the number of underlying GulfTerra
common units into which they may be converted. The Series F1 units are
convertible into up to $80 million of GulfTerra common units anytime after
August 12, 2003, and until the date GulfTerra merges with Enterprise
(subject to other defined extension rights). The Series F2 units are
convertible into up to $40 million of GulfTerra common units. The Series F2
units terminate on March 30, 2005 (subject to extension rights).
During the first quarter of 2004, 45 Series F1 convertible units were
converted into 1,146,418 GulfTerra common units, for which GulfTerra
received net proceeds of $44.1 million, which includes GulfTerra's general
partner's proportionate contribution of $0.4 million. Our pro forma
adjustment reflects GulfTerra's issuance of common units and the related
proceeds. GulfTerra also received a proportionate contribution of $0.4
million from its general partner.
After allowing for the transaction described in the previous paragraph, the
holder of the Series F1 and F2 convertible units could still purchase up to
an additional $75 million of GulfTerra common units. Assuming that
GulfTerra had received a conversion notice from the holder on December 31,
2003 for the remaining amount of securities and using a conversion price of
$40.38 per common unit at that date as
F-9
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
calculated under the terms of the Series F security, an additional
1,857,355 GulfTerra common units would be issuable. For purposes of
calculating diluted earnings per unit, we have assumed that the proceeds
from this assumed conversion would be reinvested by GulfTerra using the
treasury stock method, which results in the repurchase of 1,765,537
GulfTerra common units; therefore, a net dilution of 91,818 GulfTerra
common units would occur. If these common units are assumed outstanding
when the Enterprise exchange takes place (see Note (f)), this would result
in an additional 166,191 Enterprise common units being issued, which would
not have a material impact on our pro forma financial position, goodwill or
diluted earnings per unit.
Any Series F convertible units outstanding at the merger date of Enterprise
and GulfTerra will be converted into rights to receive Enterprise common
units, subject to the restrictions governing the Series F units. The number
of Enterprise common units and the price per unit at conversion will be
adjusted based on the 1.81 exchange ratio discussed in Note (f).
(f) Under Step Two of the proposed merger, Enterprise will purchase 2,876,620
GulfTerra common units and 10,937,500 GulfTerra Series C units from El Paso
Corporation for $500 million in cash. For purposes of this pro forma
presentation, we have assumed that this purchase will be financed by
entering into a short-term $500 million, variable interest rate acquisition
term loan, which Enterprise plans to refinance using long-term debt and
proceeds from equity offerings after the proposed merger is completed. In
addition, these pro forma adjustments reflect the $2.4 billion estimated
value of Enterprise's common units issued in an exchange for the estimated
remaining 57,790,447 GulfTerra common units, the fair value of which is
assigned to Enterprise's partners in accordance with their pro forma
ownership interest percentages after the exchange is completed.
Collectively, these pro forma adjustments reflect the following:
(1) Enterprise's receipt of $500 million in cash from borrowings and
subsequent use of these funds to purchase GulfTerra common units and
Series C units owned by El Paso Corporation. Enterprise's purchase of
the GulfTerra common units will be recorded as a component of goodwill
(see Note (j)).
(2) The assignment among Enterprise's partners' equity accounts of the
estimated $2.4 billion in estimated consideration issued to GulfTerra
unitholders in connection with the exchange of common units. The offset
to this consideration will be recorded as a component of goodwill (see
Note (j)).
(3) The elimination of GulfTerra's common units and Series C units
partners' capital accounts in consolidation with Enterprise.
F-10
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Enterprise will exchange 1.81 of its common units for each GulfTerra common
unit remaining after Enterprise's purchase of 2,876,620 common units owned
by El Paso Corporation. Enterprise currently estimates that the number of
its common units to be issued in the exchange is 104,600,709 calculated as
follows:
<Table>
GulfTerra units outstanding at December 31, 2003:
Common units.............................................. 58,404,649
Series C units............................................ 10,937,500
------------
Total historical units outstanding at December 31,
2003................................................ 69,342,149
Pro forma adjustments to GulfTerra historical units
outstanding:
Enterprise purchase of Series C units from El Paso
Corporation in connection with Step Two of the proposed
merger................................................. (10,937,500)
Enterprise purchase of common units from El Paso
Corporation in connection with Step Two of the proposed
merger................................................. (2,876,620)
Issuance of common units for unit options (see Note (d)
)...................................................... 1,116,000
Series F1 convertible units converted to common units (see
Note (e)).............................................. 1,146,418
------------
Pro forma GulfTerra common units subject to Step Two
exchange offer by Enterprise.............................. 57,790,447
Exchange ratio (1.81 Enterprise common units for each
GulfTerra common unit).................................... 1.81
------------
Pro forma Enterprise common units to be issued to GulfTerra
common unitholders in connection with merger.............. 104,600,709
============
Average closing price of Enterprise common units............ $ 23.39
============
Pro forma value of Enterprise common units issued as
consideration to complete Step Two of proposed merger
(dollars in millions)..................................... $ 2,446.6
============
</Table>
In accordance with purchase accounting rules, the pro forma $2.4 billion
value of Enterprise's common units issued in the exchange is based on the
average closing price of Enterprise's common units immediately prior to and
after the proposed merger was announced on December 15, 2003.
The following table shows the closing prices of Enterprise's common units
within two trading days prior to and after the proposed merger being
announced.
<Table>
December 11, 2003........................................... $23.10
December 12, 2003........................................... 22.80
December 16, 2003........................................... 23.85
December 17, 2003........................................... 23.80
------
Average closing price of Enterprise common units immediately
prior to and after the proposed merger was announced on
December 15, 2003......................................... $23.39
======
</Table>
(g) Reflects the pro forma adjustment to number of Enterprise common units
outstanding (as used in the calculation of basic and diluted earnings per
unit) resulting from the issuance of Enterprise common units in the
exchange with GulfTerra's common unitholders described in Note (f). For the
year ended December 31, 2003, the pro forma effect of these new common
units on the number of Enterprise units outstanding was an increase of
104,600,709 common units.
(h) In connection with Step Two of the proposed merger, El Paso Corporation
will exchange its remaining 50% membership interest in GulfTerra's general
partner (its membership interest remaining after Step One was completed on
December 15, 2003) for a 9.9% membership interest in Enterprise's general
partner and $370 million in cash from Enterprise's general partner.
Subsequently, Enterprise's general
F-11
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
partner will contribute its 50% membership interest in GulfTerra's general
partner to Enterprise. A preliminary fair value estimate of the El Paso
Corporation 50% membership interest in GulfTerra's general partner
ultimately contributed to Enterprise is $461.3 million. The pro forma
balance sheet entries reflect the contribution of this 50% membership
interest to Enterprise, the fair value of which is assigned to Enterprise's
partners in accordance with their respective ownership percentages. The
offset to this contribution amount is recorded as a component of goodwill
(see Note (j)).
(i) Reflects the pro forma balance sheet adjustments necessary for the
consolidation of GulfTerra's general partner with Enterprise's financial
information as a result of the contribution described in Note (h). The pro
forma entries reflect the reclassification of Enterprise's $425 million
investment in GulfTerra's general partner recorded in Step One (see Note
(c)) to goodwill and the elimination of GulfTerra's general partner's
account in consolidation. Enterprise's pro forma statement of consolidated
operations reflects the replacement of equity earnings recorded under Step
One with consolidated earnings for GulfTerra as if Step Two had occurred on
January 1, 2003. This adjustment required the removal of $34.7 million of
pro forma equity income we would have recorded from GulfTerra's general
partner in connection with Step One for the year ended December 31, 2003
(see Note (b)).
(j) Reflects the pro forma balance sheet adjustment to record goodwill
attributable to the proposed merger. The estimated value of consideration
to be paid or granted by Enterprise to consummate Step One and Step Two of
the proposed merger is approximately $3.8 billion. Step Two of the proposed
merger will be accounted for under the purchase method, and GulfTerra will
become a wholly owned consolidated subsidiary of Enterprise. As a result of
using purchase accounting in Step Two, we are required to assign fair
values to the assets and liabilities of GulfTerra in consolidation.
With the exception of long-term debt, a preliminary analysis indicates that
the carrying value of GulfTerra's assets and other liabilities at December
31, 2003 approximates fair value. Using market pricing information at April
19, 2004, the fair value of GulfTerra's debt was approximately $118.2
million higher than its carrying value at December 31, 2003. GulfTerra has
completed a number of business acquisitions and invested significant
capital expenditures in the last five years resulting in asset growth of
approximately $2.7 billion since 1999 to a total asset value of $3.3
billion at December 31, 2003. In accordance with generally accepted
accounting principles, many of these transactions (including $1.9 billion
in business acquisitions completed during 2003, 2002 and 2001) were
recorded at fair value or recent historical cost amounts. As a result, we
have preliminarily assumed that the amount of excess cost attributable to
tangible or identifiable intangible assets would be minimal (subject to
adjustment pending of completion of third-party valuation noted below).
Accordingly, the $2.6 billion difference between the value of Enterprise's
estimated consideration given to consummate the proposed merger and the
fair value of GulfTerra's pro forma net assets has been assigned to
goodwill. The estimated goodwill amount represents the value that
management has attached to future cash flows from the GulfTerra operations
and the strategic location of such assets and their connections. GulfTerra
is one of the biggest natural gas gatherers, based on miles of pipelines,
in the prolific natural gas supply regions offshore in the Gulf of Mexico
and onshore in Texas and in the San Juan Basin, which covers a significant
portion of the four contiguous corners of Arizona, Colorado, New Mexico and
Utah. These regions, especially the deepwater regions of the Gulf of
Mexico, one of the United States' fastest growing oil and natural gas
producing regions. offer GulfTerra significant growth potential through the
acquisition and construction of pipelines, platforms, processing and
storage facilities and other energy infrastructure.
Upon completion of the proposed merger with GulfTerra or shortly
thereafter, Enterprise will obtain a third-party valuation of GulfTerra's
assets and liabilities in order to develop a definitive allocation of the
purchase price. As a result, the final purchase price allocation may result
in some amounts being assigned to tangible or amortizable intangible assets
apart from goodwill. To the extent that any amount is assigned to a
tangible or amortizable intangible asset, this amount may ultimately be
depreciated or amortized (as appropriate) to earnings over the expected
period of benefit of the asset. To the extent that any amount remains as
goodwill, this amount would not be subject to depreciation or amortization,
but
F-12
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would be subject to periodic impairment testing and if necessary, written
down to fair value should circumstances warrant.
The following table shows our preliminary calculation of the estimated pro
forma goodwill amount (dollars in millions):
<Table>
<Caption>
PRO FORMA
REFERENCE
-------------
Cash payments made to El Paso Corporation in Steps One and
Two....................................................... $ 925.0 Notes (c),(f)
Value of 50% interest in GulfTerra GP exchanged by El Paso
Corporation with Enterprise's general partner who
subsequently contributed it to Enterprise................. 461.3 Note (h)
Issuance of 104,600,709 common units........................ 2,446.6 Note (f)
Note receivable from El Paso Corporation.................... (40.3) Note (m)
Transaction and other costs................................. 31.6 Note (l)
--------
Total purchase price........................................ 3,824.2
Estimated fair value of GulfTerra pro forma net assets at
December 31, 2003......................................... 1,214.6
--------
Excess of purchase price over net assets of GulfTerra
preliminarily assigned to goodwill........................ $2,609.6
========
</Table>
The estimated fair value of GulfTerra net assets at December 31, 2003
reflects historical amounts plus $36.1 million in net proceeds from the
assumed exercise of unit options (see Note (d)) and $44.1 million from the
conversion of Series F units (see Note (e)). In addition, GulfTerra's
historical net asset amount has been adjusted for the $118.2 million
increase in the fair value of debt discussed previously.
Enterprise's pro forma statement of consolidated operations for 2003
reflects a $13 million reduction in interest expense attributable to
amortization of the $118.2 million pro forma excess of fair value over
carrying value of GulfTerra's debt at December 31, 2003 (i.e., the "fair
value premium"). For pro forma presentation purposes, we have amortized the
fair value premium associated with each GulfTerra debt instrument assumed
over the remaining term of the instrument using the effective interest
method. If market rates underlying the fair value of each debt instrument
were to increase or decrease 1/8%, the pro forma reduction in interest
expense would be $12.1 million or $14 million, respectively.
For an analysis of the sensitivity of pro forma earnings to potential
reclassifications of this preliminary goodwill amount to tangible or
intangible assets, please read our discussion titled "Pro Forma Sensitivity
Analysis -- Sensitivity to fair value estimates" beginning on page F-17.
(k) Reflects the pro forma adjustment to interest expense attributable to
Enterprise's $500 million in borrowings to consummate the purchase of
GulfTerra units from El Paso Corporation as described in Note (f). The pro
forma increase in interest expense is $8.5 million for the year ended
December 31, 2003 and is based on the weighted-average 1.7% variable
interest rate Enterprise is currently paying on borrowings under the
Interim Term Loan and its existing revolving credit facilities. For an
analysis of sensitivity of pro forma interest expense to Enterprise's
variable interest rates, please read the discussion titled "Pro Forma
Sensitivity Analysis -- Sensitivity to variable interest rates" on page
F-17. For an analysis of sensitivity of pro forma interest expense to
Enterprise's long-term financing options, please read the discussion titled
"Pro Forma Sensitivity Analysis -- Sensitivity to long-term financing
options" on page F-17.
(l) As a result of completing Step Two, Enterprise will incur an estimated
$31.6 million of various transaction fees and costs. In accordance with
purchase accounting rules, those costs considered direct costs of the
acquisition are a component of the total purchase price. These costs
include fees for legal, accounting, printing, financial advisory and other
services rendered by third-parties to Enterprise over the course of the
transaction and anticipated involuntary severance costs. Our pro forma
balance sheet
F-13
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumes that this expenditure is made from cash on hand. The offset to this
amount is recorded as a component of goodwill (see Note (j)).
(m) Reflects the present value of a note receivable from El Paso Corporation
received as part of the negotiated net consideration reached in Step Two.
The agreements between Enterprise and El Paso Corporation provide that for
a period of three years following the closing of the proposed merger, El
Paso Corporation will make transition support payments to Enterprise in
annual amounts of $18 million, $15 million and $12 million for the first,
second and third years of such period, respectively, payable in twelve
equal monthly installments for each such year. The $45 million note
receivable related to the El Paso Corporation transition support payments
has been discounted to fair value and recorded as a reduction in the
purchase price for GulfTerra. Of the $40.3 million estimated present value,
$17.2 million of this amount has been classified on the pro forma December
31, 2003 balance sheet as a current asset with the remainder recorded as a
component of other assets. The offset to this amount is recorded as a
reduction of goodwill (see Note (j)).
Our pro forma statement of consolidated operations reflects $0.8 million of
interest income that would have been recognized from this note during 2003
using the imputed interest method.
(n) Reflects the pro forma elimination of material revenues and expenses
between Enterprise and GulfTerra as appropriate in consolidation.
(o) Reflects pro forma classification adjustments necessary to conform
GulfTerra's historical condensed financial statements with Enterprise's
method of presentation. The reclassifications were as follows:
- GulfTerra's general and administrative costs were reclassified to a
separate line item within operating expenses to conform to Enterprise's
method of presentation.
- GulfTerra's operating income increased as a result of reclassifying its
$11.4 million in equity earnings from unconsolidated affiliates to a
separate component of operating income to conform with Enterprise's
presentation of such earnings. Enterprise's equity investments with
industry partners are a vital component of its business strategy. They
are a means by which Enterprise conducts its operations to align its
interests with those of its customers, which may be a supplier of raw
materials or a consumer of finished products. This method of operation
also enables Enterprise to achieve favorable economies of scale relative
to the level of investment and business risk assumed versus what
Enterprise could accomplish on a stand-alone basis. Many of these equity
investments perform supporting or complementary roles to Enterprise's
other business operations. Based on information provided to Enterprise by
GulfTerra, GulfTerra's relationship with its equity investees is the
same.
- Enterprise grouped the income allocations to GulfTerra's Series B
unitholders, common unitholders and Series C unitholders under one
category termed "Limited Partners" to conform to the Enterprise format.
GulfTerra's balance sheet line item descriptions are similar to
Enterprise's balance sheet presentation. In general, the only change to
GulfTerra's historical balance sheet was to conform the terminology and
order of items between the two similar formats.
STEP THREE ADJUSTMENTS OF PROPOSED MERGER:
(p) Immediately after Step Two is completed, Enterprise will purchase the South
Texas Midstream Assets from El Paso Corporation for $150 million plus the
value of then outstanding inventory. For purposes of pro forma
presentation, we have assumed that this purchase will be initially financed
using a short-term, variable-rate acquisition term loan, which Enterprise
plans to refinance using long-term debt and proceeds from equity offerings
after the proposed merger is completed. This pro forma balance sheet
adjustment reflects Enterprise's receipt of $165 million in cash from
borrowings and subsequent use of these funds to purchase the South Texas
Midstream Assets from El Paso Corporation.
F-14
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(q) Reflects the pro forma adjustment to interest expense attributable to
Enterprise's $165 million in borrowings to consummate the purchase of the
South Texas Midstream Assets from El Paso Corporation as described in Note
(p). The pro forma increase in interest expense is $2.8 million for the
year ended December 31, 2003 and is based on the weighted-average 1.7%
variable interest rate Enterprise is currently paying on borrowings under
the Interim Term Loan and its existing revolving credit facilities. For an
analysis of sensitivity of pro forma interest expense to Enterprise's
variable interest rates, please read the discussion titled "Pro Forma
Sensitivity Analysis -- Sensitivity to variable interest rates" on page
F-17. For an analysis of sensitivity of pro forma interest expense to
Enterprise's long-term financing options, please read the discussion titled
"Pro Forma Sensitivity Analysis -- Sensitivity to long-term financing
options" on page F-17.
(r) Enterprise's purchase of the South Texas Midstream Assets will be recorded
using purchase accounting. As a result, Enterprise will record the assets
it acquires and any liabilities it may assume at fair value, which is
preliminarily estimated at approximately $150 million plus $15 million
assumed value of inventory. There may be amounts allocated to tangible
assets or goodwill. Under the purchase and sale agreement with El Paso
Corporation for the South Texas Midstream Assets, certain assets and
liabilities of this business will be retained by El Paso Corporation. The
pro forma balance sheet adjustments record the estimated fair value of
assets acquired and liabilities assumed by Enterprise and remove those
retained by El Paso Corporation. In addition, these pro forma adjustments
reflect the elimination of stockholder's equity in the South Texas
Midstream Assets in consolidation with Enterprise's accounts. The South
Texas Midstream Assets will be wholly-owned by Enterprise after Step Three
is completed.
(s) Reflects the pro forma elimination of material revenues and expenses
between Enterprise, GulfTerra and the South Texas Midstream Assets as
appropriate in consolidation.
(t) Reflects the pro forma adjustment to depreciation expense for the South
Texas Midstream Assets acquisition. For purposes of calculating pro forma
depreciation expense, we applied the straight-line method using an
estimated remaining useful life of these assets of 25 years to our
preliminary new basis of approximately $150 million. After adjusting for
historical depreciation recorded on these assets, pro forma depreciation
expense decreased $6 million for the year ended December 31, 2003.
(u) In accordance with the purchase and sale agreement between Enterprise and
El Paso Corporation for the South Texas Midstream Assets, El Paso
Corporation will retain all working capital items of the South Texas
Midstream Assets except for inventory. As a result, our pro forma
adjustments remove $184.2 million of current assets and $193.9 million of
current liabilities, with a $9.7 million offset to owner's net investment.
In addition, the purchase and sale agreement states that El Paso
Corporation will retain a number of NGL marketing-related contracts.
Enterprise's pro forma statement of operations includes adjustments to
remove $431.9 million of revenues and $427.2 million of operating costs and
expenses associated with these retained contracts.
(v) Reflects pro forma classification adjustments necessary to conform the
South Texas Midstream Assets' historical combined financial statements with
Enterprise's method of presentation. First, the South Texas Midstream
Assets' general and administrative costs were reclassified to a separate
line item within operating expenses to conform to Enterprise's method of
presentation. Second, the South Texas Midstream Assets' balance sheet line
item descriptions are similar to Enterprise's balance sheet presentation.
In general, the only change to the South Texas Midstream Assets' historical
combined balance sheet was to conform the terminology and order of items
between the two similar formats.
OTHER ADJUSTMENTS:
(w) Reflects the sale of 15,000,000 Enterprise common units at an offering
price of $21.00 per unit in April 2004. Total net proceeds from this sale
are approximately $307 million after deducting applicable underwriting
discounts, commissions and offering expenses of $14.3 million. Included in
the total net
F-15
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proceeds of $307 million is a net capital contribution made by the general
partner of Enterprise of $6 million to maintain its 2% general partner
interest in Enterprise, after deducting the general partner's share of the
underwriting discounts, commissions and offering expenses. The net proceeds
from this equity offering, including Enterprise's general partner's net
capital contribution, will be used to repay Enterprise's $225 million
Interim Term Loan and to temporarily reduce borrowings under Enterprise's
364-day and multi-year revolving credit facilities by $82 million.
As a result of this use of proceeds, pro forma interest expense will
decrease by $5.2 million for the year ended December 31, 2003. However,
Enterprise's pro forma adjustment also removes $1.0 million of prepaid debt
issuance costs attributable to the Interim Term Loan, which is recorded as
an increase in interest expense and a decrease in other current assets.
Taking into account these two offsets, pro forma interest expense will
decrease a net $4.2 million for the year ended December 31, 2003. The
removal of the debt issuance costs is due to repayment of the Interim Term
Loan.
For an analysis of sensitivity of pro forma interest expense to
Enterprise's variable interest rates, please read the discussion titled
"Pro Forma Sensitivity Analysis -- Sensitivity to variable interest rates"
on page F-17.
F-16
PRO FORMA SENSITIVITY ANALYSIS
Sensitivity to variable interest rates. Certain of the pro forma
adjustments to interest expense are based on Enterprise's current
weighted-average variable interest rates. The table below shows the sensitivity
of these pro forma adjustments to interest expense to a 1/8% increase in the
variable interest rates used to derive the pro forma adjustments for the year
ended December 31, 2003 (dollars in millions):
<Table>
<Caption>
HYPOTHETICAL
PRO FORMA (INCREASE) /DECREASE
(INCREASE)/DECREASE PRO FORMA IN PRO FORMA
IN INTEREST EXPENSE ADJUSTMENT INTEREST EXPENSE
ATTRIBUTABLE TO IF VARIABLE DUE TO
VARIABLE INTEREST RATES HIGHER
PRO FORMA NOTE INTEREST RATES ARE 1/8% HIGHER INTEREST RATES
- -------------- ------------------- --------------- --------------------
(A) (B) (B-A)
--- --- -----
Note (c)..................... $ (6.9) $ (7.4) $(0.5)
Note (k)..................... (8.5) (9.1) (0.6)
Note (q)..................... (2.8) (3.0) (0.2)
Note (w)..................... 5.2 5.6 0.4
------ ------ -----
Totals..................... $(13.0) $(13.9) $(0.9)
====== ====== =====
</Table>
Sensitivity to fair value estimates. Certain of the pro forma adjustments
incorporate our preliminary estimates of the fair value of investments or
businesses that we are acquiring. Early indications are that the excess of our
purchase price over the preliminary fair values ("excess cost") may be assigned
to non-amortizable other intangible assets or goodwill as opposed to depreciable
fixed assets or amortizable intangible assets. Upon completion of the proposed
merger or shortly thereafter, Enterprise will obtain a third-party valuation of
GulfTerra's assets and liabilities in order to develop a definitive allocation
of the purchase price. As result, the final purchase price allocation may result
in some amounts being assigned to tangible or amortizable intangible assets
apart from goodwill. To the extent that any amount is assigned to a tangible or
amortizable intangible asset, this amount may ultimately be depreciated or
amortized (as appropriate) to earnings over the expected period of benefit to
the asset. To the extent that any amount remains as goodwill, this amount would
not be subject to depreciation or amortization, but would be subject to periodic
impairment testing and if necessary, written down to a lower fair value should
circumstances warrant.
The table below shows the potential increase in pro forma depreciation or
amortization expense if certain amounts of the $2.6 billion of goodwill
identified in Note (j) were ultimately assigned to fixed or amortizable
intangible assets. For purposes of calculating this sensitivity, we have applied
the straight-line method of cost allocation (i.e., depreciation or amortization)
over an estimated useful life of 20 years to various fair values. The decrease
in basic earnings per unit is predicated on the $0.75 basic earnings per unit
determined using the $275.5 million final adjusted pro forma net income amount
after Step Three of the proposed merger and this proposed equity offering. The
resulting pro forma adjustments for the year ended December 31, 2003 are as
follows (dollars in millions, unless indicated otherwise):
<Table>
<Caption>
DECREASE IN
AMOUNT ALLOCATED TO TANGIBLE INCOME FROM DECREASE IN
OR AMORTIZABLE ASSETS OUT OF GOODWILL CONTINUING BASIC EARNINGS
PRELIMINARILY ASSIGNED IN NOTE (J) OPERATIONS PER UNIT
- ------------------------------------- ----------- --------------
$521.8 million or 20% of preliminary goodwill.............. $ 26.1 $0.08
$1.0 billion or 40% of preliminary goodwill................ 52.2 0.16
$1.5 billion or 60% of preliminary goodwill................ 78.3 0.24
$2.0 billion or 80% of preliminary goodwill................ 104.4 0.32
$2.5 billion or 100% of preliminary goodwill............... 130.5 0.40
</Table>
Sensitivity to long-term financing options. In connection with Step Two
and Step Three of the proposed merger, Enterprise plans to initially finance the
$665 million in total cash consideration paid to El Paso
F-17
through acquisition term loans (i.e., using "bridge" financing). Enterprise
plans to refinance these acquisition term loans using a mix of debt and equity
offerings in the future. The table below shows the sensitivity of the pro forma
adjustments to interest expense for the $500 million borrowed in Step Two (Note
k)) and the $165 million borrowed in Step Three (Note (q)) to different
long-term financing assumptions.
<Table>
<Caption>
ADJUSTED ANNUAL
PRO FORMA
CUMULATIVE INTEREST EXPENSE
LONG-TERM ANNUAL ASSUMING INCREASE/
AMOUNTS FINANCING PRO FORMA LONG-TERM (DECREASE) IN
BORROWED UNDER ASSUMPTIONS INTEREST EXPENSE FINANCING ANNUAL
LONG-TERM ACQUISITION --------------- PRESENTED IN ARRANGEMENTS PRO FORMA
DEBT TO EQUITY MIX TERM LOANS DEBT EQUITY STATEMENT COMPLETED INTEREST EXPENSE
- ------------------ ----------------- ------ ------ ------------------ ------------------ ----------------
(NOTES (K), (Q)) (NOTES (K), (Q))
40% debt to 60%
equity............. $665.0 $266.0 $399.0 $11.3 $16.0 $ 4.7
45% debt to 55%
equity............. 665.0 299.3 365.7 11.3 18.0 6.7
50% debt to 50%
equity............. 665.0 332.5 332.5 11.3 20.0 8.7
55% debt to 50%
equity............. 665.0 365.8 299.2 11.3 21.9 10.6
60% debt to 40%
equity............. 665.0 399.0 266.0 11.3 23.9 12.6
</Table>
- ---------------
(1) For pro forma presentation purposes, we estimated a long-term interest rate
of approximately 6.0%, based on 10-year notes assumed issued during the
third quarter of 2004.
F-18
PROSPECTUS
[ENTERPRISE PRODUCTS PARTNERS L.P. LOGO]
$1,500,000,000
ENTERPRISE PRODUCTS PARTNERS L.P.
ENTERPRISE PRODUCTS OPERATING L.P.
---------------------
COMMON UNITS
DEBT SECURITIES
---------------------
We may offer the following securities under this prospectus:
- common units representing limited partner interests in Enterprise
Products Partners L.P.; and
- debt securities of Enterprise Products Operating L.P., which will be
guaranteed by its parent company, Enterprise Products Partners L.P.
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read carefully this prospectus and any
prospectus supplement before you invest. You should also read the documents we
have referred you to in the "Where You Can Find More Information" section of
this prospectus for information on us and for our financial statements.
In addition, common units may be offered from time to time by other holders
thereof. Any selling unitholders will be identified, and the number of common
units to be offered by them will be specified, in a prospectus supplement to
this prospectus. We will not receive proceeds of any sale of shares by any such
selling unitholders.
Our common units are listed on the New York Stock Exchange under the
trading symbol "EPD."
---------------------
Unless otherwise specified in a prospectus supplement, the senior debt
securities, when issued, will be unsecured and will rank equally with our other
unsecured and unsubordinated indebtedness. The subordinated debt securities,
when issued, will be subordinated in right of payment to our senior debt.
LIMITED PARTNERSHIPS ARE INHERENTLY DIFFERENT FROM CORPORATIONS. YOU SHOULD
REVIEW CAREFULLY "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF
IMPORTANT RISKS YOU SHOULD CONSIDER BEFORE INVESTING ON OUR SECURITIES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus may not be used to consummate sales of securities unless
accompanied by a prospectus supplement.
---------------------
The date of this prospectus is April 21, 2003.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
ABOUT THIS PROSPECTUS....................................... iii
OUR COMPANY................................................. 1
RISK FACTORS................................................ 2
Risks Related to Our Business............................. 2
We have significant leverage that may restrict our
future financial and operating flexibility............ 2
A decrease in the difference between NGL product prices
and natural gas prices results in lower margins on
volumes processed, which would adversely affect our
profitability......................................... 2
A reduction in demand for our products by the
petrochemical, refining or heating industries, could
adversely affect our results of operations............ 3
A decline in the volume of NGLs delivered to our
facilities could adversely affect our results of
operations............................................ 3
Our business requires extensive credit risk management
that may not be adequate to protect against customer
nonpayment............................................ 4
Acquisitions and expansions may affect our business by
substantially increasing the level of our indebtedness
and contingent liabilities and increasing our risks of
being unable to effectively integrate these new
operations............................................ 4
Terrorist attacks aimed at our facilities could
adversely affect our business......................... 4
Risks Related to Our Common Units as a Result of Our
Partnership Structure.................................. 4
We may not have sufficient cash from operations to pay
distributions at the current level following
establishment of cash reserves and payments of fees
and expenses, including payments to our general
partner............................................... 4
Cost reimbursements due our general partner may be
substantial and will reduce our cash available for
distribution to holders of common units............... 5
Our general partner and its affiliates have limited
fiduciary responsibilities and conflicts of interest
with respect to our partnership....................... 5
Even if unitholders are dissatisfied, they cannot
easily remove our general partner..................... 6
If our general partner is removed without cause during
the subordination period, your distribution and
liquidation preference over the subordinated units
will be prematurely eliminated........................ 6
We may issue additional common units without the
approval of common unitholders, which would dilute
their existing ownership interests.................... 6
Our general partner has a limited call right that may
require common unitholders to sell their units at an
undesirable time or price............................. 7
Common unitholders may not have limited liability if a
court finds that limited partner actions constitute
control of our business............................... 7
Tax Risks to Common Unitholders........................... 7
The IRS could treat us as a corporation for tax
purposes, which would substantially reduce the cash
available for distribution to common unitholders...... 8
A successful IRS contest of the federal income tax
positions we take may adversely impact the market for
common units, and the costs of any contests will be
borne by our unitholders and our general partner...... 8
Common unitholders may be required to pay taxes even if
they do not receive any cash distributions............ 8
Tax gain or loss on disposition of common units could
be different than expected............................ 8
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.................................. 9
We are registered as a tax shelter. This may increase
the risk of an IRS audit of us or a unitholder........ 9
We will treat each purchaser of common units as having
the same tax benefits without regard to the units
purchased. The IRS may challenge this treatment, which
could adversely affect the value of our common
units................................................. 9
Common unitholders will likely be subject to state and
local taxes in states where they do not live as a
result of investment in our common units.............. 9
USE OF PROCEEDS............................................. 10
RATIO OF EARNINGS TO FIXED CHARGES.......................... 10
</Table>
i
<Table>
<Caption>
PAGE
----
DESCRIPTION OF DEBT SECURITIES.............................. 11
General................................................... 11
Guarantee................................................. 12
Certain Covenants......................................... 12
Events of Default......................................... 16
Amendments and Waivers.................................... 17
Defeasance................................................ 19
Subordination............................................. 19
Book-Entry System......................................... 21
Limitations on Issuance of Bearer Securities.............. 22
No Recourse Against General Partner....................... 23
Concerning the Trustee.................................... 23
Governing Law............................................. 24
DESCRIPTION OF OUR COMMON UNITS............................. 25
Meetings/Voting........................................... 25
Status as Limited Partner or Assignee..................... 25
Limited Liability......................................... 25
Reports and Records....................................... 26
Class A Special Units..................................... 26
CASH DISTRIBUTION POLICY.................................... 27
Distributions of Available Cash........................... 27
Operating Surplus and Capital Surplus..................... 27
Subordination Period...................................... 28
Distributions of Available Cash from Operating Surplus
During the Subordination Period........................ 29
Distributions of Available Cash from Operating Surplus
After Subordination Period............................. 30
Incentive Distributions................................... 30
Distributions from Capital Surplus........................ 30
Adjustment to the Minimum Quarterly Distribution and
Target Distribution Levels............................. 31
Distributions of Cash upon Liquidation.................... 31
DESCRIPTION OF OUR PARTNERSHIP AGREEMENT.................... 34
Purpose................................................... 34
Power of Attorney......................................... 34
Reimbursements of Our General Partner..................... 34
Issuance of Additional Securities......................... 34
Amendments to Our Partnership Agreement................... 35
Withdrawal or Removal of Our General Partner.............. 36
Liquidation and Distribution of Proceeds.................. 36
Change of Management Provisions........................... 37
Limited Call Right........................................ 37
Indemnification........................................... 37
Registration Rights....................................... 38
TAX CONSEQUENCES............................................ 39
Partnership Status........................................ 39
Limited Partner Status.................................... 40
Tax Consequences of Unit Ownership........................ 41
Tax Treatment of Operations............................... 45
Disposition of Common Units............................... 46
Uniformity of Units....................................... 48
Tax-Exempt Organizations and Other Investors.............. 48
Administrative Matters.................................... 49
State, Local and Other Tax Considerations................. 51
Tax Consequences of Ownership of Debt Securities.......... 51
SELLING UNITHOLDERS......................................... 52
PLAN OF DISTRIBUTION........................................ 52
Distribution by Selling Unitholders....................... 53
WHERE YOU CAN FIND MORE INFORMATION......................... 53
FORWARD-LOOKING STATEMENTS.................................. 54
LEGAL MATTERS............................................... 54
EXPERTS..................................................... 54
</Table>
ii
You should rely only on the information contained or incorporated by
reference in this prospectus or any prospectus supplement. We 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. You should not assume that the information incorporated by reference or
provided in this prospectus or any prospectus supplement is accurate as of any
date other than the date on the front of each document.
In this prospectus, the terms "we," "us" and "our" refer to Enterprise
Products Partners L.P. and Enterprise Products Operating L.P. and their
subsidiaries, unless otherwise indicated or the context requires otherwise.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we file with the
Securities and Exchange Commission (the "Commission") using a "shelf"
registration process. Under this shelf process, we may offer from time to time
up to $1,500,000,000 of our securities. Each time we offer securities, we will
provide you with a prospectus supplement that will describe, among other things,
the specific amounts and prices of the securities being offered and the terms of
the offering. The prospectus supplement may also add, update or change
information contained in this prospectus. Any statement that we make in this
prospectus will be modified or superseded by any inconsistent statement made by
us in a prospectus supplement. Therefore, you should read this prospectus and
any attached prospectus supplement before you invest in our securities.
iii
OUR COMPANY
We are a publicly traded limited partnership that was formed in April 1998
to acquire, own, and operate all of the NGL processing and distribution assets
of Enterprise Products Company, or EPCO. We conduct all of our business through
our 99% owned subsidiary, Enterprise Products Operating L.P., our "Operating
Partnership" and its subsidiaries and joint ventures. Our general partner,
Enterprise Products GP, LLC, owns a 1.0% interest in us and a 1.0101% interest
in our Operating Partnership.
We are a leading North American midstream energy company that provides a
wide range of services to producers and consumers of natural gas and natural gas
liquids, or NGLs. NGLs are used by the petrochemical and refining industries to
produce plastics, motor gasoline and other industrial and consumer products and
also are used as residential and industrial fuels. Our asset platform creates
the only integrated natural gas and NGL transportation, fractionation,
processing, storage and import/export network in North America. We provide
integrated services to our customers and generate fee-based cash flow from
multiple sources along our natural gas and NGL "value chain." Our services
include the:
- gathering and transmission of raw natural gas from both onshore and
offshore Gulf of Mexico developments;
- processing of raw natural gas into a marketable product that meets
industry quality specifications by removing mixed NGLs and impurities;
- purchase and transportation of natural gas for delivery to our
industrial, utility and municipal customers;
- transportation of mixed NGLs to fractionation facilities by pipeline;
- fractionation, or separation, of mixed NGLs produced as by-products of
crude oil refining and natural gas production into component NGL
products: ethane, propane, isobutane, normal butane and natural gasoline;
- transportation of NGL products to end-users by pipeline, railcar and
truck;
- import and export of NGL products and petrochemical products through our
dock facilities;
- fractionation of refinery-sourced propane/propylene mix into high purity
propylene, propane and mixed butane;
- transportation of high purity propylene to end-users by pipeline;
- storage of natural gas, mixed NGLs, NGL products and petrochemical
products;
- conversion of normal butane to isobutane through the process of
isomerization;
- production of high-octane additives for motor gasoline from isobutane;
and
- sale of NGL and petrochemical products we produce and/or purchase for
resale on a merchant basis.
Certain of our facilities are owned jointly by us and other industry
partners, either through co-ownership arrangements or joint ventures. Some of
our jointly owned facilities are operated by other owners.
We do not have any employees. All of our management, administrative and
operating functions are performed by employees of EPCO, our ultimate parent
company, pursuant to the EPCO Agreement. For a discussion of the EPCO Agreement,
please read Item 13 of our Annual Report on Form 10-K.
Our principal executive offices are located at 2727 North Loop West,
Houston, Texas 77008-1038, and our telephone number is (713) 880-6500.
1
RISK FACTORS
An investment in our securities involves risks. You should consider
carefully the following risk factors, together with all of the other information
included in, or incorporated by reference into, this prospectus and any
prospectus supplement in evaluating an investment in our securities. This
prospectus also contains forward-looking statements that involve risks and
uncertainties. Please read "Forward-Looking Statements." Our actual results
could differ materially from those anticipated in the forward-looking statements
as a result of certain factors, including the risks described below and
elsewhere in this prospectus. If any of these risks occur, our business,
financial condition or results of operation could be adversely affected.
RISKS RELATED TO OUR BUSINESS
WE HAVE SIGNIFICANT LEVERAGE THAT MAY RESTRICT OUR FUTURE FINANCIAL AND
OPERATING FLEXIBILITY.
Our leverage is significant in relation to our partners' capital. At
February 28, 2003, our total outstanding debt, which represented approximately
58.0% of our total capitalization, was approximately $2.1 billion. As of January
31, 2003, we had $2.1 billion of senior indebtedness ranking equal in right of
payment to all of our other senior indebtedness. As to the assets of our
subsidiary, Seminole Pipeline Company, this $2.1 billion in senior indebtedness
is structurally subordinated and ranks junior in right of payment to $45 million
of indebtedness of Seminole Pipeline Company.
Debt service obligations, restrictive covenants and maturities resulting
from this leverage may adversely affect our ability to finance future
operations, pursue acquisitions and fund other capital needs, and may make our
results of operations more susceptible to adverse economic or operating
conditions. Our ability to repay, extend or refinance our existing debt
obligations and to obtain future credit will depend primarily on our operating
performance, which will be affected by general economic, financial, competitive,
legislative, regulatory, business and other factors, many of which are beyond
our control.
Our ability to access the capital markets for future offerings may be
limited by adverse market conditions resulting from, among other things, general
economic conditions, contingencies and uncertainties that are difficult to
predict and beyond our control. If we are unable to access the capital markets
for future offerings, we might be forced to seek extensions for some of our
short-term maturities or to refinance some of our debt obligations through bank
credit, as opposed to long-term public debt securities or equity securities. The
price and terms upon which we might receive such extensions or additional bank
credit could be more onerous than those contained in our existing debt
agreements. Any such arrangements could, in turn, increase the risk that our
leverage may adversely affect our future financial and operating flexibility.
A DECREASE IN THE DIFFERENCE BETWEEN NGL PRODUCT PRICES AND NATURAL GAS PRICES
RESULTS IN LOWER MARGINS ON VOLUMES PROCESSED, WHICH WOULD ADVERSELY AFFECT
OUR PROFITABILITY.
The profitability of our operations depends upon the spread between NGL
product prices and natural gas prices. NGL product prices and natural gas prices
are subject to fluctuations in response to changes in supply, market uncertainty
and a variety of additional factors that are beyond our control. These factors
include:
- the level of domestic production;
- the availability of imported oil and gas;
- actions taken by foreign oil and gas producing nations;
- the availability of transportation systems with adequate capacity;
- the availability of competitive fuels;
- fluctuating and seasonal demand for oil, gas and NGLs; and
- conservation and the extent of governmental regulation of production and
the overall economic environment.
2
Our Processing segment is directly exposed to commodity price risks, as we
take title to NGLs and are obligated under certain of our gas processing
contracts to pay market value for the energy extracted from the natural gas
stream. We are exposed to various risks, primarily that of commodity price
fluctuations in response to changes in supply, market uncertainty and a variety
of additional factors that are beyond our control. These pricing risks cannot be
completely hedged or eliminated, and any attempt to hedge pricing risks may
expose us to financial losses.
A REDUCTION IN DEMAND FOR OUR PRODUCTS BY THE PETROCHEMICAL, REFINING OR
HEATING INDUSTRIES, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
A reduction in demand for our products by the petrochemical, refining or
heating industries, whether because of general economic conditions, reduced
demand by consumers for the end products made with NGL products, increased
competition from petroleum-based products due to pricing differences, adverse
weather conditions, government regulations affecting prices and production
levels of natural gas or the content of motor gasoline or other reasons, could
adversely affect our results of operations. For example:
Ethane. If natural gas prices increase significantly in relation to
ethane prices, it may be more profitable for natural gas processors to
leave the ethane in the natural gas stream to be burned as fuel than to
extract the ethane from the mixed NGL stream for sale.
Propane. The demand for propane as a heating fuel is significantly
affected by weather conditions. Unusually warm winters will cause the
demand for propane to decline significantly and could cause a significant
decline in the volumes of propane that we extract and transport.
Isobutane. Any reduction in demand for motor gasoline in general or
MTBE in particular may similarly reduce demand for isobutane. During
periods in which the difference in market prices between isobutane and
normal butane is low or inventory values are high relative to current
prices for normal butane or isobutane, our operating margin from selling
isobutane will be reduced.
MTBE. A number of states have either banned or currently are
considering legislation to ban MTBE. In addition, Congress is contemplating
a federal ban on MTBE, and several oil companies have taken an early
initiative to phase out the production of MTBE. If MTBE is banned or if its
use is significantly limited, the revenues and equity earnings we record
may be materially reduced or eliminated. For additional information
regarding MTBE, please read "Business and Properties -- Regulation and
Environmental Matters -- Impact of the Clean Air Act's oxygenated fuels
programs on our BEF investment" in our Annual Report on Form 10-K for the
year ended December 31, 2002.
Propylene. Any downturn in the domestic or international economy could
cause reduced demand for propylene, which could cause a reduction in the
volumes of propylene that we produce and expose our investment in
inventories of propane/propylene mix to pricing risk due to requirements
for short-term price discounts in the spot or short-term propylene markets.
Please read Items 1 and 2. "Business and Properties -- The Company's
Operations" beginning on page 3 of our Annual Report on Form 10-K for a more
detailed discussion of our operations.
A DECLINE IN THE VOLUME OF NGLS DELIVERED TO OUR FACILITIES COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Our profitability is materially impacted by the volume of NGLs processed at
our facilities. A material decrease in natural gas production of crude oil
refining, as a result of depressed commodity prices or otherwise, or a decrease
in imports of mixed butanes, could result in a decline in the volume of NGLs
delivered to our facilities for processing, thereby reducing revenue and
operating income.
3
OUR BUSINESS REQUIRES EXTENSIVE CREDIT RISK MANAGEMENT THAT MAY NOT BE
ADEQUATE TO PROTECT AGAINST CUSTOMER NONPAYMENT.
As a result of business failures, revelations of material
misrepresentations and related financial restatements by several large,
well-known companies in various industries over the last year, there have been
significant disruptions and extreme volatility in the financial markets and
credit markets. Because of the credit intensive nature of the energy industry
and troubling disclosures by some large, diversified energy companies, the
energy industry has been especially impacted by these developments, with the
rating agencies downgrading a number of large energy-related companies.
Accordingly, in this environment we are exposed to an increased level of credit
and performance risk with respect to our customers. If we fail to adequately
assess the creditworthiness of existing or future customers, unanticipated
deterioration in their creditworthiness could have an adverse impact on us.
ACQUISITIONS AND EXPANSIONS MAY AFFECT OUR BUSINESS BY SUBSTANTIALLY
INCREASING THE LEVEL OF OUR INDEBTEDNESS AND CONTINGENT LIABILITIES AND
INCREASING OUR RISKS OF BEING UNABLE TO EFFECTIVELY INTEGRATE THESE NEW
OPERATIONS.
From time to time, we evaluate and acquire assets and businesses that we
believe complement our existing operations. We may encounter difficulties
integrating these acquisitions with our existing businesses without a loss of
employees or customers, a loss of revenues, an increase in operating or other
costs or other difficulties. In addition, we may not be able to realize the
operating efficiencies, competitive advantages, cost savings or other benefits
expected from these acquisitions. Future acquisitions may require substantial
capital or the incurrence of substantial indebtedness. As a result, our
capitalization and results of operations may change significantly following an
acquisition, 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.
TERRORIST ATTACKS AIMED AT OUR FACILITIES COULD ADVERSELY AFFECT OUR BUSINESS.
Since the September 11, 2001 terrorist attacks on the United States, the
United States government has issued warnings that energy assets, including our
nation's pipeline infrastructure, may be the future target of terrorist
organizations. Any terrorist attack on our facilities, those of our customers
and, in some cases, those of other pipelines, could have a material adverse
effect on our business. An escalation of political tensions in the Middle East
and elsewhere, such as the recent commencement of United States military action
in Iraq, could result in increased volatility in the world's energy markets and
result in a material adverse effect on our business.
RISKS RELATED TO OUR COMMON UNITS AS A RESULT OF OUR PARTNERSHIP STRUCTURE
WE MAY NOT HAVE SUFFICIENT CASH FROM OPERATIONS TO PAY DISTRIBUTIONS AT THE
CURRENT LEVEL FOLLOWING ESTABLISHMENT OF CASH RESERVES AND PAYMENTS OF FEES AND
EXPENSES, INCLUDING PAYMENTS TO OUR GENERAL PARTNER.
Because distributions on our common units are dependent on the amount of
cash we generate, distributions may fluctuate based on our performance. We
cannot guarantee that we will continue to pay distributions at the current level
each quarter. The actual amount of cash that is available to be distributed each
quarter will depend upon numerous factors, some of which are beyond our control
and the control of our general partner. These factors include but are not
limited to the following:
- the level of our operating costs;
- the level of competition in our business segments;
- prevailing economic conditions;
- the level of capital expenditures we make;
- the restrictions contained in our debt agreements and our debt service
requirements;
4
- fluctuations in our working capital needs;
- the cost of acquisitions, if any; and
- the amount, if any, of cash reserves established by our general partner,
in its discretion.
In addition, you should be aware that our ability to pay the minimum
quarterly distribution each quarter depends primarily on our cash flow,
including cash flow from financial reserves and working capital borrowings, and
not solely on profitability, which is affected by non-cash items. As a result,
we may make cash distributions during periods when we record losses and we may
not make distributions during periods when we record net income.
COST REIMBURSEMENTS DUE OUR GENERAL PARTNER MAY BE SUBSTANTIAL AND WILL REDUCE
OUR CASH AVAILABLE FOR DISTRIBUTION TO HOLDERS OF COMMON UNITS.
Prior to making any distribution on our common units, we will reimburse our
general partner and its affiliates, including officers and directors of our
general partner, for expenses they incur on our behalf. The reimbursement of
expenses could adversely affect our ability to pay cash distributions to holders
of common units. Our general partner has sole discretion to determine the amount
of these expenses, subject to an annual limit. In addition, our general partner
and its affiliates may provide us other services for which we will be charged
fees as determined by our general partner.
OUR GENERAL PARTNER AND ITS AFFILIATES HAVE LIMITED FIDUCIARY RESPONSIBILITIES
AND CONFLICTS OF INTEREST WITH RESPECT TO OUR PARTNERSHIP.
The directors and officers of our general partner and its affiliates have
duties to manage the general partner in a manner that is beneficial to its
members. At the same time, our general partner has duties to manage our
partnership in a manner that is beneficial to us. Therefore, our general
partner's duties to us may conflict with the duties of its officers and
directors to its members.
Such conflicts may include, among others, the following:
- decisions of our general partner regarding the amount and timing of asset
purchases and sales, cash expenditures, borrowings, issuances of
additional units and reserves in any quarter may affect the level of cash
available to pay quarterly distributions to unitholders and the general
partner;
- under our partnership agreement, our general partner determines which
costs incurred by it and its affiliates are reimbursable by us;
- our general partner is allowed to take into account the interests of
parties other than us, such as Enterprise Products Company, in resolving
conflicts of interest, which has the effect of limiting its fiduciary
duty to unitholders;
- affiliates of our general partner may compete with us in certain
circumstances;
- our general partner may limit its liability and reduce its fiduciary
duties, while also restricting the remedies available to unitholders for
actions that might, without the limitations, constitute breaches of
fiduciary duty. As a result of purchasing units, you are deemed to
consent to some actions and conflicts of interest that might otherwise
constitute a breach of fiduciary or other duties under applicable law;
- we do not have any employees and we rely solely on employees of the
general partner and its affiliates; and
- in some instances, our general partner may cause us to borrow funds in
order to permit the payment of distributions, even if the purpose or
effect of the borrowing is to make a distribution on the subordinated
units, to make incentive distributions or to hasten the expiration of the
subordination period.
5
EVEN IF UNITHOLDERS ARE DISSATISFIED, THEY CANNOT EASILY REMOVE OUR GENERAL
PARTNER.
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 the directors of the general partner and
will have no right to elect our general partner or the directors of our general
partner on an annual or other continuing basis.
Furthermore, if unitholders are dissatisfied with the performance of our
general partner, they will have little ability to remove our general partner.
Our general partner 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 affiliates of our general partner own more than one-third of our
outstanding units, the general partner currently cannot be removed without the
consent of the general partner and its affiliates.
Unitholders' voting rights are further restricted by the partnership
agreement provision stating that any units held by a person that owns 20% or
more of any class of units then outstanding, other than our general partner and
its affiliates, 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.
IF OUR GENERAL PARTNER IS REMOVED WITHOUT CAUSE DURING THE SUBORDINATION
PERIOD, YOUR DISTRIBUTION AND LIQUIDATION PREFERENCE OVER THE SUBORDINATED
UNITS WILL BE PREMATURELY ELIMINATED.
If our general partner is removed without cause during the subordination
period, all remaining subordinated units will automatically convert into common
units and will share distributions with the existing common units pro rata,
existing arrearages on the common units will be extinguished and the common
units will no longer be entitled to arrearages if we fail to pay the minimum
quarterly distribution in any quarter. A removal of the general partner under
these circumstances would adversely affect the common units by prematurely
eliminating their distribution and liquidation preference over the subordinated
units, which otherwise would have continued until we had met certain
distribution and performance tests.
Under our partnership agreement, 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 the general partner because of the unitholders' dissatisfaction with the
general partner's performance in managing our partnership will most likely
result in the termination of the subordination period.
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT THE APPROVAL OF COMMON
UNITHOLDERS, WHICH WOULD DILUTE THEIR EXISTING OWNERSHIP INTERESTS.
During the subordination period, our general partner may cause us to issue
up to 54,550,000 additional common units without any approval by the common
unitholders. 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 such approval, in a number of circumstances, such as:
- the issuance of common units in connection with acquisitions that
increase cash flow from operations per unit on a pro forma basis;
- the conversion of subordinated units into common units;
- the conversion of special units into common units;
6
- the conversion of the general partner interest and the incentive
distribution rights into common units as a result of the withdrawal of
our general partner; or
- issuances of common units under our long-term incentive plan.
After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of the
unitholders. Our partnership agreement does not give the common unitholders the
right to approve our issuance of equity securities ranking junior to the common
units.
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
- the proportionate ownership interest of common unitholders in us will
decrease;
- the amount of cash available for distribution on each unit may decrease;
- since a lower percentage of total outstanding units will be subordinated
units, the risk that a shortfall in the payment of the minimum quarterly
distribution will be borne by the common unitholders will increase;
- the relative voting strength of each previously outstanding unit may be
diminished; and
- the market price of the common units may decline.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE COMMON
UNITHOLDERS TO SELL THEIR UNITS AT AN UNDESIRABLE TIME OR PRICE.
If at any time our general partner and its affiliates own 85% more of the
common units then outstanding, 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, common unitholders may be required to sell their common units at an
undesirable time or price and may therefore not receive any return on their
investment. They may also incur a tax liability upon a sale of their units.
Under our partnership agreement, Shell is not deemed to be an affiliate of our
general partner for purposes of this limited call right.
COMMON UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IF A COURT FINDS THAT LIMITED
PARTNER ACTIONS CONSTITUTE CONTROL OF OUR BUSINESS.
Under Delaware law, common unitholders could be held liable for our
obligations to the same extent as a general partner if a court determined that
the right of limited partners to remove our general partner or to take other
action under the partnership agreement constituted participation in the
"control" of our business.
Under Delaware law, the general partner generally has unlimited liability
for the obligations of the partnership, such as its debts and environmental
liabilities, except for those contractual obligations of the partnership that
are expressly made without recourse to the general partner.
In addition, Section 17-607 of the Delaware Revised Uniform Limited
Partnership Act provides that, under some circumstances, a limited partner may
be liable to us for the amount of a distribution for a period of three years
from the date of the distribution.
TAX RISKS TO COMMON UNITHOLDERS
You are urged to read "Tax Consequences" beginning on page 39 for a more
complete discussion of the following federal income tax risks related to owning
and disposing of common units.
7
THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO COMMON
UNITHOLDERS.
The anticipated after-tax economic benefit of an investment in the common
units depends largely on our being treated as a partnership for federal income
tax purposes. We have not requested, and do not plan to request, a ruling from
the IRS on this or any other matter affecting us.
If we were classified as a corporation for federal income tax purposes, we
would pay federal income tax on our income at the corporate tax rate, which is
currently a maximum of 35%, and we likely would pay state taxes as well.
Distributions to you would generally be taxed again to you as corporate
distributions, and no income, gains, losses or deductions would flow through to
you. Because a tax would be imposed upon us as a corporation, the cash available
for distribution to you would be substantially reduced. Therefore, treatment of
us as a corporation would result in a material reduction in the after-tax return
to you, likely causing a substantial reduction in the value of the common units.
A change in current law or a change in our business could cause us to be
taxed as a corporation for federal income tax purposes or otherwise subject us
to entity-level taxation. Our partnership agreement provides that, if a law is
enacted or existing law is modified or interpreted in a manner that subjects us
to taxation as a corporation or otherwise subjects us to entity-level taxation
for federal, state or local income tax purposes, then the minimum quarterly
distribution and the target distribution levels will be decreased to reflect
that impact on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY IMPACT THE MARKET FOR COMMON UNITS, AND THE COSTS OF ANY CONTESTS
WILL BE BORNE BY OUR UNITHOLDERS AND OUR GENERAL PARTNER.
We have not requested a ruling from the IRS with respect to any matter
affecting us. The IRS may adopt positions that differ from the conclusions of
our counsel expressed in the accompanying prospectus or from the positions we
take. 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 our counsel's conclusions or the positions we take.
Any contest with the IRS may materially and adversely impact the market for
common units and the price at which they trade. In addition, the costs of any
contest with the IRS, principally legal, accounting and related fees, will be
borne indirectly by our unitholders and our general partner.
COMMON UNITHOLDERS MAY BE REQUIRED TO PAY TAXES EVEN IF THEY DO NOT RECEIVE
ANY CASH DISTRIBUTIONS.
Common unitholders will be required to pay federal income taxes and, in
some cases, state, local and foreign income taxes on their share of our taxable
income even if they do not receive any cash distributions from us. They may not
receive cash distributions from us equal to their share of our taxable income or
even equal to the actual tax liability that results from their share of our
taxable income.
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED.
If you sell your common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax basis in those common units.
Prior distributions to you in excess of the total net taxable income you were
allocated for a common unit, which decreased your tax basis in that common unit,
will, in effect, become taxable income to you if the common unit is sold at a
price greater than your tax basis in that common unit, even if the price you
receive is less than your original cost. A substantial portion of the amount
realized, whether or not representing gain, may be ordinary income to you.
Should the IRS successfully contest some positions we take, you could recognize
more gain on the sale of units than would be the case under those positions,
without the benefit of decreased income in prior years. Also, if you sell your
units, you may incur a tax liability in excess of the amount of cash you receive
from the sale.
8
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, such as individual
retirement accounts (known as IRAs), regulated investment companies (known as
mutual funds) and foreign persons raises issues unique to them. For example,
virtually all of our income allocated to unitholders who are organizations
exempt from federal income tax, including individual retirement accounts and
other retirement plans, will be unrelated business taxable income and will be
taxable to them. Very little of our income will be qualifying income to a
regulated investment company or mutual fund. Distributions to foreign persons
will be reduced by withholding taxes at the highest effective U.S. federal
income tax rate for individuals, and foreign persons will be required to file
federal income tax returns and pay tax on their share of our taxable income.
WE ARE REGISTERED AS A TAX SHELTER. THIS MAY INCREASE THE RISK OF AN IRS AUDIT
OF US OR A UNITHOLDER.
We are registered with the IRS as a "tax shelter." Our tax shelter
registration number is 9906100007. The tax laws require that some types of
entities, including some partnerships, register as "tax shelters" in response to
the perception that they claim tax benefits that may 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 and indirectly bear a portion of the
cost of an audit of us.
WE WILL TREAT EACH PURCHASER OF COMMON UNITS AS HAVING THE SAME TAX BENEFITS
WITHOUT REGARD TO THE UNITS PURCHASED. THE IRS MAY CHALLENGE THIS TREATMENT,
WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON UNITS.
Because we cannot match transferors and transferees of common units, we
adopt depreciation and amortization positions that may not conform with all
aspects of applicable Treasury regulations. A successful IRS challenge to those
positions could adversely affect the amount of tax benefits available to a
common unitholder. It also could affect the timing of these tax benefits or the
amount of gain from a sale of common units and could have a negative impact on
the value of the common units or result in audit adjustments to the common
unitholder's tax returns.
COMMON UNITHOLDERS WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES IN STATES
WHERE THEY DO NOT LIVE AS A RESULT OF AN INVESTMENT IN OUR COMMON UNITS.
In addition to federal income taxes, common unitholders will likely be
subject to other taxes, including state and local 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 and in which
they do not reside. Common unitholders may be required to file state and local
income tax returns and pay state and local income taxes in many or all of the
jurisdictions in which we do business or own property. Further, they may be
subject to penalties for failure to comply with those requirements. It is the
responsibility of the common unitholder to file all United States federal, state
and local tax returns. Our counsel has not rendered an opinion on the state or
local tax consequences of an investment in the common units.
9
USE OF PROCEEDS
We will use the net proceeds from any sale of securities described in this
prospectus for future business acquisitions and other general corporate
purposes, such as working capital, investments in subsidiaries, the retirement
of existing debt and/or the repurchase of common units or other securities. The
prospectus supplement will describe the actual use of the net proceeds from the
sale of securities. The exact amounts to be used and when the net proceeds will
be applied to corporate purposes will depend on a number of factors, including
our funding requirements and the availability of alternative funding sources.
We will not receive any proceeds from any sale of common units by any
selling unitholders.
RATIO OF EARNINGS TO FIXED CHARGES
The ratios of earnings to fixed charges for each of the periods indicated
are as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
COMPANY 1998 1999 2000 2001 2002
- ------- ---- ---- ---- ---- ----
Enterprise Products Partners L.P............................ 1.16 5.84 6.40 5.10 2.07
Enterprise Products Operating L.P........................... 1.16 5.90 6.46 5.14 2.08
</Table>
These computations include us and our subsidiaries, and 50% or less equity
companies. For these ratios, "earnings" is the amount resulting from adding and
subtracting the following items.
Add the following:
- pre-tax income from continuing operations before adjustment for minority
interests in consolidated subsidiaries or income or loss from equity
investees;
- fixed charges;
- amortization of capitalized interest;
- distributed income of equity investees; and
- our share of pre-tax losses of equity investees for which charges arising
from guarantees are included in fixed charges.
From the total of the added items, subtract the following:
- interest capitalized;
- preference security dividend requirements of consolidated subsidiaries;
and
- minority interest in pre-tax income of subsidiaries that have not
incurred fixed charges.
The term "fixed charges" means the sum of the following:
- interest expensed and capitalized;
- amortized premiums, discounts and capitalized expenses related to
indebtedness;
- an estimate of the interest within rental expenses (equal to one-third of
rental expense); and
- preference security dividend requirements of consolidated subsidiaries.
10
DESCRIPTION OF DEBT SECURITIES
In this Description of Debt Securities references to the "Issuer" mean only
Enterprise Products Operating L.P. and not its subsidiaries. References to the
"Guarantor" mean only Enterprise Products Partners L.P. and not its
subsidiaries. References to "we" and "us" mean the Issuer and the Guarantor
collectively.
The debt securities will be issued under an Indenture dated as of March 15,
2000 (the "Indenture"), among the Issuer, the Guarantor, and Wachovia Bank,
National Association (successor to First Union National Bank), as trustee (the
"Trustee"). The terms of the debt securities will include those expressly set
forth in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). Capitalized
terms used in this Description of Debt Securities have the meanings specified in
the Indenture.
This Description of Debt Securities is intended to be a useful overview of
the material provisions of the debt securities and the Indenture. Since this
Description of Debt Securities is only a summary, you should refer to the
Indenture for a complete description of our obligations and your rights.
GENERAL
The Indenture does not limit the amount of debt securities that may be
issued thereunder. Debt securities may be issued under the Indenture from time
to time in separate series, each up to the aggregate amount authorized for such
series. The debt securities will be general obligations of the Issuer and the
Guarantor and may be subordinated to Senior Indebtedness of the Issuer and the
Guarantor. See "-- Subordination."
A prospectus supplement and a supplemental indenture (or a resolution of
our Board of Directors and accompanying officers' certificate) relating to any
series of debt securities being offered will include specific terms relating to
the offering. These terms will include some or all of the following:
- the form and title of the debt securities;
- the total principal amount of the debt securities;
- the portion of the principal amount which will be payable if the maturity
of the debt securities is accelerated;
- the currency or currency unit in which the debt securities will be paid,
if not U.S. dollars;
- any right we may have to defer payments of interest by extending the
dates payments are due whether interest on those deferred amounts will be
payable as well;
- the dates on which the principal of the debt securities will be payable;
- the interest rate which the debt securities will bear and the interest
payment dates for the debt securities;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
- any changes to or additional Events of Default or covenants;
- whether the debt securities are to be issued as Registered Securities or
Bearer Securities or both; and any special provisions for Bearer
Securities;
11
- the subordination, if any, of the debt securities and any changes to the
subordination provisions of the Indenture; and
- any other terms of the debt securities.
The prospectus supplement will also describe any material United States
federal income tax consequences or other special considerations applicable to
the applicable series of debt securities, including those applicable to:
- Bearer Securities;
- debt securities with respect to which payments of principal, premium or
interest are determined with reference to an index or formula, including
changes in prices of particular securities, currencies or commodities;
- debt securities with respect to which principal, premium or interest is
payable in a foreign or composite currency;
- debt securities that are issued at a discount below their stated
principal amount, bearing no interest or interest at a rate that at the
time of issuance is below market rates; and
- variable rate debt securities that are exchangeable for fixed rate debt
securities.
At our option, we may make interest payments, by check mailed to the
registered holders thereof or, if so stated in the applicable prospectus
supplement, at the option of a holder by wire transfer to an account designated
by the holder. Except as otherwise provided in the applicable prospectus
supplement, no payment on a Bearer Security will be made by mail to an address
in the United States or by wire transfer to an account in the United States.
Unless otherwise provided in the applicable prospectus supplement,
Registered Securities may be transferred or exchanged at the office of the
Trustee at which its corporate trust business is principally administered in the
United States or at the office of the Trustee or the Trustee's agent in New York
City, subject to the limitations provided in the Indenture, without the payment
of any service charge, other than any applicable tax or governmental charge.
Bearer Securities will be transferable only by delivery. Provisions with respect
to the exchange of Bearer Securities will be described in the applicable
prospectus supplement.
Any funds we pay to a paying agent for the payment of amounts due on any
debt securities that remain unclaimed for two years will be returned to us, and
the holders of the debt securities must thereafter look only to us for payment
thereof.
GUARANTEE
The Guarantor will unconditionally guarantee to each holder and the Trustee
the full and prompt payment of principal of, premium, if any, and interest on
the debt securities, when and as the same become due and payable, whether at
maturity, upon redemption or repurchase, by declaration of acceleration or
otherwise.
CERTAIN COVENANTS
Except as set forth below or as may be provided in a prospectus supplement
and supplemental indenture, neither the Issuer nor the Guarantor is restricted
by the Indenture from incurring any type of indebtedness or other obligation,
from paying dividends or making distributions on its partnership interests or
capital stock or purchasing or redeeming its partnership interests or capital
stock. The Indenture does not require the maintenance of any financial ratios or
specified levels of net worth or liquidity. In addition, the Indenture does not
contain any provisions that would require the Issuer to repurchase or redeem or
otherwise modify the terms of any of the debt securities upon a change in
control or other events involving the Issuer which may adversely affect the
creditworthiness of the debt securities.
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Limitations on Liens. The Indenture provides that the Guarantor will not,
nor will it permit any Subsidiary to, create, assume, incur or suffer to exist
any mortgage, lien, security interest, pledge, charge or other encumbrance
("liens") other than Permitted Liens (as defined below) upon any Principal
Property (as defined below) or upon any shares of capital stock of any
Subsidiary owning or leasing any Principal Property, whether owned or leased on
the date of the Indenture or thereafter acquired, to secure any indebtedness for
borrowed money ("debt") of the Guarantor or the Issuer or any other person
(other than the debt securities), without in any such case making effective
provision whereby all of the debt securities outstanding shall be secured
equally and ratably with, or prior to, such debt so long as such debt shall be
so secured.
In the Indenture, the term "Subsidiary" means:
(1) the Issuer; or
(2) any corporation, association or other business entity of which more
than 50% of the total voting power of the equity interests entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof or any partnership of
which more than 50% of the partners' equity interests (considering all
partners' equity interests as a single class) is, in each case, at the time
owned or controlled, directly or indirectly, by the Guarantor, the Issuer
or one or more of the other Subsidiaries of the Guarantor or the Issuer or
combination thereof.
"Permitted Liens" means:
(1) liens upon rights-of-way for pipeline purposes;
(2) any statutory or governmental lien or lien arising by operation of
law, or any mechanics', repairmen's, materialmen's, suppliers', carriers',
landlords', warehousemen's or similar lien incurred in the ordinary course
of business which is not yet due or which is being contested in good faith
by appropriate proceedings and any undetermined lien which is incidental to
construction, development, improvement or repair; or any right reserved to,
or vested in, any municipality or public authority by the terms of any
right, power, franchise, grant, license, permit or by any provision of law,
to purchase or recapture or to designate a purchaser of, any property;
(3) liens for taxes and assessments which are (a) for the then current
year, (b) not at the time delinquent, or (c) delinquent but the validity or
amount of which is being contested at the time by the Guarantor or any
Subsidiary in good faith by appropriate proceedings;
(4) liens of, or to secure performance of, leases, other than capital
leases; or any lien securing industrial development, pollution control or
similar revenue bonds;
(5) any lien upon property or assets acquired or sold by the Guarantor
or any Subsidiary resulting from the exercise of any rights arising out of
defaults on receivables;
(6) any lien in favor of the Guarantor or any Subsidiary; or any lien
upon any property or assets of the Guarantor or any Subsidiary in existence
on the date of the execution and delivery of the Indenture;
(7) any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or political
subdivision of the United States of America or any state thereof, to secure
partial, progress, advance, or other payments pursuant to any contract or
statute, or any debt incurred by the Issuer or any Subsidiary for the
purpose of financing all or any part of the purchase price of, or the cost
of constructing, developing, repairing or improving, the property or assets
subject to such lien;
(8) any lien incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance, temporary disability,
social security, retiree health or similar laws or regulations or to secure
obligations imposed by statute or governmental regulations;
(9) liens in favor of any person to secure obligations under provisions
of any letters of credit, bank guarantees, bonds or surety obligations
required or requested by any governmental authority in
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connection with any contract or statute; or any lien upon or deposits of
any assets to secure performance of bids, trade contracts, leases or
statutory obligations;
(10) any lien upon any property or assets created at the time of
acquisition of such property or assets by the Guarantor or any Subsidiary
or within one year after such time to secure all or a portion of the
purchase price for such property or assets or debt incurred to finance such
purchase price, whether such debt was incurred prior to, at the time of or
within one year after the date of such acquisition; or any lien upon any
property or assets to secure all or part of the cost of construction,
development, repair or improvements thereon or to secure debt incurred
prior to, at the time of, or within one year after completion of such
construction, development, repair or improvements or the commencement of
full operations thereof (whichever is later), to provide funds for any such
purpose;
(11) any lien upon any property or assets existing thereon at the time
of the acquisition thereof by the Guarantor or any Subsidiary and any lien
upon any property or assets of a person existing thereon at the time such
person becomes a Subsidiary by acquisition, merger or otherwise; provided
that, in each case, such lien only encumbers the property or assets so
acquired or owned by such person at the time such person becomes a
Subsidiary;
(12) liens imposed by law or order as a result of any proceeding before
any court or regulatory body that is being contested in good faith, and
liens which secure a judgment or other court-ordered award or settlement as
to which the Guarantor or the applicable Subsidiary has not exhausted its
appellate rights;
(13) any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancing, refunding or replacements) of
liens, in whole or in part, referred to in clauses (1) through (12) above;
provided, however, that any such extension, renewal, refinancing, refunding
or replacement lien shall be limited to the property or assets covered by
the lien extended, renewed, refinanced, refunded or replaced and that the
obligations secured by any such extension, renewal, refinancing, refunding
or replacement lien shall be in an amount not greater than the amount of
the obligations secured by the lien extended, renewed, refinanced, refunded
or replaced and any expenses of the Guarantor and its Subsidiaries
(including any premium) incurred in connection with such extension,
renewal, refinancing, refunding or replacement; or
(14) any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing debt of the Guarantor or
any Subsidiary.
"Principal Property" means, whether owned or leased on the date of the
Indenture or thereafter acquired:
(1) any pipeline assets of the Guarantor or any Subsidiary, including
any related facilities employed in the transportation, distribution,
storage or marketing of refined petroleum products, natural gas liquids,
and petrochemicals, that are located in the United States of America or any
territory or political subdivision thereof; and
(2) any processing or manufacturing plant or terminal owned or leased by
the Guarantor or any Subsidiary that is located in the United States or any
territory or political subdivision thereof,
except, in the case of either of the foregoing clauses (1) or (2):
(a) any such assets consisting of inventories, furniture, office
fixtures and equipment (including data processing equipment), vehicles
and equipment used on, or useful with, vehicles; and
(b) any such assets, plant or terminal which, in the opinion of the
board of directors of the General Partner, is not material in relation
to the activities of the Issuer or of the Guarantor and its Subsidiaries
taken as a whole.
Notwithstanding the foregoing, under the Indenture, the Guarantor may, and
may permit any Subsidiary to, create, assume, incur, or suffer to exist any lien
upon any Principal Property to secure debt of the Guarantor or any other person
(other than the debt securities) other than a Permitted Lien without securing
the debt securities, provided that the aggregate principal amount of all debt
then outstanding secured by such lien and all similar liens, together with all
Attributable Indebtedness from Sale-Leaseback Transactions
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(excluding Sale-Leaseback Transactions permitted by clauses (1) through (4),
inclusive, of the first paragraph of the restriction on sale-leasebacks covenant
described below) does not exceed 10% of Consolidated Net Tangible Assets.
"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets after deducting therefrom:
(1) all current liabilities (excluding (A) any current liabilities that
by their terms are extendable or renewable at the option of the obligor
thereon to a time more than 12 months after the time as of which the amount
thereof is being computed, and (B) current maturities of long-term debt);
and
(2) the value (net of any applicable reserves) of all goodwill, trade
names, trademarks, patents and other like intangible assets, all as set
forth, or on a pro forma basis would be set forth, on the consolidated
balance sheet of the Guarantor and its consolidated subsidiaries for the
Guarantor's most recently completed fiscal quarter, prepared in accordance
with generally accepted accounting principles.
Restriction on Sale-Leasebacks. The Indenture provides that the Guarantor
will not, and will not permit any Subsidiary to, engage in the sale or transfer
by the Guarantor or any Subsidiary of any Principal Property to a person (other
than the Issuer or a Subsidiary) and the taking back by the Guarantor or any
Subsidiary, as the case may be, of a lease of such Principal Property (a
"Sale-Leaseback Transaction"), unless:
(1) such Sale-Leaseback Transaction occurs within one year from the date
of completion of the acquisition of the Principal Property subject thereto
or the date of the completion of construction, development or substantial
repair or improvement, or commencement of full operations on such Principal
Property, whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a period,
including renewals, of not more than three years;
(3) the Guarantor or such Subsidiary would be entitled to incur debt
secured by a lien on the Principal Property subject thereto in a principal
amount equal to or exceeding the Attributable Indebtedness from such
Sale-Leaseback Transaction without equally and ratably securing the debt
securities; or
(4) the Guarantor or such Subsidiary, within a one-year period after
such Sale-Leaseback Transaction, applies or causes to be applied an amount
not less than the Attributable Indebtedness from such Sale-Leaseback
Transaction to (a) the prepayment, repayment, redemption, reduction or
retirement of any debt of the Guarantor or any Subsidiary that is not
subordinated to the debt securities, or (b) the expenditure or expenditures
for Principal Property used or to be used in the ordinary course of
business of the Guarantor or its Subsidiaries. "Attributable Indebtedness,"
when used with respect to any Sale-Leaseback Transaction, means, as at the
time of determination, the present value (discounted at the rate set forth
or implicit in the terms of the lease included in such transaction) of the
total obligations of the lessee for rental payments (other than amounts
required to be paid on account of property taxes, maintenance, repairs,
insurance, assessments, utilities, operating and labor costs and other
items that do not constitute payments for property rights) during the
remaining term of the lease included in such Sale-Leaseback Transaction
(including any period for which such lease has been extended). In the case
of any lease that is terminable by the lessee upon the payment of a penalty
or other termination payment, such amount shall be the lesser of the amount
determined assuming termination upon the first date such lease may be
terminated (in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required
to be paid under such lease subsequent to the first date upon which it may
be so terminated) or the amount determined assuming no such termination.
Notwithstanding the foregoing, under the Indenture the Guarantor may, and
may permit any Subsidiary to, effect any Sale-Leaseback Transaction that is not
excepted by clauses (1) through (4), inclusive, of the first paragraph under
"-- Restrictions On Sale-Leasebacks," provided that the Attributable
Indebtedness from such Sale-Leaseback Transaction, together with the aggregate
principal amount of outstanding debt
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(other than the debt securities) secured by liens other than Permitted Liens
upon Principal Property, do not exceed 10% of Consolidated Net Tangible Assets.
Merger, Consolidation or Sale of Assets. The Indenture provides that each
of the Guarantor and the Issuer may, without the consent of the holders of any
of the debt securities, consolidate with or sell, lease, convey all or
substantially all of its assets to, or merge with or into, any partnership,
limited liability company or corporation if:
(1) the partnership, limited liability company or corporation formed by
or resulting from any such consolidation or merger or to which such assets
shall have been transferred (the "successor") is either the Guarantor or
the Issuer, as applicable, or assumes all the Guarantor's or the Issuer's,
as the case may be, obligations and liabilities under the Indenture and the
debt securities (in the case of the Issuer) and the Guarantee (in the case
of the Guarantor);
(2) the successor is organized under the laws of the United States, any
state or the District of Columbia; and
(3) immediately after giving effect to the transaction no Default or
Event of Default shall have occurred and be continuing.
The successor will be substituted for the Guarantor or the Issuer, as the
case may be, in the Indenture with the same effect as if it had been an original
party to the Indenture. Thereafter, the successor may exercise the rights and
powers of the Guarantor or the Issuer, as the case may be, under the Indenture,
in its name or in its own name. If the Guarantor or the Issuer sells or
transfers all or substantially all of its assets, it will be released from all
liabilities and obligations under the Indenture and under the debt securities
(in the case of the Issuer) and the Guarantee (in the case of the Guarantor)
except that no such release will occur in the case of a lease of all or
substantially all of its assets.
EVENTS OF DEFAULT
Each of the following will be an Event of Default under the Indenture with
respect to a series of debt securities:
(1) default in any payment of interest on any debt securities of that
series when due, continued for 30 days;
(2) default in the payment of principal of or premium, if any, on any
debt securities of that series when due at its stated maturity, upon
optional redemption, upon declaration or otherwise;
(3) failure by the Guarantor or the Issuer to comply for 60 days after
notice with its other agreements contained in the Indenture;
(4) certain events of bankruptcy, insolvency or reorganization of the
Issuer or the Guarantor (the "bankruptcy provisions"); or
(5) the Guarantee ceases to be in full force and effect or is declared
null and void in a judicial proceeding or the Guarantor denies or
disaffirms its obligations under the Indenture or the Guarantee.
However, a default under clause (3) of this paragraph will not constitute an
Event of Default until the Trustee or the holders of 25% in principal amount of
the outstanding debt securities of that series notify the Issuer and the
Guarantor of the default such default is not cured within the time specified in
clause (3) of this paragraph after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause
(4) above) occurs and is continuing, the Trustee by notice to the Issuer, or the
holders of at least 25% in principal amount of the outstanding debt securities
of that series by notice to the Issuer and the Trustee, may, and the Trustee at
the request of such holders shall, declare the principal of, premium, if any,
and accrued and unpaid interest, if any, on all the debt securities of that
series to be due and payable. Upon such a declaration, such principal, premium
and accrued and unpaid interest will be due and payable immediately. If an Event
of Default
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described in clause (4) above occurs and is continuing, the principal of,
premium, if any, and accrued and unpaid interest on all the debt securities will
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders. The holders of a majority in
principal amount of the outstanding debt securities of a series may waive all
past defaults (except with respect to nonpayment of principal, premium or
interest) and rescind any such acceleration with respect to the debt securities
of that series and its consequences if rescission would not conflict with any
judgment or decree of a court of competent jurisdiction and all existing Events
of Default, other than the nonpayment of the principal of, premium, if any, and
interest on the debt securities of that series that have become due solely by
such declaration of acceleration, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the debt securities unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding debt
securities of that series have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding
debt securities of that series have not given the Trustee a direction that,
in the opinion of the Trustee, is inconsistent with such request within
such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding debt securities of a series are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any trust or power conferred on the
Trustee with respect to that series of debt securities. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder or that would involve the Trustee in personal liability. Prior to taking
any action under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium, if any, or interest on any debt securities, the
Trustee may withhold notice if and so long as a committee of trust officers of
the Trustee in good faith determines that withholding notice is in the interests
of the holders. In addition, the Issuer is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Issuer also is required to deliver to the Trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action the Issuer is taking
or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Issuer,
the Guarantor and the Trustee with the consent of the holders of a majority in
principal amount of all debt securities then outstanding under the Indenture
(including consents obtained in connection with a tender offer or exchange offer
for the
17
debt securities). However, without the consent of each holder of outstanding
debt securities of each series affected thereby, no amendment may, among other
things:
(1) reduce the amount of debt securities whose holders must consent to
an amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any debt securities;
(3) reduce the principal of or extend the stated maturity of any debt
securities;
(4) reduce the premium payable upon the redemption of any debt
securities or change the time at which any debt securities may be redeemed
as described above under "-- Optional Redemption" or any similar provision;
(5) make any debt securities payable in money other than that stated in
the debt securities;
(6) impair the right of any holder to receive payment of, premium, if
any, principal of and interest on such holder's debt securities on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's debt securities;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions; or
(8) release the Guarantor or modify the Guarantee in any manner adverse
to the holders.
The holders of a majority in aggregate principal amount of the outstanding
debt securities of each series affected thereby, on behalf of all such holders,
may waive compliance by the Issuer and the Guarantor with certain restrictive
provisions of the Indenture. Subject to certain rights of the Trustee as
provided in the Indenture, the holders of a majority in aggregate principal
amount of the debt securities of each series affected thereby, on behalf of all
such holders, may waive any past default under the Indenture (including any such
waiver obtained in connection with a tender offer or exchange offer for the debt
securities), except a default in the payment of principal, premium or interest
or a default in respect of a provision that under the Indenture that cannot be
modified or amended without the consent of all holders of the series of debt
securities that is affected.
Without the consent of any holder, the Issuer, the Guarantor and the
Trustee may amend the Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation, partnership,
trust or limited liability company of the obligations of the Guarantor or
the Issuer under the Indenture;
(3) provide for uncertificated debt securities in addition to or in
place of certificated debt securities (provided that the uncertificated
debt securities are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated debt
securities are described in Section 163(f)(2)(B) of the Code);
(4) add guarantees with respect to the debt securities;
(5) secure the debt securities;
(6) add to the covenants of the Guarantor or the Issuer for the benefit
of the holders or surrender any right or power conferred upon the Guarantor
or the Issuer;
(7) make any change that does not adversely affect the rights of any
holder; or
(8) comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, the Issuer is required to mail to the holders a
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notice briefly describing such amendment. However, the failure to give such
notice to all the holders, or any defect therein, will not impair or affect the
validity of the amendment.
DEFEASANCE
The Issuer at any time may terminate all its obligations under a series of
debt securities and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the debt securities, to replace mutilated,
destroyed, lost or stolen debt securities and to maintain a registrar and paying
agent in respect of the debt securities. If the Issuer exercises its legal
defeasance option, the Guarantee will terminate with respect to that series.
The Issuer at any time may terminate its obligations under covenants
described under "-- Certain Covenants" (other than "Merger, Consolidation or
Sale of Assets"), the bankruptcy provisions with respect to the Guarantor and
the Guarantee provision described under "Events of Default" above with respect
to a series of debt securities ("covenant defeasance").
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the affected series of debt securities may
not be accelerated because of an Event of Default with respect thereto. If the
Issuer exercises its covenant defeasance option, payment of the affected series
of debt securities may not be accelerated because of an Event of Default
specified in clause (3), (4), (with respect only to the Guarantor) or (5) under
"-- Events of Default" above.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the series of debt securities to redemption or maturity, as the case
may be, and must comply with certain other conditions, including delivery to the
Trustee of an opinion of counsel (subject to customary exceptions and
exclusions) to the effect that holders of the series of debt securities will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit and defeasance and will be subject to Federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred. In the case of legal
defeasance only, such opinion of counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law.
SUBORDINATION
Debt securities of a series may be subordinated to our "Senior
Indebtedness," which we define generally to include all notes or other evidences
of indebtedness for money borrowed by the Issuer, including guarantees, that are
not expressly subordinate or junior in right of payment to any other
indebtedness of the Issuer. Subordinated debt securities will be subordinate in
right of payment, to the extent and in the manner set forth in the Indenture and
the prospectus supplement relating to such series, to the prior payment of all
indebtedness of the Issuer and Guarantor that is designated as "Senior
Indebtedness" with respect to the series.
The holders of Senior Indebtedness of the Issuer will receive payment in
full of the Senior Indebtedness before holders of subordinated debt securities
will receive any payment of principal, premium or interest with respect to the
subordinated debt securities:
- upon any payment of distribution of our assets of the Issuer to its
creditors;
- upon a total or partial liquidation or dissolution of the Issuer; or
- in a bankruptcy, receivership or similar proceeding relating to the
Issuer or its property.
Until the Senior Indebtedness is paid in full, any distribution to which
holders of subordinated debt securities would otherwise be entitled will be made
to the holders of Senior Indebtedness, except that such
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holders may receive units representing limited partner interests and any debt
securities that are subordinated to Senior Indebtedness to at least the same
extent as the subordinated debt securities.
If the Issuer does not pay any principal, premium or interest with respect
to Senior Indebtedness within any applicable grace period (including at
maturity), or any other default on Senior Indebtedness occurs and the maturity
of the Senior Indebtedness is accelerated in accordance with its terms, the
Issuer may not:
- make any payments of principal, premium, if any, or interest with respect
to subordinated debt securities;
- make any deposit for the purpose of defeasance of the subordinated debt
securities; or
- repurchase, redeem or otherwise retire any subordinated debt securities,
except that in the case of subordinated debt securities that provide for
a mandatory sinking fund, we may deliver subordinated debt securities to
the Trustee in satisfaction of our sinking fund obligation,
unless, in either case,
- the default has been cured or waived and the declaration of acceleration
has been rescinded;
- the Senior Indebtedness has been paid in full in cash; or
- the Issuer and the Trustee receive written notice approving the payment
from the representatives of each issue of "Designated Senior
Indebtedness."
Generally, "Designated Senior Indebtedness" will include:
- indebtedness for borrowed money under a bank credit agreement, called
"Bank Indebtedness"; and
- any specified issue of Senior Indebtedness of at least $100 million.
During the continuance of any default, other than a default described in
the immediately preceding paragraph, that may cause the maturity of any Senior
Indebtedness to be accelerated immediately without further notice, other than
any notice required to effect such acceleration, or the expiration of any
applicable grace periods, the Issuer may not pay the subordinated debt
securities for a period called the "Payment Blockage Period." A Payment Blockage
Period will commence on the receipt by us and the Trustee of written notice of
the default, called a "Blockage Notice," from the representative of any
Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period.
The Payment Blockage Period may be terminated before its expiration:
- by written notice from the person or persons who gave the Blockage
Notice;
- by repayment in full in cash of the Senior Indebtedness with respect to
which the Blockage Notice was given; or
- if the default giving rise to the Payment Blockage Period is no longer
continuing.
Unless the holders of Senior Indebtedness shall have accelerated the maturity of
the Senior Indebtedness, we may resume payments on the subordinated debt
securities after the expiration of the Payment Blockage Period.
Generally, not more than one Blockage Notice may be given in any period of
360 consecutive days unless the first Blockage Notice within the 360-day period
is given by holders of Designated Senior Indebtedness, other than Bank
Indebtedness, in which case the representative of the Bank Indebtedness may give
another Blockage Notice within the period. The total number of days during which
any one or more Payment Blockage Periods are in effect, however, may not exceed
an aggregate of 179 days during any period of 360 consecutive days.
20
After all Senior Indebtedness is paid in full and until the subordinated
debt securities are paid in full, holders of the subordinated debt securities
shall be subrogated to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness.
By reason of the subordination, in the event of insolvency, our creditors
who are holders of Senior Indebtedness, as well as certain of our general
creditors, may recover more, ratably, than the holders of the subordinated debt
securities.
BOOK-ENTRY SYSTEM
We will issue the debt securities in the form of one or more global
securities in fully registered form initially in the name of Cede & Co., as
nominee of DTC, or such other name as may be requested by an authorized
representative of DTC. The global securities will be deposited with the Trustee
as custodian for DTC and may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any nominee to a successor of DTC or a nominee of such successor.
DTC has advised us as follows:
- DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act.
- DTC holds securities that its participants deposit with DTC and
facilitates the settlement among direct participants of securities
transactions, such as transfers and pledges, in deposited securities,
through electronic computerized book-entry changes in direct
participants' accounts, thereby eliminating the need for physical
movement of securities certificates.
- Direct participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
- DTC is owned by a number of its direct participants and by the New York
Stock Exchange, Inc., the American Stock Exchange LLC and the National
Association of Securities Dealers, Inc.
- Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either
directly or indirectly.
- The rules applicable to DTC and its direct and indirect participants are
on file with the Commission.
Purchases of debt securities under the DTC system must be made by or
through direct participants, which will receive a credit for the debt securities
on DTC's records. The ownership interest of each actual purchaser of debt
securities is in turn to be recorded on the direct and indirect participants'
records. Beneficial owners of the debt securities will not receive written
confirmation from DTC of their purchase, but beneficial owners are expected to
receive written confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the direct or indirect participants
through which the beneficial owner entered into the transaction. Transfers of
ownership interests in the debt securities are to be accomplished by entries
made on the books of direct and indirect participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interests in the debt securities, except in the event that use
of the book-entry system for the debt securities is discontinued.
To facilitate subsequent transfers, all debt securities deposited by direct
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co., or such other name as may be requested by an authorized
representative of DTC. The deposit of debt securities with DTC and their
registration in the name of Cede & Co. or such other nominee do not effect any
change in beneficial ownership. DTC has no knowledge of the actual beneficial
owners of the debt securities; DTC's records reflect only the identity of the
direct participants to whose accounts such debt securities are credited, which
may or may not be the
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beneficial owners. The direct and indirect participants will remain responsible
for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by, direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote
with respect to the global securities. Under its usual procedures, DTC mails an
omnibus proxy to the issuer as soon as possible after the record date. The
omnibus proxy assigns Cede & Co.'s consenting or voting rights to those direct
participants to whose accounts the debt securities are credited on the record
date (identified in the listing attached to the omnibus proxy).
All payments on the global securities will be made to Cede & Co., as holder
of record, or such other nominee as may be requested by an authorized
representative of DTC. DTC's practice is to credit direct participants' accounts
upon DTC's receipt of funds and corresponding detail information from us or the
Trustee on payment dates in accordance with their respective holdings shown on
DTC's records. Payments by participants to beneficial owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such participant and not of DTC, us or
the Trustee, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal, premium, if any, and interest to
Cede & Co. (or such other nominee as may be requested by an authorized
representative of DTC) shall be the responsibility of us or the Trustee.
Disbursement of such payments to direct participants shall be the responsibility
of DTC, and disbursement of such payments to the beneficial owners shall be the
responsibility of direct and indirect participants.
DTC may discontinue providing its service as securities depositary with
respect to the debt securities at any time by giving reasonable notice to us or
the Trustee. In addition, we may decide to discontinue use of the system of
book-entry transfers through DTC (or a successor securities depositary). Under
such circumstances, in the event that a successor securities depositary is not
obtained, note certificates in fully registered form are required to be printed
and delivered to beneficial owners of the global securities representing such
debt securities.
Neither we, the Trustee nor the initial purchasers will have any
responsibility or obligation to direct or indirect participants, or the persons
for whom they act as nominees, with respect to the accuracy of the records of
DTC, its nominee or any participant with respect to any ownership interest in
the debt securities, or payments to, or the providing of notice to participants
or beneficial owners.
So long as the debt securities are in DTC's book-entry system, secondary
market trading activity in the debt securities will settle in immediately
available funds. All payments on the debt securities issued as global securities
will be made by us in immediately available funds.
LIMITATIONS ON ISSUANCE OF BEARER SECURITIES
The debt securities of a series may be issued as Registered Securities
(which will be registered as to principal and interest in the register
maintained by the registrar for the debt securities) or Bearer Securities (which
will be transferable only by delivery). If the debt securities are issuable as
Bearer Securities, certain special limitations and conditions will apply.
In compliance with United States federal income tax laws and regulations,
we and any underwriter, agent or dealer participating in an offering of Bearer
Securities will agree that, in connection with the original issuance of the
Bearer Securities and during the period ending 40 days after the issue date,
they will not offer, sell or deliver any such Bearer Securities, directly or
indirectly, to a United States Person (as defined below) or to any person within
the United States, except to the extent permitted under United States Treasury
regulations.
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Bearer Securities will bear a legend to the following effect: "Any United
States person who holds this obligation will be subject to limitations under the
United States federal income tax laws, including the limitations provided in
Sections 165(j) and 1287(a) of the Internal Revenue Code." The sections referred
to in the legend provide that, with certain exceptions, a United States taxpayer
who holds Bearer Securities will not be allowed to deduct any loss with respect
to, and will not be eligible for capital gain treatment with respect to any gain
realized on the sale, exchange, redemption or other disposition of, the Bearer
Securities.
For this purpose, "United States" includes the United States of America and
its possessions, and "United States person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States, or an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source.
Pending the availability of a definitive global security or individual
Bearer Securities, as the case may be, debt securities that are issuable as
Bearer Securities may initially be represented by a single temporary global
security, without interest coupons, to be deposited with a common depositary in
London for Morgan Guaranty Trust Company of New York, Brussels Office, as
operator of the Euroclear System ("Euroclear"), or Centrale de Livraison de
Valeurs Mobilieres S.A. ("CEDEL") for credit to the accounts designated by or on
behalf of the purchasers thereof. Following the availability of a definitive
global security in bearer form, without coupons attached, or individual Bearer
Securities and subject to any further limitations described in the applicable
prospectus supplement, the temporary global security will be exchangeable for
interests in the definitive global security or for the individual Bearer
Securities, respectively, only upon receipt of a "Certificate of Non-U.S.
Beneficial Ownership," which is a certificate to the effect that a beneficial
interest in a temporary global security is owned by a person that is not a
United States Person or is owned by or through a financial institution in
compliance with applicable United States Treasury regulations. No Bearer
Security will be delivered in or to the United States. If so specified in the
applicable prospectus supplement, interest on a temporary global security will
be paid to each of Euroclear and CEDEL with respect to that portion of the
temporary global security held for its account, but only upon receipt as of the
relevant interest payment date of a Certificate of Non-U.S. Beneficial
Ownership.
NO RECOURSE AGAINST GENERAL PARTNER
Our general partner and its directors, officers, employees and members, as
such, shall have no liability for any obligations of the Guarantor or the Issuer
under the debt securities, the Indenture or the guarantee or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
holder by accepting a note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the debt securities.
Such waiver may not be effective to waive liabilities under the federal
securities laws, and it is the view of the Commission that such a waiver is
against public policy.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee,
should it become our creditor, to obtain payment of claims in certain cases, or
to realize for its own account on certain property received in respect of any
such claim as security or otherwise. The Trustee is permitted to engage in
certain other transactions. However, if it acquires any conflicting interest
within the meaning of the Trust Indenture Act, it must eliminate the conflict or
resign as Trustee.
The holders of a majority in principal amount of all outstanding debt
securities (or if more than one series of debt securities under the Indenture is
affected thereby, all series so affected, voting as a single class) will have
the right to direct the time, method and place of conducting any proceeding for
exercising any remedy or power available to the Trustee for the debt securities
or all such series so affected.
If an Event of Default occurs and is not cured under the Indenture and is
known to the Trustee, the Trustee shall exercise such of the rights and powers
vested in it by the Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise or use under the circumstances in
the conduct of his own affairs. Subject to such provisions, the Trustee will not
be under any obligation to exercise any of
23
its rights or powers under the Indenture at the request of any of the holders of
debt securities unless they shall have offered to such Trustee reasonable
security and indemnity.
Wachovia Bank, National Association is the Trustee under the Indenture and
has been appointed by the Issuer as Registrar and Paying Agent with regard to
the debt securities. Wachovia Bank, National Association is the Administrative
Agent and a lender under the Issuer's credit facilities.
GOVERNING LAW
The Indenture, the debt securities and the guarantee are governed by, and
will be construed in accordance with, the laws of the State of New York.
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DESCRIPTION OF OUR COMMON UNITS
Generally, our common units represent limited partner interests that
entitle the holders to participate in our cash distributions and to exercise the
rights and privileges available to limited partners under our partnership
agreement. For a description of the relative rights and preferences of holders
of common units, holders of subordinated units and our general partner in and to
cash distributions, together with a description of the circumstances under which
subordinated units convert into common units, see "Cash Distribution Policy" in
this prospectus.
Our outstanding common units are listed on the NYSE under the symbol "EPD."
Any additional common units we issue will also be listed on the NYSE.
The transfer agent and registrar for our common units is Mellon Investor
Services LLC.
MEETINGS/VOTING
Each holder of common units is entitled to one vote for each common unit on
all matters submitted to a vote of the unitholders.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described below under "-- Limited Liability," the common units
will be fully paid, and unitholders will not be required to make additional
capital contributions to us.
For a purchaser of common units offered by this prospectus to be registered
as a record holder of common units on the books of our transfer agent or issued
a common unit certificate, the purchaser must execute a transfer application
whereby the purchaser requests admission as a substituted limited partner and
makes representations and agrees to provisions stated in the transfer
application. If this action is not taken, a purchaser's common units will be
held in nominee accounts.
An assignee, pending its admission as a substituted limited partner, is
entitled to an interest in us equivalent to that of a limited partner with
respect to the right to share in allocations and distributions, including
liquidating distributions. Our general partner will vote and exercise other
powers attributable to common units owned by an assignee who has not become a
substituted limited partner at the written direction of the assignee.
Transferees who do not execute and deliver transfer applications will be treated
neither as assignees nor as record holders of common units and will not receive
distributions, federal income tax allocations or reports furnished to record
holders of common units. The only right the transferees will have is the right
to admission as a substituted limited partner in respect of the transferred
common units upon execution of a transfer application in respect of the common
units. A nominee or broker who has executed a transfer application with respect
to common units held in street name or nominee accounts will receive
distributions and reports pertaining to its common units.
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of our
business within the meaning of the Delaware Revised Uniform Limited Partnership
Act (the "Delaware Act") and that he otherwise acts in conformity with the
provisions of our partnership agreement, his liability under the Delaware Act
will be limited, subject to some possible exceptions, generally to the amount of
capital he is obligated to contribute to us in respect of his units plus his
share of any undistributed profits and assets.
Under the Delaware Act, a limited partnership may not make a distribution
to a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership.
For the purposes of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of the property
subject to liability of which recourse of creditors is limited shall be
25
included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and knew at the time
of the distribution that the distribution was in violation of the Delaware Act
is liable to the limited partnership for the amount of the distribution for
three years from the date of the distribution.
REPORTS AND RECORDS
As soon as practicable. but in no event later than 120 days after the close
of each fiscal year, our general partner will furnish or make available to each
unitholder of record (as of a record date selected by our general partner) an
annual report containing our audited financial statements for the past fiscal
year. These financial statements will be prepared in accordance with generally
accepted accounting principles. In addition, no later than 45 days after the
close of each quarter (except the fourth quarter), our general partner will
furnish or make available to each unitholder of record (as of a record date
selected by our general partner) a report containing our unaudited financial
statements and any other information required by law.
Our general partner will use all reasonable efforts to furnish each
unitholder of record information reasonably required for tax reporting purposes
within 90 days after the close of each fiscal year. Our general partner's
ability to furnish this summary tax information will depend on the cooperation
of unitholders in supplying information to our general partner. Each unitholder
will receive information to assist him in determining his U.S. federal and state
and Canadian federal and provincial tax liability and filing his U.S. federal
and state and Canadian federal and provincial income tax returns.
A limited partner can, for a purpose reasonably related to the limited
partner's interest as a limited partner, upon reasonable demand and at his own
expense, have furnished to him:
- a current list of the name and last known address of each partner; a copy
of our tax returns;
- information as to the amount of cash and a description and statement of
the agreed value of any other property or services, contributed or to be
contributed by each partner and the date on which each became a partner;
- copies of our partnership agreement. our certificate of limited
partnership, amendments to either of them and powers of attorney which
have been executed under our partnership agreement; information regarding
the status of our business and financial condition; and
- any other information regarding our affairs as is just and reasonable.
Our general partner may, and intends to, keep confidential from the limited
partners trade secrets and other information the disclosure of which our general
partner believes in good faith is not in our best interest or which we are
required by law or by agreements with third parties to keep confidential.
CLASS A SPECIAL UNITS
A total of 29,000,000 Class A special units were issued as part of the
purchase price of Tejas Natural Gas Liquids LLC. These units do not accrue
distributions and are not entitled to cash distributions until their conversion
into an equal number of common units. On August 1, 2000, August 1, 2001 and
August 1, 2002, 2,000,000, 10,000,000 and 17,000,000 of the Class A special
units, respectively, were converted into an equal number of common units. As an
additional part of the purchase price of Tejas Natural Gas Liquids LLC, we
agreed to issue up to 12,000,000 more Class A special units to the seller if the
volumes of natural gas that we process for Shell Oil Company and its affiliates
reach certain agreed upon levels in 2000 and 2001. On August 1, 2000, we issued
6,000,000 of these Class A special units to the seller, and on August 1, 2001,
we issued the remaining 6,000,000 Class A special units to the seller under our
foregoing agreement. On August 1, 2002, 2,000,000 of these additional Class A
special units converted into an equal number of common units. The remaining
10,000,000 additional Class A special units will convert into an equal number of
common units in August 2003.
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CASH DISTRIBUTION POLICY
DISTRIBUTIONS OF AVAILABLE CASH
General. Within approximately 45 days after the end of each quarter, we
will distribute all of our available cash to unitholders of record on the
applicable record date.
Definition of Available Cash. Available cash is defined in our partnership
agreement and generally means, with respect to any calendar quarter, all cash on
hand at the end of such quarter:
- less the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the general partner to:
- provide for the proper conduct of our business;
- comply with applicable law or any debt instrument or other agreement
(including reserves for future capital expenditures and for our future
credit needs); or
- provide funds for distributions to unitholders and our general partner
in respect of 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 facilities and in all cases are used solely for
working capital purposes or to pay distributions to partners.
OPERATING SURPLUS AND CAPITAL SURPLUS
General. Cash distributions are characterized as distributions from either
operating surplus or capital surplus. We distribute available cash from
operating surplus differently than available cash from capital surplus.
Definition of Operating Surplus. Operating surplus is defined in the
partnership agreement and generally means:
- our cash balance on July 31, 1998, the closing date of our initial public
offering of common units (excluding $46.5 million to fund certain capital
commitments existing at such closing date); plus
- all of our cash receipts since the closing of our initial public
offering, excluding cash from interim capital transactions such as
borrowings that are not working capital borrowings, sales of equity and
debt securities and sales or other disposition of assets for cash, other
than inventory, accounts receivable and other assets sold in the ordinary
course of business or as part of normal retirements or replacements of
assets; plus
- up to $60.0 million of cash from interim capital transactions; plus
- working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for the quarter; less
- all of our operating expenditures since the closing of our initial public
offering, including the repayment of working capital borrowings, but not
the repayment of other borrowings, and including maintenance capital
expenditures; less
- the amount of cash reserved that we deem necessary or advisable to
provide funds for future operating expenditures.
Definition of Capital Surplus. Capital surplus is generally generated only
by borrowings (other than borrowings for working capital purposes), sales of
debt and equity securities and sales or other dispositions of assets for cash
(other than inventory, accounts receivable and other assets disposed of in the
ordinary course of business).
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Characterization of Cash Distributions. To avoid the difficulty of trying
to determine whether available cash we distribute is from operating surplus or
from capital surplus, all available cash we distribute from any source will be
treated as distributed from operating surplus until the sum of all available
cash distributed since July 31, 1998 equals the operating surplus as of the end
of the quarter prior to such distribution. Any available cash in excess of such
amount (irrespective of its source) will be deemed to be from capital surplus
and distributed accordingly.
If available cash from capital surplus is distributed in respect of each
common unit in an aggregate amount per common unit equal to the $11.00 initial
public offering price of the common units, plus any common unit arrearages, the
distinction between operating surplus and capital surplus will cease, and all
distributions of available cash will be treated as if they were from operating
surplus. We do not anticipate that there will be significant distributions from
capital surplus.
SUBORDINATION PERIOD
General. With respect to each quarter during the subordination period, to
the extent there is sufficient available cash, the holders of common units will
have the right to receive the minimum quarterly distribution of $0.225 per unit,
plus any common unit arrearages, prior to any distribution of available cash to
the holders of subordinated units. The purpose of the subordinated units is to
increase the likelihood that during the subordination period there will be
sufficient available cash from operating surplus for us to distribute the
minimum quarterly distribution on each common unit. Common units will not accrue
arrearages with respect to distributions for any quarter after the subordination
period, and subordinated units will not accrue any arrearages with respect to
distributions for any quarter.
Definition of Subordination Period. The subordination period will
generally extend until the first day of any quarter beginning after June 30,
2003 that the following tests are met:
- distributions of available cash from operating surplus on each of the
outstanding common units and the subordinated units with respect to each
of the three consecutive, non-overlapping, four-quarter periods
immediately preceding such date equaled or exceeded the minimum quarterly
distribution on all of the outstanding common units and subordinated
units during such periods;
- the adjusted operating surplus generated during each of the three
consecutive, non-overlapping, four-quarter periods immediately preceding
such date equaled or exceeded the sum of:
-- the minimum quarterly distribution on all of the outstanding common
units and subordinated units during those periods on a fully diluted
basis; and
-- the related distribution on the general partner interests in us and
our operating partnership; and
- there are no outstanding common unit arrearages.
Early Conversion of Subordinated Units. On May 1, 2002, 10,704,936 of the
original subordinated units, or approximately 25%, converted into an equal
number of common units. As of December 31, 2002, 32,114,804 subordinated units
remained outstanding. An additional 10,704,936 subordinated units will convert
into an equal number of common units on the first day after the record date
established for the distribution in respect of any quarter ending on or after
March 31, 2003 if the following tests are met:
- distributions of available cash from operating surplus on the common
units and the subordinated units with respect to each of the three
consecutive, non-overlapping, four-quarter periods immediately preceding
such date equaled or exceeded the sum of the minimum quarterly
distribution on all of the outstanding common units and subordinated
units during such periods;
- 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 $0.225 per unit on all of the
common units and subordinated units that were outstanding during such
period on a fully
28
diluted basis and the related distribution on the general partner
interests in us and our operating partnership; and
- there are no outstanding common unit arrearages.
Because the tests for early conversion and the end of the subordination
period are the same, if the test for early conversion is not met for the quarter
ending March 31, 2003, there will not be any additional early conversion of the
subordinated units. If the test is met at the end of any subsequent quarter,
then the subordination period will end and all of the subordinated units will
convert into common units. On August 1, 2003, 10,000,000 special units owned by
Shell that are currently not entitled to distributions will convert into common
units and, if the subordination period has not terminated at such time, will be
included as common units for purposes of the above test.
Definition of Adjusted Operating Surplus. 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. Adjusted operating
surplus for any period generally means:
- operating surplus generated during that period; less
- any net increase in working capital borrowings during that period; less
- any net reduction in cash reserves for operating expenditures during that
period not relating to an operating expenditure made during that period;
plus
- any net decrease in working capital borrowings during that period; plus
- any net increase in cash reserves for operating expenditures during that
period required by any debt instrument for the repayment of principal,
interest or premium.
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 our general partner is removed
as our general partner under circumstances where cause does not exist and units
held by our general partner and its affiliates are not voted in favor of such
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 common unit arrearages will be extinguished; and
- our general partner will have the right to convert its general partner
interest into common units or to receive cash in exchange for such
interests.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus with
respect to any quarter during the subordination period in the following manner:
- first, 98% to the common unitholders, pro rata, and 2% to the general
partner, until there has been distributed in respect of each outstanding
common unit an amount equal to $0.225 per unit for such quarter.
- second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until there has been distributed in respect of each outstanding
common unit an amount equal to any common unit arrearages accrued and
unpaid with respect to any prior quarters during the subordination
period;
- third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until there has been distributed in respect of each
outstanding subordinated unit an amount equal to $0.225 per unit; and
- thereafter, in the manner described in "Incentive Distributions" below.
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The above references to the 2% of available cash from operating surplus
distributed to the general partner are references to the amount of the
percentage interest of our general partner (exclusive of its or any of its
affiliates' interests as holders of common units or subordinated units) in
distributions from us and our operating partnership. Our general partner owns a
1% general partner interests in us and a 1.0101% general partner interest in our
operating partnership.
With respect to any common unit, the term "common unit arrearages" refers
to the amount by which the minimum quarterly distribution of $0.225 per unit in
any quarter during the subordination period exceeds the distribution of
available cash from operating surplus actually made for such quarter on a common
unit issued in our initial public offering, cumulative for such quarter and all
prior quarters during the subordination period. Common unit arrearages will not
accrue interest.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus with
respect to any quarter after the subordination period in the following manner:
- first, 98% to all common unitholders, pro rata and 2% to the general
partner, until there has been distributed in respect of each unit an
amount equal to $0.225; and
- thereafter, in the manner described in "Incentive Distributions" below.
INCENTIVE DISTRIBUTIONS
Incentive distributions 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. For any quarter for which available cash from operating surplus
is distributed to the common and subordinated unitholders in an amount equal to
$0.225 per unit on all units and to the common unitholders in an amount equal to
any unpaid common unit arrearages, then any additional available cash from
operating surplus in respect of such quarter will be distributed among the
unitholders and the general partner in the following manner:
- first, 98% to all common and subordinated unitholders, pro rata, and 2%
to the general partner, until the unitholders have received a total of
$0.253 for such quarter in respect of each outstanding unit (the "First
Target Distribution");
- second, 85% to all common and subordinated unitholders, pro rata, and 15%
to the general partner, until the unitholders have received a total of
$0.3085 for such quarter in respect of each outstanding unit (the "Second
Target Distribution"); and
- thereafter, 75% to all common and subordinated unitholders, pro rata, and
25% to the general partner.
In each case, the amount of the target distribution set forth above is
exclusive of any distributions to our common unitholders to eliminate any
cumulative arrearages in payment of the minimum quarterly distribution.
DISTRIBUTIONS FROM CAPITAL SURPLUS
How Distributions from Capital Surplus Will Be Made. We will make
distributions of available cash from capital surplus in the following manner:
- first, 98% to all common and subordinated unitholders, pro rata, and 2%
to the general partner, until we have distributed, in respect of each
outstanding common unit issued in our initial public offering, available
cash from capital surplus in an aggregate amount per common unit equal to
the initial unit price of $11.00;
- second, 98% to the holders of common units, pro rata, and 2% to the
general partner, until the Company has distributed, in respect of each
outstanding common unit, available cash from capital
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surplus in an aggregate amount equal to any unpaid common unit arrearages
with respect to such common unit; and
- thereafter, all distributions of available cash from capital surplus will
be distributed as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. Our partnership agreement
treats a distribution of capital surplus on a common unit as the repayment of
the common unit price from its initial public offering, which is a return of
capital. The initial public offering price less any distributions of capital
surplus per common unit is referred to as the unrecovered initial common unit
price. Each time a distribution of capital surplus is made on a common unit, the
minimum quarterly distribution and the target distribution levels for all units
will be reduced in the same proportion as the corresponding reduction in the
unrecovered initial common 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.
However, any distribution by us of capital surplus before the unrecovered
initial common unit price is reduced to zero cannot be applied to the payment of
the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a common unit in any amount equal to
the unrecovered initial common unit price plus any arrearages, it will reduce
the minimum quarterly distribution and the target distribution levels to zero
and it will make all future distributions of available cash from operating
surplus, with 25% being paid to the holders of units, as applicable, and 75% to
our general partner.
ADJUSTMENT TO THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the minimum quarterly distribution and target
distribution levels made upon a distribution of available cash from capital
surplus, 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;
- the target distribution levels;
- the unrecovered initial common unit price;
- the number of common units issuable during the subordination period
without a unitholder vote; and
- the number of common units issuable upon conversion of the subordinated
units.
For example, in the event of a two-for-one split of the common units
(assuming no prior adjustments), the minimum quarterly distribution, each of the
target distribution levels and the unrecovered capital of the common units would
each be reduced to 50% of its initial level.
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, then we will reduce the minimum quarterly distribution and the
target distribution levels by multiplying the same by one minus the sum of the
highest effective 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 effective federal, state and local income tax
rate of 38%, then the minimum quarterly distribution and the target distribution
levels would each be reduced to 62% of their previous levels.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
If we dissolve in accordance with the partnership agreement, we will sell
or otherwise dispose of our assets in a process called a liquidation. We will
first apply the proceeds of liquidation to the payment of our creditors in the
order of priority provided in the partnership agreement and by law and,
thereafter, we will distribute any remaining proceeds to the unitholders and our
general partner in accordance with their respective capital account balances as
so adjusted.
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Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding subordinated units
upon our liquidation, to the extent required to permit common unitholders to
receive their unrecovered capital plus any unpaid common unit arrearages. Thus,
net losses recognized upon our liquidation will be allocated to the holders of
the subordinated units to the extent of their capital account balances before
any loss is allocated to the holders of the common units, and net gains
recognized upon liquidation will be allocated first to restore negative balances
in the capital account of the general partner and any unitholders and then to
the common unitholders until their capital account balances equal their
unrecovered capital plus unpaid common unit arrearages. However, no assurance
can be given that there will be sufficient gain upon our liquidation to enable
the holders of common units to fully recover all of such amounts, even though
there may be cash available after such allocation for distribution to the
holders of subordinated units.
Manner of Adjustments for Gain. The manner of the adjustment is set forth
in the partnership agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any net gain (or unrealized gain
attributable to assets distributed in kind to the partners as follows:
- first, to the general partner and the holders of units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
- second, 98% to the holders of common units, pro rata, and 2% to the
general partner, until the capital account for each common unit is equal
to the sum of:
- the unrecovered capital in respect of such common unit; plus
- the amount of the minimum quarterly distribution for the quarter during
which our liquidation occurs; plus
- any unpaid common unit arrearages in respect of such common unit;
- third, if the capital account with respect to a Class A special unit is
not equal to the capital account with respect to each common unit, 98% to
the holders of common units and the holders of Class A special units in
the manner and amount necessary to equalize, to the maximum extent
possible, the capital account for each common unit and Class A special
unit, and 2% to the general partner;
- fourth, 98% to the holders of subordinated units, pro rata, and 2% to the
general partner, until the capital account for each subordinated unit is
equal to the sum of:
- the unrecovered capital in respect of such subordinated unit; plus
- the amount of the minimum quarterly distribution for the quarter during
which our liquidation occurs;
- fifth, 98% to all unitholders, pro rata, and 2% to the general partner,
until there has been allocated under this paragraph fifth an amount per
unit equal to:
- 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
- the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the minimum quarterly distribution
per unit that were distributed 98% to the unitholders, pro rata, and 2%
to the general partner for each quarter of our existence;
- sixth, 85% to all unitholders, pro rata, and 15% to the general partner,
until there has been allocated under this paragraph sixth an amount per
unit equal to:
- 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
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- the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the First Target Distribution per
unit that were distributed 85% to the unitholders, pro rata, and 15% to
the general partner for each quarter of our existence; and
- thereafter, 75% to all unitholders, pro rata, and 25% to the general
partner.
If the liquidation occurs after the conversion of all the Class A special
units into common units, the distinction between Class A special units and
common units will disappear, so that all of paragraph third above will no longer
be applicable. If the liquidation occurs after the subordination period, the
distinction between common units and subordinated units will disappear, so that
the third bullet of paragraph second above and all of paragraph fourth above
will no longer be applicable.
Manner of Adjustments for Losses. Upon our liquidation, any loss will
generally be allocated to the general partner and the unitholders as follows:
- first, 98% to holders of subordinated units in proportion to the positive
balances in their respective capital accounts and 2% to the general
partner, until the capital accounts of the holders of the subordinated
units have been reduced to zero;
- second, if the capital account with respect to a Class A special unit is
not equal to the capital account with respect to each common unit, 98% to
the holders of common units and the holders of Class A special units in
the manner and amount necessary to equalize, to the maximum extent
possible, the capital account for each common unit and Class A special
unit, and 2% to the general partner;
- third, 98% to the holders of common units in proportion to the positive
balances in their respective capital accounts and 2% to the general
partner, until the capital accounts of the common unitholders have been
reduced to zero; and
- thereafter, 100% to the general partner.
If the liquidation occurs after the subordination period, the distinction
between common units and subordinated units will disappear, so that all of
paragraph first above will no longer be applicable. If the liquidation occurs
after the conversion of all the Class A special units into common units, the
distinction between Class A special units and common units will disappear, so
that all of paragraph second above will no longer be applicable.
Adjustments to Capital Accounts. In addition, interim adjustments to
capital accounts will be made at the time we issue additional partnership
interests or make distributions of property. Such adjustments will be based on
the fair market value of the partnership interests or the property distributed
and any gain or loss resulting therefrom will be allocated to the unitholders
and the general partner in the same manner as gain or loss is allocated upon
liquidation. In the event that positive interim adjustments are made to the
capital accounts, any subsequent negative adjustments to the capital accounts
resulting from the issuance of additional partnership interests in us,
distributions of property by us, or upon our liquidation, will be allocated in a
manner which results, to the extent possible, in the capital account balances of
the general partner equaling the amount that would have been the general
partner's capital account balances if no prior positive adjustments to the
capital accounts had been made.
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DESCRIPTION OF OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. Our amended and restated partnership agreement has been filed with
the Commission, and is incorporated by reference in this prospectus. The
following provisions of our partnership agreement are summarized elsewhere in
this prospectus:
- distributions of our available cash are described under "Cash
Distribution Policy";
- allocations of taxable income and other tax matters are described under
"Tax Consequences"; and
- rights of holders of common units are described under "Description of Our
Common Units."
PURPOSE
Our purpose under our partnership agreement is to serve as a partner of our
operating partnership and to engage in any business activities that may be
engaged in by our operating partnership or that are approved by our general
partner. The partnership agreement of our operating partnership provides that it
may engage in any activity that was engaged in by our predecessors at the time
of our initial public offering or reasonably related thereto and any other
activity approved by our general partner.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to our general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for our qualification, continuance or
dissolution. The power of attorney also grants the authority for the amendment
of, and to make consents and waivers under, our partnership agreement.
REIMBURSEMENTS OF OUR GENERAL PARTNER
Our general partner does not receive any compensation for its services as
our general partner. It is, however, entitled to be reimbursed for all of its
costs incurred in managing and operating our business. Our partnership agreement
provides that our general partner will determine the expenses that are allocable
to us in any reasonable manner determined by our general partner in its sole
discretion.
ISSUANCE OF ADDITIONAL SECURITIES
Our partnership agreement authorizes us to issue an unlimited number of
additional limited partner interests and other equity securities that are equal
in rank with or junior to our common units on terms and conditions established
by our general partner in its sole discretion without the approval of any
limited partners. During the subordination period, however, except as set forth
in the following paragraph, we may not issue an aggregate of more than
approximately 54,550,000 additional common units or an equivalent number of
units that are equal in rank with our common units, in each case, without the
approval of at least a majority of our outstanding common units (excluding
common units owned by the general partner and its affiliates).
During the subordination period, we may issue an unlimited number of common
units to finance an acquisition or a capital improvement that would have
resulted, on a pro forma basis, in an increase in per unit adjusted operating
surplus as provided in our partnership agreement.
In no event may we issue partnership interests during the subordination
period that are senior to our common units without the approval of the holders
of a majority of our outstanding common units (excluding common units owned by
the general partner and its affiliates).
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our cash distributions. In addition, the issuance of
additional
34
partnership interests may dilute the value of the interests of the then-existing
holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership interests that, in the sole
discretion of our general partner, may have special voting rights to which
common units are not entitled.
Our general partner has the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase common units,
subordinated units or other equity securities whenever, and on the same terms
that, we issue those securities to persons other than our general partner and
its affiliates, to the extent necessary to maintain their percentage interests
in us that existed immediately prior to the issuance. The holders of common
units will not have preemptive rights to acquire additional common units or
other partnership interests in us.
AMENDMENTS TO OUR PARTNERSHIP AGREEMENT
Amendments to our partnership agreement may be proposed only by our general
partner. Any amendment that materially and adversely affects the rights or
preferences of any type or class of limited partner interests in relation to
other types or classes of limited partner interests or our general partner
interest will require the approval of at least a majority of the type or class
of limited partner interests or general partner interests so affected. However,
our general partner may make amendments to our partnership agreement without the
approval of our limited partners or assignees 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;
- a change to qualify or continue our qualification as a limited
partnership or a partnership in which our limited partners have limited
liability under the laws of any state or to ensure that neither we, our
operating partnership, nor any of our subsidiaries will be treated as an
association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
- a change that does not adversely affect our limited partners in any
material respect;
- a change to (i) 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 or (ii) facilitate the trading of our limited partner
interests or comply with any rule, regulation, guideline or requirement
of any national securities exchange on which our limited partner
interests are or will be listed for trading;
- a change in our fiscal year or taxable year and any changes that are
necessary or advisable as a result of a change in our fiscal year or
taxable year;
- an amendment that is necessary to prevent us, or our general partner or
its directors, officers, trustees or agents from 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;
- an amendment that is necessary or advisable in connection with the
authorization or issuance of any class or series of our securities;
- any amendment expressly permitted in our partnership agreement to be made
by our general partner acting alone;
- an amendment effected, necessitated or contemplated by a merger agreement
approved in accordance with our partnership agreement;
- an amendment that is necessary or advisable to reflect, account for and
deal with appropriately our formation of, or investment in, any
corporation, partnership, joint venture, limited liability company or
35
other entity other than our operating partnership, in connection with our
conduct of activities permitted by our partnership agreement;
- a merger or conveyance to effect a change in our legal form; or
- any other amendments substantially similar to the foregoing.
WITHDRAWAL OR REMOVAL OF OUR GENERAL PARTNER
Our general partner has agreed not to withdraw voluntarily as our general
partner prior to December 31, 2008 without obtaining the approval of the holders
of a majority of our outstanding common units, excluding those held by our
general partner and its affiliates, and furnishing an opinion of counsel stating
that such withdrawal (following the selection of the successor general partner)
would not result in the loss of the limited liability of any of our limited
partners or of a member of our operating partnership or cause us or our
operating partnership to be treated as an association taxable as a corporation
or otherwise to be taxed as an entity for federal income tax purposes (to the
extent not previously treated as such).
On or after December 31, 2008, our general partner may withdraw as general
partner without first obtaining approval of any unitholder by giving 90 days'
written notice, and that withdrawal will not constitute a violation of our
partnership agreement. In addition, our general partner may withdraw without
unitholder approval upon 90 days' notice to our limited partners if at least 50%
of our outstanding common units are held or controlled by one person and its
affiliates other than our general partner and its affiliates.
Upon the voluntary withdrawal of our general partner, the holders of a
majority of our outstanding common units, excluding the common units held by the
withdrawing general partner and its affiliates, may elect a successor to the
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 90 days
after that withdrawal, the holders of a majority of our outstanding units,
excluding the common units held by the withdrawing general partner and its
affiliates, and the holders of a majority of the subordinated units, voting as
separate classes, agree to continue our business and to appoint a successor
general partner.
Our general partner may not be removed unless that removal is approved by
the vote of the holders of not less than two-thirds of our outstanding units,
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 this kind is also subject to the approval of a successor general partner by
the vote of the holders of a majority of our outstanding common units, including
those held by our general partner and its affiliates, and the holders of a
majority of the subordinated units, voting as separate classes.
While our partnership agreement limits the ability of our general partner
to withdraw, it allows the general partner interest to be transferred to an
affiliate or to a third party in conjunction with a merger or sale of all or
substantially all of the assets of our general partner. In addition, our
partnership agreement expressly permits the sale, in whole or in part, of the
ownership of our general partner. Our general partner may also transfer, in
whole or in part, the common units and subordinated units it owns.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the person authorized to wind up our affairs (the
liquidator) will, acting with all the powers of our general partner that
36
the liquidator deems necessary or desirable in its good faith judgment,
liquidate our assets. The proceeds of the liquidation will be applied as
follows:
- first, towards the payment of all of our creditors and the creation of
a reserve for contingent liabilities; and
- then, to all partners in accordance with the positive balance in the
respective capital accounts.
Under some circumstances and subject to some limitations, the liquidator
may defer liquidation or distribution of our assets for a reasonable period of
time. If the liquidator determines that a sale would be impractical or would
cause a loss to our partners, our general partner may distribute assets in kind
to our partners.
CHANGE OF MANAGEMENT PROVISIONS
Our partnership agreement contains the following specific provisions that
are intended to discourage a person or group from attempting to remove our
general partner or otherwise change management:
- if the holders, including the general partner and its affiliates, of at
least 66 2/3% of the units vote to remove the general partner without
cause, all remaining subordinated units will automatically convert into
common units and will share distributions with the existing common units
pro rata, existing arrearages on the common units will be extinguished
and the common units will no longer be entitled to arrearages if we fail
to pay the minimum quarterly distribution in any quarter. Cause is
narrowly defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding the general partner
liable for actual fraud, gross negligence or willful or wanton misconduct
in its capacity as our general partner;
- any units held by a person that owns 20% or more of any class of units
then outstanding, other than our general partner and its affiliates,
cannot be voted on any matter; and
- the partnership agreement contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting the unitholders' ability
to influence the manner or direction of management.
LIMITED CALL RIGHT
If at any time our general partner and its affiliates own 85% or more of
the issued and outstanding limited partner interests of any class, our general
partner will have the right to purchase all, but not less than all, of the
outstanding limited partner interests of that class that are held by
non-affiliated persons. The record date for determining ownership of the limited
partner interests would be selected by our general partner on at least 10 but
not more than 60 days' notice. The purchase price in the event of a purchase
under these provisions would be the greater of (1) the current market price (as
defined in our partnership agreement) of the limited partner interests of the
class as of the date three days prior to the date that notice is mailed to the
limited partners as provided in the partnership agreement and (2) the highest
cash price paid by our general partner or any of its affiliates for any limited
partner interest of the class purchased within the 90 days preceding the date
our general partner mails notice of its election to purchase the units. Under
our partnership agreement, Shell is not deemed to be an affiliate of our general
partner for purposes of this limited call right.
As of March 1, 2003, our general partner and its affiliates own 81,875,602
common units and 32,114,804 subordinated units, representing an aggregate 56.8%
limited partner interest in us.
INDEMNIFICATION
Under our partnership agreement, in most circumstances, we will indemnify
our general partner, its affiliates and their officers and directors to the
fullest extent permitted by law, from and against all losses, claims or damages
any of them may suffer by reason of their status as general partner, officer or
director, as long as the person seeking indemnity acted in good faith and in a
manner believed to be in or not opposed to our best interest. Any
indemnification under these provisions will only be out of our assets. Our
general
37
partner shall not be personally liable for, or have any obligation to contribute
or loan funds or assets to us to enable us to effectuate any indemnification. We
are authorized to purchase insurance against liabilities asserted against and
expenses incurred by persons for our activities, regardless of whether we would
have the power to indemnify the person against liabilities under our partnership
agreement.
REGISTRATION RIGHTS
Under our partnership agreement, we have agreed to register for resale
under the Securities Act of 1933, as amended (the "Securities Act") and
applicable state securities laws any common units, subordinated units or other
partnership securities proposed to be sold by our general partner or any of its
affiliates or their assignees if an exemption from the registration requirements
is not otherwise available. We are obligated to pay all expenses incidental to
the registration, excluding underwriting discounts and commissions.
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TAX CONSEQUENCES
This section is a summary of the material tax consequences that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States and, unless otherwise noted in the following discussion,
represents the opinion of Vinson & Elkins L.L.P., special counsel to the general
partner and us, insofar as it relates to matters of United States federal income
tax law 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.
The following discussion does not comment on all federal income tax matters
affecting us or the unitholders. Moreover, the discussion focuses on unitholders
who are individual citizens or residents of the United States and has only
limited application to corporations, estates, trusts, nonresident aliens or
other unitholders subject to specialized tax treatment, such as tax-exempt
institutions, foreign persons, individual retirement accounts (IRAs), real
estate investment trusts (REITs)or mutual funds. Accordingly, we recommend that
each prospective unitholder consult, and depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences particular to
him of the ownership or disposition of common units.
All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section, unless otherwise noted, are the
opinion of counsel and are based on the accuracy of the representations made by
us.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. Instead, we will rely on opinions and
advice of Vinson & Elkins L.L.P. Unlike a ruling, an opinion of counsel
represents only that counsel's best legal judgment and does not bind the IRS or
the courts. Accordingly, the opinions and statements made here may not be
sustained by a court if contested by the IRS. Any contest of this sort with the
IRS may materially and adversely impact the market for the common units and the
prices at which common units trade. In addition, the costs of any contest with
the IRS will be borne directly or indirectly by the unitholders and the general
partner. Furthermore, the tax treatment of us, or of an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read "-- Tax
Consequences of Unit Ownership -- Treatment of Short Sales");
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees"); and
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "-- Tax Consequences of Unit Ownership -- Section
754 Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of whether
cash distributions are made to him by the partnership. Distributions by a
partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
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
39
year consists of "qualifying income." Qualifying income includes income and
gains derived from the exploration, development, mining or production,
processing, refining, transportation and marketing of any mineral or natural
resource. 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 2% of
our current gross income is not qualifying income; however, this estimate could
change from time to time. Based upon and subject to this estimate, the factual
representations made by us and the general partner and a review of the
applicable legal authorities, counsel is of the opinion that at least 90% of our
current gross income constitutes qualifying income.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our status or the status of the Operating Partnership as
partnerships for federal income tax purposes or whether our operations generate
"qualifying income" under Section 7704 of the Internal Revenue Code. Instead, we
will rely on the opinion of counsel that, based upon the Internal Revenue Code,
its regulations, published revenue rulings and court decisions and the
representations described below, we and the Operating Partnership will be
classified as a partnership for federal income tax purposes.
In rendering its opinion, counsel has relied on factual representations
made by us and the general partner. The representations made by us and our
general partner upon which counsel has relied are:
(a) Neither we nor the Operating Partnership will elect to be treated as
a corporation; and
(b) For each taxable year, more than 90% of our gross income will be
income from sources that our counsel has opined or will opine is
"qualifying income" within the meaning of Section 7704(d) of the Internal
Revenue Code.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
in return for stock in that corporation, and then distributed that stock to the
unitholders in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and us so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
tax basis in his common units, or taxable capital gain, after the unitholder's
tax basis in his common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the units.
The discussion below is based on the conclusion that we will be classified
as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Company will be treated
as partners of the Company for federal income tax purposes. Also:
(a) assignees who have executed and delivered transfer applications, and
are awaiting admission as limited partners, and
(b) unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units,
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will be treated as partners of the Company 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, the opinion of Vinson & Elkins L.L.P. 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. We strongly
recommend that prospective unitholders consult their own tax advisors with
respect to their status as partners in the Company 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. Our taxable year ends on December 31.
Treatment of Distributions. Distributions by us to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "-- Disposition of Common Units"
below. Any reduction in a unitholder's share of our liabilities for which no
partner, including the general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. To the extent our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he must recapture
any losses deducted in previous years. Please read "-- Limitations on
Deductibility of Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his share of our nonrecourse
liabilities, and thus will result in a corresponding deemed distribution of
cash. A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his common units, if the
distribution reduces the unitholder's share of our "unrealized receivables,"
including depreciation recapture, and/or substantially appreciated "inventory
items," both as defined in the Internal Revenue Code, and collectively, "Section
751 Assets." To that extent, he will be treated as having been distributed his
proportionate share of the Section 751 Assets and having exchanged those assets
with us in return for the non-pro rata portion of the actual distribution made
to him. This latter deemed exchange will generally result in the unitholder's
realization of ordinary income. That income will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the unitholder's tax basis
for the share of Section 751 Assets deemed relinquished in the exchange.
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
unitholder will have no share of our debt which is
41
recourse to the general partner, but will have a share, generally based on his
share of profits, of our nonrecourse liabilities. Please read "-- Disposition of
Common Units -- Recognition of Gain or Loss."
Limitations on Deductibility of Losses. The deduction by a unitholder of
his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder, if more than 50%
of the value of the corporate unitholder's stock is owned directly or indirectly
by five or fewer individuals or some tax-exempt organizations, to the amount for
which the unitholder is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A unitholder must recapture
losses deducted in previous years to the extent that distributions cause his at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that his tax basis or at risk
amount, whichever is the limiting factor, is subsequently increased. Upon the
taxable disposition of a unit, any gain recognized by a unitholder can be offset
by losses that were previously suspended by the at risk limitation but may not
be offset by losses suspended by the basis limitation. Any excess loss above
that gain previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire or
hold his units, if the lender of those borrowed funds owns an interest in us, is
related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our nonrecourse
liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally corporate or
partnership activities in which the taxpayer does not materially participate,
only to the extent of the taxpayer's income from those passive activities. The
passive loss limitations are applied separately with respect to each
publicly-traded partnership. Consequently, any passive losses we generate will
be available to offset only our passive income generated in the future and will
not be available to offset income from other passive activities or investments,
including our investments or investments in other publicly-traded partnerships,
or salary or active business income. Passive losses that are not deductible
because they exceed a unitholder's share of income we generate may be deducted
in full when he disposes of his entire investment in us in a fully taxable
transaction with an unrelated party. The passive activity loss rules are applied
after other applicable limitations on deductions, including the at risk rules
and the basis limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." 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 earned by a publicly-traded
partnership will be treated as
42
investment income to unitholders. 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 the
general partner or any former unitholder, we are authorized to pay those taxes
from our funds. That payment, if made, will be treated as a distribution of cash
to the partner on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are authorized to
treat the payment as a distribution to all current unitholders. We are
authorized to amend the partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
later distributions, so that after giving effect to these distributions, the
priority and characterization of distributions otherwise applicable under the
partnership agreement is maintained as nearly as is practicable. Payments by us
as described above could give rise to an overpayment of tax on behalf of an
individual partner in which event the partner would be required to file a claim
in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made to the
common units in excess of distributions to the subordinated units, or incentive
distributions are made to the general partner, gross income will be allocated to
the recipients to the extent of these distributions. If we have a net loss for
the entire year, that loss will be allocated first to the general partner and
the unitholders in accordance with their percentage interests in us to the
extent of their positive capital accounts and, second, to the general partner.
Specified items of our income, gain, loss and deduction will be allocated
to account for the difference between the tax basis and fair market value of
property contributed to us by the general partner and its affiliates, referred
to in this discussion as "Contributed Property." The effect of these allocations
to a unitholder purchasing common units in this offering will be essentially the
same as if the tax basis of our assets were equal to their fair market value at
the time of an offering. In addition, items of recapture income will be
allocated to the extent possible to the partner who was allocated the deduction
giving rise to the treatment of that gain as recapture income in order to
minimize the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of our income and gain will be allocated in an amount and manner to
eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction, other than
an allocation required by the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the fair market value
of Contributed Property, and "tax" capital account, credited with the tax basis
of Contributed Property, referred to in this discussion as the "Book-Tax
Disparity", will generally be given effect for federal income tax purposes in
determining a partner's share of an item of income, gain, loss or deduction only
if the allocation has substantial economic effect. In any other case, a
partner's share of an item will be determined on the basis of his interest in
us, which will be determined by taking into account all the facts and
circumstances, including his relative contributions to us, the interests of all
the partners in profits and losses, the interest of all the partners in cash
flow and other nonliquidating distributions and rights of all the partners to
distributions of capital upon liquidation.
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
43
units during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period:
- any of our income, gain, loss or deduction with respect to those units
would not be reportable by the unitholder;
- any cash distributions received by the unitholder as to those units
would be fully taxable; and
- all of these distributions would appear to be ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership interests. Please
also read "-- Disposition of Common Units -- Recognition of Gain or Loss."
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The current minimum tax
rate for noncorporate taxpayers is 26% on the first $175,000 of alternative
minimum taxable income in excess of the exemption amount and 28% on any
additional alternative minimum taxable income. We strongly recommend that
prospective unitholders 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 currently is 38.6% and the maximum United States
federal income tax rate for net capital gains of an individual currently is 20%
if the asset disposed of was held for more than 12 months at the time of
disposition.
Section 754 Election. We have made the election permitted by Section 754
of the Internal Revenue Code. That election is irrevocable without the consent
of the IRS. The election generally permits 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 unitholders. For
purposes of this discussion, a unitholder'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
that, if the remedial allocation method is adopted (which we have adopted), a
portion of the Section 743(b) adjustment attributable to recovery property 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
but is arguably inconsistent with Treasury regulation Section 1.167(c)-1(a)(6).
To the extent this Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury regulations and legislative history. If we determine
that this position cannot reasonably be taken, we may take a depreciation
44
or amortization position under which all purchasers acquiring units in the same
month would receive depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same applicable rate as if
they had purchased a direct interest in our assets. This kind of aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to some unitholders. Please read "-- Tax Treatment
of Operations -- Uniformity of Units."
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have, among other items, a greater amount of depreciation
and depletion deductions and his share of any gain or loss on a sale of our
assets would be less. Conversely, a Section 754 election is disadvantageous if
the transferee's tax basis in his units is lower than those units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the units may be affected either favorably or unfavorably
by the election.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue Code. The IRS could
seek to reallocate some or all of any Section 743(b) adjustment allocated by us
to our tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. We cannot assure you that the determinations we
make will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether. Should the IRS
require a different basis adjustment to be made, and should, in our opinion, the
expense of compliance exceed the benefit of the 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 an offering will be
borne by our general partner, its affiliates and our unitholders as of that
time. 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.
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.
45
Please read "-- Tax Consequences of Unit Ownership -- Allocation of Income,
Gain, Loss and Deduction" and "-- Disposition of Common Units -- Recognition of
Gain or Loss."
The costs incurred in selling our units (called "syndication expenses")
must be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as a syndication cost.
Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates and determinations of basis
are subject to challenge and will not be binding on the IRS or the courts. If
the estimates of fair market value or 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%. A portion of this gain or loss, which will
likely be substantial, however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Net capital loss may offset
capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. Although the
ruling is unclear as to how the holding period of these interests is determined
once they are combined, recently finalized 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 Treasury regulations, may designate specific common units sold for
purposes of determining the holding period of units transferred. A unitholder
46
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. We strongly recommend that a unitholder considering
the purchase of additional units or a sale of common units purchased in separate
transactions consult his tax advisor as to the possible consequences of this
ruling and application of the final regulations.
Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or related persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the applicable
exchange on the first business day of the month (the "Allocation Date").
However, gain or loss realized on a sale or other disposition of our assets
other than in the ordinary course of business will be allocated among the
unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be allocated
income, gain, loss and deduction realized after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, 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, as well as among unitholders whose
interests vary during a taxable year, to conform to a method permitted under
future Treasury regulations.
A unitholder who owns units at any time during a quarter and who disposes
of them prior to the record date set for a cash distribution for that quarter
will be allocated items of our income, gain, loss and deductions attributable to
that quarter but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who sells or exchanges units is
required to notify us in writing of that sale or exchange within 30 days after
the sale or exchange. We are required to notify the IRS of that transaction and
to furnish specified information to the transferor and transferee. However,
these reporting requirements do not apply to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Failure to satisfy these reporting obligations may lead to the
imposition of substantial penalties.
Constructive Termination. We will be considered to have been terminated
for tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than 12
months of our taxable income or loss being includable in his taxable income for
the year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of
47
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, consistent with the regulations under Section 743, even
though that position may be inconsistent with Treasury regulation Section
1.167(c)-1(a)(6). Please read "-- Tax Consequences of Unit Ownership -- Section
754 Election." To the extent that the Section 743(b) adjustment is attributable
to appreciation in value in excess of the unamortized Book-Tax Disparity, we
will apply the rules described in the Treasury regulations and legislative
history. If we determine that this position cannot reasonably be taken, we may
adopt a depreciation and amortization position under which all purchasers
acquiring units in the same month would receive depreciation and amortization
deductions, whether attributable to a common basis or Section 743(b) adjustment,
based upon the same applicable rate as if they had purchased a direct interest
in our property. If this position is adopted, it may result in lower annual
depreciation and amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and amortization deductions
not taken in the year that these deductions are otherwise allowable. This
position will not be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on the unitholders.
If we choose not to utilize this aggregate method, we may use any other
reasonable depreciation and amortization method to preserve the uniformity of
the intrinsic tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If this
challenge were sustained, the uniformity of units might be affected, and the
gain from the sale of units might be increased without the benefit of additional
deductions. Please read "-- Disposition of Common Units -- Recognition of Gain
or Loss."
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder 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. Under rules applicable to publicly traded
48
partnerships, we will withhold (currently at the rate of 38.6%) on cash
distributions made quarterly to foreign unitholders. Each foreign unitholder
must obtain a taxpayer identification number from the IRS and submit that number
to our transfer agent on a Form W-8 BEN 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, Treasury regulations or administrative
interpretations of the IRS. Neither we nor counsel can assure prospective
unitholders that the IRS will not successfully contend in court that those
positions are impermissible. Any challenge by the IRS could negatively affect
the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each unitholder to adjust a prior year's
tax liability, and possibly may result in an audit of his own return. Any audit
of a unitholder's return could result in adjustments not related to our returns
as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code requires
that one partner be designated as the "Tax Matters Partner" for these purposes.
The partnership agreement names our general partner 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.
49
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. It is arguable
that we are not subject to the registration requirement on the basis that we
will not constitute a tax shelter. However, our general partner, as our
principal organizer, has registered us as a tax shelter with the Secretary of
Treasury because of the absence of assurance that we will not be subject to tax
shelter registration and in light of the substantial penalties which might be
imposed if registration is required and not undertaken.
ISSUANCE OF THIS REGISTRATION NUMBER DOES NOT INDICATE THAT INVESTMENT IN
US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
IRS.
We must supply our tax shelter registration number to unitholders, and 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
50
($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 AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will be subject to other taxes,
including state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in which you are a
resident. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in us. You will be required to file state income tax returns and to
pay state income taxes in some or all of the states in which we do business or
own property and may be subject to penalties for failure to comply with those
requirements. In some states, tax losses may not produce a tax benefit in the
year incurred and also may not be available to offset income in subsequent
taxable years. Some of the states may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a unitholder who is not a
resident of the state. Withholding, the amount of which may be greater or less
than a particular unitholder's income tax liability to the state, generally does
not relieve a nonresident unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to unitholders for
purposes of determining the amounts distributed by us. Please read "-- Tax
Consequences of Unit Ownership -- Entity-Level Collections." Based on current
law and our estimate of our future operations, our general partner anticipates
that any amounts required to be withheld will not be material. We may also own
property or do business in other states in the future.
It is the responsibility of each unitholder to investigate the legal and
tax consequences, under the laws of pertinent states and localities, of his
investment in us. Accordingly, we strongly recommend that each prospective
unitholder consult, and depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each unitholder to
file all state and local, as well as United States federal tax returns, that may
be required of him. Vinson & Elkins L.L.P. has not rendered an opinion on the
state or local tax consequences of an investment in us.
TAX CONSEQUENCES OF OWNERSHIP OF DEBT SECURITIES
A description of the material federal income tax consequences of the
acquisition, ownership and disposition of debt securities will be set forth in
the prospectus supplement relating to the offering of debt securities.
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SELLING UNITHOLDERS
In addition to covering our offering of securities, this Prospectus covers
the offering for resale of an unspecified number of common units by selling
unitholders. The applicable prospectus supplement will set forth, with respect
to each selling unitholder:
- the name of the selling unitholder,
- the nature of any position, office or other materials relationship which
the selling unitholder will have had within the prior three years with us
or any of our predecessors or affiliates,
- the number of common units owned by the selling unitholders prior to the
offering,
- the amount of common units to be offered for the selling unitholder's
account, and
- the amount and (if one percent or more) the percentage of the common
units to be owned by the selling unitholders after completion of the
offering.
PLAN OF DISTRIBUTION
We may sell the common units or debt securities directly, through agents,
or to or through underwriters or dealers. Please read the prospectus supplement
to find the terms of the common unit or debt securities offering including:
- the names of any underwriters, dealers or agents;
- the offering price;
- underwriting discounts;
- sales agents' commissions;
- other forms of underwriter or agent compensation;
- discounts, concessions or commissions that underwriters may pass on to
other dealers; and
- any exchange on which the common units or debt securities are listed.
We may change the offering price, underwriter discounts or concessions, or
the price to dealers when necessary. Discounts or commissions received by
underwriters or agents and any profits on the resale of common units or debt
securities by them may constitute underwriting discounts and commissions under
the Securities Act.
Unless we state otherwise in the prospectus supplement, underwriters will
need to meet certain requirements before purchasing common units or debt
securities. Agents will act on a "best efforts" basis during their appointment.
We will also state the net proceeds from the sale in the prospectus supplement.
Any brokers or dealers that participate in the distribution of the common
units or debt securities may be "underwriters" within the meaning of the
Securities Act for such sales. Profits, commissions, discounts or concessions
received by such broker or dealer may be underwriting discounts and commissions
under the securities act.
When necessary, we may fix common unit or debt securities distribution
using changeable, fixed prices, market prices at the time of sale, prices
related to market prices, or negotiated prices.
We may, through agreements, indemnify underwriters, dealers or agents who
participate in the distribution of the common units or debt securities against
certain liabilities including liabilities under the Securities Act. We may also
provide funds for payments such underwriters, dealers or agents may be required
to make. Underwriters, dealers and agents, and their affiliates may transact
with us and our affiliates in the ordinary course of their business.
52
DISTRIBUTION BY SELLING UNITHOLDERS
Distribution of any common units to be offered by one or more of the
selling unitholders may be effected from time to time in one or more
transactions (which may involve block transactions) (1) on the New York Stock
Exchange, (2) in the over-the-counter market, (3) in underwritten transactions;
(4) in transactions otherwise than on the New York Stock Exchange or in the
over-the-counter market or (5) in a combination of any of these transactions.
The transactions may be effected by the selling unitholders at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices or at fixed prices. The selling unitholders may
offer their shares through underwriters, brokers, dealers or agents, who may
receive compensation in the form of underwriting discounts, commissions or
concessions from the selling unitholders and/or the purchasers of the shares for
whom they act as agent. The selling unitholders may engage in short sales, short
sales against the box, puts and calls and other transactions in our securities,
or derivatives thereof, and may sell and deliver their common units in
connection therewith. In addition, the selling unitholders may from time to time
sell their common units in transactions permitted by Rule 144 under the
Securities Act.
As of the date of this prospectus, we have not engaged any underwriter,
broker, dealer or agent in connection with the distribution of common units
pursuant to this prospectus by the selling unitholders. To the extent required,
the number of common units to be sold, the purchase price, the name of any
applicable agent, broker, dealer or underwriter and any applicable commissions
with respect to a particular offer will be set forth in the applicable
prospectus supplement. The aggregate net proceeds to the selling unitholders
from the sale of their common units offered hereby will be the sale price of
those shares, less any commissions, if any, and other expenses of issuance and
distribution not borne by us.
The selling unitholders and any brokers, dealers, agents or underwriters
that participate with the selling unitholders in the distribution of shares may
be deemed to be "underwriters" within the meaning of the Securities Act, in
which event any discounts, concessions and commissions received by such brokers,
dealers, agents or underwriters and any profit on the resale of the shares
purchased by them may be deemed to be underwriting discounts and commissions
under the Securities Act.
The applicable prospectus supplement will set forth the extent to which we
will have agreed to bear fees and expenses of the selling unitholders in
connection with the registration of the common units being offered hereby by
them. We may, if so indicated in the applicable prospectus supplement, agree to
indemnify selling unitholders against certain civil liabilities, including
liabilities under the Securities Act.
WHERE YOU CAN FIND MORE INFORMATION
Enterprise Products Partners L.P. and Enterprise Products Operating L.P.
file combined annual, quarterly and current reports, and other information with
the Commission under the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"). You may read and copy any document we file at the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the Commission at 1-800-732-0330 for further information on
the public reference room. Our filings are also available to the public at the
Commission's web site at http://www.sec.gov. In addition, documents filed by us
can be inspected at the offices of the New York Stock Exchange, Inc. 20 Broad
Street, New York, New York 10002.
The Commission allows us to incorporate by reference into this prospectus
the information we file with it, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is part of this prospectus and later information that
we file with the Commission will automatically update and supersede this
information. Therefore, before you decide to invest in a particular offering
under this shelf registration, you should always check for reports we may have
filed with the Commission after the date of this prospectus. We incorporate by
reference the documents listed below filed by Enterprise Products Partners L.P.
and Enterprise Products Operating L.P. and any future filings
53
made by either company with the Commission under section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act until our offering is completed:
- Annual Report on Form 10-K for the fiscal year ended December 31, 2002,
Commission File Nos. 1-14323 and 333-93239-01;
- Current Report on Form 8-K filed with the Commission on January 10, 2003,
Commission File Nos. 1-14323 and 333-93239-01; and
- the description of the common units contained in the Registration
Statement on Form 8-A, initially filed with the Commission on July 21,
1998, and any subsequent amendment thereto filed for the purposes of
updating such description.
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request, a
copy of any document incorporated by reference in this prospectus, other than
exhibits to any such document not specifically described above. Requests for
such documents should be directed to Investor Relations, Enterprise Products
Partners L.P., 2727 North Loop West, Suite 700, Houston, Texas 77008-1038;
telephone number: (713) 880-6812.
We intend to furnish or make available to our unitholders within 90 days
(or such shorter period as the Commission may prescribe) following the close of
our fiscal year end annual reports containing audited financial statements
prepared in accordance with generally accepted accounting principles and furnish
or make available within 45 days (or such shorter period as the Commission may
prescribe) following the close of each fiscal quarter quarterly reports
containing unaudited interim financial information, including the information
required by Form 10-Q, for the first three fiscal quarters of each of our fiscal
years. Our annual report will include a description of any transactions with our
general partner or its affiliates, and of fees, commissions, compensation and
other benefits paid, or accrued to our general partner or its affiliates for the
fiscal year completed, including the amount paid or accrued to each recipient
and the services performed.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference contain various
forward-looking statements and information that are based on our beliefs and
those of our general partner, as well as assumptions made by us and information
currently available to us. When used in this prospectus, words such as
"anticipate," "project," "expect," "plan," "goal," "forecast," "intend,"
"could," "believe," "may" and similar expressions and statements regarding our
plans and objectives for future operations, are intended to identify forward-
looking statements. Although we and our general partner believe that such
expectations reflected in such forward-looking statements are reasonable,
neither we nor our general partner can give any assurances that such
expectations will prove to be correct. Such statements are subject to a variety
of risks, uncertainties and assumptions. If one or more of these risks or
uncertainties materialize, or if underlying assumptions prove incorrect, our
actual results may vary materially from those anticipated, estimated, projected
or expected.
You should not put undue reliance on any forward-looking statements. When
considering forward-looking statements, please review the risk factors described
under "Risk Factors" in this prospectus and in any prospectus supplement.
LEGAL MATTERS
Vinson & Elkins L.L.P., our counsel, will issue an opinion for us about the
legality of the common units and debt securities and the material federal income
tax considerations regarding the common units. Any underwriter will be advised
about other issues relating to any offering by their own legal counsel.
EXPERTS
The (i) consolidated financial statements and the related consolidated
financial statement schedules of Enterprise Products Partners L.P. and of
Enterprise Products Operating L.P. and subsidiaries as of
54
December 31, 2002 and 2001, and for each of the three years in the period ended
December 31, 2002, incorporated by reference in this prospectus, and (ii) the
balance sheet of Enterprise Products GP, LLC as of December 31, 2002,
incorporated by reference in this prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are
incorporated by reference herein (each such report expresses an unqualified
opinion and the reports for Enterprise Products Partners L.P. and Enterprise
Products Operating L.P. each include an explanatory paragraph referring to a
change in method of accounting for goodwill in 2002 and derivative instruments
in 2001 as discussed in Notes 8 and 1, respectively, to Enterprise Products
Partners L.P.'s and Enterprise Products Operating L.P.'s consolidated financial
statements, respectively) and have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
55
(ENTERPRISE PRODUCTS PARTNERS L.P. LOGO)
ENTERPRISE PRODUCTS PARTNERS L.P.
15,000,000 COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
---------------------------
PROSPECTUS SUPPLEMENT
APRIL 29, 2004
---------------------------
LEHMAN BROTHERS
UBS INVESTMENT BANK
---------------------------
CITIGROUP
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY
A.G. EDWARDS
WACHOVIA SECURITIES
SANDERS MORRIS HARRIS
---------------------------
KEYBANC CAPITAL MARKETS
JP MORGAN