| ENTERPRISE PRODUCTS PARTNERS L P Item 1A Risk Factors |
| An investment in our common units involves certain risks |
| If any of these risks were to occur, our business, results of operations, cash flows and financial condition could be materially adversely affected |
| In that case, the trading price of our common units could decline, and you could lose part or all of your investment |
| Among the key risk factors that may have a direct impact on our business, results of operations, cash flows and financial condition are: Risks Related to Our Business Changes in the prices of hydrocarbon products may materially adversely affect our results of operations, cash flows and financial condition |
| We operate predominantly in the midstream energy sector which includes gathering, transporting, processing, fractionating and storing natural gas, NGLs and crude oil |
| As such, our 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 |
| Generally, the prices of natural gas, NGLs, crude oil and other hydrocarbon products are subject to fluctuations in response to changes in supply, demand, 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 |
| We are exposed to natural gas and NGL commodity price risk under certain of our natural gas processing and gathering and NGL fractionation contracts that provide for our fees 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 our results of operations, cash flows and financial position |
| A decline in the volume of natural gas, NGLs and crude oil delivered to our facilities could adversely affect our results of operations, cash flows and financial condition |
| Our profitability could be materially impacted by a decline in the volume of natural gas, NGLs and crude oil transported, gathered or processed at our 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 our facilities |
| The crude oil, natural gas and NGLs available to our facilities will be derived from reserves produced from existing wells, which reserves naturally decline over time |
| To offset this natural decline, our facilities will need access to additional reserves |
| Additionally, some of our facilities will be dependent 15 _________________________________________________________________ [52]Table of Contents 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 beyond our control and can adversely affect the decision by producers to explore for and develop new reserves |
| These factors could include relatively low oil and natural gas prices, cost and availability of equipment and labor, regulatory changes, capital budget limitations, the lack of available capital or the probability of success in finding hydrocarbons |
| 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 our facilities are located |
| This could result in a decrease in volumes to our offshore platforms, natural gas processing plants, natural gas, crude oil and NGL pipelines, and NGL fractionators, which would have a material adverse affect on our results of operations, cash flows and financial position |
| Additional reserves, if discovered, may not be developed in the near future or at all |
| A decrease in demand for NGL products by the petrochemical, refining or heating industries could materially adversely affect our results of operations, cash flows and financial position |
| A decrease 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 our results of operations, cash flows and financial position |
| 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 |
| 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 we transport |
| A 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, our operating margin from selling isobutane could be reduced |
| A 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 |
| 16 _________________________________________________________________ [53]Table of Contents We face competition from third parties in our midstream businesses |
| Even if reserves exist in the areas accessed by our facilities and are ultimately produced, we may not be chosen by the producers in these areas to gather, transport, process, fractionate, store or otherwise handle the hydrocarbons that are produced |
| We 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 |
| Our future debt level may limit our future financial and operating flexibility |
| As of December 31, 2005, we had approximately dlra4dtta8 billion of consolidated debt outstanding |
| The amount of our future debt could have significant effects on our operations, including, among other things: § a significant portion of our cash flow could be dedicated to the payment of principal and interest on our future debt and may not be available for other purposes, including the payment of distributions on our common units and capital expenditures; § credit rating agencies may view our debt level negatively; § covenants contained in our existing debt arrangements will require us to continue to meet financial tests that may adversely affect our flexibility in planning for and reacting to changes in our business; § our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general partnership purposes may be limited; § we may be at a competitive disadvantage relative to similar companies that have less debt; and § we may be more vulnerable to adverse economic and industry conditions as a result of our significant debt level |
| Our public debt indentures currently do not limit the amount of future indebtedness that we can create, incur, assume or guarantee |
| Although our Multi-Year Revolving Credit Facility restricts our ability to incur additional debt above certain levels, any debt we may incur in compliance with these restrictions may still be substantial |
| For information regarding our Multi-Year Revolving Credit Facility, please read Note 14 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report |
| Our Multi-Year Revolving Credit Facility and each of our indentures for our public debt contain conventional financial covenants and other restrictions |
| For example, we are prohibited from making distributions to our partners if such distributions would cause an event of default or otherwise violate a covenant under our Multi-Year Revolving Credit Facility |
| A breach of any of these restrictions by us could permit our lenders or noteholders, as applicable, to declare all amounts outstanding under these debt agreements to be immediately due and payable and, in the case of our Multi-Year Revolving Credit Facility, to terminate all commitments to extend further credit |
| For additional information regarding our Multi-Year Revolving Credit Facility, please read Note 14 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report |
| 17 _________________________________________________________________ [54]Table of Contents Our ability to access capital markets to raise capital on favorable terms will be affected by our debt level, the amount of our debt maturing in the next several years and current maturities, and by prevailing market conditions |
| Moreover, if the rating agencies were to downgrade our credit ratings, then we could experience an increase in our borrowing costs, difficulty assessing capital markets or a reduction in the market price of our common units |
| Such a development could adversely affect our ability to obtain financing for working capital, capital expenditures or acquisitions or to refinance existing indebtedness |
| If we are unable to access the capital markets on favorable terms in the future, we might be forced to seek extensions for some of our short-term securities 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, if at all, could be more onerous than those contained in existing debt agreements |
| Any such arrangements could, in turn, increase the risk that our leverage may adversely affect our future financial and operating flexibility and thereby impact our ability to pay cash distributions at expected rates |
| We may not be able to fully execute our growth strategy if we encounter illiquid capital markets or increased competition for investment opportunities |
| Our strategy 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 our ability to compete effectively and diversifying our asset portfolio, thereby providing more stable cash flow |
| We regularly consider and enter into discussions regarding, and are currently contemplating and/or pursuing, potential joint ventures, stand alone projects or other transactions that we believe will present opportunities to realize synergies, expand our role in the energy infrastructure business and increase our market position |
| We will require substantial new capital to finance the future development and acquisition of assets and businesses |
| Any limitations on our access to capital will impair our ability to execute this strategy |
| If the cost of such capital becomes too expensive, our ability to develop or acquire accretive assets will be limited |
| We may not be able to raise the necessary funds on satisfactory terms, if at all |
| The primary factors that influence our initial cost of equity include market conditions, fees we pay to underwriters and other offering costs, which include amounts we pay for legal and accounting services |
| The primary factors influencing our cost of borrowing include interest rates, credit spreads, covenants, underwriting or loan origination fees and similar charges we pay to lenders |
| In addition, we are experiencing increased competition for the types of assets and businesses we have historically purchased or acquired |
| Increased competition for a limited pool of assets could result in our losing to other bidders more often or acquiring assets at less attractive prices |
| Either occurrence would limit our ability to fully execute our growth strategy |
| Our inability to execute our growth strategy may materially adversely affect our ability to maintain or pay higher distributions in the future |
| Our growth strategy may adversely affect our results of operations if we do not successfully integrate the businesses that we acquire or if we substantially increase our indebtedness and contingent liabilities to make acquisitions |
| Our growth strategy includes making accretive acquisitions |
| As a result, from time to time, we will evaluate and acquire assets and businesses that we believe complement our existing operations |
| We may incur substantial expenses or encounter delays or other problems in connection with our growth strategy that could negatively impact our 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; § establishing the internal controls and procedures that we are required to maintain under the Sarbanes-Oxley Act of 2002; 18 _________________________________________________________________ [55]Table of Contents § managing relationships with new joint venture partners with whom we have not previously partnered; § 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, our capitalization and results of operations may change significantly following an acquisition |
| A substantial increase in our indebtedness and contingent liabilities could have a material adverse effect on our results of operations, cash flows and financial condition |
| In addition, any anticipated benefits of a material acquisition, such as expected cost savings, may not be fully realized, if at all |
| We may incur substantial expenses or encounter delays or other problems in connection with our growth strategy that could negatively impact our results of operations, cash flows and financial condition |
| 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 and amortization expenses |
| As a result, our capitalization and results of operations may change significantly following an acquisition |
| A substantial increase in our indebtedness and contingent liabilities could have a material adverse effect on our results of operations, cash flows and financial condition |
| Our operating cash flows from our capital projects may not be immediate |
| We are engaged in several construction projects involving existing and new facilities for which significant capital has been or will be expended, and our operating cash flow from a particular project may not increase until a period of time after its completion |
| For instance, if we build a new pipeline or platform or expand an existing facility, the design, construction, development and installation may occur over an extended period of time, and we may not receive any material increase in operating cash flow from that project until a period of time after it is placed in service |
| If we experience any unanticipated or extended delays in generating operating cash flow from these projects, we may be required to reduce or reprioritize our capital budget, sell non-core assets, access the capital markets or decrease or limit distributions to unitholders in order to meet our capital requirements |
| Our actual construction, development and acquisition costs could exceed forecasted amounts |
| We will have significant expenditures for the development and construction of energy infrastructure assets, including some construction and development projects with significant technological challenges |
| We may not be able to complete our projects at the costs estimated at the time of each project’s initiation |
| Substantially all of the common units in us that are owned by EPCO and its affiliates are pledged as security under EPCO’s credit facility |
| Additionally, all of the member interests in our general partner and all of the common units in us that are owned by Enterprise GP Holdings are pledged under its credit facility |
| Upon an event of default under either of these credit facilities, a change in ownership or control of us could ultimately result |
| 19 _________________________________________________________________ [56]Table of Contents An affiliate of EPCO has pledged substantially all of its common units in us as security under its credit facility |
| EPCO’s credit facility contains customary and other events of default relating to defaults of EPCO and certain of its subsidiaries, including certain defaults by us and other affiliates of EPCO An event of default, followed by a foreclosure on EPCO’s pledged collateral, could ultimately result in a change in ownership of us |
| In addition, the 100prca membership interest in our general partner and the 13cmam454cmam498 of our common units that are owned by Enterprise GP Holdings are pledged under Enterprise GP Holdings’ credit facility |
| Enterprise GP Holdings’ credit facility contains customary and other events of default |
| Upon an event of default, the lenders under Enterprise GP Holdings’ credit facility could foreclose on Enterprise GP Holdings’ assets, which could ultimately result in a change in control of our general partner and a change in the ownership of our units held by Enterprise GP Holdings |
| The credit and risk profile of our general partner and its owners could adversely affect our credit ratings and profile |
| The credit and business risk profiles of the general partner or owners of a general partner may be factors in credit evaluations of a master limited partnership |
| This is because the general partner can exercise significant influence over the business activities of the partnership, including its cash distribution and acquisition strategy and business risk profile |
| Another factor that may be considered is the financial condition of the general partner and its owners, including the degree of their financial leverage and their dependence on cash flow from the partnership to service their indebtedness |
| Entities controlling the owner of our general partner have significant indebtedness outstanding and are dependent principally on the cash distributions from their general partner and limited partner equity interests in us to service such indebtedness |
| Any distributions by us to such entities will be made only after satisfying our then current obligations to our creditors |
| Although we have taken certain steps in our organizational structure, financial reporting and contractual relationships to reflect the separateness of us and Enterprise Products GP from the entities that control Enterprise Products GP, our credit ratings and business risk profile could be adversely affected if the ratings and risk profiles of the entities that control our general partner were viewed as substantially lower or more risky than ours |
| The interruption of distributions to us from our subsidiaries and joint ventures may affect our ability to satisfy our obligations and to make distributions to our partners |
| We are a holding company with no business operations |
| Our only significant assets are the equity interests we own in our subsidiaries and joint ventures |
| As a result, we depend upon the earnings and cash flow of our subsidiaries and joint ventures and the distribution of that cash to us in order to meet our obligations and to allow us to make distributions to our partners |
| In addition, the charter documents governing our joint ventures typically vest in the joint venture management committee sole discretion regarding the occurrence and amount of distributions |
| Some of the joint ventures in which we participate have separate credit agreements that contain various restrictive covenants |
| Among other things, those covenants may limit or restrict the joint venture’s ability to make distributions to us under certain circumstances |
| Accordingly, our joint ventures may be unable to make distributions to us at current levels if at all |
| We may be unable to cause our joint ventures to take or not to take certain actions unless some or all of our joint venture participants agree |
| We participate in several joint ventures |
| Due to the nature of some of these arrangements, each participant in these joint ventures has made substantial investments in the joint venture and, accordingly, has required that the relevant charter 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, 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 customarily 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 100prca) to authorize more significant 20 _________________________________________________________________ [57]Table of Contents 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, we may be unable to cause any of our joint ventures to take or not to take certain actions, even though those actions may be in the best interest of us or the particular joint venture |
| 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 us being required to partner with different or additional parties |
| A natural disaster, catastrophe or other event could result in severe personal injury, property damage and environmental damage, which could curtail our operations and otherwise materially adversely affect our cash flow and, accordingly, affect the market price of our common units |
| Some of our operations involve risks of personal injury, property damage and environmental damage, which could curtail our operations and otherwise materially adversely affect our cash flow |
| For example, natural gas facilities operate at high pressures, sometimes in excess of 1cmam100 pounds per square inch |
| We 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 our operations are exposed to potential natural disasters, including hurricanes, tornadoes, storms, floods and/or earthquakes |
| If one or more facilities that are owned by us or that deliver oil, natural gas or other products to us are damaged by severe weather or any other disaster, accident, catastrophe or event, our operations could be significantly interrupted |
| Similar interruptions could result from damage to production or other facilities that supply our facilities or other stoppages arising from factors beyond our 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 we are a party to obligate us to indemnify our customers for any damage or injury occurring during the period in which the customers’ natural gas is in our possession |
| Any event that interrupts the revenues generated by our operations, or which causes us to make significant expenditures not covered by insurance, could reduce our cash available for paying distributions and, accordingly, adversely affect the market price of our common units |
| We believe that EPCO maintains adequate insurance coverage on behalf of us, 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, EPCO may not be able to renew existing insurance policies on behalf of us or procure other desirable insurance on commercially reasonable terms, if at all |
| If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position and results of operations |
| An impairment of goodwill and intangible assets could reduce our earnings |
| At December 31, 2005, our balance sheet reflected dlra494 million of goodwill and dlra913dtta6 million of 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 |
| Generally accepted accounting principles in the United States (otherwise known as “GAAP”) require us 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 we determine that any of our goodwill or intangible assets were impaired, we would be required to take an immediate charge to earnings 21 _________________________________________________________________ [58]Table of Contents with a correlative effect on partners’ equity and balance sheet leverage as measured by debt to total capitalization |
| Increases in interest rates could materially adversely affect our business, results of operations, cash flows and financial condition |
| In addition to our exposure to commodity prices, we have significant exposure to increases in interest rates |
| As of December 31, 2005, we had approximately dlra4dtta8 billion of consolidated debt, of which approximately dlra3dtta3 billion was at fixed interest rates and approximately dlra1dtta5 billion was at variable interest rates, after giving effect to existing interest swap arrangements |
| From time to time, we may enter into additional interest rate swap arrangements, which could increase our exposure to variable interest rates |
| As a result, our results of operations, cash flows and financial condition, could be materially adversely affected by significant increases in interest rates |
| An increase in interest rates may also cause a corresponding decline in demand for equity investments, in general, and in particular for yield-based equity investments such as our common units |
| Any such reduction in demand for our common units resulting from other more attractive investment opportunities may cause the trading price of our common units to decline |
| The use of derivative financial instruments could result in material financial losses by us |
| We 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 |
| 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 |
| Our pipeline integrity program may impose significant costs and liabilities on us |
| The US Department of Transportation issued final rules (effective March 2001 with respect to hazardous liquid pipelines and February 2004 with respect to natural gas pipelines) requiring pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rules refer to as “high consequence areas |
| ” The final rule resulted from the enactment of the Pipeline Safety Improvement Act of 2002 |
| At this time, we cannot predict the ultimate costs of compliance with this rule because those costs will depend on the number and extent of any repairs found to be necessary as a result of the pipeline integrity testing that is required by the rule |
| We will continue our pipeline integrity testing programs to assess and maintain the integrity of our pipelines |
| The results of these tests could cause us to incur significant and unanticipated capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines |
| Environmental costs and liabilities and changing environmental regulation could materially affect our results of operations, cash flows and financial condition |
| Our operations are 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 |
| We will make expenditures in connection with environmental matters as part of normal capital expenditure programs |
| However, future environmental law developments, such as stricter laws, 22 _________________________________________________________________ [59]Table of Contents regulations, permits or enforcement policies, could significantly increase some costs of our operations, including the handling, manufacture, use, emission or disposal of substances and wastes |
| Federal, state or local regulatory measures could materially adversely affect our business, results of operations, cash flows and financial condition |
| The FERC regulates our interstate natural gas pipelines and interstate natural gas storage facilities under the Natural Gas Act, and interstate NGL and petrochemical pipelines under the ICA The STB regulates our interstate propylene pipelines |
| State regulatory agencies regulate our intrastate natural gas and NGL pipelines, intrastate storage facilities and gathering lines |
| Under the Natural Gas Act, the FERC has authority to regulate natural gas companies that provide natural gas pipeline transportation services in interstate commerce |
| Its authority to regulate those services is comprehensive and includes the rates charged for the services, terms and condition of service and certification and construction of new facilities |
| The FERC requires that our services are provided on a non-discriminatory basis so that all shippers have open access to our pipelines and storage |
| Pursuant to the FERC’s jurisdiction over interstate gas pipeline rates, existing pipeline rates may be challenged by customer complaint or by the FERC Staff and proposed rate increases may be challenged by protest |
| We have interests in natural gas pipeline facilities offshore from Texas and Louisiana |
| These facilities are subject to regulation by the 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 |
| We also have natural gas underground storage facilities in Louisiana, Mississippi and Texas |
| Although state regulation is typically less onerous than at the FERC, proposed and existing rates subject to state regulation and the provision of services on a non-discriminatory basis are also subject to challenge by protest and complaint, respectively |
| For a general overview of federal, state and local regulation applicable to our assets, please read the regulation and environmental information included under Item 1 of this annual report |
| This regulatory oversight can affect certain aspects of our business and the market for our products and could materially adversely affect our cash flows |
| Terrorist attacks aimed at our facilities could adversely affect our business, results of operations, cash flows and financial condition |
| 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 or pipelines or those of our customers could have a material adverse effect on our business |
| We depend on the leadership and involvement of Dan L Duncan and other key personnel for the success of our and our subsidiaries’ businesses |
| We depend on the leadership, involvement and services of Dan L Duncan, the founder of EPCO and the Chairman of our general partner |
| Duncan has been integral to our success and the success of EPCO due in part to his ability to identify and develop business opportunities, make strategic decisions and attract and retain key personnel |
| The loss of his leadership and involvement or the services of any members of our senior management team could have a material adverse effect on our business, results of operations, cash flows and financial condition |
| 23 _________________________________________________________________ [60]Table of Contents Some of our executive officers and directors face potential conflicts of interest in managing our business |
| Certain of our executive officers and directors are also officers and/or directors of EPCO, the general partner of Enterprise GP Holdings, the general partner of TEPPCO and other affiliates of EPCO These relationships may create conflicts of interest regarding corporate opportunities and other matters |
| The resolution of any such conflicts may not always be in our or our unitholders’ best interests |
| In addition, these overlapping executive officers and directors allocate their time among EPCO, Enterprise GP Holdings, TEPPCO and other affiliates of EPCO These officers and directors face potential conflicts regarding the allocation of their time, which may adversely affect our business, results of operations and financial condition |
| Please read Item 10 of this annual report for more detailed information on which of our officers and directors serve as officers and/or directors of EPCO, the general partner of Enterprise GP Holdings, the general partner of TEPPCO and other affiliates of EPCO Risks Related to Our Common Units as a Result of Our Partnership Structure We may issue additional securities without the approval of our common unitholders |
| Subject to NYSE rules, we may issue an unlimited number of limited partner interests of any type (to parties other than our affiliates) without the approval of our unitholders |
| Our partnership agreement does not give our common unitholders the right to approve the issuance of equity securities including equity securities ranking senior to our 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 a common unit will decrease; § the amount of cash available for distributions on each unit may decrease; § the ratio of taxable income to distributions may increase; § the relative voting strength of each previously outstanding unit may be diminished; and § the market price of our common units may decline |
| 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 Enterprise Products GP 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 Enterprise Products GP 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; § fluctuations in our working capital needs; 24 _________________________________________________________________ [61]Table of Contents § the cost of acquisitions, if any; and § the amount, if any, of cash reserves established by Enterprise Products GP in its sole 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, 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 |
| We do not have the same flexibility as other types of organizations to accumulate cash and equity to protect against illiquidity in the future |
| Unlike a corporation, our partnership agreement requires us to make quarterly distributions to our unitholders of all available cash reduced by any amounts of reserves for commitments and contingencies, including capital and operating costs and debt service requirements |
| The value of our units and other limited partner interests may decrease in direct correlation with decreases in the amount we distribute per unit |
| Accordingly, if we experience a liquidity problem in the future, we may not be able to issue more equity to recapitalize |
| Cost reimbursements and fees due to Enterprise Products GP may be substantial and will reduce our cash available for distribution to holders of our units |
| Prior to making any distribution on our units, we will reimburse Enterprise Products GP and its affiliates, including officers and directors of Enterprise Products GP, for expenses they incur on our behalf |
| The reimbursement of expenses could adversely affect our ability to pay cash distributions to holders of our units |
| Enterprise Products GP has sole discretion to determine the amount of these expenses |
| In addition, Enterprise Products GP and its affiliates may provide other services to us for which we will be charged fees as determined by Enterprise Products GP Enterprise Products GP and its affiliates have limited fiduciary responsibilities to, and conflicts of interest with respect to, our partnership, which may permit it to favor its own interests to your detriment |
| The directors and officers of Enterprise Products GP and its affiliates have duties to manage Enterprise Products GP in a manner that is beneficial to its members |
| At the same time, Enterprise Products GP has duties to manage our partnership in a manner that is beneficial to us |
| Therefore, Enterprise Products GP’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: § neither our partnership agreement nor any other agreement requires Enterprise Products GP or EPCO to pursue a business strategy that favors us; § decisions of Enterprise Products GP 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 Enterprise Products GP; § under our partnership agreement, Enterprise Products GP determines which costs incurred by it and its affiliates are reimbursable by us; § Enterprise Products GP is allowed to resolve any conflicts of interest involving us and Enterprise Products GP and its affiliates; 25 _________________________________________________________________ [62]Table of Contents § Enterprise Products GP is allowed to resolve any conflicts of interest involving us and Enterprise Products GP and its affiliates; § Enterprise Products GP is allowed to take into account the interests of parties other than us, such as EPCO, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to unitholders; § any resolution of a conflict of interest by Enterprise Products GP not made in bad faith and that is fair and reasonable to us shall be binding on the partners and shall not be a breach of our partnership agreement; § affiliates of Enterprise Products GP, including TEPPCO, may compete with us in certain circumstances; § Enterprise Products GP has limited its liability and reduced its fiduciary duties and has also restricted the remedies available to our unitholders for actions that might, without the limitations, constitute breaches of fiduciary duty |
| As a result of purchasing our 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 EPCO and its affiliates; § in some instances, Enterprise Products GP 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 incentive distributions; § our partnership agreement does not restrict Enterprise Products GP from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf; § Enterprise Products GP intends to limit its liability regarding our contractual and other obligations and, in some circumstances, may be entitled to be indemnified by us; § Enterprise Products GP controls the enforcement of obligations owed to us by our general partner and its affiliates; and § Enterprise Products GP decides whether to retain separate counsel, accountants or others to perform services for us |
| We have significant business relationships with entities controlled by Dan L Duncan, including EPCO and TEPPCO For detailed information on these relationships and related transactions with these entities, please read Item 13 included within this annual report |
| Even if unitholders are dissatisfied, they cannot easily remove Enterprise Products GP 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 Enterprise Products GP or its directors and will have no right to elect our general partner or its directors on an annual or other continuing basis |
| Furthermore, if unitholders are dissatisfied with the performance of our general partner, they currently have no practical ability to remove Enterprise Products GP or the officers or directors of Enterprise Products GP Enterprise Products GP may not be removed except upon the vote of the holders of at least 60prca of our outstanding units voting together as a single class |
| Because affiliates of Enterprise Products GP currently own approximately 35dtta6prca of our outstanding common units, the removal of Enterprise Products GP as our general partner is not practicable without the consent of both Enterprise Products GP and its affiliates |
| 26 _________________________________________________________________ [63]Table of Contents Unitholders’ voting rights are further restricted by a provision in our partnership agreement stating that any units held by a person that owns 20prca or more of any class of our units then outstanding, other than our general partner and its affiliates, cannot be voted on any matter |
| In addition, our 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 our unitholders’ ability to influence the manner or direction of our management |
| As a result of these provisions, the trading price of our common units may be lower than other forms of equity ownership because of the absence or reduction of a takeover premium in the trading price |
| Enterprise Products GP has a limited call right that may require common unitholders to sell their units at an undesirable time or price |
| If at any time Enterprise Products GP and its affiliates own 85prca or more of the common units then outstanding, Enterprise Products GP 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 the 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 |
| Our 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 our partnership agreement constituted participation in the “control” of our business |
| Under Delaware law, our general partner generally has unlimited liability for our obligations, such as our debts and environmental liabilities, except for those of our contractual obligations that are expressly made without recourse to our 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 |
| A large number of our outstanding common units may be sold in the market, which may depress the market price of our common units |
| Shell owns 29cmam407cmam549 of our common units, representing approximately 7dtta5prca of our outstanding common units at February 15, 2006, and 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 |
| All of the common units held by Shell are registered for resale under our effective registration statement on Form S-3 |
| Sales of a substantial number of our common units in the public market could cause the market price of our common units to decline |
| As of February 22, 2006, we had 390cmam308cmam358 common units outstanding |
| Sales of a substantial number of these common 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 |
| 27 _________________________________________________________________ [64]Table of Contents Tax Risks to Common Unitholders If we were to become subject to entity level taxation for federal or state tax purposes, then our cash available for distribution to our common unitholders would be substantially reduced |
| The anticipated after-tax economic benefit of an investment in our 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 Internal Revenue Service (“IRS”) on this matter |
| If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35prca, and we likely would pay state taxes as well |
| Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow though to our unitholders |
| Because a tax would be imposed upon us as a corporation, the cash available for distributions to our common unitholders would be substantially reduced |
| Therefore, treatment of us as a corporation would result in a material reduction in the after-tax return to our common unitholders, likely causing a substantial reduction in the value of our common units |
| Current law may change, causing us to be treated as a corporation for federal income tax purposes or otherwise subjecting us to entity level taxation |
| For example, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation |
| If any state were to impose a tax upon us as an entity, the cash available for distribution to our common unitholders would be reduced |
| A successful IRS contest of the federal income tax positions we take may adversely impact the market for our common units, and the costs of any contests will be borne by our unitholders and our general partner |
| The IRS may adopt positions that differ from the positions we take, even positions taken with advice of counsel |
| It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take |
| A court may not agree with some or all of the positions we take |
| Any contest with the IRS may materially and adversely impact the market for our common units and the price at which our common units 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 |
| Even if our common unitholders do not receive any cash distributions from us, they will be required to pay taxes on their share of our taxable income |
| Common unitholders will be required to pay federal income taxes and, in some cases, state and local income taxes on their share of our taxable income even if they do not receive any cash distributions from us |
| Our common unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability which results from their share of our taxable income |
| Tax gain or loss on the disposition of our common units could be different than expected |
| If a common unitholder sells its common units, the unitholder will recognize a gain or loss equal to the difference between the amount realized and the unitholder’s tax basis in those common units |
| Prior distributions to a unitholder in excess of the total net taxable income a unitholder is allocated for a common unit, which decreased the unitholder’s tax basis in that common unit, will, in effect, become taxable income to the unitholder if the common unit is sold at a price greater than the unitholder’s tax basis in that common unit, even if the price the unitholder receives is less than the unitholder’s original cost |
| A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to a unitholder |
| 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 |
| 28 _________________________________________________________________ [65]Table of Contents Investments 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 |
| Recent legislation treats net income derived from the ownership of certain publicly traded partnerships (including us) as qualifying income to a regulated investment company |
| Distributions to non-US persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-US persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income |
| We will treat each purchaser of our 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 our common units or result in audit adjustments to the common unitholder’s tax returns |
| Our common unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of an investment in our common units |
| In addition to federal income taxes, our 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 |
| Our common unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions |
| Further, they may by subject to penalties for failure to comply with those requirements |
| We may own property or conduct business in other states or foreign countries in the future |
| It is the responsibility of the common unitholder to file all United States federal, state and local tax returns |
| The sale or exchange of 50prca or more of our capital and profits interests during any twelve- month period will result in the termination of our partnership for federal income tax purposes |
| We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50prca or more of the total interests in our capital and profits within a twelve-month period |
| Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income |