e424b4
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-138747
PROSPECTUS
TARGA RESOURCES PARTNERS
LP
16,800,000 Common
Units
Representing Limited Partner
Interests
Targa Resources Partners LP is a limited partnership recently
formed by Targa Resources, Inc. This is the initial public
offering of our common units. All of the common units are being
sold by us. Prior to this offering, there has been no public
market for our common units. Our common units have been approved
for listing on The NASDAQ Global Market under the symbol
NGLS.
Investing in our common units
involves risks. Please see Risk Factors beginning on
page 17.
These risks include the following:
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We may not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner, to enable
us to make cash distributions to holders of our common units and
subordinated units at the initial distribution rate under our
cash distribution policy.
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Our cash flow is affected by natural gas and natural gas liquid
prices, and decreases in these prices could adversely affect our
ability to make distributions to holders of our common units and
subordinated units.
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Because of the natural decline in production from existing wells
in our operating regions, our success depends on our ability to
obtain new sources of supplies of natural gas and natural gas
liquids, which depends on certain factors beyond our control.
Any decrease in supplies of natural gas or natural gas liquids
could adversely affect our business and operating results.
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Our hedging activities may not be effective in reducing the
variability of our cash flows and may, in certain circumstances,
increase the variability of our cash flows. In addition, the
significant contribution to our results of operations that we
are currently receiving from our hedge positions will decrease
substantially through 2010.
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We depend on one natural gas producer for a significant portion
of our supply of natural gas. The loss of this customer or
replacement of its contracts on less favorable terms could
result in a decline in our volumes, revenues and cash available
for distribution.
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Targa Resources, Inc. controls our general partner, which has
sole responsibility for conducting our business and managing our
operations. Targa Resources, Inc. has conflicts of interest with
us and may favor its own interests to your detriment.
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Targa Resources, Inc. is not limited in its ability to compete
with us, which could limit our ability to acquire additional
assets or businesses.
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Holders of our common units have limited voting rights and are
not entitled to elect our general partner or its directors.
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You may be required to pay taxes on your share of our income
even if you do not receive any cash distributions from us.
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Per Common Unit
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Total
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Public Offering Price
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$
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21.0000
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$
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352,800,000
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Underwriting Discount(1)
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$
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1.2075
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$
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20,286,000
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Proceeds to Targa Resources
Partners LP (before expenses)(2)
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$
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19.7925
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$
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332,514,000
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(1)
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Excludes an aggregate structuring
fee equal to 0.4% of the gross proceeds of this offering, or
approximately $1.4 million, payable to Citigroup Global
Markets Inc., Goldman, Sachs & Co., UBS Securities LLC
and Merrill Lynch & Co.
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(2)
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We will pay approximately
$322.9 million of the proceeds we receive from this
offering to Targa Resources, Inc. to retire a portion of our
affiliate indebtedness.
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We have granted the underwriters a
30-day
option to purchase up to an additional 2,520,000 common units
from us on the same terms and conditions as set forth above if
the underwriters sell more than 16,800,000 common units in this
offering.
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.
The underwriters expect to deliver the common units through the
facilities of The Depository Trust Company on or about
February 14, 2007.
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Citigroup |
Goldman,
Sachs &
Co. |
UBS
Investment
Bank |
Merrill
Lynch & Co. |
February 8, 2007
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167
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168
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171
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171
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171
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171
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F-1
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A-1
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B-1
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You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with different information. If
anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should
assume that the information appearing in this prospectus is
accurate as of the date on the front cover of this prospectus.
Our business, financial condition, results of operations and
prospects may have changed since that date.
Until March 5, 2007 (25 days after the date of this
prospectus), all dealers that buy, sell or trade our common
units, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
iv
SUMMARY
This summary provides a brief overview of information
contained elsewhere in this prospectus. Because it is
abbreviated, this summary may not contain all of the information
that you should consider before investing in the common units.
You should read the entire prospectus carefully, including the
historical and pro forma financial statements and the notes to
those financial statements. Unless indicated otherwise, the
information presented in this prospectus assumes that the
underwriters do not exercise their option to purchase additional
units. You should read Risk Factors beginning on
page 17 for more information about important risks that you
should consider carefully before buying our common units. We
include a glossary of some of the terms used in this prospectus
as Appendix B. As used in this prospectus, unless we
indicate otherwise: (1) our, we,
us and similar terms refer to Targa Resources
Partners LP, together with our subsidiaries, after giving effect
to the Formation Transactions described on page 5 of this
prospectus, (2) Targa refers to Targa
Resources, Inc. and its subsidiaries and affiliates (other than
us) and (3) references to our pro forma financial
information refer to the historical financial information of the
Predecessor Business described on page 13 of this prospectus as
adjusted to give effect to the Formation Transactions.
Targa
Resources Partners LP
We are a growth-oriented Delaware limited partnership recently
formed by Targa, a leading provider of midstream natural gas and
NGL services in the United States, to own, operate, acquire and
develop a diversified portfolio of complementary midstream
energy assets. We currently operate in the Fort Worth Basin
in north Texas and are engaged in the business of gathering,
compressing, treating, processing and selling natural gas and
fractionating and selling natural gas liquids, or NGLs, and NGL
products. Fractionating means separating a mixed stream of NGLs
into its constituent products. We intend to leverage our
relationship with Targa to acquire and construct additional
midstream energy assets and to utilize the significant
experience of Targas management team to execute our growth
strategy. At September 30, 2006, Targa had total assets of
$3.4 billion, with the North Texas System to be contributed
to us in connection with this offering representing
$1.1 billion of this amount. Targa intends, but is not
obligated, to offer us the opportunity to purchase substantially
all of its remaining businesses.
Our operations consist of an extensive network of approximately
3,950 miles of integrated gathering pipelines that gather
and compress natural gas received from approximately 2,650
receipt points in the Fort Worth Basin, two natural gas
processing plants that compress, treat and process the natural
gas and a fractionator that fractionates a portion of our raw
NGLs produced in our processing operations into NGL products.
These assets, together with the business conducted thereby, are
collectively referred to as the North Texas System.
We serve a fourteen-county natural gas producing region in the
Fort Worth Basin that includes production from the Barnett
Shale formation and other shallower formations, which are
subsurface rock formations containing hydrocarbons, including
the Bend Conglomerate, Caddo, Atoka, Marble Falls, and other
Pennsylvanian and upper Mississippian formations, which we refer
to as the other Fort Worth Basin formations.
For more information on the North Texas System, please see
Business Our Partnership.
For the year ended December 31, 2005 and the nine months
ended September 30, 2006, we generated pro forma net income
(loss) of approximately $(6.8) million and $0.4 million,
respectively, pro forma operating margin of $81.2 million
and $67.8 million, respectively, and had 162.5 million
cubic feet of natural gas per day, or MMcf/d, and
168.2 MMcf/d of gathering throughput, respectively. For the
year ended December 31, 2005 and the nine months ended
September 30, 2006, we generated approximately
$72.8 million and $62.7 million of pro forma income
before interest, income taxes, depreciation and amortization, or
EBITDA, respectively.
1
Non-GAAP
Financial Measures
EBITDA. We define EBITDA as net income before
interest, income taxes, depreciation and amortization. EBITDA is
used as a supplemental financial measure by our management and
by external users of our financial statements such as investors,
commercial banks and others, to assess:
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the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
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our operating performance and return on capital as compared to
other companies in the midstream energy sector, without regard
to financing or capital structure; and
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the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
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The economic substance behind managements use of EBITDA is
to measure the ability of our assets to generate cash sufficient
to pay interest costs, support our indebtedness, and make
distributions to our investors.
The GAAP measures most directly comparable to EBITDA are net
cash provided by operating activities and net income. Our
non-GAAP financial measure of EBITDA should not be considered as
an alternative to GAAP net cash provided by operating activities
and GAAP net income. EBITDA is not a presentation made in
accordance with GAAP and has important limitations as an
analytical tool. You should not consider EBITDA in isolation or
as a substitute for analysis of our results as reported under
GAAP. Because EBITDA excludes some, but not all, items that
affect net income and net cash provided by operating activities
and is defined differently by different companies in our
industry, our definition of EBITDA may not be comparable to
similarly titled measures of other companies.
Management compensates for the limitations of EBITDA as an
analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes.
Operating Margin. We define operating margin
as total operating revenues, which consist of natural gas and
NGL sales plus service fee revenues, less product purchases,
which consist primarily of producer payments and other natural
gas purchases, and operating expense. Management reviews
operating margin monthly for consistency and trend analysis.
Based on this monthly analysis, management takes appropriate
action to maintain positive trends or to reverse negative
trends. Management uses operating margin as an important
performance measure of the core profitability of our operations.
The GAAP measure most directly comparable to operating margin is
net income. Our non-GAAP financial measure of operating margin
should not be considered as an alternative to GAAP net income.
Operating margin is not a presentation made in accordance with
GAAP and has important limitations as an analytical tool. You
should not consider operating margin in isolation or as a
substitute for analysis of our results as reported under GAAP.
Because operating margin excludes some, but not all, items that
affect net income and is defined differently by different
companies in our industry, our definition of operating margin
may not be comparable to similarly titled measures of other
companies, thereby diminishing its utility.
Management compensates for the limitations of operating margin
as an analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes.
We believe that investors benefit from having access to the same
financial measures that our management uses in evaluating our
operating results. Operating margin provides useful information
to investors because it is used as a supplemental financial
measure by our management and by external users of our financial
statements, including such investors, commercial banks and
others, to assess:
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the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
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our operating performance and return on capital as compared to
other companies in the midstream energy sector, without regard
to financing or capital structure;
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the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
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Predecessor Business
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Targa Resources Partners LP
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Dynegy
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Targa
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Pro Forma
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Nine Months
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Ten Months
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Two Months
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Nine Months
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Nine Months
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Years Ended
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Ended
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Ended
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Ended
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Ended
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Year Ended
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Ended
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December 31,
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September 30,
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October 31,
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December 31,
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September 30,
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December 31,
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September 30,
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2003
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2004
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2005
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2005
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2005
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2006
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2005
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2006
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(Audited)
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(Audited)
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(Unaudited)
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(Audited)
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(Audited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(in millions of dollars)
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Reconciliation of
EBITDA to net cash provided by (used in) operating
activities:
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Net cash provided by (used in)
operating activities
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$
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31.3
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$
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58.0
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$
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59.2
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$
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72.7
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$
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(1.5
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$
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11.1
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Allocated interest expense from
parent(1)
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10.7
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50.5
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Changes in operating working
capital which provided (used) cash:
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Accounts receivable
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0.7
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(0.7
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0.5
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0.3
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0.1
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(0.4
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Accounts payable
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(1.0
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(2.7
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1.1
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1.3
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0.8
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Other, including changes in
noncurrent assets and liabilities
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(4.9
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(3.8
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(12.6
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(17.1
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5.5
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1.5
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EBITDA
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$
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26.1
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$
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50.8
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$
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48.2
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$
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57.2
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$
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15.6
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$
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62.7
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Reconciliation of
EBITDA to net income:
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Net income (loss)
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$
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14.1
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$
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38.6
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$
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38.1
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$
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45.9
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$
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(5.1
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$
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(35.4
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$
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(6.8
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$
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0.4
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Add:
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Interest expense, net
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11.5
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54.4
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24.8
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18.6
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Deferred tax expense
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2.0
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2.0
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Depreciation and amortization
expense
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12.0
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12.2
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10.1
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11.3
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9.2
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41.7
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54.8
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41.7
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EBITDA
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$
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26.1
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$
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50.8
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$
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48.2
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$
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57.2
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$
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15.6
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$
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62.7
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$
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72.8
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$
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62.7
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Reconciliation of
operating margin to net income:
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Net income (loss)
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$
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14.1
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$
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38.6
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$
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38.1
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$
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45.9
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$
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(5.1
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$
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(35.4
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$
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(6.8
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$
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0.4
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Add:
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Depreciation and amortization
expense
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12.0
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12.2
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10.1
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11.3
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9.2
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41.7
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54.8
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41.7
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Deferred income tax
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2.0
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2.0
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Other, net
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0.6
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0.3
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Interest expense, net
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11.5
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54.4
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24.8
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18.6
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General and administrative expense
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7.7
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7.2
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6.7
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7.3
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1.1
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5.1
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8.4
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5.1
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Operating margin
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$
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34.4
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|
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$
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58.3
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|
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$
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54.9
|
|
|
$
|
64.5
|
|
|
|
$
|
16.7
|
|
|
$
|
67.8
|
|
|
$
|
81.2
|
|
|
$
|
67.8
|
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|
|
|
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(1) |
Excludes non-cash amortization of debt issue costs of $0.8
million for the two months ended December 31, 2005 and
$3.9 million for the nine months ended September 30, 2006.
|
Please see Business Strategies and
Business Competitive Strengths for a
discussion of our strategies and competitive strengths.
3
Our
Relationship with Targa Resources, Inc.
One of our principal strengths is our relationship with Targa, a
leading provider of midstream natural gas and NGL services in
the United States. Targa has indicated that it intends to use us
as a growth vehicle to pursue the acquisition and expansion of
midstream natural gas, NGL and other complementary energy
businesses and assets. We expect to have the opportunity to make
acquisitions directly from Targa in the future. Targa intends to
offer us the opportunity to purchase substantially all of its
remaining businesses, although it is not obligated to do so.
While Targa believes it will be in its best interest to
contribute additional assets to us given its significant
ownership of limited and general partner interests in us, Targa
constantly evaluates acquisitions and dispositions and may elect
to acquire, construct or dispose of midstream assets in the
future without offering us the opportunity to purchase or
construct those assets. Targa has retained such flexibility
because it believes it is in the best interests of its
shareholders to do so. We cannot say with any certainty which,
if any, opportunities to acquire assets from Targa may be made
available to us or if we will choose to pursue any such
opportunity. Moreover, Targa is not prohibited from competing
with us and constantly evaluates acquisitions and dispositions
that do not involve us. In addition, through our relationship
with Targa, we will have access to a significant pool of
management talent, strong commercial relationships throughout
the energy industry and access to Targas broad
operational, commercial, technical, risk management and
administrative infrastructure.
Following this offering, Targa will continue to own interests in
or operate approximately 6,680 miles of natural gas
pipelines and approximately 720 miles of NGL pipelines,
with natural gas gathering systems covering approximately
11,900 square miles and 20 natural gas processing plants
with access to natural gas supplies in the Permian basin,
onshore Louisiana and the Gulf of Mexico. Additionally, Targa
has a significant, integrated NGL logistics and marketing
business, with 13 storage, marine and transport terminals with
an NGL storage capacity of 730 MBbls, net NGL fractionation
capacity of approximately 287 thousand barrels per day, or
MBbls/d, and 43 operated storage wells with a capacity of
103 MMBbls. These asset locations provide Targa access to
relatively stable natural gas supplies and proximity to end-use
markets and market hubs while positioning Targa to capitalize on
growth opportunities from the continued development of onshore
as well as deepwater and deep shelf Gulf of Mexico natural gas
reserves and the increasing importation of liquified natural
gas, or LNG, to the Gulf Coast.
Our
Relationship with Warburg Pincus LLC
Warburg Pincus LLC, or Warburg Pincus, controls us through its
ownership of securities in Targa Resources Investments Inc., the
indirect parent of Targa, and a stockholders agreement among
Targa Resources Investments Inc. and its owners. Warburg Pincus
is a private equity firm and over four decades has invested more
than $20 billion in 525 companies in
30 countries, representing a variety of industries
including energy, information and communication technology,
financial services, healthcare, media and business services and
real estate.
Summary
of Risk Factors
An investment in our common units involves risks associated with
our business, regulatory and legal matters, our limited
partnership structure and the tax characteristics of our common
units. The following list of risk factors is not exhaustive.
Please see these and other risks described under Risk
Factors.
Risks
Related to Our Business
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We may not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner, to enable
us to make cash distributions to holders of our common units and
subordinated units at the initial distribution rate under our
cash distribution policy.
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|
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|
On a pro forma basis we would not have had sufficient cash
available for distribution to pay the full minimum quarterly
distribution on all units for the year ended December 31,
2005 or for the twelve months ended September 30, 2006.
|
4
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Our cash flow is affected by natural gas and NGL prices, and
decreases in these prices could adversely affect our ability to
make distributions to holders of our common units and
subordinated units.
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|
Because of the natural decline in production from existing wells
in our operating regions, our success depends on our ability to
obtain new sources of supplies of natural gas and NGLs, which
depends on certain factors beyond our control. Any decrease in
supplies of natural gas or NGLs could adversely affect our
business and operating results.
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Our hedging activities may not be effective in reducing the
variability of our cash flows and may, in certain circumstances,
increase the variability of our cash flows. In addition, the
significant contribution to our results of operations that we
are currently receiving from our hedge positions will decrease
substantially through 2010.
|
Risks
Inherent in an Investment in Us
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Targa controls our general partner, which has sole
responsibility for conducting our business and managing our
operations. Targa has conflicts of interest with us and may
favor its own interests to your detriment.
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The credit and business risk profile of our general partner and
its owners could adversely affect our credit ratings and profile.
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Our partnership agreement limits our general partners
fiduciary duties to holders of our units and restricts the
remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of
fiduciary duty.
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Targa is not limited in its ability to compete with us, which
could limit our ability to acquire additional assets or
businesses.
|
Tax
Risks to Common Unitholders
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Our tax treatment depends on our status as a partnership for
federal income tax purposes, as well as our not being subject to
a material amount of entity-level taxation by individual states.
If the Internal Revenue Service, or IRS, were to treat us as a
corporation or if we were to become subject to a material amount
of entity-level taxation for state tax purposes, then our cash
available for distribution to you would be substantially reduced.
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|
If the IRS contests the federal income tax positions we take,
the market for our common units may be adversely affected, and
the cost of any contest will reduce our cash available for
distribution to you.
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|
|
|
You may be required to pay taxes on your share of our income
even if you do not receive any cash distributions from us.
|
Formation
Transactions and Partnership Structure
General
At the closing of this offering, we anticipate that the
following transactions, which we refer to as the Formation
Transactions, will occur:
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|
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Targa will contribute the North Texas System to us;
|
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|
|
we will issue to Targa 11,528,231 subordinated units,
representing a 39.9% limited partner interest in us;
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|
|
we will issue to our general partner, Targa Resources GP LLC,
578,127 general partner units representing its initial 2%
general partner interest in us, and all of our incentive
distribution rights,
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5
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which incentive distribution rights will entitle our general
partner to increasing percentages of the cash we distribute in
excess of $0.3881 per unit per quarter;
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we will issue 16,800,000 common units to the public in this
offering, representing a 58.1% limited partner interest in us,
and will use the proceeds to pay expenses associated with this
offering, the Formation Transactions and our new credit facility
and to pay approximately $322.9 million to Targa to retire
a portion of our affiliate indebtedness;
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|
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we will borrow approximately $342.5 million under our new
$500 million credit facility, the proceeds of which will be
paid to Targa to retire an additional portion of our affiliate
indebtedness;
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the remaining affiliate indebtedness will be retired and treated
as a capital contribution to us;
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we will enter into an omnibus agreement with Targa and our
general partner, which will address, among other things, the
provision of and the reimbursement for general and
administrative and operating services;
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we will enter into a natural gas purchase agreement, pursuant to
which we will sell all of our residue natural gas to Targa at
market-based prices for a term of 15 years; and
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we will enter into NGL and condensate purchase agreements,
pursuant to which we will sell all of our NGLs and high-pressure
condensate to Targa at market-based prices for a term of
15 years.
|
Our affiliate indebtedness consists of borrowings incurred by
Targa and allocated to us for financial reporting purposes as
well as intercompany indebtedness to be contributed to us
together with the North Texas System.
We will use any net proceeds from the exercise of the
underwriters option to reduce outstanding borrowings under
our new credit facility. If the underwriters exercise in full
their option to purchase additional common units, the ownership
interest of the public unitholders will increase to 19,320,000
common units, representing an aggregate 61.4% limited partner
interest in us, the ownership interest of our general partner
will increase to 629,555 general partner units, representing a
2% general partner interest in us, and the ownership interest of
Targa will remain at 11,528,231 subordinated units, representing
a 36.6% limited partner interest in us.
Management
of Targa Resources Partners LP
Targa Resources GP LLC, our general partner, will manage our
business and operations, and its board of directors and officers
will make decisions on our behalf. All of the executive officers
and some of the directors of Targa also serve as executive
officers or directors of our general partner.
Unlike shareholders in a publicly traded corporation, our
unitholders will not be entitled to elect our general partner or
its directors. Targa will elect all seven members to the board
of directors of our general partner and we will have three
directors that are independent as defined under the independence
standards established by The NASDAQ Global Market. For more
information about these individuals, please see
Management Directors and Executive
Officers.
The diagram on the following page depicts our organization and
ownership after giving effect to the offering and the related
Formation Transactions.
6
Simplified
Organizational Structure and Ownership of Targa Resources
Partners LP
after the Formation Transactions
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|
|
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Public Common Units
|
|
|
58.1
|
%
|
Targa Subordinated Units
|
|
|
39.9
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%
|
General Partner Units
|
|
|
2.0
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%
|
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|
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Total
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|
|
100.0
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%
|
|
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|
(1)
|
|
Ownership percentages are presented
on a fully-diluted basis.
|
|
(2)
|
|
Targa Resources, Inc. is an
indirect wholly-owned subsidiary of Targa Resources Investments
Inc. Warburg Pincus LLC controls us through its ownership of
securities in Targa Resources Investments Inc. and a
stockholders agreement among Targa Resources Investments Inc.
and its owners.
|
7
Principal
Executive Offices and Internet Address
Our principal executive offices are located at 1000 Louisiana,
Suite 4300, Houston, Texas 77002 and our telephone number
is
(713) 584-1000.
Our website is located at www.targaresources.com. We expect to
make our periodic reports and other information filed with or
furnished to the Securities and Exchange Commission, or the SEC,
available, free of charge, through our website, as soon as
reasonably practicable after those reports and other information
are electronically filed with or furnished to the SEC.
Information on our website or any other website is not
incorporated by reference into this prospectus and does not
constitute a part of this prospectus.
Summary
of Conflicts of Interest and Fiduciary Duties
Targa Resources GP LLC, our general partner, has a legal duty to
manage us in a manner beneficial to holders of our common units
and subordinated units. This legal duty originates in statutes
and judicial decisions and is commonly referred to as a
fiduciary duty. However, because our general partner
is owned by Targa, the officers and directors of our general
partner also have fiduciary duties to manage our general partner
in a manner beneficial to Targa. As a result of this
relationship, conflicts of interest may arise in the future
between us and holders of our common units and subordinated
units, on the one hand, and our general partner and its
affiliates on the other hand. Our partnership agreement also
provides that Targa is not restricted from competing with us.
For a more detailed description of the conflicts of interest and
fiduciary duties of our general partner, please see
Conflicts of Interest and Fiduciary Duties.
8
The
Offering
|
|
|
Common units offered to the public |
|
16,800,000 common units or 19,320,000 common units if the
underwriters exercise in full their option to purchase
additional common units. |
|
Units outstanding after this offering |
|
16,800,000 common units and 11,528,231 subordinated units,
representing 58.1% and 39.9% limited partner interests in us
(19,320,000 common units and 11,528,231 subordinated units,
representing 61.4% and 36.6% limited partner interests in us if
the underwriters exercise in full their option to purchase
additional common units). The general partner will own 578,127
general partner units, or 629,555 general partner units if the
underwriters exercise in full their option to purchase
additional common units, in each case representing a 2% general
partner interest in us. |
|
Use of proceeds |
|
We intend to use the net proceeds of approximately
$331.1 million from this offering, after deducting
underwriting discounts and deducting a structuring fee of
approximately $1.4 million but before paying offering
expenses, to: |
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pay approximately $4.0 million in expenses
associated with this offering and the Formation Transactions;
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pay approximately $4.2 million in fees and
expenses related to our new credit facility; and
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use the remaining proceeds to pay approximately
$322.9 million to Targa to retire a portion of our
affiliate indebtedness.
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|
We also expect to borrow approximately $342.5 million under
our new credit facility upon the closing of this offering and to
pay that amount to Targa to retire an additional portion of our
affiliate indebtedness. The remaining balance of our affiliate
indebtedness will be retired and treated as a capital
contribution to us. Please see Certain Relationships and
Related Party Transactions Distributions and
Payments to our General Partner and its Affiliates. |
|
|
|
We will use any net proceeds from the exercise of the
underwriters option to purchase additional common units to
reduce outstanding borrowings under our new credit facility. |
|
Cash distributions |
|
We will make an initial quarterly distribution of $0.3375 per
common unit ($1.35 per common unit on an annualized basis) to
the extent we have sufficient cash from operations after
establishment of cash reserves and payment of fees and expenses.
Our ability to pay cash distributions at this initial
distribution rate is subject to various restrictions and other
factors described in more detail under the caption Our
Cash Distribution Policy and Restrictions on Distributions. |
|
|
|
Our partnership agreement requires us to distribute all of our
cash on hand at the end of each quarter, less reserves
established by our general partner. We refer to this cash as
available cash, and we define its meaning in our
partnership agreement. Our |
9
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|
partnership agreement also requires that we distribute all of
our available cash from operating surplus each quarter during
the subordination period in the following manner: |
|
|
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first, 98% to the holders of common units and
2% to our general partner, until each common unit has received a
minimum quarterly distribution of $0.3375 plus any arrearages
from prior quarters;
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|
second, 98% to the holders of subordinated
units and 2% to our general partner, until each subordinated
unit has received a minimum quarterly distribution of
$0.3375; and |
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|
third, 98% to all unitholders, pro rata, and
2% to our general partner, until each unit has received an
aggregate distribution of $0.3881. |
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|
|
If cash distributions to our unitholders exceed $0.3881 per
common unit in any quarter, our general partner will receive, in
addition to distributions on its 2% general partner interest,
increasing percentages, up to 48%, of the cash we distribute in
excess of that amount. We refer to these distributions as
incentive distributions. Please see Provisions
of Our Partnership Agreement Relating to Cash
Distributions. |
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|
|
We will adjust the quarterly distribution for the period from
the closing of this offering through March 31, 2007 based
on the actual length of the period. We expect to pay this cash
distribution on or about May 15, 2007. |
|
|
|
The amount of our pro forma available cash generated during the
year ended December 31, 2005 and the twelve months ended
September 30, 2006 would have been sufficient to allow us
to pay the full minimum quarterly distribution on all of our
common units but only approximately 29% and 98%, respectively,
of the minimum quarterly distribution on our subordinated units
during these periods (29% and 98%, respectively, assuming the
underwriters exercise in full their option to purchase
additional common units). For a calculation of our ability to
make distributions to unitholders based on our pro forma results
for 2006, please see Our Cash Distribution Policy and
Restrictions on Distributions. |
|
|
|
We believe that, based on the minimum estimated EBITDA for the
twelve months ending December 31, 2007 included under the
caption Our Cash Distribution Policy and Restrictions on
Distributions, we will have sufficient cash available for
distribution to make cash distributions for the four quarters
ending December 31, 2007 at the initial quarterly
distribution rate of $0.3375 per unit on all common units,
subordinated units and general partner units. |
|
Subordinated units |
|
Targa will initially own all of our subordinated units. The
principal difference between our common units and subordinated
units is that in any quarter during the subordination period,
holders of the subordinated units are entitled to receive the
minimum quarterly distribution of $0.3375 per unit only after
the common units have received the minimum quarterly
distribution plus any |
10
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arrearages in the payment of the minimum quarterly distribution
from prior quarters. Subordinated units will not accrue
arrearages. The subordination period generally will end if we
have earned and paid at least $0.3375 on each outstanding unit
and general partner unit for any three consecutive,
non-overlapping four-quarter periods ending on or after
March 31, 2010. The subordination period will also end if
the unitholders remove our general partner other than for cause
and units held by our general partner and its affiliates are not
voted in favor of such removal. |
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When the subordination period ends, all remaining subordinated
units will convert into common units on a
one-for-one
basis, and the common units will no longer be entitled to
arrearages. |
|
Early conversion of subordinated units |
|
If we have earned and paid at least $2.025 (150% of the
annualized minimum quarterly distribution) on each outstanding
common unit, subordinated unit and general partner unit for any
four-quarter
period, the subordination period will terminate automatically
and all of the subordinated units will convert into an equal
number of common units. Please see Provisions of Our
Partnership Agreement Related to Cash Distributions
Subordination Period. |
|
General Partners right to reset the target distribution
levels |
|
Our general partner has the right, at a time when there are no
subordinated units outstanding and it has received incentive
distributions at the highest level to which it is entitled (48%)
for each of the prior four consecutive fiscal quarters, to reset
the initial cash target distribution levels at higher levels
based on the distribution at the time of the exercise of the
reset election. Following a reset election by our general
partner, the minimum quarterly distribution amount will be reset
to an amount equal to the average cash distribution amount per
common unit for the two fiscal quarters immediately preceding
the reset election (such amount is referred to as the
reset minimum quarterly distribution) and the target
distribution levels will be reset to correspondingly higher
levels based on the same percentage increases above the reset
minimum quarterly distribution amount as in our current target
distribution levels. |
|
|
|
In connection with resetting these target distribution levels,
our general partner will be entitled to receive Class B
units. The Class B units will be entitled to the same cash
distributions per unit as our common units and will be
convertible into an equal number of common units. The number of
Class B units to be issued will be equal to that number of
common units whose aggregate quarterly cash distributions
equaled the average of the distributions to our general partner
on the incentive distribution rights in the prior two quarters.
For a more detailed description of our general partners
right to reset the target distribution levels upon which the
incentive distribution payments are based and the concurrent
right of our general partner to receive Class B units in
connection with this reset, please see Provisions of Our |
11
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Partnership Agreement Related to Cash Distributions
General Partners Right to Reset Incentive Distribution
Levels. |
|
Issuance of additional units |
|
We can issue an unlimited number of units without the consent of
our unitholders. Please see Units Eligible for Future
Sale and The Partnership Agreement
Issuance of Additional Securities. |
|
Limited voting rights |
|
Our general partner will manage and operate us. Unlike the
holders of common stock in a corporation, you will have only
limited voting rights on matters affecting our business. You
will have no right to elect our general partner or its directors
on an annual or other continuing basis. Our general partner may
not be removed except by a vote of the holders of at least
662/3%
of the outstanding units, including any units owned by our
general partner and its affiliates, voting together as a single
class. Upon consummation of this offering, our general partner
and its affiliates will own an aggregate of 40.7% of our common
and subordinated units. This will give our general partner the
ability to prevent its involuntary removal. Please see The
Partnership Agreement Voting Rights. |
|
Limited call right |
|
If at any time our general partner and its affiliates own more
than 80% of the outstanding common units, our general partner
has the right, but not the obligation, to purchase all of the
remaining common units at a price not less than the then-current
market price of the common units. |
|
Estimated ratio of taxable income to distributions |
|
We estimate that if you own the common units you purchase in
this offering through the record date for distributions for the
period ending December 31, 2009, you will be allocated, on
a cumulative basis, an amount of federal taxable income for that
period that will be 20% or less of the cash distributed to you
with respect to that period. For example, if you receive an
annual distribution of $1.35 per unit, we estimate that your
average allocable federal taxable income per year will be no
more than $0.27 per unit. Please see Material Tax
Consequences Tax Consequences of Unit
Ownership Ratio of Taxable Income to
Distributions. |
|
Material tax consequences |
|
For a discussion of other material federal income tax
consequences that may be relevant to prospective unitholders who
are individual citizens or residents of the United States,
please see Material Tax Consequences. |
|
Exchange listing |
|
Our common units have been approved for listing on The NASDAQ
Global Market under the symbol NGLS. |
12
Summary
Historical and Pro Forma Financial and Operating Data
The following table shows summary historical financial and
operating data of the North Texas System and pro forma financial
data of Targa Resources Partners LP for the periods and as of
the dates indicated. The historical financial statements
included in this prospectus reflect the results of operations of
the North Texas System to be contributed to us by Targa upon the
closing of this offering. We refer to the results of operations
of the North Texas System as the results of operations of the
Predecessor Business. The summary historical financial data for
the years ended December 31, 2003 and 2004, the ten-month
period ended October 31, 2005 and for the two-month period
ended December 31, 2005 are derived from the audited
financial statements of the Predecessor Business. The summary
historical financial data for the nine months ended
September 30, 2005 and 2006 are derived from the unaudited
financial statements of the Predecessor Business. The
Predecessor Business was acquired by Targa as part of
Targas acquisition of substantially all of Dynegy
Inc.s midstream business on October 31, 2005 (the
DMS Acquisition). The summary pro forma financial
data for the year ended December 31, 2005 and the nine
months ended September 30, 2006 are derived from the
unaudited pro forma financial statements of Targa Resources
Partners LP included in this prospectus. The pro forma
adjustments have been prepared as if certain transactions to be
effected at the closing of this offering had taken place on
September 30, 2006, in the case of the pro forma balance
sheet, or as of January 1, 2005, in the case of the pro
forma statement of operations for the nine months ended
September 30, 2006 and for the year ended December 31,
2005. The transactions reflected in the pro forma adjustments
assume the following actions will occur:
Targa will contribute the North Texas System to us;
|
|
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|
|
we will issue to Targa 11,528,231 subordinated units,
representing a 39.9% limited partner interest in us;
|
|
|
|
we will issue to our general partner, Targa Resources GP LLC,
578,127 general partner units representing its initial 2%
general partner interest in us, and all of our incentive
distribution rights, which incentive distribution rights will
entitle our general partner to increasing percentages of the
cash we distribute in excess of $0.3881 per unit per quarter;
|
|
|
|
we will issue 16,800,000 common units to the public in this
offering, representing a 58.1% limited partner interest in us,
and will use the proceeds to pay expenses associated with this
offering, the Formation Transactions and our new credit facility
and to pay approximately $322.9 million to Targa to retire
a portion of our affiliate indebtedness;
|
|
|
|
we will borrow approximately $342.5 million under our new
$500 million credit facility the proceeds of which will be
paid to Targa to retire an additional portion of our affiliate
indebtedness; and
|
|
|
|
the remaining affiliate indebtedness will be retired and treated
as a capital contribution to us.
|
We derived the information in the following table from, and that
information should be read together with and is qualified in its
entirety by reference to, the historical combined and pro forma
condensed financial statements and the accompanying notes
included elsewhere in this prospectus.
13
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Predecessor Business
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Targa Resources Partners LP
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Dynegy
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Targa
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Pro Forma
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Nine Months
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Ten Months
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Two Months
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Nine Months
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Nine Months
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Years Ended
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Ended
|
|
|
Ended
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
October 31,
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions of dollars, except per unit and operating
data)
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
196.8
|
|
|
$
|
258.6
|
|
|
$
|
249.7
|
|
|
$
|
293.3
|
|
|
|
$
|
75.1
|
|
|
$
|
290.9
|
|
|
$
|
368.4
|
|
|
$
|
290.9
|
|
Product purchases
|
|
|
147.3
|
|
|
|
182.6
|
|
|
|
179.0
|
|
|
|
210.8
|
|
|
|
|
54.9
|
|
|
|
205.2
|
|
|
|
265.7
|
|
|
|
205.2
|
|
Operating expense
|
|
|
15.1
|
|
|
|
17.7
|
|
|
|
15.8
|
|
|
|
18.0
|
|
|
|
|
3.5
|
|
|
|
17.9
|
|
|
|
21.5
|
|
|
|
17.9
|
|
Depreciation and amortization
expense
|
|
|
12.0
|
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
11.3
|
|
|
|
|
9.2
|
|
|
|
41.7
|
|
|
|
54.8
|
|
|
|
41.7
|
|
General and administrative expense
|
|
|
7.7
|
|
|
|
7.2
|
|
|
|
6.7
|
|
|
|
7.3
|
|
|
|
|
1.1
|
|
|
|
5.1
|
|
|
|
8.4
|
|
|
|
5.1
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
54.4
|
|
|
|
24.8
|
|
|
|
18.6
|
|
Deferred income tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Other, net
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14.1
|
|
|
$
|
38.6
|
|
|
$
|
38.1
|
|
|
$
|
45.9
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per
limited partner unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.24
|
)
|
|
$
|
0.01
|
|
Financial and Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(2)
|
|
$
|
34.4
|
|
|
$
|
58.3
|
|
|
$
|
54.9
|
|
|
$
|
64.5
|
|
|
|
$
|
16.7
|
|
|
$
|
67.8
|
|
|
$
|
81.2
|
|
|
$
|
67.8
|
|
EBITDA(3)
|
|
|
26.1
|
|
|
|
50.8
|
|
|
|
48.2
|
|
|
|
57.2
|
|
|
|
|
15.6
|
|
|
|
62.7
|
|
|
|
72.8
|
|
|
|
62.7
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering throughput, MMcf/d(4)
|
|
|
134.3
|
|
|
|
152.0
|
|
|
|
160.4
|
|
|
|
161.2
|
|
|
|
|
168.8
|
|
|
|
168.2
|
|
|
|
|
|
|
|
|
|
Plant natural gas inlet, MMcf/d(5)
|
|
|
128.6
|
|
|
|
145.4
|
|
|
|
155.4
|
|
|
|
156.2
|
|
|
|
|
161.9
|
|
|
|
161.6
|
|
|
|
|
|
|
|
|
|
Gross NGL production, MBbl/d
|
|
|
15.9
|
|
|
|
17.2
|
|
|
|
18.4
|
|
|
|
18.5
|
|
|
|
|
19.8
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
Natural gas sales, BBtu/d
|
|
|
42.0
|
|
|
|
59.2
|
|
|
|
68.4
|
|
|
|
68.9
|
|
|
|
|
72.3
|
|
|
|
75.2
|
|
|
|
|
|
|
|
|
|
NGL sales, MBbl/d
|
|
|
15.3
|
|
|
|
13.2
|
|
|
|
14.2
|
|
|
|
14.3
|
|
|
|
|
15.4
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
Condensate sales, MBbl/d
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period
end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
$
|
180.4
|
|
|
$
|
191.2
|
|
|
|
195.4
|
|
|
$
|
196.4
|
|
|
|
$
|
1,097.0
|
|
|
$
|
1,073.0
|
|
|
|
|
|
|
$
|
1,073.0
|
|
Total assets
|
|
|
182.9
|
|
|
|
193.5
|
|
|
|
197.6
|
|
|
|
198.5
|
|
|
|
|
1,122.8
|
|
|
|
1,126.3
|
|
|
|
|
|
|
|
1,110.9
|
|
Long-term debt (including current
portion)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
868.9
|
|
|
|
865.2
|
|
|
|
|
|
|
|
342.5
|
|
Partners capital / Net parent
equity
|
|
|
164.8
|
|
|
|
168.8
|
|
|
|
161.9
|
|
|
|
158.5
|
|
|
|
|
219.5
|
|
|
|
227.2
|
|
|
|
|
|
|
|
734.5
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
31.3
|
|
|
$
|
58.0
|
|
|
$
|
59.2
|
|
|
$
|
72.7
|
|
|
|
$
|
(1.5
|
)
|
|
$
|
11.1
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(14.6
|
)
|
|
|
(23.4
|
)
|
|
|
(14.2
|
)
|
|
|
(16.4
|
)
|
|
|
|
(2.1
|
)
|
|
|
(17.7
|
)
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
(16.7
|
)
|
|
|
(34.6
|
)
|
|
|
(45.0
|
)
|
|
|
(56.3
|
)
|
|
|
|
3.6
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In May 2006, Texas adopted a margin tax consisting of a 1% tax
on the amount by which total revenue exceeds cost of goods sold.
The amount presented represents our estimated liability for this
tax.
|
|
(2)
|
Operating margin is total operating revenues less product
purchases and operating expense. Please see
Non-GAAP Financial Measures.
|
|
(3)
|
EBITDA is net income before interest, income taxes, depreciation
and amortization. Please see Non-GAAP Financial
Measures.
|
|
(4)
|
Gathering throughput represents the volume of natural gas
gathered and passed through natural gas gathering pipelines from
connections to producing wells and central delivery points.
|
|
(5)
|
Plant natural gas inlet represents the volume of natural gas
passing through the meter located at the inlet point of a
natural gas processing plant.
|
14
Non-GAAP Financial
Measures
EBITDA. We define EBITDA as net income before
interest, income taxes, depreciation and amortization. EBITDA is
used as a supplemental financial measure by our management and
by external users of our financial statements such as investors,
commercial banks and others, to assess:
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
our operating performance and return on capital as compared to
other companies in the midstream energy sector, without regard
to financing or capital structure; and
|
|
|
|
the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
|
The economic substance behind managements use of EBITDA is
to measure the ability of our assets to generate cash sufficient
to pay interest costs, support our indebtedness, and make
distributions to our investors.
The GAAP measures most directly comparable to EBITDA are net
cash provided by operating activities and net income. Our
non-GAAP financial measure of EBITDA should not be considered as
an alternative to GAAP net cash provided by operating activities
and GAAP net income. EBITDA is not a presentation made in
accordance with GAAP and has important limitations as an
analytical tool. You should not consider EBITDA in isolation or
as a substitute for analysis of our results as reported under
GAAP. Because EBITDA excludes some, but not all, items that
affect net income and net cash provided by operating activities
and is defined differently by different companies in our
industry, our definition of EBITDA may not be comparable to
similarly titled measures of other companies.
Management compensates for the limitations of EBITDA as an
analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes.
Operating Margin. We define operating margin
as total operating revenues, which consist of natural gas and
NGL sales plus service fee revenues, less product purchases,
which consist primarily of producer payments and other natural
gas purchases, and operating expense. Management reviews
operating margin monthly for consistency and trend analysis.
Based on this monthly analysis, management takes appropriate
action to maintain positive trends or to reverse negative
trends. Management uses operating margin as an important
performance measure of the core profitability of our operations.
The GAAP measure most directly comparable to operating margin is
net income. Our non-GAAP financial measure of operating margin
should not be considered as an alternative to GAAP net income.
Operating margin is not a presentation made in accordance with
GAAP and has important limitations as an analytical tool. You
should not consider operating margin in isolation or as a
substitute for analysis of our results as reported under GAAP.
Because operating margin excludes some, but not all, items that
affect net income and is defined differently by different
companies in our industry, our definition of operating margin
may not be comparable to similarly titled measures of other
companies, thereby diminishing its utility.
Management compensates for the limitations of operating margin
as an analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes.
We believe that investors benefit from having access to the same
financial measures that our management uses in evaluating our
operating results. Operating margin provides useful information
to investors because it is used as a supplemental financial
measure by our management and by external users of our financial
statements, including such investors, commercial banks and
others, to assess:
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
15
|
|
|
|
|
our operating performance and return on capital as compared to
other companies in the midstream energy sector, without regard
to financing or capital structure; and
|
|
|
|
the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Business
|
|
|
Targa Resources Partners LP
|
|
|
|
Dynegy
|
|
|
|
Targa
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Ten Months
|
|
|
|
Two Months
|
|
|
Nine Months
|
|
|
|
|
|
Nine Months
|
|
|
|
Years Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
October 31,
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions of dollars)
|
|
Reconciliation of
EBITDA to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
31.3
|
|
|
$
|
58.0
|
|
|
$
|
59.2
|
|
|
$
|
72.7
|
|
|
|
$
|
(1.5
|
)
|
|
$
|
11.1
|
|
|
|
|
|
|
|
|
|
Allocated interest expense from
parent(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
|
|
50.5
|
|
|
|
|
|
|
|
|
|
Changes in operating working
capital which provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
0.7
|
|
|
|
(0.7
|
)
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1.0
|
)
|
|
|
(2.7
|
)
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, including changes in
noncurrent assets and liabilities
|
|
|
(4.9
|
)
|
|
|
(3.8
|
)
|
|
|
(12.6
|
)
|
|
|
(17.1
|
)
|
|
|
|
5.5
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
26.1
|
|
|
$
|
50.8
|
|
|
$
|
48.2
|
|
|
$
|
57.2
|
|
|
|
$
|
15.6
|
|
|
$
|
62.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
EBITDA to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14.1
|
|
|
$
|
38.6
|
|
|
$
|
38.1
|
|
|
$
|
45.9
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.4
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
54.4
|
|
|
|
24.8
|
|
|
|
18.6
|
|
Deferred tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Depreciation and amortization
expense
|
|
|
12.0
|
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
11.3
|
|
|
|
|
9.2
|
|
|
|
41.7
|
|
|
|
54.8
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
26.1
|
|
|
$
|
50.8
|
|
|
$
|
48.2
|
|
|
$
|
57.2
|
|
|
|
$
|
15.6
|
|
|
$
|
62.7
|
|
|
$
|
72.8
|
|
|
$
|
62.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
operating margin to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14.1
|
|
|
$
|
38.6
|
|
|
$
|
38.1
|
|
|
$
|
45.9
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.4
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
12.0
|
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
11.3
|
|
|
|
|
9.2
|
|
|
|
41.7
|
|
|
|
54.8
|
|
|
|
41.7
|
|
Deferred income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Other, net
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
54.4
|
|
|
|
24.8
|
|
|
|
18.6
|
|
General and administrative expense
|
|
|
7.7
|
|
|
|
7.2
|
|
|
|
6.7
|
|
|
|
7.3
|
|
|
|
|
1.1
|
|
|
|
5.1
|
|
|
|
8.4
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
$
|
34.4
|
|
|
$
|
58.3
|
|
|
$
|
54.9
|
|
|
$
|
64.5
|
|
|
|
$
|
16.7
|
|
|
$
|
67.8
|
|
|
$
|
81.2
|
|
|
$
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes non-cash amortization of debt issue costs of $0.8
million for the two months ended December 31, 2005 and
$3.9 million for the nine months ended September 30, 2006.
|
16
RISK
FACTORS
Limited partner interests are inherently different from
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in similar businesses. You should
consider carefully the following risk factors together with all
of the other information included in this prospectus in
evaluating an investment in our common units.
If any of the following risks were actually to occur, then
our business, financial condition or results of operations could
be materially adversely affected. In that case, we might not be
able to pay the minimum quarterly distribution on our common
units, the trading price of our common units could decline and
you could lose all or part of your investment.
Risks
Related to Our Business
We may
not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner, to enable
us to make cash distributions to holders of our common units and
subordinated units at the initial distribution rate under our
cash distribution policy.
In order to make our cash distributions at our initial
distribution rate of $0.3375 per common unit and
subordinated unit per complete quarter, or $1.35 per unit per
year, we will require available cash of approximately
$9.8 million per quarter, or $39.0 million per year,
based on the common units and subordinated units outstanding
immediately after completion of this offering
($10.6 million or $42.5 million, respectively, if the
underwriters exercise in full their option to purchase
additional common units). We may not have sufficient available
cash from operating surplus each quarter to enable us to make
cash distributions at the initial distribution rate under our
cash distribution policy. The amount of cash we can distribute
on our units principally depends upon the amount of cash we
generate from our operations, which will fluctuate from quarter
to quarter based on, among other things:
|
|
|
|
|
the fees we charge and the margins we realize for our services;
|
|
|
|
the prices of, levels of production of, and demand for, natural
gas and natural gas liquids, or NGLs;
|
|
|
|
the volume of natural gas we gather, treat, compress, process,
transport and sell, and the volume of NGLs we process or
fractionate and sell;
|
|
|
|
the relationship between natural gas and NGL prices;
|
|
|
|
cash settlements of hedging positions;
|
|
|
|
the level of competition from other midstream energy companies;
|
|
|
|
the level of our operating and maintenance and general and
administrative costs; and
|
|
|
|
prevailing economic conditions.
|
In addition, the actual amount of cash we will have available
for distribution will depend on other factors, some of which are
beyond our control, including:
|
|
|
|
|
the level of capital expenditures we make;
|
|
|
|
our ability to make borrowings under our credit facility to pay
distributions;
|
|
|
|
the cost of acquisitions;
|
|
|
|
our debt service requirements and other liabilities;
|
|
|
|
fluctuations in our working capital needs;
|
|
|
|
general and administrative expenses, including expenses we will
incur as a result of being a public company;
|
17
|
|
|
|
|
restrictions on distributions contained in our debt
agreements; and
|
|
|
|
the amount of cash reserves established by our general partner
for the proper conduct of our business.
|
For a description of additional restrictions and factors that
may affect our ability to make cash distributions, please see
Our Cash Distribution Policy and Restrictions on
Distributions.
On a
pro forma basis we would not have had sufficient cash available
for distribution to pay the full minimum quarterly distribution
on all units for the year ended December 31, 2005 or for
the twelve months ended September 30, 2006.
The amount of available cash we need to pay the minimum
quarterly distribution for four quarters on all of our units to
be outstanding immediately after this offering is approximately
$39.0 million. The amount of our pro forma available cash
generated during the year ended December 31, 2005 and the
twelve months ended September 30, 2006 would have been
sufficient to allow us to pay the full minimum quarterly
distribution on all of our common units but only approximately
29% and 98%, respectively, of the minimum quarterly distribution
on our subordinated units during these periods (29% and 98%
respectively, assuming the underwriters exercise in full their
option to purchase additional common units). For a calculation
of our ability to make distributions to unitholders based on our
pro forma results for 2006, please see Our Cash
Distribution Policy and Restrictions on Distributions.
Our
cash flow is affected by natural gas and NGL prices, and
decreases in these prices could adversely affect our ability to
make distributions to holders of our common units and
subordinated units.
Our operations can be affected by the level of natural gas and
NGL prices and the relationship between these prices. The prices
of natural gas and NGLs have been volatile and we expect this
volatility to continue. The NYMEX daily settlement price for
natural gas for the forward month contract in 2005 ranged from a
high of $15.38 per MMBtu to a low of $5.79 per MMBtu.
In the first nine months of 2006, NYMEX pricing ranged from a
high of $10.63 per MMBtu to a low of $4.20 per MMBtu.
Natural gas prices reached relatively high levels in 2005 and
early 2006 but have declined substantially through the first
three quarters of 2006, with the forward month gas futures
contracts closing at a four-year low in September of 2006. NGL
prices exhibit similar volatility. Based on monthly index
prices, the average price for our NGL composition ranged from a
high of $1.12 per gallon to a low $0.73 per gallon in 2005, and
from a high of $1.14 per gallon to a low of $0.88 per
gallon for the first nine months of 2006.
Our future cash flow will be materially adversely affected if we
experience significant, prolonged pricing deterioration below
general price levels experienced over the past few years in our
industry.
The markets and prices for natural gas and NGLs depend upon
factors beyond our control. These factors include demand for
these commodities, which fluctuate with changes in market and
economic conditions and other factors, including:
|
|
|
|
|
the impact of seasonality and weather;
|
|
|
|
general economic conditions;
|
|
|
|
the level of domestic crude oil and natural gas production and
consumption;
|
|
|
|
the availability of imported natural gas, NGLs and crude oil;
|
|
|
|
actions taken by foreign oil and gas producing nations;
|
|
|
|
the availability of local, intrastate and interstate
transportation systems;
|
|
|
|
the availability and marketing of competitive fuels;
|
|
|
|
the impact of energy conservation efforts; and
|
|
|
|
the extent of governmental regulation and taxation.
|
Our primary natural gas gathering and processing arrangements
that expose us to commodity price risk are our
percent-of-proceeds
arrangements. For the nine month period ended September 30,
2006, our
percent-of-proceeds
arrangements accounted for approximately 96% of our gathered
natural gas volume.
18
Under
percent-of-proceeds
arrangements, we generally process natural gas from producers
for an agreed percentage of the proceeds from the sale of
residue gas and NGLs resulting from our processing activities,
selling the resulting residue gas and NGLs at market prices.
Under these types of arrangements, our revenues and our cash
flows increase or decrease, whichever is applicable, as the
price of natural gas, NGLs and crude oil fluctuates. For
additional information regarding our hedging activities, please
see Managements Discussion and Analysis of Financial
Condition and Results of Operation Quantitative and
Qualitative Disclosures about Market Risk Commodity
Price Risk.
Because
of the natural decline in production from existing wells in our
operating regions, our success depends on our ability to obtain
new sources of supplies of natural gas and NGLs, which depends
on certain factors beyond our control. Any decrease in supplies
of natural gas or NGLs could adversely affect our business and
operating results.
Our gathering systems are connected to natural gas wells, from
which the production will naturally decline over time, which
means that our cash flows associated with these wells will also
decline over time. To maintain or increase throughput levels on
our gathering systems and the utilization rate at our processing
plants and our treating and fractionation facilities, we must
continually obtain new natural gas supplies. Our ability to
obtain additional sources of natural gas depends in part on the
level of successful drilling activity near our gathering systems.
We have no control over the level of drilling activity in the
areas of our operations, the amount of reserves associated with
the wells or the rate at which production from a well will
decline. In addition, we have no control over producers or their
drilling or production decisions, which are affected by, among
other things, prevailing and projected energy prices, demand for
hydrocarbons, the level of reserves, geological considerations,
governmental regulations, availability of drilling rigs and
other production and development costs and the availability and
cost of capital. We believe that rig availability in the
Fort Worth Basin has been and will continue to be a
limiting factor on the number of wells drilled in that area.
Fluctuations in energy prices can greatly affect production
rates and investments by third parties in the development of new
oil and natural gas reserves. Drilling activity generally
decreases as oil and natural gas prices decrease. Natural gas
prices reached relatively high levels in 2005 and early 2006 but
have declined substantially through the first
three quarters of 2006, with gas futures contracts closing
at a four-year low in September of 2006. These recent declines
in natural gas prices are beginning to have a negative impact on
exploration, development and production activity, and if
sustained, could lead to a material decrease in such activity.
Reductions in exploration or production activity or shut-ins by
producers in the areas in which we operate as a result of a
sustained decline in natural gas prices would lead to reduced
utilization of our gathering and processing assets.
Because of these factors, even if new natural gas reserves are
discovered in areas served by our assets, producers may choose
not to develop those reserves. If, due to reductions in drilling
activity or competition, we are not able to obtain new supplies
of natural gas to replace the natural decline in volumes from
existing wells, throughput on our pipelines and the utilization
rates of our treating, processing and fractionation facilities
would decline, which could reduce our revenue and impair our
ability to make distributions to our unitholders.
Our
hedging activities may not be effective in reducing the
variability of our cash flows and may, in certain circumstances,
increase the variability of our cash flows. In addition, the
significant contribution to our results of operations that we
are currently receiving from our hedge positions will decrease
substantially through 2010.
We have entered into derivative transactions related to only a
portion of our equity volumes. As a result, we will continue to
have direct commodity price risk to the unhedged portion. Our
actual future volumes may be significantly higher or lower than
we estimated at the time we entered into the derivative
transactions for that period. If the actual amount is higher
than we estimated, we will have greater commodity price risk
than we intended. If the actual amount is lower than the amount
that is subject to our derivative financial instruments, we
might be forced to satisfy all or a portion of our derivative
transactions without the benefit of the cash flow from our sale
of the underlying physical commodity, resulting in a
19
reduction of our liquidity. The derivative instruments we
utilize for these hedges are based on posted market prices,
which may be lower than the actual natural gas, NGL and
condensate prices that we realize in our operations. As a result
of these factors, our hedging activities may not be as effective
as we intend in reducing the variability of our cash flows, and
in certain circumstances may actually increase the variability
of our cash flows. To the extent we hedge our commodity price
risk, we may forego the benefits we would otherwise experience
if commodity prices were to change in our favor.
Our results of operations are currently realizing a significant
benefit from hedge positions entered into in April and May of
2006. We estimate that our hedges will generate approximately
$15 million in operating income for the twelve months
ending December 31, 2007. If future prices remain
comparable to current prices, we expect that this benefit will
decline materially over the life of the hedges, which cover
decreasing volumes at declining prices through 2010. For
additional information regarding our hedging activities, please
see Managements Discussion and Analysis of Financial
Condition and Results of Operation Quantitative and
Qualitative Disclosures about Market Risk.
The
assumptions underlying the minimum estimated EBITDA we include
in Our Cash Distribution Policy and Restrictions on
Distributions are inherently uncertain and are subject to
significant business, economic, financial, regulatory and
competitive risks and uncertainties that could cause actual
results to differ materially from those
forecasted.
The minimum estimated EBITDA set forth in Our Cash
Distribution Policy and Restrictions on Distributions
presents our ability to make the minimum quarterly distribution
for the twelve months ending December 31, 2007. Our minimum
estimated EBITDA and related assumptions have been prepared by,
and are the responsibility of, management and our independent
auditor has neither compiled nor examined our minimum estimated
EBITDA and provides no assurance nor any report on it. The
assumptions underlying our minimum estimated EBITDA are
inherently uncertain and are subject to significant business,
economic, financial, regulatory and competitive risks and
uncertainties that could cause actual results to differ
materially from those forecasted. If we do not achieve our
anticipated results, we may not be able to pay the full minimum
quarterly distribution or any amount on our common units or
subordinated units, in which event the market price of our
common units may decline materially.
We
depend on one natural gas producer for a significant portion of
our supply of natural gas. The loss of this customer or
replacement of its contracts on less favorable terms could
result in a decline in our volumes, revenues and cash available
for distribution.
Our largest natural gas supplier for the year ended
December 31, 2005 and the nine months ended
September 30, 2006 was ConocoPhillips, who accounted for
approximately 36% and 34%, respectively, of our supply. The loss
of all or even a portion of the natural gas volumes supplied by
this customer or the extension or replacement of these contracts
on less favorable terms, if at all, as a result of competition
or otherwise, could reduce our revenue or increase our cost for
product purchases, impairing our ability to make distributions
to our unitholders.
If
third-party pipelines and other facilities interconnected to our
natural gas pipelines and facilities become partially or fully
unavailable to transport natural gas and NGLs, our revenues and
cash available for distribution could be adversely
affected.
We depend upon third party pipelines and other facilities that
provide delivery options to and from our pipelines and
facilities. Since we do not own or operate these pipelines or
other facilities, their continuing operation is not within our
control. If any of these third-party pipelines and other
facilities become partially or fully unavailable to transport
natural gas and NGLs, our revenues and cash available for
distribution could be adversely affected.
We
depend on our Chico system for a substantial majority of our
revenues and if those revenues were reduced, there would be a
material adverse effect on our results of operations and ability
to make distributions to unitholders.
Any significant curtailment of gathering, compressing, treating,
processing or fractionation of natural gas on our Chico system
could result in our realizing materially lower levels of
revenues and cash flow for
20
the duration of such curtailment. For the nine months ended
September 30, 2006, our Chico plant inlet volume accounted
for over 90% of our revenues. Operations at our Chico system
could be partially curtailed or completely shut down,
temporarily or permanently, as a result of:
|
|
|
|
|
competition from other systems that may be able to meet producer
needs or supply end-user markets on a more cost-effective basis;
|
|
|
|
operational problems such as catastrophic events at the Chico
processing plant or gathering lines, labor difficulties or
environmental proceedings or other litigation that compel
cessation of all or a portion of the operations on our Chico
system;
|
|
|
|
an inability to obtain sufficient quantities of natural gas for
the Chico system at competitive terms; or
|
|
|
|
reductions in exploration or production activity, or shut-ins by
producers in the areas in which we operate.
|
The magnitude of the effect on us of any curtailment of
operations will depend on the length of the curtailment and the
extent of the operations affected by such curtailment. We have
no control over many of the factors that may lead to a
curtailment of operations.
In addition, our business interruption insurance is subject to
limitations and deductions. If a significant accident or event
occurs at our Chico system that is not fully insured, it could
adversely affect our operations and financial condition.
We are
exposed to the credit risk of Targa and any material
nonperformance by Targa could reduce our ability to make
distributions to our unitholders.
At the closing of this offering, we will enter into purchase
agreements with Targa pursuant to which Targa will purchase all
of our natural gas, NGLs and high-pressure condensate for a term
of 15 years. We will also enter into an omnibus agreement
with Targa which will address, among other things, the provision
of general and administrative and operating services to us. As
of January 31, 2007, Moodys and Standard &
Poors assigned Targa corporate credit ratings of B1 and
B+, respectively, which are speculative ratings. These
speculative ratings signify a higher risk that Targa will
default on its obligations, including its obligations to us,
than does an investment grade credit rating. Any material
nonperformance under the omnibus and purchase agreements by
Targa could materially and adversely impact our ability to
operate and make distributions to our unitholders.
Our
general partner is an obligor under, and subject to a pledge
related to, Targas credit facility; in the event Targa is
unable to meet its obligations under that facility, or is
declared bankrupt, Targas lenders may gain control of our
general partner or, in the case of bankruptcy, our partnership
may be dissolved.
Our general partner is an obligor under, and all of its assets
and Targas ownership interest in it are subject to a lien
related to, Targas credit facility. In the event Targa is
unable to satisfy its obligations under the credit facility and
the lenders foreclose on their collateral, the lenders will own
our general partner and all of its assets, which include the
general partner interest in us and our incentive distribution
rights. In such event, the lenders would control our management
and operation. Moreover, in the event Targa becomes insolvent or
is declared bankrupt, our general partner may be deemed
insolvent or declared bankrupt as well. Under the terms of our
partnership agreement, the bankruptcy or insolvency of our
general partner will cause a dissolution of our partnership.
Our
industry is highly competitive, and increased competitive
pressure could adversely affect our business and operating
results.
We compete with similar enterprises in our respective areas of
operation. Some of our competitors are large oil, natural gas
and petrochemical companies that have greater financial
resources and access to supplies of natural gas and NGLs than we
do. Some of these competitors may expand or construct gathering,
processing and transportation systems that would create
additional competition for the services we provide to our
customers. In addition, our customers who are significant
producers of natural gas may develop their own gathering,
processing and transportation systems in lieu of using ours. Our
ability to renew or replace existing contracts with our
customers at rates sufficient to maintain current revenues and
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cash flows could be adversely affected by the activities of our
competitors and our customers. All of these competitive
pressures could have a material adverse effect on our business,
results of operations, financial condition and ability to make
cash distributions to you.
Our
business involves many hazards and operational risks, some of
which may not be fully covered by insurance. If a significant
accident or event occurs that is not fully insured, our
operations and financial results could be adversely
affected.
Our operations are subject to many hazards inherent in the
gathering, compressing, treating, processing and transporting of
natural gas and NGLs, including:
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damage to pipelines and plants, related equipment and
surrounding properties caused by hurricanes, tornadoes, floods,
fires and other natural disasters, explosions and acts of
terrorism;
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inadvertent damage from third parties, including from
construction, farm and utility equipment;
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leaks of natural gas, NGLs and other hydrocarbons or losses of
natural gas or NGLs as a result of the malfunction of equipment
or facilities; and
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other hazards that could also result in personal injury and loss
of life, pollution and suspension of operations.
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These risks could result in substantial losses due to personal
injury
and/or loss
of life, severe damage to and destruction of property and
equipment and pollution or other environmental damage and may
result in curtailment or suspension of our related operations. A
natural disaster or other hazard affecting the areas in which we
operate could have a material adverse effect on our operations.
Our insurance is provided under Targas insurance programs.
We are not fully insured against all risks inherent to our
business. We are not insured against all environmental accidents
that might occur which may include toxic tort claims, other than
those considered to be sudden and accidental. If a significant
accident or event occurs that is not fully insured, it could
adversely affect our operations and financial condition. In
addition, Targa may not be able to maintain or obtain insurance
of the type and amount we desire at reasonable rates. Moreover,
significant claims by Targa may limit or eliminate the amount of
insurance proceeds available to us. As a result of market
conditions, premiums and deductibles for certain of our
insurance policies have increased substantially, and could
escalate further. In some instances, certain insurance could
become unavailable or available only for reduced amounts of
coverage.
Our
debt levels may limit our flexibility in obtaining additional
financing and in pursuing other business
opportunities.
At the closing of this offering, we will borrow approximately
$342.5 million under our new credit facility. Our level of
debt could have important consequences for us, including the
following:
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our ability to obtain additional financing, if necessary, for
working capital, capital expenditures, acquisitions or other
purposes may be impaired or such financing may not be available
on favorable terms;
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we will need a portion of our cash flow to make interest
payments on our debt, reducing the funds that would otherwise be
available for operations, future business opportunities and
distributions to unitholders;
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our debt level will make us more vulnerable to competitive
pressures or a downturn in our business or the economy
generally; and
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our debt level may limit our flexibility in responding to
changing business and economic conditions.
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Our ability to service our debt will depend upon, among other
things, our future financial and operating performance, which
will be affected by prevailing economic conditions and
financial, business, regulatory and other factors, some of which
are beyond our control. If our operating results are not
sufficient to service our current or future indebtedness, we
will be forced to take actions such as reducing distributions,
reducing or delaying our business activities, acquisitions,
investments or capital expenditures, selling assets,
restructuring or refinancing our debt, or seeking additional
equity capital. We may not be able to effect any of
22
these actions on satisfactory terms, or at all. Please see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources Capital Requirements.
Increases
in interest rates could adversely affect our
business.
In addition to our exposure to commodity prices, we will have
significant exposure to increases in interest rates. After this
offering, we expect to have approximately $342.5 million of
debt on a pro forma basis at variable interest rates. An
increase of 1 percentage point in the interest rates will
result in an increase in annual interest expense of
$3.4 million. As a result, our results of operations, cash
flows and financial condition could be materially adversely
affected by significant increases in interest rates.
Restrictions
in our credit facility may interrupt distributions to us from
our subsidiaries, which may limit our ability to make
distributions to you, satisfy our obligations and capitalize on
business opportunities.
We are a holding company with no business operations. As such,
we depend upon the earnings and cash flow of our subsidiaries
and the distribution of that cash to us in order to meet our
obligations and to allow us to make distributions to our
unitholders. In connection with this offering, we expect to
enter into a new credit facility which will contain covenants
limiting our ability to make distributions, incur indebtedness,
grant liens, and engage in transactions with affiliates.
Furthermore, our credit facility will contain covenants
requiring us to maintain a ratio of consolidated indebtedness to
consolidated EBITDA initially of not more than 5.75 to 1.00 and
a ratio of consolidated EBITDA to consolidated interest expense
of not less than 2.25 to 1.00. If we fail to meet these tests or
otherwise breach the terms of our credit facility our operating
subsidiary will be prohibited from making any distribution to us
and, ultimately, to you. Any interruption of distributions to us
from our subsidiaries may limit our ability to satisfy our
obligations and to make distributions to you.
We may
incur significant costs and liabilities in the future resulting
from a failure to comply with new or existing environmental
regulations or an accidental release of hazardous substances or
hydrocarbons into the environment.
Our operations are subject to stringent and complex federal,
state and local environmental laws and regulations. These
include, for example, (1) the federal Clean Air Act and
comparable state laws and regulations that impose obligations
related to air emissions, (2) the federal Resource
Conservation and Recovery Act, or RCRA, and comparable state
laws that impose requirements for the handling, storage,
treatment or discharge of waste from our facilities and
(3) the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, or CERCLA, also known
as Superfund, and comparable state laws that
regulate the cleanup of hazardous substances that may have been
released at properties currently or previously owned or operated
by us or locations to which we have sent waste for disposal.
Failure to comply with these laws and regulations or newly
adopted laws or regulations may trigger a variety of
administrative, civil and criminal enforcement measures,
including the assessment of monetary penalties, the imposition
of remedial requirements, and the issuance of orders enjoining
future operations or imposing additional compliance requirements
on such operations. Certain environmental regulations, including
CERCLA and analogous state laws and regulations, impose strict,
joint and several liability for costs required to clean up and
restore sites where hazardous substances or hydrocarbons have
been disposed or otherwise released. Moreover, it is not
uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly
caused by the release of hazardous substances, hydrocarbons or
other waste products into the environment.
There is inherent risk of the incurrence of environmental costs
and liabilities in our business due to our handling of natural
gas and other petroleum products, air emissions related to our
operations, and historical industry operations and waste
disposal practices. For example, an accidental release from one
of our facilities could subject us to substantial liabilities
arising from environmental cleanup and restoration costs, claims
made by neighboring landowners and other third parties for
personal injury and property damage and fines or penalties for
related violations of environmental laws or regulations.
Moreover, the possibility exists that stricter laws, regulations
or enforcement policies could significantly increase our
operational or compliance costs and the cost of any remediation
that may become necessary. In particular, we may incur
expenditures in order to maintain compliance with legal
requirements governing emissions of air pollutants
23
from our facilities. We may not be able to recover these costs
from insurance. Please see
Business Environmental Matters.
We
typically do not obtain independent evaluations of natural gas
reserves dedicated to our gathering pipeline systems; therefore,
volumes of natural gas on our systems in the future could be
less than we anticipate.
We typically do not obtain independent evaluations of natural
gas reserves connected to our gathering systems due to the
unwillingness of producers to provide reserve information as
well as the cost of such evaluations. Accordingly, we do not
have independent estimates of total reserves dedicated to our
gathering systems or the anticipated life of such reserves. If
the total reserves or estimated life of the reserves connected
to our gathering systems is less than we anticipate and we are
unable to secure additional sources of natural gas, then the
volumes of natural gas on our gathering systems in the future
could be less than we anticipate. A decline in the volumes of
natural gas on our systems could have a material adverse effect
on our business, results of operations, financial condition and
our ability to make cash distributions to you.
A
change in the jurisdictional characterization of some of our
assets by federal, state or local regulatory agencies or a
change in policy by those agencies may result in increased
regulation of our assets, which may cause our revenues to
decline and operating expenses to increase.
Our natural gas gathering operations are generally exempt from
Federal Energy Regulatory Commission, or FERC, regulation under
the Natural Gas Act of 1938, or NGA, but FERC regulation still
affects these businesses and the markets for products derived
from these businesses. FERCs policies and practices across
the range of its natural gas regulatory activities, including,
for example, its policies on open access transportation,
ratemaking, capacity release and market center promotion,
indirectly affect intrastate markets. In recent years, FERC has
pursued pro-competitive policies in its regulation of interstate
natural gas pipelines. However, we cannot assure you that FERC
will continue this approach as it considers matters such as
pipeline rates and rules and policies that may affect rights of
access to natural gas transportation capacity. In addition, the
distinction between FERC-regulated transmission services and
federally unregulated gathering services has been the subject of
regular litigation; accordingly, the classification and
regulation of some of our intrastate pipelines may be subject to
change based on future determinations by FERC, the courts or
Congress.
State regulation of natural gas gathering facilities generally
includes various safety, environmental and, in some
circumstances, nondiscriminatory take requirements, and
complaint-based rate regulation. Natural gas gathering may
receive greater regulatory scrutiny at both the state and
federal levels now that FERC has taken a more light-handed
approach to regulation of the gathering activities of interstate
pipeline transmission companies and as a number of such
companies have transferred gathering facilities to unregulated
affiliates. The Railroad Commission of Texas, or TRRC, has
adopted regulations that generally allow natural gas producers
and shippers to file complaints with the TRRC in an effort to
resolve grievances relating to intrastate pipeline access and
rate discrimination. Our natural gas gathering operations could
be adversely affected in the future should they become subject
to the application of state or federal regulation of rates and
services. Our gathering operations also may be or become subject
to safety and operational regulations relating to the design,
installation, testing, construction, operation, replacement and
management of gathering facilities. Additional rules and
legislation pertaining to these matters are considered or
adopted from time to time. We cannot predict what effect, if
any, such changes might have on our operations, but the industry
could be required to incur additional capital expenditures and
increased costs depending on future legislative and regulatory
changes. Other state and local regulations also may affect our
business. See Business Regulation of
Operations.
Our
costs may increase because our credit obligations under hedging
and other contractual arrangements will not be guaranteed by
Targa.
Prior to the completion of this offering, Targa maintains credit
support for our obligations related to derivative financial
instruments, such as commodity price hedging contracts.
Beginning with the closing of this offering, Targa will no
longer provide credit support for our obligations under
derivative financial instruments and other commercial contracts
governing our business or operations. Consequently, we will need
to provide our own credit support arrangements for commercial
contracts, which may increase our
24
costs. For example, it could be more costly for us to manage our
commodity price risk through certain types of financial hedging
arrangements unless we are able to achieve creditworthiness
similar to the current creditworthiness of Targa.
All of
our operations are based in the Fort Worth Basin and we are
dependent on drilling activities and our ability to attract and
maintain customers in such region.
All of our operations are located in the Fort Worth Basin
in north Texas. Due to our lack of diversification in industry
type and location, an adverse development in the oil and gas
production from this area would have a significantly greater
impact on our financial condition and results of operations than
if we maintained more diverse assets and operating areas.
Under
the terms of our gas sales agreement, Targa will manage the
sales of our natural gas and will pay us the amount it realizes
for gas sales less certain costs; however, unexpected volume
changes due to production variability or to gathering, plant, or
pipeline system disruptions may increase our exposure to
commodity price movements.
Targa will sell our processed natural gas to third parties and
other Targa affiliates at our plant tailgate or at interstate
pipeline pooling points. Sales made to natural gas marketers and
end-users may be interrupted by disruptions to volumes anywhere
along the system. Targa will attempt to balance sales with
volumes supplied from our processing operations, but unexpected
volume variations due to production variability or to gathering,
plant, or pipeline system disruptions may expose us to volume
imbalances which, in conjunction with movements in commodity
prices, could materially impact our income from operations, and
cash flow.
We may
incur significant costs and liabilities resulting from pipeline
integrity programs and related repairs.
Pursuant to the Pipeline Safety Improvement Act of 2002, the
United States Department of Transportation, or DOT, has adopted
regulations requiring pipeline operators to develop integrity
management programs for pipelines located where a leak or
rupture could do the most harm in high consequence
areas. The regulations require operators to:
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perform ongoing assessments of pipeline integrity;
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identify and characterize applicable threats to pipeline
segments that could impact a high consequence area;
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improve data collection, integration and analysis;
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repair and remediate the pipeline as necessary; and
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implement preventive and mitigating actions.
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We currently estimate that we will incur an aggregate cost of
approximately $1 million between 2006 and 2010 to implement
pipeline integrity management program testing along certain
segments of our natural gas and NGL pipelines. This does not
include the costs, if any, of any repair, remediation,
preventative or mitigating actions that may be determined to be
necessary as a result of the testing program, which costs could
be substantial.
Our
construction of new assets may not result in revenue increases
and is subject to regulatory, environmental, political, legal
and economic risks, which could adversely affect our results of
operations and financial condition.
One of the ways we intend to grow our business is through the
construction of new midstream assets. The construction of
additions or modifications to our existing systems, and the
construction of new midstream assets, involves numerous
regulatory, environmental, political and legal uncertainties
beyond our control and may require the expenditure of
significant amounts of capital. If we undertake these projects,
they may not be completed on schedule or at the budgeted cost,
or at all. Moreover, our revenues may not increase immediately
upon the expenditure of funds on a particular project. For
instance, if we expand a new pipeline, the construction may
occur over an extended period of time, and we will not receive
any material increases in revenues until the project is
completed. Moreover, we may construct facilities to
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capture anticipated future growth in production in a region in
which such growth does not materialize. Since we are not engaged
in the exploration for and development of natural gas and oil
reserves, we do not possess reserve expertise and we often do
not have access to third-party estimates of potential reserves
in an area prior to constructing facilities in such area. To the
extent we rely on estimates of future production in our decision
to construct additions to our systems, such estimates may prove
to be inaccurate because there are numerous uncertainties
inherent in estimating quantities of future production. As a
result, new facilities may not be able to attract enough
throughput to achieve our expected investment return, which
could adversely affect our results of operations and financial
condition. In addition, the construction of additions to our
existing gathering and transportation assets may require us to
obtain new
rights-of-way
prior to constructing new pipelines. We may be unable to obtain
such
rights-of-way
to connect new natural gas supplies to our existing gathering
lines or capitalize on other attractive expansion opportunities.
Additionally, it may become more expensive for us to obtain new
rights-of-way
or to renew existing
rights-of-way.
If the cost of renewing or obtaining new
rights-of-way
increases, our cash flows could be adversely affected.
If we
do not make acquisitions on economically acceptable terms, or
efficiently and effectively integrate the acquired assets with
our asset base, our future growth will be limited.
Our ability to grow depends, in part, on our ability to make
acquisitions that result in an increase in the cash generated
from operations per unit. If we are unable to make these
accretive acquisitions either because we are (1) unable to
identify attractive acquisition candidates or negotiate
acceptable purchase contracts with them, (2) unable to
obtain financing for these acquisitions on economically
acceptable terms, or (3) outbid by competitors, then our
future growth and ability to increase distributions will be
limited.
Any acquisition involves potential risks, including, among other
things:
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mistaken assumptions about volumes, revenues and costs,
including synergies;
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an inability to integrate successfully the businesses we acquire;
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the assumption of unknown liabilities;
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limitations on rights to indemnity from the seller;
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mistaken assumptions about the overall costs of equity or debt;
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the diversion of managements and employees attention
from other business concerns;
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unforeseen difficulties operating in new product areas or new
geographic areas; and
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customer or key employee losses at the acquired businesses.
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If these risks materialize, the acquired assets may inhibit our
growth or fail to deliver expected benefits.
Our acquisition strategy is based, in part, on our expectation
of ongoing divestitures of energy assets by industry
participants. A material decrease in such divestitures would
limit our opportunities for future acquisitions and could
adversely affect our operations and cash flows available for
distribution to our unitholders.
We do
not own all of the land on which our pipelines and facilities
are located, which could disrupt our operations.
We do not own most of the land on which our pipelines and
facilities are located, and we are therefore subject to the
possibility of more onerous terms
and/or
increased costs to retain necessary land use if we do not have
valid rights of way or leases or if such rights of way or leases
lapse or terminate. We sometimes obtain the rights to land owned
by third parties and governmental agencies for a specific period
of time. Our loss of these rights, through our inability to
renew
right-of-way
contracts, leases or otherwise, could cause us to cease
operations on the affected land, increase costs related to
continuing operations elsewhere, reduce our revenue and impair
our ability to make distributions to our unitholders.
We do
not have any officers or employees and rely solely on officers
of our general partner and employees of Targa.
None of the officers of our general partner are employees of our
general partner. We intend to enter into an omnibus agreement
with Targa, pursuant to which Targa will operate our assets and
perform other
26
administrative services for us such as accounting, legal,
regulatory, corporate development, finance, land and
engineering. Affiliates of Targa conduct businesses and
activities of their own in which we have no economic interest,
including businesses and activities relating to Targa. As a
result, there could be material competition for the time and
effort of the officers and employees who provide services to our
general partner and Targa. If the officers of our general
partner and the employees of Targa do not devote sufficient
attention to the management and operation of our business, our
financial results may suffer and our ability to make
distributions to our unitholders may be reduced.
If our
general partner fails to develop or maintain an effective system
of internal controls, then we may not be able to accurately
report our financial results or prevent fraud. As a result,
current and potential unitholders could lose confidence in our
financial reporting, which would harm our business and the
trading price of our common units.
Targa Resources GP LLC, our general partner, has sole
responsibility for conducting our business and for managing our
operations. Effective internal controls are necessary for our
general partner, on our behalf, to provide reliable financial
reports, prevent fraud and operate us successfully as a public
company. If our general partners efforts to develop and
maintain its internal controls are not successful, it is unable
to maintain adequate controls over our financial processes and
reporting in the future or it is unable to assist us in
complying with our obligations under Section 404 of the
Sarbanes-Oxley Act of 2002, our operating results could be
harmed or we may fail to meet our reporting obligations.
Ineffective internal controls also could cause investors to lose
confidence in our reported financial information, which would
likely have a negative effect on the trading price of our common
units.
The
amount of cash we have available for distribution to holders of
our common units and subordinated units depends primarily on our
cash flow and not solely on profitability. Consequently, even if
we are profitable, we may not be able to make cash distributions
to holders of our common units and subordinated
units.
You should be aware that the amount of cash we have available
for distribution depends primarily upon our cash flow and not
solely on profitability, which will be affected by non-cash
items. As a result, we may make cash distributions during
periods when we record losses for financial accounting purposes
and may not make cash distributions during periods when we
record net earnings for financial accounting purposes.
Terrorist
attacks, and the threat of terrorist attacks, have resulted in
increased costs to our business. Continued hostilities in the
Middle East or other sustained military campaigns may adversely
impact our results of operations.
The long-term impact of terrorist attacks, such as the attacks
that occurred on September 11, 2001, and the threat of
future terrorist attacks on our industry in general, and on us
in particular, is not known at this time. Increased security
measures taken by us as a precaution against possible terrorist
attacks have resulted in increased costs to our business.
Uncertainty surrounding continued hostilities in the Middle East
or other sustained military campaigns may affect our operations
in unpredictable ways, including disruptions of crude oil
supplies and markets for our products, and the possibility that
infrastructure facilities could be direct targets of, or
indirect casualties of, an act of terror.
Changes in the insurance markets attributable to terrorist
attacks may make certain types of insurance more difficult for
us to obtain. Moreover, the insurance that may be available to
us may be significantly more expensive than our existing
insurance coverage. Instability in the financial markets as a
result of terrorism or war could also affect our ability to
raise capital.
Risks
Inherent in an Investment in Us
Targa
controls our general partner, which has sole responsibility for
conducting our business and managing our operations. Targa has
conflicts of interest with us and may favor its own interests to
your detriment.
Following this offering, Targa will own and control our general
partner. Some of our general partners directors, and some
of its executive officers, are directors or officers of Targa.
Therefore, conflicts of interest
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may arise between Targa, including our general partner, on the
one hand, and us and our unitholders, on the other hand. In
resolving these conflicts of interest, our general partner may
favor its own interests and the interests of its affiliates over
the interests of our unitholders. These conflicts include, among
others, the following situations:
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neither our partnership agreement nor any other agreement
requires Targa to pursue a business strategy that favors us.
Targas directors and officers have a fiduciary duty to
make decisions in the best interests of the owners of Targa,
which may be contrary to our interests;
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our general partner is allowed to take into account the
interests of parties other than us, such as Targa, or its
owners, including Warburg Pincus, in resolving conflicts of
interest; and
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Targa is not limited in its ability to compete with us and is
under no obligation to offer assets to us; please see
Targa is not limited in its ability to compete
with us, which could limit our ability to acquire additional
assets or businesses below.
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Please see Conflicts of Interest and Fiduciary
Duties.
The
credit and business 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 and
its owners 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.
Targa, the owner of our general partner, has significant
indebtedness outstanding and is partially dependent on the cash
distributions from their indirect 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. 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.
Our
partnership agreement limits our general partners
fiduciary duties to holders of our units and restricts the
remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of
fiduciary duty.
The directors and officers of our general partner have a
fiduciary duty to manage our general partner in a manner
beneficial to its owner, Targa. Our partnership agreement
contains provisions that reduce the standards to which our
general partner would otherwise be held by state fiduciary duty
laws. For example, our partnership agreement:
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permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and factors that it desires, and it has no
duty or obligation to give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner;
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provides that our general partner will not have any liability to
us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith, meaning it
believed the decision was in the best interests of our
partnership;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of our general partner acting in good
faith and not involving a vote of unitholders must be on terms
no less favorable to us than those generally being provided to
or available from unrelated third parties or must be fair
and reasonable to us, as determined by our general partner
in good faith and that, in determining whether a transaction or
resolution is fair and reasonable, our general
partner may consider the totality of the relationships
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between the parties involved, including other transactions that
may be particularly advantageous or beneficial to us;
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for any acts or omissions unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that the general partner or
those other persons acted in bad faith or engaged in fraud or
willful misconduct or, in the case of a criminal matter, acted
with knowledge that the conduct was criminal; and
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provides that in resolving conflicts of interest, it will be
presumed that in making its decision the general partner acted
in good faith, and in any proceeding brought by or on behalf of
any limited partner or us, the person bringing or prosecuting
such proceeding will have the burden of overcoming such
presumption.
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If you purchase any common units, you will agree to become bound
by the provisions in the partnership agreement, including the
provisions discussed above. Please see Conflicts of
Interests and Fiduciary Duties Fiduciary
Duties.
Targa
is not limited in its ability to compete with us, which could
limit our ability to acquire additional assets or
businesses.
Neither our partnership agreement nor the omnibus agreement
between us and Targa will prohibit Targa from owning assets or
engaging in businesses that compete directly or indirectly with
us. In addition, Targa may acquire, construct or dispose of
additional midstream or other assets in the future, without any
obligation to offer us the opportunity to purchase or construct
any of those assets. Targa is a large, established participant
in the midstream energy business, and has significantly greater
resources and experience than we have, which factors may make it
more difficult for us to compete with Targa with respect to
commercial activities as well as for acquisition candidates. As
a result, competition from Targa could adversely impact our
results of operations and cash available for distribution.
Please see Conflicts of Interest and Fiduciary
Duties.
Cost
reimbursements due our general partner and its affiliates for
services provided, which will be determined by our general
partner, will be substantial and will reduce our cash available
for distribution to you.
Pursuant to an omnibus agreement we will enter into with Targa
Resources GP LLC, our general partner and others upon the
closing of this offering, Targa will receive reimbursement for
the payment of operating expenses related to our operations and
for the provision of various general and administrative services
for our benefit. Payments for these services will be substantial
and will reduce the amount of cash available for distribution to
unitholders. Please see Certain Relationships and Related
Party Transactions Omnibus Agreement. In
addition, under Delaware partnership law, our general partner
has unlimited liability for our obligations, such as our debts
and environmental liabilities, except for our contractual
obligations that are expressly made without recourse to our
general partner. To the extent our general partner incurs
obligations on our behalf, we are obligated to reimburse or
indemnify our general partner. If we are unable or unwilling to
reimburse or indemnify our general partner, our general partner
may take actions to cause us to make payments of these
obligations and liabilities. Any such payments could reduce the
amount of cash otherwise available for distribution to our
unitholders.
Holders
of our common units have limited voting rights and are not
entitled to elect our general partner or its
directors.
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
managements decisions regarding our business. Unitholders
will not elect our general partner or our general partners
board of directors, and will have no right to elect our general
partner or our general partners board of directors on an
annual or other continuing basis. The board of directors of our
general partner will be chosen by Targa. Furthermore, if the
unitholders were dissatisfied with the performance of our
general partner, they will have little ability
29
to remove our general partner. As a result of these limitations,
the price at which the common units will trade could be
diminished because of the absence or reduction of a takeover
premium in the trading price.
Even
if holders of our common units are dissatisfied, they cannot
initially remove our general partner without its
consent.
The unitholders will be unable initially to remove our general
partner without its consent because our general partner and its
affiliates will own sufficient units upon completion of this
offering to be able to prevent its removal. The vote of the
holders of at least
662/3%
of all outstanding units voting together as a single class is
required to remove the general partner. Following the closing of
this offering, our general partner and its affiliates will own
40.7% of our aggregate outstanding common and subordinated
units. Also, if our general partner is removed without cause
during the subordination period and units held by our general
partner and its affiliates are not voted in favor of that
removal, all remaining subordinated units will automatically
convert into common units and any existing arrearages on our
common units will be extinguished. A removal of our general
partner under these circumstances would adversely affect our
common units by prematurely eliminating their distribution and
liquidation preference over our subordinated units, which would
otherwise have continued until we had met certain distribution
and performance tests. 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 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 our general partners performance in
managing our partnership will most likely result in the
termination of the subordination period and conversion of all
subordinated units to common units.
We may
issue additional units without your approval, which would dilute
your existing ownership interests.
Our partnership agreement does not limit the number of
additional limited partner interests that we may issue at any
time without the approval of our unitholders. The issuance by us
of additional common units or other equity securities of equal
or senior rank will have the following effects:
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our unitholders proportionate ownership interest in us
will decrease;
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the amount of cash available for distribution on each unit may
decrease;
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because a lower percentage of total outstanding units will be
subordinated units, the risk that a shortfall in the payment of
the minimum quarterly distribution will be borne by our common
unitholders will increase;
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the ratio of taxable income to distributions may increase;
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the relative voting strength of each previously outstanding unit
may be diminished; and
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the market price of the common units may decline.
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Affiliates
of our general partner may sell common units in the public
markets, which sales could have an adverse impact on the trading
price of the common units.
After the sale of the common units offered hereby, management of
our general partner and Targa will hold no common units and
11,528,231 subordinated units. All of the subordinated units
will convert into common units at the end of the subordination
period and may convert earlier. The sale of these units in the
public markets could have an adverse impact on the price of the
common units or on any trading market that may develop.
Our
general partner may elect to cause us to issue Class B
units to it in connection with a resetting of the target
distribution levels related to our general partners
incentive distribution rights without the approval of the
conflicts committee of our general partner or holders of our
common units. This ability may result in lower distributions to
holders of our common units in certain situations.
Our general partner has the right, at a time when there are no
subordinated units outstanding and it has received incentive
distributions at the highest level to which it is entitled (48%)
for each of the prior
30
four consecutive fiscal quarters, to reset the initial cash
target distribution levels at higher levels based on the
distribution at the time of the exercise of the reset election.
Following a reset election by our general partner, the minimum
quarterly distribution amount will be reset to an amount equal
to the average cash distribution amount per common unit for the
two fiscal quarters immediately preceding the reset
election (such amount is referred to as the reset
minimum quarterly distribution) and the target
distribution levels will be reset to correspondingly higher
levels based on percentage increases above the reset minimum
quarterly distribution amount.
In connection with resetting these target distribution levels,
our general partner will be entitled to receive Class B
units. The Class B units will be entitled to the same cash
distributions per unit as our common units and will be
convertible into an equal number of common units. The number of
Class B units to be issued will be equal to that number of
common units whose aggregate quarterly cash distributions
equaled the average of the distributions to our general partner
on the incentive distribution rights in the prior two quarters.
We anticipate that our general partner would exercise this reset
right in order to facilitate acquisitions or internal growth
projects that would not be sufficiently accretive to cash
distributions per common unit without such conversion; however,
it is possible that our general partner could exercise this
reset election at a time when it is experiencing, or may be
expected to experience, declines in the cash distributions it
receives related to its incentive distribution rights and may
therefore desire to be issued our Class B units, which are
entitled to receive cash distributions from us on the same
priority as our common units, rather than retain the right to
receive incentive distributions based on the initial target
distribution levels. As a result, a reset election may cause our
common unitholders to experience dilution in the amount of cash
distributions that they would have otherwise received had we not
issued new Class B units to our general partner in
connection with resetting the target distribution levels related
to our general partners incentive distribution rights.
Please see Provisions of Our Partnership Agreement Related
to Cash Distributions General Partner Interest and
Incentive Distribution Rights.
Increases
in interest rates could adversely impact our unit price and our
ability to issue additional equity to make acquisitions, for
expansion capital expenditures or for other
purposes.
As with other yield-oriented securities, our unit price is
impacted by the level of our cash distributions and implied
distribution yield. The distribution yield is often used by
investors to compare and rank related yield-oriented securities
for investment decision-making purposes. Therefore, changes in
interest rates, either positive or negative, may affect the
yield requirements of investors who invest in our units, and a
rising interest rate environment could have an adverse impact on
our unit price and our ability to issue additional equity to
make acquisitions, for expansion capital expenditures or for
other purposes.
We
will incur increased costs as a result of being a
publicly-traded company.
We have no history operating as a publicly-traded company. As a
publicly-traded company, we will incur significant legal,
accounting and other expenses that we would not incur as a
private company. In addition, the Sarbanes-Oxley Act of 2002, as
well as new rules subsequently implemented by the SEC and The
NASDAQ Global Market, have required changes in corporate
governance practices of publicly-traded companies. We expect
these new rules and regulations to increase our legal and
financial compliance costs and to make activities more
time-consuming and costly. For example, as a result of becoming
a publicly-traded company, we are required to have at least
three independent directors, create additional board committees
and adopt policies regarding internal controls and disclosure
controls and procedures, including the preparation of reports on
internal controls over financial reporting. In addition, we will
incur additional costs associated with our publicly-traded
company reporting requirements. We also expect these new rules
and regulations to make it more difficult and more expensive for
our general partner to obtain director and officer liability
insurance and it may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, it may be more difficult
for our general partner to attract and retain qualified persons
to serve on its board of directors or as executive officers. We
have included $2.5 million of estimated incremental costs
per year associated with being a publicly-traded company for
purposes of our financial forecast included elsewhere in this
prospectus; however, it is possible that our actual incremental
costs of being a publicly-traded company will be higher than we
currently estimate.
31
Our
partnership agreement restricts the voting rights of unitholders
owning 20% or more of our common units.
Unitholders voting rights are further restricted by the
partnership agreement provision providing that any units held by
a person that owns 20% or more of any class of units then
outstanding, other than our general partner, its affiliates,
their transferees and persons who acquired such units with the
prior approval of the board of directors of our general partner,
cannot vote on any matter. Our partnership agreement also
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.
Control
of our general partner may be transferred to a third party
without unitholder consent.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of the unitholders.
Furthermore, our partnership agreement does not restrict the
ability of the owners of our general partner from transferring
all or a portion of their respective ownership interest in our
general partner to a third party. The new owners of our general
partner would then be in a position to replace the board of
directors and officers of our general partner with its own
choices and thereby influence the decisions taken by the board
of directors and officers.
Our
general partner has a limited call right that may require you to
sell your units at an undesirable time or price.
If at any time our general partner and its affiliates own more
than 80% of the common units, our general partner will have the
right, but not the obligation, which it may assign to any of its
affiliates or to us, to acquire all, but not less than all, of
the common units held by unaffiliated persons at a price not
less than their then-current market price. As a result, you may
be required to sell your common units at an undesirable time or
price and may not receive any return on your investment. You may
also incur a tax liability upon a sale of your units. At the end
of the subordination period, assuming no additional issuances of
common units, our general partner and its affiliates will own
approximately 40.7% of our aggregate outstanding common units.
For additional information about this right, please see
The Partnership Agreement Limited Call
Right.
Your
liability may not be limited if a court finds that unitholder
action constitutes control of our business.
A general partner of a partnership generally has unlimited
liability for the obligations of the partnership, except for
those contractual obligations of the partnership that are
expressly made without recourse to the general partner. Our
partnership is organized under Delaware law and we conduct
business in Texas. The limitations on the liability of holders
of limited partner interests for the obligations of a limited
partnership have not been clearly established in some of the
other states in which we do business. You could be liable for
any and all of our obligations as if you were a general partner
if:
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a court or government agency determined that we were conducting
business in a state but had not complied with that particular
states partnership statute; or
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your right to act with other unitholders to remove or replace
the general partner, to approve some amendments to our
partnership agreement or to take other actions under our
partnership agreement constitute control of our
business.
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For a discussion of the implications of the limitations of
liability on a unitholder, please see The Partnership
Agreement Limited Liability.
Unitholders
may have liability to repay distributions that were wrongfully
distributed to them.
Under certain circumstances, unitholders may have to repay
amounts wrongfully returned or distributed to them. Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to you if the distribution would cause
our liabilities to exceed the fair value of our assets. Delaware
law provides that for a period of three years from the date of
the impermissible distribution, limited partners who received
the distribution and who knew at the time of the distribution
32
that it violated Delaware law will be liable to the limited
partnership for the distribution amount. Substituted limited
partners are liable for the obligations of the assignor to make
contributions to the partnership that are known to the
substituted limited partner at the time it became a limited
partner and for unknown obligations if the liabilities could be
determined from the partnership agreement. Liabilities to
partners on account of their partnership interest and
liabilities that are non-recourse to the partnership are not
counted for purposes of determining whether a distribution is
permitted.
Tax Risks
to Common Unitholders
In addition to reading the following risk factors, you should
read Material Tax Consequences for a more complete
discussion of the expected material federal income tax
consequences of owning and disposing of common units.
Our
tax treatment depends on our status as a partnership for federal
income tax purposes, as well as our not being subject to a
material amount of entity-level taxation by individual states.
If the Internal Revenue Service, or IRS, were to treat us as a
corporation or if we were to become subject to a material amount
of entity-level taxation for state tax purposes, then our cash
available for distribution to you would be substantially
reduced.
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 tax matter affecting us.
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 35%
and would likely pay state income tax at varying rates.
Distributions to you would generally be taxed again 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, our 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
anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the value of our
common units.
Current law may change so as to cause us to be treated as a
corporation for federal income tax purposes or otherwise subject
us to entity-level taxation. In addition, because of widespread
state budget deficits and other reasons, several states are
evaluating ways to subject partnerships to entity-level taxation
through the imposition of state income, margin, franchise and
other forms of taxation. For example, beginning in 2008, we will
be subject to a new entity level tax (imposed at a maximum
effective rate of 0.7%) on the portion of our income that is
generated in Texas. Imposition of such a tax on us by Texas, or
any other state, will reduce the cash available for distribution
to you. The partnership agreement provides that if a law is
enacted or existing law is modified or interpreted in a manner
that subjects us to taxation as a corporation or otherwise
subjects us to entity-level taxation for federal, state or local
income tax purposes, the minimum quarterly distribution amount
and the target distribution amounts will be adjusted to reflect
the impact of that law on us.
If the
IRS contests the federal income tax positions we take, the
market for our common units may be adversely affected, and the
cost of any contest will reduce our cash available for
distribution to you.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes or
any other matter affecting us. The IRS may adopt positions that
differ from the conclusions of our counsel expressed in this
prospectus or from the positions we take. It may be necessary to
resort to administrative or court proceedings to sustain some or
all of our counsels conclusions or the positions we take.
A court may not agree with some or all of our counsels
conclusions or positions we take. Any contest with the IRS may
materially and adversely impact the market for our common units
and the price at which they trade. In addition, our costs of any
contest with the IRS will be borne indirectly by our unitholders
and our general partner because the costs will reduce our cash
available for distribution.
33
You
may be required to pay taxes on your share of our income even if
you do not receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we
will allocate taxable income which could be different in amount
than the cash we distribute, you will be required to pay any
federal income taxes and, in some cases, state and local income
taxes on your share of our taxable income even if you receive no
cash distributions from us. You may not receive cash
distributions from us equal to your share of our taxable income
or even equal to the actual tax liability that results from that
income.
Tax
gain or loss on disposition of our common units could be more or
less than expected.
If you sell your common units, you will recognize a 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. In addition, if
you sell your units, you may incur a tax liability in excess of
the amount of cash you receive from the sale.
Tax-exempt
entities and foreign persons face unique tax issues from owning
our 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), other retirement
plans and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations that are exempt from federal
income tax, including IRAs and other retirement plans, will be
unrelated business taxable income and will be taxable to them.
Distributions to
non-U.S. persons
will be reduced by withholding taxes at the highest applicable
effective tax rate, and
non-U.S. persons
will be required to file United States federal tax returns and
pay tax on their share of our taxable income. If you are a
tax-exempt entity or a foreign person, you should consult your
tax advisor before investing in our common units.
We
will treat each purchaser of our common units as having the same
tax benefits without regard to the actual common units
purchased. The IRS may challenge this treatment, which could
adversely affect the value of the common units.
Because we cannot match transferors and transferees of common
units and because of other reasons, we will adopt depreciation
and amortization positions that may not conform to all aspects
of existing Treasury Regulations. A successful IRS challenge to
those positions could adversely affect the amount of tax
benefits available to you. It also could affect the timing of
these tax benefits or the amount of gain from the sale of common
units and could have a negative impact on the value of our
common units or result in audit adjustments to your tax returns.
For a further discussion of the effect of the depreciation and
amortization positions we will adopt, please see Material
Tax Consequences Tax Consequences of Unit
Ownership Section 754 Election.
The
sale or exchange of 50% 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 our partnership for
federal income tax purposes if there is a sale or exchange of
50% 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. Please see
Material Tax Consequences Disposition of
Common Units Constructive Termination for a
discussion of the consequences of our termination for federal
income tax purposes.
34
You
may be subject to state and local taxes and return filing
requirements in states where you do not live as a result of
investing in our common units.
In addition to federal income taxes, you might be subject to
return filing requirements and other taxes, including foreign,
state and local taxes, unincorporated business taxes and estate,
inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property, now or in
the future, even if you do not live in any of those
jurisdictions. Further, you may be subject to penalties for
failure to comply with those requirements. We will initially own
assets and conduct business in the State of Texas. Currently,
Texas does not impose a personal income tax on individuals. As
we make acquisitions or expand our business, we may own assets
or do business in states that impose a personal income tax. It
is your responsibility to file all United States federal, state
and local tax returns. Our counsel has not rendered an opinion
on the foreign, state or local tax consequences of an investment
in our common units.
35
USE OF
PROCEEDS
We expect to receive net proceeds from this offering of
approximately $331.1 million, after deducting underwriting
discounts and deducting a structuring fee of approximately
$1.4 million but before paying offering expenses. We
anticipate using the aggregate net proceeds of this
offering to:
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pay approximately $4.0 million in expenses associated with
this offering and the Formation Transactions;
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pay approximately $4.2 million in fees and expenses related
to our new credit facility; and
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use the remaining proceeds to pay approximately
$322.9 million to Targa to retire a portion of our
affiliate indebtedness.
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The structuring fee will be paid to Citigroup Global Markets
Inc., Goldman, Sachs & Co., UBS Securities LLC and Merrill
Lynch & Co. for evaluation, analysis and structuring of
our partnership. We also expect to borrow approximately
$342.5 million under our new credit facility upon the
closing of this offering and to pay that amount to Targa to
retire an additional portion of our affiliate indebtedness. The
remaining balance of our affiliate indebtedness will be retired
and treated as a capital contribution to us. Please see
Certain Relationships and Related Party
Transactions Distributions and Payments to our
General Partner and its Affiliates. The affiliate
indebtedness to be repaid with proceeds of this offering and
borrowings under our new credit facility will be contributed to
us in connection with the Formation Transactions, is due
December 31, 2009 and bears interest at a rate of
10% per annum.
We will use any net proceeds from the exercise of the
underwriters option to purchase additional common units to
reduce outstanding borrowings under our new credit facility. If
the underwriters exercise in full their option to purchase
additional common units, the ownership interest of the public
unitholders will increase to 19,320,000 common units
representing an aggregate 61.4% limited partner interest in us
and the ownership interest of our general partner will increase
to 629,555 general partner units representing a 2% general
partner interest in us.
36
CAPITALIZATION
The following table shows:
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the cash and capitalization of the Predecessor Business as of
September 30, 2006; and
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our pro forma cash and capitalization as of September 30,
2006, as adjusted to reflect this offering, the other
transactions described under Summary Formation
Transactions and Partnership Structure General
and the application of the net proceeds from this offering as
described under Use of Proceeds.
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We derived this table from, and it should be read in conjunction
with and is qualified in its entirety by reference to, the
historical and pro forma financial statements and the
accompanying notes included elsewhere in this prospectus. You
should also read this table in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations. For a description of
the pro forma adjustments, please see our Unaudited Pro Forma
Condensed Balance Sheet.
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As of September 30,
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2006
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Historical
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Pro Forma
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(in millions of dollars)
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Cash
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$
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$
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Long-term debt:
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Credit facility
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342.5
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Affiliate debt (including current
portion)(1)
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865.2
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Total long-term debt
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865.2
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342.5
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Partners capital(2)(3):
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Predecessor Business
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194.8
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Common units public
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327.1
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Subordinated units
sponsor
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357.8
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General partner interest
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17.9
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Total partners capital
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194.8
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702.8
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Total capitalization
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$
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1,060.0
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$
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1,045.3
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(1) |
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Affiliate debt presented above represents indebtedness incurred
by Targa in connection with the DMS Acquisition that has been
allocated to the North Texas System. In connection with this
offering, a portion of the affiliate indebtedness will be repaid
and the remainder will be retired and treated as a capital
contribution to us. Please see Use of Proceeds. |
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(2) |
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Reflects partner capital of common unitholders from the net
proceeds of this offering of approximately $327.1 million,
including approximately $25.7 million of underwriters
discounts, fees and other offering expenses payable by us and
the application of the proceeds as described in Use of
Proceeds. |
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(3) |
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Partners capital as presented above excludes accumulated
other comprehensive income. |
This table does not reflect the issuance of up to 2,520,000
common units that may be sold to the underwriters upon exercise
of their option to purchase additional units.
37
DILUTION
Dilution or accretion is the difference between the offering
price paid by the purchasers of common units sold in this
offering and the pro forma net tangible book value per unit
after the offering. On a pro forma basis as of
September 30, 2006, after giving effect to the offering of
common units and the application of the related net proceeds,
and assuming the underwriters option to purchase
additional common units is not exercised, our net tangible book
value would be $730.3 million, or $25.26 per common
unit. Net tangible book value excludes $4.2 million of net
intangible assets. Purchasers of common units in this offering
will experience an immediate accretion in net tangible book
value per common unit for financial accounting purposes, as
illustrated in the following table:
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Initial public offering price per
common unit
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$
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21.00
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Net tangible book value per unit
before the offering(1)
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$
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17.21
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Increase in net tangible book
value per common unit attributable to purchasers in the offering
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8.05
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Pro forma net tangible book value
per common unit after the offering(2)
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25.26
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Immediate dilution (accretion) in
tangible net book value per common unit to new investors
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$
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(4.26
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(1)
|
Determined by dividing the number of units (11,528,231
subordinated units and 578,127 general partner units) to be
issued to Targa for its contribution of the North Texas System
into the net tangible book value of the North Texas System
before the offering.
|
|
(2)
|
Determined by dividing the total number of limited partner units
and general partner units to be outstanding after the offering
(16,800,000 common units, 11,528,231 subordinated units and
578,127 general partner units) into our pro forma net tangible
book value, after giving effect to the application of the
expected net proceeds of the offering.
|
The following table sets forth the number of units that we will
issue and the total consideration contributed to us by Targa and
by the purchasers of common units in this offering upon
consummation of the transactions contemplated by this prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Acquired
|
|
|
Total Consideration
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Equity contribution by Targa(1)(2)
|
|
|
12,106,358
|
|
|
|
41.9
|
%
|
|
$
|
375,700,000
|
|
|
|
51.6
|
%
|
New investors cash contribution
|
|
|
16,800,000
|
|
|
|
58.1
|
%
|
|
|
352,800,000
|
|
|
|
48.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28,906,358
|
|
|
|
100.0
|
%
|
|
$
|
728,500,000
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The units acquired by Targa and its affiliates consist of
11,528,231 subordinated units and 578,127 general partner units.
|
|
(2)
|
The North Texas System contributed by Targa is reflected at
Targas historical net carrying value subsequent to
recording the step up in property, plant and equipment at fair
value in connection with the DMS Acquisition. Related
acquisition indebtedness of Targa was also recognized and is
reflected in partners capital. See the historical
financial statements and related notes of the Predecessor
Business for a discussion of the DMS Acquisition.
|
38
The table below shows the net investment of Targa in us after
giving effect to this offering and the Formation Transactions.
Please see our Unaudited Pro Forma Balance Sheet on
page F-3
for a more complete presentation of the adjustments associated
with this offering and the Formation Transactions.
|
|
|
|
|
|
|
|
|
|
|
(in millions
|
|
|
|
of dollars)
|
|
|
Total partners capital
excluding accumulated other comprehensive income as of
September 30, 2006
|
|
|
|
|
|
$
|
194.8
|
|
Affiliate debt including current
portion, net of deferred issuance costs
|
|
$
|
846.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application of net offering
proceeds, after expenses associated with this offering and the
Formation Transactions, to reduce affiliate debt
|
|
|
322.9
|
|
|
|
|
|
Application of borrowings under
our new credit facility to reduce affiliate debt
|
|
|
342.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reduction in affiliate debt
|
|
|
665.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of remaining affiliate
debt (net of unamortized debt issue cost), treated as a capital
contribution to us
|
|
|
|
|
|
|
180.9
|
|
|
|
|
|
|
|
|
|
|
Equity contribution by Targa
|
|
|
|
|
|
$
|
375.7
|
|
|
|
|
|
|
|
|
|
|
39
OUR CASH
DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
You should read the following discussion of our cash
distribution policy in conjunction with specific assumptions
included in this section. For more detailed information
regarding the factors and assumptions upon which our cash
distribution policy is based, please see Assumptions and
Considerations. In addition, you should read
Forward-Looking Statements and Risk
Factors for information regarding statements that do not
relate strictly to historical or current facts and certain risks
inherent in our business.
For additional information regarding our historical and pro
forma operating results, you should refer to our historical and
pro forma financial statements included elsewhere in this
prospectus.
General
Rationale for Our Cash Distribution
Policy. Our partnership agreement requires us
to distribute all of our available cash quarterly. Our available
cash is our cash on hand, including cash from borrowings, at the
end of a quarter after the payment of our expenses and the
establishment of reserves for future capital expenditures and
operational needs. We intend to fund a portion of our capital
expenditures with additional borrowings, or issuances of
additional units. We may also borrow to make distributions to
unitholders, for example, in circumstances where we believe that
the distribution level is sustainable over the long term, but
short-term factors have caused available cash from operations to
be insufficient to pay the distribution at the current level.
Our cash distribution policy reflects a basic judgment that our
unitholders will be better served by our distributing rather
than retaining our available cash.
Limitations on Cash Distributions and Our Ability to
Change Our Cash Distribution Policy. There is
no guarantee that unitholders will receive quarterly
distributions from us. Our distribution policy is subject to
certain restrictions and may be changed at any time, including:
|
|
|
|
|
Our cash distribution policy is subject to restrictions on
distributions under our new credit facility. Specifically, the
agreement related to our credit facility will contain material
financial tests and covenants that we must satisfy. These
financial tests and covenants are described in this prospectus
under the caption Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Reserves Description of Credit Agreement.
Should we be unable to satisfy these restrictions under our
credit facility or if we are otherwise in default under our
credit facility, we would be prohibited from making cash
distributions to you notwithstanding our stated cash
distribution policy.
|
|
|
|
Our board of directors will have the authority to establish
reserves for the prudent conduct of our business and for future
cash distributions to our unitholders, and the establishment of
those reserves could result in a reduction in cash distributions
to you from levels we currently anticipate pursuant to our
stated distribution policy.
|
|
|
|
While our partnership agreement requires us to distribute all of
our available cash, our partnership agreement, including
provisions requiring us to make cash distributions contained
therein, may be amended. Although during the subordination
period, with certain exceptions, our partnership agreement may
not be amended without the approval of the public common
unitholders, our partnership agreement can be amended with the
consent of our general partner and the approval of a majority of
the outstanding common units and any Class B units issued
upon the reset of incentive distribution rights, if any, voting
as a class (including common units held by Targa) after the
subordination period has ended. At the closing of this offering,
Targa will own our general partner and approximately 40.7% of
our outstanding common units and subordinated units.
|
|
|
|
Even if our cash distribution policy is not modified or revoked,
the amount of distributions we pay under our cash distribution
policy and the decision to make any distribution is determined
by our general partner, taking into consideration the terms of
our partnership agreement.
|
40
|
|
|
|
|
Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to you if the distribution would cause
our liabilities to exceed the fair value of our assets.
|
|
|
|
We may lack sufficient cash to pay distributions to our
unitholders due to increases in our operating or general and
administrative expense, principal and interest payments on our
outstanding debt, tax expenses, working capital requirements and
anticipated cash needs.
|
Our Ability to Grow is Dependent on Our Ability to Access
External Expansion Capital. We will
distribute all of our available cash to our unitholders. As a
result, we expect that we will rely primarily upon external
financing sources, including commercial bank borrowings and the
issuance of debt and equity securities, to fund our acquisitions
and expansion capital expenditures. As a result, to the extent
we are unable to finance growth externally, our cash
distribution policy will significantly impair our ability to
grow. In addition, because we distribute all of our available
cash, our growth may not be as fast as businesses that reinvest
their available cash to expand ongoing operations. To the extent
we issue additional units in connection with any acquisitions or
expansion capital expenditures, the payment of distributions on
those additional units may increase the risk that we will be
unable to maintain or increase our per unit distribution level,
which in turn may impact the available cash that we have to
distribute on each unit. There are no limitations in our
partnership agreement or our credit facility on our ability to
issue additional units, including units ranking senior to the
common units. The incurrence of additional commercial borrowings
or other debt to finance our growth strategy would result in
increased interest expense, which in turn may impact the
available cash that we have to distribute to our unitholders.
Our
Initial Distribution Rate
Upon completion of this offering, the board of directors of our
general partner will adopt a policy pursuant to which we will
declare an initial quarterly distribution of $0.3375 per
unit per complete quarter, or $1.35 per unit per year, to
be paid no later than 45 days after the end of each fiscal
quarter through the quarter ending December 31, 2007. This
equates to an aggregate cash distribution of $9.8 million
per quarter or $39.0 million per year, in each case based
on the number of common units, subordinated units and general
partner units outstanding immediately after completion of this
offering. If the underwriters exercise in full their option to
purchase additional common units, the ownership interest of the
public unitholders will increase to 19,320,000 common units
representing an aggregate 61.4% limited partner interest in us
and our aggregate cash distribution per quarter would be $10.6
million or $42.5 million per year. Our ability to make cash
distributions at the initial distribution rate pursuant to this
policy will be subject to the factors described above under the
caption Limitations on Cash Distributions and
Our Ability to Change Our Cash Distribution Policy.
As of the date of this offering, our general partner will be
entitled to 2% of all distributions that we make prior to our
liquidation. In the future, the general partners initial
2% interest in these distributions may be reduced if we issue
additional units in the future and our general partner does not
contribute a proportionate amount of capital to us to maintain
its initial 2% general partner interest. However, if the
underwriters option is exercised in the transaction, and
additional common units are issued, our general partner will
maintain its initial 2% interest and will not be required to
make a capital contribution to us. Our general partner is not
obligated to contribute a proportionate amount of capital to us
to maintain its current general partner interest.
41
The table below sets forth the assumed number of outstanding
common units (assuming no exercise and full exercise of the
underwriters option to purchase additional common units),
subordinated units and general partner units upon the closing of
this offering and the aggregate distribution amounts payable on
such units during the year following the closing of this
offering at our initial distribution rate of $0.3375 per
common unit per quarter ($1.35 per common unit on an
annualized basis).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Exercise of the Underwriters
|
|
|
Full Exercise of the Underwriters
|
|
|
|
Option to Purchase Additional Units
|
|
|
Option to Purchase Additional Units
|
|
|
|
Number of
|
|
|
Distributions
|
|
|
Number of
|
|
|
Distributions
|
|
|
|
Units
|
|
|
One Quarter
|
|
|
Annualized
|
|
|
Units
|
|
|
One Quarter
|
|
|
Annualized
|
|
|
Publicly held common units
|
|
|
16,800,000
|
|
|
$
|
5,670,000
|
|
|
$
|
22,680,000
|
|
|
|
19,320,000
|
|
|
$
|
6,520,500
|
|
|
$
|
26,082,000
|
|
Subordinated units held by Targa
|
|
|
11,528,231
|
|
|
|
3,890,778
|
|
|
|
15,563,112
|
|
|
|
11,528,231
|
|
|
|
3,890,778
|
|
|
|
15,563,112
|
|
General partner units held by Targa
|
|
|
578,127
|
|
|
|
195,118
|
|
|
|
780,471
|
|
|
|
629,555
|
|
|
|
212,475
|
|
|
|
849,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28,906,358
|
|
|
$
|
9,755,896
|
|
|
$
|
39,023,583
|
|
|
|
31,477,786
|
|
|
$
|
10,623,753
|
|
|
$
|
42,495,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The subordination period generally will end if we have earned
and paid at least $1.35 on each outstanding unit and general
partner unit for any three consecutive, non-overlapping
four-quarter periods ending on or after March 31, 2010. If
we have earned and paid at least $2.025 (150% of the annualized
minimum quarterly distribution) on each outstanding common unit,
subordinated unit and general partner unit for any four-quarter
period, the subordination period will terminate automatically
and all of the subordinated units will convert into an equal
number of common units. Please see the Provisions of Our
Partnership Agreement Relating to Cash Distributions
Subordination Period.
We do not have a legal obligation to pay distributions at our
initial distribution rate or at any other rate except as
provided in our partnership agreement. Our partnership agreement
requires that we distribute all of our available cash quarterly.
Under our partnership agreement, available cash is defined to
generally mean, for each fiscal quarter, cash generated from our
business in excess of expenses and the amount of reserves our
general partner determines is necessary or appropriate to
provide for the conduct of our business, comply with applicable
law, to comply with any of our debt instruments or other
agreements or provide for future distributions to our
unitholders for any one or more of the upcoming four quarters.
Please see Provisions of Our Partnership Agreement
Relating to Cash Distributions.
If distributions on our common units are not paid with respect
to any fiscal quarter at the initial distribution rate, our
unitholders will not be entitled to receive such payments in the
future except that, during the subordination period to the
extent we have available cash in any future quarter in excess of
the amount necessary to make cash distributions to holders of
our common units at the initial distribution rate, we will use
this excess available cash to pay these deficiencies related to
prior quarters before any cash distribution is made to holders
of subordinated units. Please see Provisions of Our
Partnership Agreement Relating to Cash Distributions
Subordination Period.
Our partnership agreement provides that any determination made
by our general partner in its capacity as our general partner
must be made in good faith and that any such determination will
not be subject to any other standard imposed by our partnership
agreement, the Delaware limited partnership statute or any other
law, rule or regulation or imposed at equity. Holders of our
common units may pursue judicial action to enforce provisions of
our partnership agreement, including those related to
requirements to make cash distributions as described above;
however, our partnership agreement provides that our general
partner is entitled to make the determinations described above
without regard to any standard other than the requirements to
act in good faith. Our partnership agreement provides that, in
order for a determination by our general partner to be made in
good faith, our general partner must believe that
the determination is in our best interests.
Our cash distribution policy, as expressed in our partnership
agreement, may not be modified or repealed without amending our
partnership agreement. The actual amount of our cash
distributions for any quarter is subject to fluctuations based
on the amount of cash we generate from our business and the
amount of reserves our general partner establishes in accordance
with our partnership agreement as described above.
42
We will pay our distributions on or about the 15th of each of
February, May, August and November to holders of record on or
about the 1st of each such month. If the distribution date
does not fall on a business day, we will make the distribution
on the business day immediately preceding the indicated
distribution date. We will adjust the quarterly distribution for
the period from the closing of this offering through
March 31, 2007 based on the actual length of the period.
In the sections that follow, we present in detail the basis for
our belief that we will be able to fully fund our initial
distribution rate of $0.3375 per unit each quarter through
the quarter ending December 31, 2007. In those sections, we
present two tables, consisting of:
|
|
|
|
|
Unaudited Pro Forma Available Cash, in which we
present the amount of cash we would have had available for
distribution for our fiscal year ended December 31, 2005
and the twelve months ended September 30, 2006, derived
from our unaudited pro forma financial statements that are
included in this prospectus, which unaudited pro forma financial
statements are based on the combined results of operations of
the Predecessor Business reflected in the Pre-Acquisition
Financial Statements and the Post-Acquisition Financial
Statements and on the results of operations reflected in the
unaudited historical financial statements of the Predecessor
Business for the nine months ended September 30, 2006, each
as adjusted to give pro forma effect to the offering and the
Formation Transactions; and
|
|
|
|
Statement of Minimum Estimated EBITDA for the Twelve
Months Ending December 31, 2007, in which we
demonstrate our ability to generate the minimum estimated EBITDA
necessary for us to pay distributions at the initial
distribution rate on all units for the twelve months ending
December 31, 2007.
|
Unaudited
Pro Forma Available Cash for Year Ended December 31, 2005
and the Twelve Months Ended September 30, 2006
If we had completed the transactions contemplated in this
prospectus on January 1, 2005, pro forma available cash
generated during the year ended December 31, 2005 would
have been approximately $31.2 million. Assuming the
underwriters exercise in full their option to purchase
additional common units, this amount would have been sufficient
to make a cash distribution for 2005 at the initial rate of
$0.3375 per unit per quarter ($1.35 per unit on an
annualized basis) on all of the common units and a cash
distribution of $0.0975 per unit per quarter ($0.3898 on an
annualized basis) or 29% of the minimum quarterly distribution
on all of the subordinated units. Assuming the underwriters do
not exercise their option to purchase additional common units,
this amount would have been sufficient to make the full minimum
quarterly distribution on all of the common units and a cash
distribution of $0.0968 per unit per quarter ($0.3874 on an
annualized basis) or 29% of the minimum quarterly distribution
on all of the subordinated units.
If we had completed the transactions contemplated in this
prospectus on October 1, 2005, our pro forma available cash
generated for the twelve months ended September 30, 2006
would have been approximately $42.2 million. Assuming the
underwriters exercise in full their option to purchase
additional common units, this amount would have been sufficient
to make a cash distribution for the twelve months ended
September 30, 2006 at the initial distribution rate of
$0.3375 per unit per quarter ($1.35 per unit on an
annualized basis) on all of the common units and a cash
distribution of $0.3312 per unit per quarter ($1.3249 on an
annualized basis) or 98% of the minimum quarterly distribution
on all of the subordinated units. Assuming the underwriters do
not exercise their option to purchase additional common units,
this amount would have been sufficient to make the full minimum
quarterly distribution on all of the common units and a cash
distribution of $0.3306 per unit per quarter ($1.3225 on an
annualized basis) or 98% of the minimum quarterly distribution
on all of the subordinated units. We had no hedges in place
during the year ended December 31, 2005. Pro forma
available cash for the twelve months ended September 30,
2006 includes $0.3 million in net benefit for hedge
settlements during the second and third quarters of 2006.
Unaudited pro forma available cash from operating surplus
includes direct, incremental general and administrative expenses
that will result from operating as a separate publicly held
limited partnership. These
43
direct, incremental general and administrative expenses are
expected to be approximately $2.5 million annually, are not
subject to the cap contained in the omnibus agreement and
include costs associated with annual and quarterly reports to
unitholders, tax return and
Schedule K-1
preparation and distribution, incremental independent auditor
fees, registrar and transfer agent fees and independent director
compensation. These direct, incremental general and
administrative expenditure are not reflected in the historical
financial statements of the Predecessor Business or our pro
forma financial statements.
We based the pro forma adjustments upon currently available
information and specific estimates and assumptions. The pro
forma amounts below do not purport to present our results of
operations had the transactions contemplated in this prospectus
actually been completed as of the dates indicated. In addition,
cash available to pay distributions is primarily a cash
accounting concept, while our pro forma financial statements
have been prepared on an accrual basis. As a result, you should
view the amount of pro forma available cash only as a general
indication of the amount of cash available to pay distributions
that we might have generated had we been formed in earlier
periods.
The following table illustrates, on a pro forma basis, for the
year ended December 31, 2005 and for the twelve months
ended September 30, 2006, the amount of available cash that
would have been available for distributions to our unitholders,
assuming in each case that this offering had been consummated at
the beginning of such period and that the underwriters exercised
in full their option to purchase additional common units. Each
of the pro forma adjustments presented below is explained in the
footnotes to such adjustments.
Targa
Resources Partners LP
Unaudited
Pro Forma Available Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions of dollars,
|
|
|
|
except per unit data)
|
|
|
Net income
(loss)(1)
|
|
$
|
40.8
|
|
|
$
|
(32.7
|
)
|
Interest expense (including debt
issuance amortization)(2)
|
|
|
11.5
|
|
|
|
65.9
|
|
Depreciation and amortization(2)
|
|
|
20.5
|
|
|
|
52.1
|
|
Income taxes(2)
|
|
|
0.0
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
|
72.8
|
|
|
|
87.3
|
|
Incremental general and
administrative expense of being a public company(4)
|
|
|
2.5
|
|
|
|
2.5
|
|
Pro forma net cash interest
expense(5)
|
|
|
20.5
|
|
|
|
20.5
|
|
Maintenance capital expenditures(6)
|
|
|
12.9
|
|
|
|
12.3
|
|
Expansion capital expenditures(6)
|
|
|
5.7
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
Pro forma available
cash
|
|
$
|
31.2
|
|
|
$
|
42.2
|
|
|
|
|
|
|
|
|
|
|
Distributions per
unit(7)
|
|
$
|
1.35
|
|
|
$
|
1.35
|
|
Pro forma cash
distributions:
|
|
|
|
|
|
|
|
|
Distributions to public common
unitholders(7)
|
|
|
26.1
|
|
|
|
26.1
|
|
Distributions to Targa(7)
|
|
|
16.4
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
Total distributions(7)
|
|
$
|
42.5
|
|
|
$
|
42.5
|
|
|
|
|
|
|
|
|
|
|
Excess (shortfall)
|
|
$
|
(11.3
|
)
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
Ratio of consolidated indebtedness
to consolidated EBITDA(8)
|
|
|
4.0
|
x
|
|
|
3.4
|
x
|
Ratio of consolidated EBITDA to
consolidated interest expense(8)
|
|
|
3.6
|
x
|
|
|
4.3
|
x
|
44
|
|
|
(1) |
|
Reflects actual net income of the Predecessor Business derived
from its financial statements for the periods indicated without
giving pro forma effect to the offering and the related
transactions. |
|
(2) |
|
Reflects adjustments to reconcile net income to EBITDA. |
|
(3) |
|
EBITDA. We define EBITDA as net income before
interest, income taxes, depreciation and amortization. EBITDA is
used as a supplemental financial measure by our management and
by external users of our financial statements such as investors,
commercial banks and others, to assess: |
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
our operating performance and return on capital as compared to
other companies in the midstream energy sector, without regard
to financing or capital structure; and
|
|
|
|
the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
|
|
|
|
|
|
The economic substance behind managements use of EBITDA is
to measure the ability of our assets to generate cash sufficient
to pay interest costs, support our indebtedness, and make
distributions to our investors. |
|
|
|
The GAAP measures most directly comparable to EBITDA are net
cash provided by operating activities and net income. Our
non-GAAP financial measure of EBITDA should not be considered as
an alternative to GAAP net cash provided by operating activities
and GAAP net income. EBITDA is not a presentation made in
accordance with GAAP and has important limitations as an
analytical tool. You should not consider EBITDA in isolation or
as a substitute for analysis of our results as reported under
GAAP. Because EBITDA excludes some, but not all, items that
affect net income and net cash provided by operating activities
and is defined differently by different companies in our
industry, our definition of EBITDA may not be comparable to
similarly titled measures of other companies. |
|
|
|
Management compensates for the limitations of EBITDA as an
analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes. |
|
(4) |
|
Reflects an adjustment to our EBITDA for an estimated
incremental cash expense associated with being a publicly traded
limited partnership, including costs associated with annual and
quarterly reports to unitholders, tax return and
Schedule K-1
preparation and distribution, independent auditor fees, investor
relations activities, registrar and transfer agent fees,
incremental director and officer liability insurance costs and
director compensation. |
|
(5) |
|
Reflects the interest expense related to $292.8 million in
borrowings under our new credit facility at an assumed annual
interest rate of 7.0%. This balance reflects the reduction to
our expected initial borrowings of approximately
$342.5 million through the application of the net proceeds
from the assumed exercise in full of the underwriters
option to purchase additional common units. If the interest rate
used to calculate this interest were 1% higher or lower,
our annual cash interest cost would increase or decrease,
respectively, by $2.9 million. |
|
(6) |
|
Maintenance capital expenditures are capital expenditures made
to replace partially or fully depreciated assets, to maintain
the existing operating capacity of our assets and to extend
their useful lives, or other capital expenditures that are
incurred in maintaining existing system volumes and related cash
flows. Expansion capital expenditures are made to acquire
additional assets to grow our business, to expand and upgrade
our systems and facilities and to construct or acquire similar
systems or facilities. |
|
(7) |
|
The table below assumes full exercise of the underwriters
option to purchase additional common units and sets forth the
assumed number of outstanding common units, subordinated units
and general partner units upon the closing of this offering and
the estimated per unit and aggregate distribution amounts
payable on our common units, subordinated units and general
partner units for four quarters at our initial distribution rate
of $0.3375 per common unit per quarter ($1.35 per
common unit on an annualized basis). |
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full Exercise of the Underwriters Option to Purchase
Additional Units
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
One Quarter
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
|
Publicly held common units
|
|
|
19,320,000
|
|
|
$
|
6,520,500
|
|
|
$
|
26,082,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated units held
by Targa
|
|
|
11,528,231
|
|
|
|
3,890,778
|
|
|
|
15,563,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner units held
by Targa
|
|
|
629,555
|
|
|
|
212,475
|
|
|
|
849,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31,477,786
|
|
|
$
|
10,623,753
|
|
|
$
|
42,495,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) |
|
In connection with this offering, we expect to enter into a new
credit facility which will contain covenants limiting our
ability to make distributions, incur indebtedness, grant liens,
and engage in transactions with affiliates. Furthermore, our
credit facility will contain covenants requiring us to maintain
a ratio of consolidated indebtedness to consolidated EBITDA
initially of not more than 5.75 to 1.00 and a ratio of
consolidated EBITDA to consolidated interest expense of not less
than 2.25 to 1.00. Any subsequent replacement of our credit
facility or any new indebtedness could have similar or greater
restrictions. |
Minimum
Estimated EBITDA for the Twelve Months Ending December 31,
2007
Set forth below is a Statement of Minimum Estimated EBITDA that
reflects our ability to generate sufficient cash flows to make
the minimum quarterly distribution on all of our outstanding
units for the twelve months ending December 31, 2007, based
on assumptions we believe to be reasonable. EBITDA is defined as
net income before interest, income taxes, depreciation and
amortization. Our minimum estimated EBITDA is prepared on a
basis consistent with the accounting principles used in the
historical financial statements of the Predecessor Business.
Our minimum estimated EBITDA assumes the underwriters exercise
in full their option to purchase additional common units. The
underwriters may or may not elect to exercise this option. We
have presented our ability to make distributions assuming the
issuance of an additional 2,520,000 common units and 51,428
general partner units as a result of this option. Because we
will use the proceeds from the exercise of this option to reduce
outstanding indebtedness, our cash available for distribution
will increase by $3.5 million as a result of reduced
interest expense. This increase is offset by $3.5 million
of cash required to make distributions on the additional common
and general partner units. If the option to purchase additional
units is not exercised, our interest expense will increase and
cash available for distribution will decrease by
$3.5 million. Our pro forma financial statements and other
information presented in this prospectus does not assume any
exercise of the underwriters option to purchase additional
common units.
Our minimum estimated EBITDA reflects our judgment as of the
date of this prospectus of conditions we expect to exist and the
course of action we expect to take in order to make the minimum
quarterly distribution on all our outstanding units for the
twelve months ending December 31, 2007. The assumptions
disclosed below under Assumptions and
Considerations are those that we believe are significant
to our ability to generate our minimum estimated EBITDA. We
believe our actual results of operations and cash flows will be
sufficient to generate the minimum estimated EBITDA; however, we
can give you no assurance that our minimum estimated EBITDA will
be achieved. There will likely be differences between our
minimum estimated EBITDA and our actual results and those
differences could be material. If we fail to generate the
minimum estimated EBITDA, we may not be able to pay cash
distributions on our common units at the initial distribution
rate stated in our cash distribution policy. Assuming the
underwriters exercise in full their option to purchase
additional common units, in order to fund distributions to all
of our common and subordinated unitholders at our initial rate
of $1.35 per unit for the twelve months ending December 31,
2007, our minimum estimated EBITDA for the twelve months ending
December 31, 2007 must be at least $78.1 million.
Assuming the underwriters do not exercise their option to
purchase additional common units, in order to fund distributions
to all of our common and subordinated unitholders at our initial
rate of $1.35 per unit for the twelve months ending
December 31, 2007, our minimum estimated EBITDA for the
twelve months ending December 31, 2007 must be at least
$78.1 million.
46
We do not as a matter of course make public projections as to
future operations, earnings, or other results. However,
management has prepared the minimum estimated EBITDA and related
assumptions set forth below to substantiate our belief that we
will have sufficient cash to make the minimum quarterly
distribution to all our unitholders for the twelve months ending
December 31, 2007. The accompanying prospective financial
information was not prepared with a view toward complying with
the guidelines established by the American Institute of
Certified Public Accountants with respect to prospective
financial information but, in the view of our management, the
prospective financial information has been prepared on a
reasonable basis, reflects the best currently available
estimates and judgments, and presents, to the best of
managements knowledge and belief, the assumptions on which
we base our belief that we can generate the minimum estimated
EBITDA necessary for us to have sufficient cash available for
distributions to pay the minimum quarterly distribution to all
our unitholders. However, this information is not fact and
should not be relied upon as being necessarily indicative of
future results, and readers of this prospectus are cautioned not
to place undue reliance on the prospective financial information.
The prospective financial information included in this
prospectus has been prepared by, and is the responsibility of,
our management. PricewaterhouseCoopers LLP has neither examined
nor compiled the accompanying prospective financial information
and accordingly, PricewaterhouseCoopers LLP does not express an
opinion or any other form of assurance with respect thereto. The
PricewaterhouseCoopers LLP report included in this prospectus
relates to our historical information. It does not extend to the
prospective financial information and should not be read to do
so.
When considering our minimum estimated EBITDA, you should keep
in mind the risk factors and other cautionary statements under
Risk Factors. Any of the risks discussed in this
prospectus could cause our actual results of operations to vary
significantly from those supporting our minimum estimated EBITDA.
We are providing our minimum estimated EBITDA and related
assumptions to supplement our pro forma and historical financial
statements in support of our belief that we will have sufficient
available cash to allow us to pay cash distributions on all of
our outstanding common and subordinated units for each quarter
in the four-quarter period ending December 31, 2007 at our
stated initial distribution rate. Please see below under
Assumptions and Considerations for
further information as to the assumptions we have made for the
financial forecast.
We do not undertake any obligation to release publicly the
results of any future revisions we may make to the assumptions
used in generating minimum estimated EBITDA or to update those
assumptions to reflect events or circumstances after the date of
this prospectus. Therefore, you are cautioned not to place undue
reliance on this information.
47
Targa
Resources Partners LP
Statement
of Minimum Estimated EBITDA
|
|
|
|
|
|
|
Twelve Months Ending
|
|
|
|
December 31, 2007
|
|
|
|
(in millions of dollars,
|
|
|
|
except for per unit data)
|
|
|
Operating revenues
|
|
$
|
358.5
|
|
Hedging gain (loss)
|
|
|
15.0
|
|
|
|
|
|
|
Total operating
revenues
|
|
|
373.5
|
|
Product purchases
|
|
|
256.4
|
|
Operating expense
|
|
|
23.7
|
|
General and administrative expense
|
|
|
7.5
|
|
Depreciation and amortization
expense
|
|
|
55.2
|
|
Interest expense, net
|
|
|
21.4
|
|
|
|
|
|
|
Net income
|
|
$
|
9.3
|
|
Adjustments to reconcile net income
to minimum estimated EBITDA:
|
|
|
|
|
Add:
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
55.2
|
|
Interest expense, net
|
|
|
21.4
|
|
Less:
|
|
|
|
|
Cash reserves(1)
|
|
|
7.8
|
|
|
|
|
|
|
Minimum estimated
EBITDA(2)
|
|
|
78.1
|
|
Adjustments to reconcile minimum
estimated EBITDA to estimated cash available for distribution:
|
|
|
|
|
Less:
|
|
|
|
|
Cash interest expense
|
|
|
20.6
|
|
Expansion capital expenditures
|
|
|
1.8
|
|
Maintenance capital expenditures
|
|
|
15.0
|
|
Add:
|
|
|
|
|
Borrowing to fund expansion capital
expenditures
|
|
|
1.8
|
|
|
|
|
|
|
Estimated cash available for
distribution
|
|
$
|
42.5
|
|
|
|
|
|
|
Per unit minimum annual distribution
|
|
$
|
1.35
|
|
Annual distributions to:
|
|
|
|
|
Public common unitholders
|
|
$
|
26.1
|
|
Targa
|
|
|
16.4
|
|
|
|
|
|
|
Total minimum annual cash
distributions
|
|
|
42.5
|
|
|
|
|
|
|
Ratio of consolidated indebtedness
to consolidated EBITDA(3)
|
|
|
3.4
|
x
|
Ratio of consolidated EBITDA to
consolidated interest expense(3)
|
|
|
4.0
|
x
|
|
|
|
(1) |
|
Represents a discretionary reserve to be used for reinvestment
and other general partnership purposes. |
|
(2) |
|
EBITDA. We define EBITDA as net income before
interest, income taxes, depreciation and amortization. EBITDA is
used as a supplemental financial measure by our management and
by external users of our financial statements such as investors,
commercial banks and others, to assess: |
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
our operating performance and return on capital as compared to
other companies in the midstream energy sector, without regard
to financing or capital structure; and
|
|
|
|
the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
|
|
|
|
|
|
The economic substance behind managements use of EBITDA is
to measure the ability of our assets to generate cash sufficient
to pay interest costs, support our indebtedness, and make
distributions to our investors. |
48
|
|
|
|
|
The GAAP measures most directly comparable to EBITDA are net
cash provided by operating activities and net income. Our
non-GAAP financial measure of EBITDA should not be considered as
an alternative to GAAP net cash provided by operating activities
and GAAP net income. EBITDA is not a presentation made in
accordance with GAAP and has important limitations as an
analytical tool. You should not consider EBITDA in isolation or
as a substitute for analysis of our results as reported under
GAAP. Because EBITDA excludes some, but not all, items that
affect net income and net cash provided by operating activities
and is defined differently by different companies in our
industry, our definition of EBITDA may not be comparable to
similarly titled measures of other companies. |
|
|
|
Management compensates for the limitations of EBITDA as an
analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes. |
|
(3) |
|
In connection with this offering, we expect to enter into a new
credit facility which will contain covenants limiting our
ability to make distributions, incur indebtedness, grant liens,
and engage in transactions with affiliates. Furthermore, our
credit facility will contain covenants requiring us to maintain
a ratio of consolidated indebtedness to consolidated EBITDA of
not more than 5.75 to 1.00 and a ratio of consolidated EBITDA to
consolidated interest expense of not less than 2.25 to 1.00. Any
subsequent replacement of our credit facility or any new
indebtedness could have similar or greater restrictions. |
Please see accompanying summary of the assumptions used to
support our minimum estimated EBITDA.
Assumptions
and Considerations
We believe the assumptions and estimates we have made to support
our ability to generate minimum estimated EBITDA, which are set
forth below, are reasonable.
General/Commodity
Price and Risk Considerations
|
|
|
|
|
Our minimum estimated EBITDA includes the effect of our
commodity price hedging program under which we have hedged a
portion of the commodity price risk related to our expected
natural gas, NGL and condensate sales. Our hedging program for
the twelve months ending December 31, 2007 covers
approximately 90% of our expected natural gas, 62% of our
expected NGL and 93% of our expected condensate equity volumes.
We have the following hedging arrangements in place for 2007:
|
|
|
|
|
|
|
|
|
|
Natural Gas
|
|
NGL
|
|
Condensate
|
|
Hedged volume swaps
|
|
13,612 MMBtu/d
|
|
2,416 Bbls/d
|
|
439 Bbls/d
|
Weighted average price
swaps
|
|
$8.63 per MMBtu
|
|
$0.99 per gallon
|
|
$72.82 per Bbl
|
Hedged volume floors
|
|
870 MMBtu/d
|
|
|
|
25 Bbls/d
|
Weighted average price
floors
|
|
$6.55 per MMBtu
|
|
|
|
$58.60 per Bbl
|
|
|
|
|
|
As of January 30, 2007, the NYMEX 2007 forward prices for
natural gas and crude oil were
$7.82/MMbtu
and $58.35/Bbl, respectively. These prices are 6% above and 13%
below the forecasted prices of $7.40/MMbtu and $67.00/Bbl for
natural gas and crude oil (based on forward prices as of
September 29, 2006) used to calculate 2007 minimum
estimated EBITDA.
|
Total
Operating Revenues
|
|
|
|
|
Inlet Volumes. We estimate that we will
have average inlet volumes of 162.1 MMcf/d of natural gas
for the twelve months ending December 31, 2007, as compared
to 161.8 MMcf/d for the twelve months ended
September 30, 2006, 157.2 MMcf/d for the year ended
December 31, 2005, and 145.4 MMcf/d for the year ended
December 31, 2004.
|
|
|
|
Residue Gas Sales (Volumes and
Prices). We estimate that we will sell an
average of 73.5 BBtu/d of residue gas for the twelve months
ending December 31, 2007 at an average realized price of
$6.96/MMBtu, as compared to 74.6 BBtu/d at an average price
of $6.83/MMBtu for the twelve months
|
49
|
|
|
|
|
ended September 30, 2006, 69.5 BBtu/d at an average price
of $7.11/MMBtu for the year ended December 31, 2005, and
59.2 BBtu/d at an average price of $5.43/MMBtu for the year
ended December 31, 2004. These assumptions take into
account the effect of our natural gas hedges under which we have
hedged through a combination of swaps and purchased puts (or
floors) natural gas commodity price exposure related to
approximately 90% of our expected natural gas equity volumes.
Please see Managements Discussion and Analysis of
Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market
Risk Commodity Price Risk for additional
detail related to the terms of these natural gas hedges. For our
unhedged natural gas volumes, our forecasted realized price is
$6.58/MMBtu compared to average realized prices of $6.09/MMBtu
for the nine months ended September 30, 2006.
|
Based on these assumptions, residue gas sales for the:
|
|
|
|
|
twelve months ending December 31, 2007 compared to twelve
months ending September 30, 2006 increase approximately
$0.6 million consisting of higher revenues of
$3.3 million attributable to higher natural gas prices
offset by $2.7 million due to decreased volumes;
|
|
|
|
twelve months ending December 31, 2007 compared to twelve
months ending December 31, 2005 increase approximately
$6.5 million consisting of higher revenues of
$10.6 million attributable to increased volumes offset by
$4.1 million due to lower natural gas prices; and
|
|
|
|
twelve months ending December 31, 2007 compared to twelve
months ending December 31, 2004 increase approximately
$69.0 million consisting of higher revenues of
$41.0 million attributable to higher natural gas prices and
$28.0 million due to increased volumes.
|
|
|
|
|
|
NGL Sales (Volumes and Prices). We
estimate that we will sell an average of 14.2 MBbls/d of
NGLs for the twelve months ending December 31, 2007 at an
average price of $33.34/Bbl, as compared to 15.2 MBbls/d at
an average price of $38.20/Bbl for the twelve months ended
September 30, 2006, 14.5 MBbls/d at an average price
of $33.56/Bbl for the calendar year ended December 31,
2005, and 13.2 MBbls/d at an average price of $26.71/Bbl
for the calendar year ended December 31, 2004. These
assumptions take into account the effect of our NGL hedges under
which we have hedged the NGL commodity price exposure related to
approximately 62% of our expected NGL equity volumes. Please see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Quantitative and
Qualitative Disclosures about Market Risk Commodity
Price Risk for additional detail related to the terms of
these NGL hedges. For our unhedged NGL volumes, our estimated
realized price is $32.59/Bbl compared to average realized prices
of $37.80/Bbl for the nine months ended September 30, 2006.
|
Based on these assumptions, NGL sales for the:
|
|
|
|
|
twelve months ending December 31, 2007 compared to
twelve months ending September 30, 2006 decrease
approximately $37.4 million consisting of lower revenues of
$23.8 million attributable to lower NGL prices and
$13.6 million due to decreased volumes;
|
|
|
|
twelve months ending December 31, 2007 compared to twelve
months ending December 31, 2005 decrease approximately
$4.1 million consisting of lower revenues of
$2.9 million attributable to decreased volumes and $1.2
million due to lower NGL prices; and
|
|
|
|
twelve months ending December 31, 2007 compared to twelve
months ending December 31, 2004 increase approximately
$43.9 million consisting of higher revenues of
$34.4 million attributable to higher NGL prices and
$9.5 million due to increased volumes.
|
|
|
|
|
|
Condensate Sales (Volumes and
Prices). We estimate that we will sell an
average of 0.5 MBbls/d of condensate for the twelve months
ending December 31, 2007 at an average price of $71.12/Bbl,
as compared to 0.5 MBbls/d at an average price of
$61.55/Bbl for the twelve months ended September 30, 2006,
0.5 MBbls/d at an average price of $54.03/Bbl for the
calendar year ended December 31, 2005, and 0.7 MBbls/d
at an average price of $40.56/Bbl for the calendar year ended
December 31, 2004. These assumptions take into account the
effect of the crude oil hedges under
|
50
|
|
|
|
|
which we have hedged through a combination of swaps and
purchased puts (or floors) commodity price exposure related to
approximately 93% of our expected condensate equity volumes.
Please see Managements Discussion and Analysis of
Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market
Risk Commodity Price Risk for additional
detail related to the terms of these crude oil hedges. For our
unhedged condensate volumes, our estimated realized price is
$66.00/Bbl compared to average realized prices of $62.66/Bbl for
the nine months ended September 30, 2006.
|
Based on these assumptions, condensate sales for the:
|
|
|
|
|
twelve months ending December 31, 2007 compared to twelve
months ending September 30, 2006 increase approximately
$1.8 million due to higher condensate prices;
|
|
|
|
twelve months ending December 31, 2007 compared to twelve
months ending December 31, 2005 increase approximately
$2.6 million consisting of higher revenues of
$3.1 million attributable to higher condensate prices
offset by $0.5 million due to decreased volumes; and
|
|
|
|
twelve months ending December 31, 2007 compared to twelve
months ending December 31, 2004 increase approximately
$2.7 million consisting of higher revenues of
$5.5 million attributable to higher condensate prices
offset by $2.8 million due to decreased volumes.
|
|
|
|
|
|
Impact of Volume Declines. If all other
assumptions are held constant, a 5% decline in inlet volumes
below forecasted levels would result in a $5.1 million
decline in cash available for distribution. A decline in
estimated cash flows greater than $7.8 million would result
in our generating less than the minimum cash necessary to pay
distributions. For the twelve months ended December 31,
2004, the twelve months ended December 31, 2005 and the
twelve months ended September 30, 2006, a 5% decline in
inlet volumes would have resulted in a $3.8 million,
$5.1 million and $5.4 million, respectively, decline
in cash available for distribution.
|
|
|
|
Impact of Price Declines. A difference
in realized versus estimated commodity prices would affect our
cash flows. For the twelve months ending December 31, 2007,
approximately 10%, 38% and 7% of our forecasted natural gas, NGL
and condensate equity volumes are unhedged. If all other
assumptions are held constant, a 10% decrease in realized
natural gas, NGL and crude oil prices versus our estimated
prices for the unhedged portions of our estimated volumes of
natural gas, NGLs and condensate would result in a
$2.8 million decline in cash available for distribution. A
20% decline in these prices would result in an $5.6 million
decline in cash available for distribution.
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Hedging Gain / (Loss). We estimate hedge gains
will be $15.0 million for the twelve months ending
December 31, 2007. In 2006, we entered into certain hedges
for 2007 at prices that are materially higher than the prices
underlying our Estimated EBITDA for the year ending
December 31, 2007. For a description of our hedges, please
see Managements Discussion and Analysis of Financial
Condition and Results of Operations Quantitative and
Qualitative Disclosures about Market Risk Summary of
Our Hedges.
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Costs
and Expenses
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Product Purchases. We estimate that our
product purchases for the twelve months ending December 31,
2007 will be $256.4 million, as compared to
$291.9 million for the twelve months ended
September 30, 2006, $265.7 million for the twelve
months ended December 31, 2005, and $182.6 million for
the twelve months ended December 31, 2004.
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Based on this estimate, the product purchases for the:
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twelve months ending December 31, 2007 compared to twelve
months ending September 30, 2006 decrease approximately
$35.5 million consisting of lower costs of
$82.9 million attributable to lower commodity prices offset
by $47.4 million due to increased volumes;
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51
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twelve months ending December 31, 2007 compared to twelve
months ending December 31, 2005 decrease approximately
$9.5 million consisting of lower costs of
$65.6 million attributable to lower commodity prices offset
by $56.1 million due to increased volumes; and
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twelve months ending December 31, 2007 compared to twelve
months ending December 31, 2004 increase approximately
$73.9 million consisting of higher costs of
$10.9 million attributable to higher commodity prices and
$63.0 million due to increased volumes.
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Operating Expense. We estimate that we
will incur operating expense of $23.7 million for the
twelve months ending December 31, 2007, as compared to
$23.6 million for the twelve months ended
September 30, 2006, $21.5 million for the twelve
months ended December 31, 2005, and $17.7 million for
the twelve months ended December 31, 2004. The expected
increase in operating expense is driven by higher costs for
labor, supplies and equipment and the expansion of our gathering
system.
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General and Administrative Expense. Our
estimated general and administrative expense will be
$7.5 million for the twelve months ending December 31,
2007 and will consist of up to a maximum of $5.0 million,
subject to adjustment, of general and administrative expense
allocated from Targa pursuant to the omnibus agreement, and
$2.5 million of estimated general and administrative
expense that relates to operating as a publicly held limited
partnership. General and administrative expense was
$6.8 million, $8.4 million and $7.2 million for
the twelve months ended September 30, 2006, the twelve
months ended December 31, 2005 and the twelve months ended
December 31, 2004, respectively. Please see Certain
Relationships and Related Party Transactions Omnibus
Agreement for additional details related to our omnibus
agreement.
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Depreciation and Amortization
Expense. Estimated depreciation and
amortization expense for the twelve months ending
December 31, 2007 is $55.2 million as compared to
$52.1 million for the twelve months ending
September 30, 2006, $20.5 million for the twelve
months ended December 31, 2005 and $12.2 million for
the twelve months ended December 31, 2004. Estimated
depreciation and amortization expense reflects managements
estimates, which are based on consistent average depreciable
asset lives and depreciation methodologies. The majority of the
increase in depreciation and amortization is attributable to the
step-up in
basis associated with the DMS Acquisition.
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Capital Expenditures. Estimated capital
expenditures for the twelve months ending December 31, 2007
are based on the following assumptions:
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Maintenance Capital Expenditures. Our
estimated maintenance capital expenditures are
$15.0 million for the twelve months ending
December 31, 2007 as compared to $12.3 million for the
twelve months ending September 30, 2006, $12.9 million
for the twelve months ended December 31, 2005 and
$10.2 million for the twelve months ended December 31,
2004. The expected increase in maintenance capital expenditures
is attributable to capital spending for additional well
connections in 2007 and the increased size of our gathering
systems compared to prior periods.
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Expansion Capital Expenditures. Our
estimated expansion capital expenditures are $1.8 million
for the twelve months ending December 31, 2007 as compared
to $9.8 million for the twelve months ending
September 30, 2006, $5.7 million for the twelve months
ended December 31, 2005 and $13.5 million for the
twelve months ended December 31, 2004. We expect to finance
our $1.8 million in expansion capital expenditures from
borrowings under our credit facility. The expected decrease in
expansion capital expenditures is primarily due to the
completion of the refurbishment of the Chico processing plant in
2006 offset by remaining expenditures for projects expected to
be completed in the year ending December 31, 2007.
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52
Financing. Our estimate for the twelve
months ending December 31, 2007 is based on the following
significant financing assumptions:
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Indebtedness. Our expected initial
borrowings of approximately $342.5 million under our new
credit facility will be reduced by $49.7 million through
the application of the net proceeds from the exercise in full of
the underwriters option to purchase additional units, and
increased by $1.8 million in order to fund our expansion
capital requirement.
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Interest Expense. The borrowings under
our credit facility will bear an average variable interest rate
of 7.0% through December 31, 2007. An increase or decrease
of 1% in the interest rate will result in increased or
decreased, respectively, annual interest expense of
$2.9 million.
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Covenant Compliance. We will remain in
compliance with the financial and other covenants in our new
credit facility.
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Regulatory, Industry and Economic
Factors. Our estimate for the twelve months
ending December 31, 2007 is based on the following
significant assumptions related to regulatory, industry and
economic factors:
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There will not be any new federal, state or local regulation of
portions of the energy industry in which we operate, or an
interpretation of existing regulation, that will be materially
adverse to our business.
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There will not be any major adverse change in the portions of
the energy industry or in general economic conditions.
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Market, insurance and overall economic conditions will not
change substantially.
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53
PROVISIONS
OF OUR PARTNERSHIP AGREEMENT
RELATING TO CASH DISTRIBUTIONS
Targa Resources, Inc. and certain of its affiliates hold all
of the membership interests in our general partner, and
consequently are indirectly entitled to all of the distributions
that we make to Targa Resources GP LLC, subject to the terms of
the limited liability company agreement of Targa Resources GP
LLC and relevant legal restrictions.
Set forth below is a summary of the significant provisions of
our partnership agreement that relate to cash distributions.
Distributions
of Available Cash
General. Our partnership agreement
requires that, within 45 days after the end of each
quarter, beginning with the quarter ending March 31, 2007,
we distribute all of our available cash to unitholders of record
on the applicable record date.
Definition of Available Cash. The term
available cash, for any quarter, means all cash and
cash equivalents on hand on the date of determination of
available cash for that quarter:
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less the amount of cash reserves established by our general
partner to:
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provide for the proper conduct of our business;
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comply with applicable law, any of our debt instruments or other
agreements; or
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provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters.
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Minimum Quarterly Distribution. We will
distribute to the holders of common units and subordinated units
on a quarterly basis at least the minimum quarterly distribution
of $0.3375 per unit, or $1.35 per year, to the extent we
have sufficient cash from our operations after establishment of
cash reserves and payment of fees and expenses, including
payments to our general partner. However, there is no guarantee
that we will pay the minimum quarterly distribution on the units
in any quarter. Even if our cash distribution policy is not
modified or revoked, the amount of distributions paid under our
policy and the decision to make any distribution is determined
by our general partner, taking into consideration the terms of
our partnership agreement. We will be prohibited from making any
distributions to unitholders if it would cause an event of
default, or an event of default is existing, under our credit
agreement. Please see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Capital Requirements
Description of Credit Agreement for a discussion of the
restrictions to be included in our credit agreement that may
restrict our ability to make distributions.
General Partner Interest and Incentive Distribution
Rights. Initially, our general partner will
be entitled to 2% of all quarterly distributions since inception
that we make prior to our liquidation. This general partner
interest will be represented by 578,127 general partner units
(or 629,555 general partner units if the underwriters exercise
their option to purchase additional common units in full). Our
general partner has the right, but not the obligation, to
contribute a proportionate amount of capital to us to maintain
its current general partner interest. The general partners
initial 2% interest in these distributions may be reduced if we
issue additional units in the future and our general partner
does not contribute a proportionate amount of capital to us to
maintain its 2% general partner interest.
Our general partner also currently holds incentive distribution
rights that entitle it to receive increasing percentages, up to
a maximum of 50%, of the cash we distribute from operating
surplus (as defined below) in excess of $0.3881 per unit
per quarter. The maximum distribution of 50% includes
distributions paid to our general partner on its 2% general
partner interest and assumes that our general partner maintains
its general partner interest at 2%. The maximum distribution of
50% does not include any distributions that our general partner
may receive on subordinated units that it owns. Please see
General Partner Interest and Incentive
Distribution Rights for additional information.
54
Operating
Surplus and Capital Surplus
General. All cash distributed to
unitholders will be characterized as either operating
surplus or capital surplus. Our partnership
agreement requires that we distribute available cash from
operating surplus differently than available cash from capital
surplus.
Operating
Surplus. Operating
surplus consists of:
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an amount equal to four times the amount needed for any one
quarter for us to pay a distribution on all of our units
(including the general partner units) and the incentive
distribution rights at the same per-unit amount as was
distributed in the immediately preceding quarter; plus
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all of our cash receipts after the closing of this offering,
excluding cash from borrowings, sales of equity and debt
securities, sales or other dispositions of assets outside the
ordinary course of business, capital contributions or corporate
reorganizations or restructurings (provided that cash receipts
from the termination of a commodity hedge or interest rate swap
prior to its specified termination date shall be included in
operating surplus in equal quarterly installments over the
scheduled life of such commodity hedge or interest rate swap);
less
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all of our operating expenditures after the closing of this
offering, but excluding the repayment of borrowings, and
including maintenance capital expenditures; less
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the amount of cash reserves established by our general partner
to provide funds for future operating expenditures.
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Maintenance capital expenditures represent capital expenditures
made to replace partially or fully depreciated assets, to
maintain the existing operating capacity of our assets and to
extend their useful lives, or other capital expenditures that
are incurred in maintaining existing system volumes and related
cash flows. Expansion capital expenditures represent capital
expenditures made to expand or to increase the efficiency of the
existing operating capacity of our assets or to expand the
operating capacity or revenues of existing or new assets,
whether through construction or acquisition. Costs for repairs
and minor renewals to maintain facilities in operating condition
and that do not extend the useful life of existing assets will
be treated as operating expenses as we incur them. Our
partnership agreement provides that our general partner
determines how to allocate a capital expenditure for the
acquisition or expansion of our assets between maintenance
capital expenditures and expansion capital expenditures.
Capital
Surplus. Capital
surplus generally consists of:
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borrowings;
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sales of our equity and debt securities;
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sales or other dispositions of assets for cash, other than
inventory, accounts receivable and other current assets sold in
the ordinary course of business or as part of normal retirement
or replacement of assets;
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capital contributions received; and
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corporate restructurings.
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Characterization of Cash
Distributions. Our partnership agreement
requires that we treat all available cash distributed as coming
from operating surplus until the sum of all available cash
distributed since the closing of this offering equals the
operating surplus as of the most recent date of determination of
available cash. Our partnership agreement requires that we treat
any amount distributed in excess of operating surplus,
regardless of its source, as capital surplus. As reflected
above, operating surplus includes an amount equal to four times
the amount needed for any one quarter for us to pay a
distribution on all of our units (including the general partner
units) and the incentive distribution rights at the same
per-unit amount as was distributed in the immediately preceding
quarter. This amount, which initially equals approximately
$39.0 million, does not reflect actual cash on hand that is
available for distribution to our unitholders.
55
Rather, it is a provision that will enable us, if we choose, to
distribute as operating surplus up to this amount of cash we
receive in the future from non-operating sources, such as asset
sales, issuances of securities, and borrowings, that would
otherwise be distributed as capital surplus. We do not
anticipate that we will make any distributions from capital
surplus.
Subordination
Period
General. Our partnership agreement
provides that, during the subordination period (which we define
below and in Appendix B), the common units will have the
right to receive distributions of available cash from operating
surplus each quarter in an amount equal to $0.3375 per
common unit, which amount is defined in our partnership
agreement as the minimum quarterly distribution, plus any
arrearages in the payment of the minimum quarterly distribution
on the common units from prior quarters, before any
distributions of available cash from operating surplus may be
made on the subordinated units. These units are deemed
subordinated because for a period of time, referred
to as the subordination period, the subordinated units will not
be entitled to receive any distributions until the common units
have received the minimum quarterly distribution plus any
arrearages from prior quarters. Furthermore, no arrearages will
be paid on the subordinated units. The practical effect of the
subordinated units is to increase the likelihood that during the
subordination period there will be available cash to be
distributed on the common units.
Subordination Period. The subordination
period will extend until the first day of any quarter beginning
after March 31, 2010 that each of the following tests are
met:
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distributions of available cash from operating surplus on each
of the outstanding common units, subordinated units and general
partner units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date;
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the adjusted operating surplus (as defined below)
generated during each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distributions on all
of the outstanding common and subordinated units and general
partner units during those periods on a fully diluted basis
during those periods; and
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there are no arrearages in payment of the minimum quarterly
distribution on the common units.
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Expiration of the Subordination
Period. When the subordination period
expires, each outstanding subordinated unit will convert into
one common unit and will then participate pro rata with the
other common units in distributions of available cash. In
addition, if the unitholders remove our general partner other
than for cause and units held by the general partner and its
affiliates are not voted in favor of such removal:
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the subordination period will end and each subordinated unit
will immediately convert into one common unit;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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the general partner will have the right to convert its general
partner units and its incentive distribution rights into common
units or to receive cash in exchange for those interests.
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Early Conversion of Subordinated
Units. The subordination period will
automatically terminate and all of the subordinated units will
convert into common units on a
one-for-one
basis if each of the following occurs:
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distributions of available cash from operating surplus on each
outstanding common unit and subordinated unit equaled or
exceeded $2.025 (150% of the annualized minimum quarterly
distribution) for any four-quarter period immediately preceding
that date;
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the adjusted operating surplus (as defined below)
generated during any four-quarter period immediately preceding
that date equaled or exceeded the sum of a distribution of
$2.025 (150% of the annualized minimum quarterly distribution)
on all of the outstanding common units and subordinated units
and general partner units on a fully diluted basis; and
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there are no arrearages in payment of the minimum quarterly
distribution on the common units.
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Adjusted Operating Surplus. Adjusted
operating surplus is intended to reflect the cash generated from
operations during a particular period and therefore excludes net
drawdowns of reserves of cash generated in prior periods.
Adjusted operating surplus consists of:
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operating surplus generated with respect to that period
(excluding any amounts attributable to the items described in
the first bullet point under Operating Surplus
and Capital Surplus Operating Surplus above);
plus
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any net decrease made in subsequent periods in cash reserves for
operating expenditures initially established with respect to
that period to the extent such decrease results in a reduction
in adjusted operating surplus in subsequent periods pursuant to
the following bullet point; less
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any net decrease in cash reserves for operating expenditures
with respect to that period not relating to an operating
expenditure made with respect to that period; plus
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any net increase in cash reserves for operating expenditures
with respect to that period required by any debt instrument for
the repayment of principal, interest or premium.
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Distributions
of Available Cash from Operating Surplus during the
Subordination Period
Our partnership agreement requires that we make distributions of
available cash from operating surplus for any quarter during the
subordination period in the following manner:
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first, 98% to the common unitholders, pro rata, and 2% to
the general partner, until we distribute for each outstanding
common unit an amount equal to the minimum quarterly
distribution for that quarter;
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second, 98% to the common unitholders, pro rata, and 2%
to the general partner, until we distribute for each outstanding
common unit an amount equal to any arrearages in payment of the
minimum quarterly distribution on the common units for any prior
quarters during the subordination period;
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third, 98% to the subordinated unitholders, pro rata, and
2% to the general partner, until we distribute for each
subordinated unit an amount equal to the minimum quarterly
distribution for that quarter; and
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thereafter, in the manner described in
General Partner Interest and Incentive
Distribution Rights below.
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The preceding discussion is based on the assumptions that our
general partner maintains its 2% general partner interest and
that we do not issue additional classes of equity securities.
Distributions
of Available Cash from Operating Surplus after the Subordination
Period
Our partnership agreement requires that we make distributions of
available cash from operating surplus for any quarter after the
subordination period in the following manner:
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first, 98% to all unitholders, pro rata, and 2% to the
general partner, until we distribute for each outstanding unit
an amount equal to the minimum quarterly distribution for that
quarter; and
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thereafter, in the manner described in
General Partner Interest and Incentive
Distribution Rights below.
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The preceding discussion is based on the assumptions that our
general partner maintains its 2% general partner interest and
that we do not issue additional classes of equity securities.
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General
Partner Interest and Incentive Distribution Rights
Our partnership agreement provides that our general partner
initially will be entitled to 2% of all distributions that we
make prior to our liquidation. Our general partner has the
right, but not the obligation, to contribute a proportionate
amount of capital to us to maintain its 2% general partner
interest if we issue additional units. Our general
partners 2% interest, and the percentage of our cash
distributions to which it is entitled, will be proportionately
reduced if we issue additional units in the future and our
general partner does not contribute a proportionate amount of
capital to us in order to maintain its 2% general partner
interest. Our general partner will be entitled to make a capital
contribution in order to maintain its 2% general partner
interest in the form of the contribution to us of common units
that it may hold based on the current market value of the
contributed common units.
Incentive distribution rights represent the right to receive an
increasing percentage (13%, 23% and 48%) of quarterly
distributions of available cash from operating surplus after the
minimum quarterly distribution and the target distribution
levels have been achieved. Our general partner currently holds
the incentive distribution rights, but may transfer these rights
separately from its general partner interest, subject to
restrictions in the partnership agreement.
The following discussion assumes that the general partner
maintains its 2% general partner interest and continues to own
the incentive distribution rights.
If for any quarter:
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we have distributed available cash from operating surplus to the
common and subordinated unitholders in an amount equal to the
minimum quarterly distribution; and
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we have distributed available cash from operating surplus on
outstanding common units in an amount necessary to eliminate any
cumulative arrearages in payment of the minimum quarterly
distribution;
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then, our partnership agreement requires that we distribute any
additional available cash from operating surplus for that
quarter among the unitholders and the general partner in the
following manner:
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first, 98% to all unitholders, pro rata, and 2% to the
general partner, until each unitholder receives a total of
$0.3881 per unit for that quarter (the first target
distribution);
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second, 85% to all unitholders, pro rata, and 15% to the
general partner, until each unitholder receives a total of
$0.4219 per unit for that quarter (the second target
distribution);
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third, 75% to all unitholders, pro rata, and 25% to the
general partner, until each unitholder receives a total of
$0.50625 per unit for that quarter (the third target
distribution); and
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thereafter, 50% to all unitholders, pro rata, and 50% to
the general partner.
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Percentage
Allocations of Available Cash from Operating Surplus
The following table illustrates the percentage allocations of
available cash from operating surplus between the unitholders
and our general partner based on the specified target
distribution levels. The amounts set forth under Marginal
Percentage Interest in Distributions are the percentage
interests of our general partner and the unitholders in any
available cash from operating surplus we distribute up to and
including the corresponding amount in the column Total
Quarterly Distribution Per Unit, until available cash from
operating surplus we distribute reaches the next target
distribution level, if any. The percentage interests shown for
the unitholders and the general partner for the minimum
quarterly distribution are also applicable to quarterly
distribution amounts that are less than the minimum quarterly
distribution. The percentage interests set forth below for our
general partner include its 2% general partner interest and
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assume our general partner has contributed any additional
capital to maintain its 2% general partner interest and has not
transferred its incentive distribution rights.
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Total Quarterly
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Marginal Percentage
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Distribution
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Interest in
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per Unit
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Distributions
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General
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Target Amount
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Unitholders
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Partner
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Minimum Quarterly Distribution
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$0.3375
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98
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%
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2
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%
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First Target Distribution
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up to $0.3881
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98
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%
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2
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%
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Second Target Distribution
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above $0.3881 up to $0.4219
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85
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%
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15
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%
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Third Target Distribution
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above $0.4219 up to $0.50625
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75
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%
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25
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%
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Thereafter
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above $0.50625
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50
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%
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50
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%
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General
Partners Right to Reset Incentive Distribution
Levels
Our general partner, as the holder of our incentive distribution
rights, has the right under our partnership agreement to elect
to relinquish the right to receive incentive distribution
payments based on the initial cash target distribution levels
and to reset, at higher levels, the minimum quarterly
distribution amount and cash target distribution levels upon
which the incentive distribution payments to our general partner
would be set. Our general partners right to reset the
minimum quarterly distribution amount and the target
distribution levels upon which the incentive distributions
payable to our general partner are based may be exercised,
without approval of our unitholders or the conflicts committee
of our general partner, at any time when there are no
subordinated units outstanding and we have made cash
distributions to the holders of the incentive distribution
rights at the highest level of incentive distribution for each
of the prior four consecutive fiscal quarters. The reset minimum
quarterly distribution amount and target distribution levels
will be higher than the minimum quarterly distribution amount
and the target distribution levels prior to the reset such that
our general partner will not receive any incentive distributions
under the reset target distribution levels until cash
distributions per unit following this event increase as
described below. We anticipate that our general partner would
exercise this reset right in order to facilitate acquisitions or
internal growth projects that would otherwise not be
sufficiently accretive to cash distributions per common unit,
taking into account the existing levels of incentive
distribution payments being made to our general partner.
In connection with the resetting of the minimum quarterly
distribution amount and the target distribution levels and the
corresponding relinquishment by our general partner of incentive
distribution payments based on the target cash distributions
prior to the reset, our general partner will be entitled to
receive a number of newly issued Class B units based on a
predetermined formula described below that takes into account
the cash parity value of the average cash
distributions related to the incentive distribution rights
received by our general partner for the two quarters prior to
the reset event as compared to the average cash distributions
per common unit during this period.
The number of Class B units that our general partner would
be entitled to receive from us in connection with a resetting of
the minimum quarterly distribution amount and the target
distribution levels then in effect would be equal to
(x) the average amount of cash distributions received by
our general partner in respect of its incentive distribution
rights during the two consecutive fiscal quarters ended
immediately prior to the date of such reset election divided by
(y) the average of the amount of cash distributed per
common unit during each of these two quarters. Each Class B
unit will be convertible into one common unit at the election of
the holder of the Class B unit at any time following the
first anniversary of the issuance of these Class B units.
We will also issue an additional amount of general partner units
in order to maintain the general partners ownership
interest in us relative to the issuance of the Class B
units.
Following a reset election by our general partner, the minimum
quarterly distribution amount will be reset to an amount equal
to the average cash distribution amount per common unit for the
two fiscal quarters immediately preceding the reset
election (such amount is referred to as the reset
minimum
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quarterly distribution) and the target distribution levels
will be reset to be correspondingly higher such that we would
distribute all of our available cash from operating surplus for
each quarter thereafter as follows:
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|
|
|
first, 98% to all unitholders, pro rata, and 2% to the
general partner, until each unitholder receives an amount equal
to 115% of the reset minimum quarter distribution for that
quarter;
|
|
|
|
second, 85% to all unitholders, pro rata, and 15% to the
general partner, until each unitholder receives an amount per
unit equal to 125% of the reset minimum quarterly distribution
for that quarter;
|
|
|
|
third, 75% to all unitholders, pro rata, and 25% to the
general partner, until each unitholder receives an amount per
unit equal to 150% of the reset minimum quarterly distribution
for that quarter; and
|
|
|
|
thereafter, 50% to all unitholders, pro rata, and 50% to
the general partner.
|
The following table illustrates the percentage allocation of
available cash from operating surplus between the unitholders
and our general partner at various levels of cash distribution
levels pursuant to the cash distribution provision of our
partnership agreement in effect at the closing of this offering
as well as following a hypothetical reset of the minimum
quarterly distribution and target distribution levels based on
the assumption that the average quarterly cash distribution
amount per common unit during the two fiscal quarters
immediately preceding the reset election was $0.60.
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal Percentage
|
|
|
|
|
|
|
Interest in Distributions
|
|
|
|
|
Quarterly Distribution
|
|
|
|
General
|
|
Quarterly Distribution per Unit
|
|
|
per Unit Prior to Reset
|
|
Unitholders
|
|
Partner
|
|
Following Hypothetical Reset
|
|
Minimum Quarterly Distribution
|
|
$0.3375
|
|
98%
|
|
2%
|
|
$0.6000
|
First Target Distribution
|
|
up to $0.3881
|
|
98%
|
|
2%
|
|
up to $0.6900(1)
|
Second Target Distribution
|
|
above $0.3881 up to $0.4219
|
|
85%
|
|
15%
|
|
above $0.6900(1) up to $0.7500(2)
|
Third Target Distribution
|
|
above $0.4219 up to $0.50625
|
|
75%
|
|
25%
|
|
above $0.7500(2) up to $0.9000(3)
|
Thereafter
|
|
above $0.50625
|
|
50%
|
|
50%
|
|
above $0.9000(3)
|
|
|
|
(1) |
|
This amount is 115% of the hypothetical reset minimum quarterly
distribution. |
|
(2) |
|
This amount is 125% of the hypothetical reset minimum quarterly
distribution. |
|
(3) |
|
This amount is 150% of the hypothetical reset minimum quarterly
distribution. |
The following table illustrates the total amount of available
cash from operating surplus that would be distributed to the
unitholders and the general partner, including in respect of
incentive distribution rights, based on an average of the
amounts distributed per quarter for the two quarters immediately
prior to the reset. The table assumes that there are 30,848,231
common units and 629,555 general partner units outstanding and
that the average distribution to each common unit is
$0.60 for the two quarters prior to the reset. The assumed
number of outstanding units assumes the underwriters exercise in
full their option to purchase additional common units, the
conversion of all subordinated units into common units and no
additional unit issuances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
|
|
Common
|
|
|
General Partner Cash Distributions Prior to Reset
|
|
|
|
|
|
|
Distribution
|
|
Unitholders Cash
|
|
|
|
|
|
2% General
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
per Unit
|
|
Distributions
|
|
|
Class B
|
|
|
Partner
|
|
|
Distribution
|
|
|
|
|
|
Total
|
|
|
|
Prior to Reset
|
|
Prior to Reset
|
|
|
Units
|
|
|
Interest
|
|
|
Rights
|
|
|
Total
|
|
|
Distributions
|
|
|
Minimum Quarterly Distribution
|
|
$0.3375
|
|
$
|
10,411,278
|
|
|
$
|
|
|
|
$
|
212,475
|
|
|
$
|
|
|
|
$
|
212,475
|
|
|
$
|
10,623,753
|
|
First Target Distribution
|
|
up to $0.3881
|
|
|
1,560,920
|
|
|
|
|
|
|
|
31,856
|
|
|
|
|
|
|
|
31,856
|
|
|
|
1,592,776
|
|
Second Target Distribution
|
|
above $0.3881 up to $0.4219
|
|
|
1,042,670
|
|
|
|
|
|
|
|
24,533
|
|
|
|
159,467
|
|
|
|
184,001
|
|
|
|
1,226,671
|
|
Third Target Distribution
|
|
above $0.4219 up to $0.50625
|
|
|
2,603,591
|
|
|
|
|
|
|
|
69,429
|
|
|
|
798,434
|
|
|
|
867,864
|
|
|
|
3,471,454
|
|
Thereafter
|
|
above $0.50625
|
|
|
2,890,479
|
|
|
|
|
|
|
|
115,619
|
|
|
|
2,774,860
|
|
|
|
2,890,479
|
|
|
|
5,780,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,508,939
|
|
|
$
|
|
|
|
$
|
453,912
|
|
|
$
|
3,732,762
|
|
|
$
|
4,186,674
|
|
|
$
|
22,695,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The following table illustrates the total amount of available
cash from operating surplus that would be distributed to the
unitholders and the general partner with respect to the quarter
in which the reset occurs. The table reflects that as a result
of the reset there are 30,848,231 common units, 6,221,270
Class B units and 756,520 general partner units
outstanding, and that the average distribution to each common
unit is $0.60. The number of Class B units was calculated
by dividing (x) the $3,732,762 received by the general
partner in respect of its incentive distribution rights per
quarter for the two quarters prior to the reset as shown in the
table above by (y) the $0.60 of available cash from
operating surplus distributed to each common unit per quarter
for the two quarters prior to the reset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
|
|
Common
|
|
|
General Partner Cash Distributions After Reset
|
|
|
|
|
|
|
Distribution
|
|
Unitholders Cash
|
|
|
|
|
|
2% General
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
per Unit
|
|
Distributions
|
|
|
Class B
|
|
|
Partner
|
|
|
Distribution
|
|
|
|
|
|
Total
|
|
|
|
After Reset
|
|
After Reset
|
|
|
Units
|
|
|
Interest
|
|
|
Rights
|
|
|
Total
|
|
|
Distributions
|
|
|
Minimum Quarterly Distribution
|
|
$0.6000
|
|
$
|
18,508,939
|
|
|
$
|
3,732,762
|
|
|
$
|
453,912
|
|
|
$
|
|
|
|
$
|
4,186,674
|
|
|
$
|
22,695,613
|
|
First Target Distribution(1)
|
|
up to 0.6900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Target Distribution(2)
|
|
above $0.6900 up to $0.7500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Target Distribution(3)
|
|
above $0.7500 up to $0.9000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
above $0.9000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,508,939
|
|
|
$
|
3,732,762
|
|
|
$
|
453,912
|
|
|
$
|
|
|
|
$
|
4,186,674
|
|
|
$
|
22,695,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount is 115% of the hypothetical reset minimum quarterly
distribution. |
|
(2) |
|
This amount is 125% of the hypothetical reset minimum quarterly
distribution. |
|
(3) |
|
This amount is 150% of the hypothetical reset minimum quarterly
distribution. |
Our general partner will be entitled to cause the minimum
quarterly distribution amount and the target distribution levels
to be reset on more than one occasion, provided that it may not
make a reset election except at a time when it has received
incentive distributions for the prior four consecutive fiscal
quarters based on the highest level of incentive distributions
that it is entitled to receive under our partnership agreement.
Distributions
from Capital Surplus
How Distributions from Capital Surplus Will Be
Made. Our partnership agreement requires that
we make distributions of available cash from capital surplus, if
any, in the following manner:
|
|
|
|
|
first, 98% to all unitholders, pro rata, and 2% to the
general partner, until we distribute for each common unit that
was issued in this offering, an amount of available cash from
capital surplus equal to the initial public offering price;
|
|
|
|
second, 98% to the common unitholders, pro rata, and 2%
to the general partner, until we distribute for each common
unit, an amount of available cash from capital surplus equal to
any unpaid arrearages in payment of the minimum quarterly
distribution on the common units; and
|
|
|
|
thereafter, we will make all distributions of available
cash from capital surplus as if they were from operating surplus.
|
Effect of a Distribution from Capital
Surplus. Our partnership agreement treats a
distribution of capital surplus as the repayment of the initial
unit price from this initial public offering, which is a return
of capital. The initial public offering price less any
distributions of capital surplus per unit is referred to as the
unrecovered initial unit price. Each time a
distribution of capital surplus is made, the minimum quarterly
61
distribution and the target distribution levels will be reduced
in the same proportion as the corresponding reduction in the
unrecovered initial unit price. Because distributions of capital
surplus will reduce the minimum quarterly distribution, after
any of these distributions are made, it may be easier for the
general partner to receive incentive distributions and for the
subordinated units to convert into common units. However, any
distribution of capital surplus before the unrecovered initial
unit price is reduced to zero cannot be applied to the payment
of the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a unit issued in this
offering in an amount equal to the initial unit price, our
partnership agreement specifies that the minimum quarterly
distribution and the target distribution levels will be reduced
to zero. Our partnership agreement specifies that we then make
all future distributions from operating surplus, with 50% being
paid to the holders of units and 50% to the general partner. The
percentage interests shown for our general partner include its
2% general partner interest and assume the general partner has
not transferred the incentive distribution rights.
Adjustment
to the Minimum Quarterly Distribution and Target Distribution
Levels
In addition to adjusting the minimum quarterly distribution and
target distribution levels to reflect a distribution of capital
surplus, if we combine our units into fewer units or subdivide
our units into a greater number of units, our partnership
agreement specifies that the following items will be
proportionately adjusted:
|
|
|
|
|
the minimum quarterly distribution;
|
|
|
|
target distribution levels;
|
|
|
|
the unrecovered initial unit price; and
|
|
|
|
the number of common units into which a subordinated unit is
convertible.
|
For example, if a
two-for-one
split of the common units should occur, the minimum quarterly
distribution, the target distribution levels and the unrecovered
initial unit price would each be reduced to 50% of its initial
level, and each subordinated unit would be convertible into two
common units. Our partnership agreement provides that we not
make any adjustment by reason of the issuance of additional
units for cash or property.
In addition, if legislation is enacted or if existing law is
modified or interpreted by a governmental taxing authority, so
that we become taxable as a corporation or otherwise subject to
taxation as an entity for federal, state or local income tax
purposes, our partnership agreement specifies that the general
partner may reduce the minimum quarterly distribution and the
target distribution levels for each quarter by multiplying each
distribution level by a fraction, the numerator of which is
available cash for that quarter and the denominator of which is
the sum of available cash for that quarter plus the general
partners estimate of our aggregate liability for the
quarter for such income taxes payable by reason of such
legislation or interpretation. To the extent that the actual tax
liability differs from the estimated tax liability for any
quarter, the difference will be accounted for in subsequent
quarters.
Distributions
of Cash Upon Liquidation
General. If we dissolve in accordance
with the partnership agreement, we will sell or otherwise
dispose of our assets in a process called liquidation. We will
first apply the proceeds of liquidation to the payment of our
creditors. We will distribute any remaining proceeds to the
unitholders and the general partner, in accordance with their
capital account balances, as adjusted to reflect any gain or
loss upon the sale or other disposition of our assets in
liquidation.
The allocations of gain and loss upon liquidation are intended,
to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding
subordinated units upon our liquidation, to the extent required
to permit common unitholders to receive their unrecovered
initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid
arrearages in payment of the minimum quarterly distribution on
the common units. However, there may not be sufficient gain upon
our liquidation to enable the holders of common units to
62
fully recover all of these amounts, even though there may be
cash available for distribution to the holders of subordinated
units. Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive
distribution rights of the general partner.
Manner of Adjustments for Gain. The
manner of the adjustment for gain is set forth in the
partnership agreement. If our liquidation occurs before the end
of the subordination period, we will allocate any gain to the
partners in the following manner:
|
|
|
|
|
first, to the general partner and the holders of units
who have negative balances in their capital accounts to the
extent of and in proportion to those negative balances;
|
|
|
|
second, 98% to the common unitholders, pro rata, and 2%
to the general partner, until the capital account for each
common unit is equal to the sum of: (1) the unrecovered
initial unit price; (2) the amount of the minimum quarterly
distribution for the quarter during which our liquidation
occurs; and (3) any unpaid arrearages in payment of the
minimum quarterly distribution;
|
|
|
|
third, 98% to the subordinated unitholders, pro rata, and
2% to the general partner until the capital account for each
subordinated unit is equal to the sum of: (1) the
unrecovered initial unit price; and (2) the amount of the
minimum quarterly distribution for the quarter during which our
liquidation occurs;
|
|
|
|
fourth, 98% to all unitholders, pro rata, and 2% to the
general partner, until we allocate under this paragraph an
amount per unit equal to: (1) the sum of the excess of the
first target distribution per unit over the minimum quarterly
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the minimum
quarterly distribution per unit that we distributed 98% to the
unitholders, pro rata, and 2% to the general partner, for each
quarter of our existence;
|
|
|
|
fifth, 85% to all unitholders, pro rata, and 15% to the
general partner, until we allocate under this paragraph an
amount per unit equal to: (1) the sum of the excess of the
second target distribution per unit over the first target
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the first
target distribution per unit that we distributed 85% to the
unitholders, pro rata, and 15% to the general partner for each
quarter of our existence;
|
|
|
|
sixth, 75% to all unitholders, pro rata, and 25% to the
general partner, until we allocate under this paragraph an
amount per unit equal to: (1) the sum of the excess of the
third target distribution per unit over the second target
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the second
target distribution per unit that we distributed 75% to the
unitholders, pro rata, and 25% to the general partner for each
quarter of our existence; and
|
|
|
|
thereafter, 50% to all unitholders, pro rata, and 50% to
the general partner.
|
The percentage interests set forth above for our general partner
include its 2% general partner interest and assume the general
partner has not transferred the incentive distribution rights.
If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that clause (3) of the second
bullet point above and all of the third bullet point above will
no longer be applicable.
Manner of Adjustments for Losses. If
our liquidation occurs before the end of the subordination
period, we will generally allocate any loss to the general
partner and the unitholders in the following manner:
|
|
|
|
|
first, 98% to holders of subordinated units in proportion
to the positive balances in their capital accounts and 2% to the
general partner, until the capital accounts of the subordinated
unitholders have been reduced to zero;
|
63
|
|
|
|
|
second, 98% to the holders of common units in proportion
to the positive balances in their capital accounts and 2% to the
general partner, until the capital accounts of the common
unitholders have been reduced to zero; and
|
|
|
|
thereafter, 100% to the general partner.
|
If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that all of the first bullet point
above will no longer be applicable.
Adjustments to Capital Accounts. Our
partnership agreement requires that we make adjustments to
capital accounts upon the issuance of additional units. In this
regard, our partnership agreement specifies that we allocate any
unrealized and, for tax purposes, unrecognized gain or loss
resulting from the adjustments to the unitholders and the
general partner in the same manner as we allocate gain or loss
upon liquidation. In the event that we make positive adjustments
to the capital accounts upon the issuance of additional units,
our partnership agreement requires that we allocate any later
negative adjustments to the capital accounts resulting from the
issuance of additional units or upon our liquidation in a manner
which results, to the extent possible, in the general
partners capital account balances equaling the amount
which they would have been if no earlier positive adjustments to
the capital accounts had been made.
64
SELECTED
HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table shows selected historical financial and
operating data of the North Texas System and pro forma financial
data of Targa Resources Partners LP for the periods and as of
the dates indicated. The historical financial statements
included in this prospectus reflect the results of operations of
the North Texas System to be contributed to us by Targa upon the
closing of this offering. We refer to the results of operations
of the North Texas System as the results of operations of the
Predecessor Business. The selected historical financial data for
the years ended December 31, 2001 and 2002 are derived from
the books and records of the Predecessor Business. The selected
historical financial data for the years ended December 31,
2003 and 2004, the ten-month period ended October 31, 2005
and the two-month period ended December 31, 2005 are
derived from the audited financial statements of the Predecessor
Business. The selected historical financial data for the nine
months ended September 30, 2005 and 2006 are derived from
the unaudited financial statements of the Predecessor Business.
The Predecessor Business was acquired by Targa as part of the
DMS Acquisition. The selected pro forma financial data for the
year ended December 31, 2005 and the nine months ended
September 30, 2006 are derived from the unaudited pro forma
financial statements of Targa Resources Partners LP included in
this prospectus. The pro forma adjustments have been prepared as
if certain transactions to be effected at the closing of this
offering had taken place on September 30, 2006, in the case
of the pro forma balance sheet, or as of January 1, 2005,
in the case of the pro forma statement of operations for the
nine months ended September 30, 2006 and for the year ended
December 31, 2005. The transactions reflected in the pro
forma adjustments assume the following actions will occur:
|
|
|
|
|
Targa will contribute the North Texas System to us;
|
|
|
|
we will issue to Targa 11,528,231 subordinated units,
representing a 39.9% limited partner interest in us;
|
|
|
|
we will issue to our general partner, Targa Resources GP
LLC, 578,127 general partner units representing its initial 2%
general partner interest in us, and all of our incentive
distribution rights, which incentive distribution rights will
entitle our general partner to increasing percentages of the
cash we distribute in excess of $0.3881 per unit per quarter;
|
|
|
|
we will issue 16,800,000 common units to the public in this
offering, representing a 58.1% limited partner interest in us,
and will use the proceeds to pay expenses associated with this
offering, the Formation Transactions and our new credit facility
and to pay approximately $322.9 million to Targa to retire
a portion of our affiliate indebtedness;
|
|
|
|
we will borrow approximately $342.5 million under our new
$500 million credit facility the proceeds of which will be
paid to Targa to retire an additional portion of our affiliate
indebtedness; and
|
|
|
|
the remaining affiliate indebtedness will be retired and treated
as a capital contribution to us.
|
We derived the information in the following table from, and that
information should be read together with and is qualified in its
entirety by reference to, the historical combined and pro forma
condensed financial statements and the accompanying notes
included elsewhere in this prospectus.
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Business
|
|
|
Targa Resources Partners LP
|
|
|
|
Dynegy
|
|
|
|
Targa
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
|
|
|
Ten
|
|
|
|
Two
|
|
|
Nine
|
|
|
|
|
|
Nine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
Months
|
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Months
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Months
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Year
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Months
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Ended
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Ended
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Ended
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Ended
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Ended
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Ended
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Years Ended December 31,
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September 30,
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October 31,
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December 31,
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September 30,
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December 31,
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September 30,
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2001
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2002
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2003
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2004
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2005
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2005
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2005
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2006
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2005
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2006
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(Unaudited)
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(Unaudited)
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(Audited)
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(Audited)
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(Unaudited)
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(Audited)
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(Audited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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|
(in millions of dollars, except per unit, operating and price
data)
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|
Statement of Operations
Data:
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|
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Total operating revenues
|
|
$
|
122.9
|
|
|
$
|
112.5
|
|
|
$
|
196.8
|
|
|
$
|
258.6
|
|
|
$
|
249.7
|
|
|
$
|
293.3
|
|
|
|
$
|
75.1
|
|
|
$
|
290.9
|
|
|
$
|
368.4
|
|
|
$
|
290.9
|
|
Product purchases
|
|
|
94.0
|
|
|
|
82.7
|
|
|
|
147.3
|
|
|
|
182.6
|
|
|
|
179.0
|
|
|
|
210.8
|
|
|
|
|
54.9
|
|
|
|
205.2
|
|
|
|
265.7
|
|
|
|
205.2
|
|
Operating expense
|
|
|
15.8
|
|
|
|
14.9
|
|
|
|
15.1
|
|
|
|
17.7
|
|
|
|
15.8
|
|
|
|
18.0
|
|
|
|
|
3.5
|
|
|
|
17.9
|
|
|
|
21.5
|
|
|
|
17.9
|
|
Depreciation and amortization
expense
|
|
|
9.7
|
|
|
|
11.8
|
|
|
|
12.0
|
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
11.3
|
|
|
|
|
9.2
|
|
|
|
41.7
|
|
|
|
54.8
|
|
|
|
41.7
|
|
General and administrative expense
|
|
|
7.2
|
|
|
|
7.7
|
|
|
|
7.7
|
|
|
|
7.2
|
|
|
|
6.7
|
|
|
|
7.3
|
|
|
|
|
1.1
|
|
|
|
5.1
|
|
|
|
8.4
|
|
|
|
5.1
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
54.4
|
|
|
|
24.8
|
|
|
|
18.6
|
|
Deferred income taxes(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Other, net
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3.8
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
14.1
|
|
|
$
|
38.6
|
|
|
$
|
38.1
|
|
|
$
|
45.9
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per
limited partner unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.24
|
)
|
|
$
|
0.01
|
|
Financial and Operating
Data:
|
|
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|
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|
|
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|
|
|
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|
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|
|
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Financial data:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(2)
|
|
$
|
13.1
|
|
|
$
|
14.9
|
|
|
$
|
34.4
|
|
|
$
|
58.3
|
|
|
$
|
54.9
|
|
|
$
|
64.5
|
|
|
|
$
|
16.7
|
|
|
$
|
67.8
|
|
|
$
|
81.2
|
|
|
$
|
67.8
|
|
EBITDA(2)
|
|
|
5.9
|
|
|
|
7.5
|
|
|
|
26.1
|
|
|
|
50.8
|
|
|
|
48.2
|
|
|
|
57.2
|
|
|
|
|
15.6
|
|
|
|
62.7
|
|
|
|
72.8
|
|
|
|
62.7
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering throughput, MMcf/d(3)
|
|
|
95.9
|
|
|
|
106.6
|
|
|
|
134.3
|
|
|
|
152.0
|
|
|
|
160.4
|
|
|
|
161.2
|
|
|
|
|
168.8
|
|
|
|
168.2
|
|
|
|
|
|
|
|
|
|
Plant natural gas inlet, MMcf/d(4)
|
|
|
85.6
|
|
|
|
104.0
|
|
|
|
128.6
|
|
|
|
145.4
|
|
|
|
155.4
|
|
|
|
156.2
|
|
|
|
|
161.9
|
|
|
|
161.6
|
|
|
|
|
|
|
|
|
|
Gross NGL production, MBbl/d
|
|
|
11.3
|
|
|
|
12.5
|
|
|
|
15.9
|
|
|
|
17.2
|
|
|
|
18.4
|
|
|
|
18.5
|
|
|
|
|
19.8
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
Natural gas sales, BBtu/d
|
|
|
31.5
|
|
|
|
38.2
|
|
|
|
42.0
|
|
|
|
59.2
|
|
|
|
68.4
|
|
|
|
68.9
|
|
|
|
|
72.3
|
|
|
|
75.2
|
|
|
|
|
|
|
|
|
|
NGL sales, MBbl/d
|
|
|
11.3
|
|
|
|
12.3
|
|
|
|
15.3
|
|
|
|
13.2
|
|
|
|
14.2
|
|
|
|
14.3
|
|
|
|
|
15.4
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
Condensate sales, MBbl/d
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Average Realized
Prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas, $/MMBtu
|
|
|
4.00
|
|
|
|
2.84
|
|
|
|
4.97
|
|
|
|
5.43
|
|
|
|
6.39
|
|
|
|
6.79
|
|
|
|
|
8.61
|
|
|
|
6.09
|
|
|
|
|
|
|
|
|
|
NGL, $/gal
|
|
|
0.41
|
|
|
|
0.35
|
|
|
|
0.47
|
|
|
|
0.64
|
|
|
|
0.75
|
|
|
|
0.78
|
|
|
|
|
0.90
|
|
|
|
0.90
|
|
|
|
|
|
|
|
|
|
Condensate, $/Bbl
|
|
|
21.34
|
|
|
|
23.24
|
|
|
|
29.86
|
|
|
|
40.56
|
|
|
|
52.61
|
|
|
|
53.42
|
|
|
|
|
57.54
|
|
|
|
62.66
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period
end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
159.0
|
|
|
$
|
178.2
|
|
|
$
|
180.4
|
|
|
$
|
191.2
|
|
|
|
195.4
|
|
|
$
|
196.4
|
|
|
|
$
|
1,097.0
|
|
|
$
|
1,073.0
|
|
|
|
|
|
|
$
|
1,073.0
|
|
Total assets
|
|
|
160.1
|
|
|
|
179.7
|
|
|
|
182.9
|
|
|
|
193.5
|
|
|
|
197.6
|
|
|
|
198.5
|
|
|
|
|
1,122.8
|
|
|
|
1,126.3
|
|
|
|
|
|
|
|
1,110.9
|
|
Long-term debt (including current
portion)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
868.9
|
|
|
|
865.2
|
|
|
|
|
|
|
|
342.5
|
|
Partners capital / Net parent
equity
|
|
|
151.2
|
|
|
|
167.3
|
|
|
|
164.8
|
|
|
|
168.8
|
|
|
|
161.9
|
|
|
|
158.5
|
|
|
|
|
219.5
|
|
|
|
227.2
|
|
|
|
|
|
|
|
734.5
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
2.6
|
|
|
$
|
10.2
|
|
|
$
|
31.3
|
|
|
$
|
58.0
|
|
|
$
|
59.2
|
|
|
$
|
72.7
|
|
|
|
$
|
(1.5
|
)
|
|
$
|
11.1
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(41.2
|
)
|
|
|
(30.6
|
)
|
|
|
(14.6
|
)
|
|
|
(23.4
|
)
|
|
|
(14.2
|
)
|
|
|
(16.4
|
)
|
|
|
|
(2.1
|
)
|
|
|
(17.7
|
)
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
38.6
|
|
|
|
20.4
|
|
|
|
(16.7
|
)
|
|
|
(34.6
|
)
|
|
|
(45.0
|
)
|
|
|
(56.3
|
)
|
|
|
|
3.6
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In May 2006, Texas adopted a margin tax consisting of a 1% tax
on the amount by which total revenue exceeds cost of goods. The
amount presented represents our estimated liability for this tax.
|
66
|
|
(2) |
EBITDA. We define EBITDA as net income before
interest, income taxes, depreciation and amortization. EBITDA is
used as a supplemental financial measure by our management and
by external users of our financial statements such as investors,
commercial banks and others, to assess:
|
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
our operating performance and return on capital as compared to
other companies in the midstream energy sector, without regard
to financing or capital structure; and
|
|
|
|
the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
|
The economic substance behind managements use of EBITDA is
to measure the ability of our assets to generate cash sufficient
to pay interest costs, support our indebtedness, and make
distributions to our investors.
The GAAP measures most directly comparable to EBITDA are net
cash provided by operating activities and net income. Our
non-GAAP financial measure of EBITDA should not be considered as
an alternative to GAAP net cash provided by operating activities
and GAAP net income. EBITDA is not a presentation made in
accordance with GAAP and has important limitations as an
analytical tool. You should not consider EBITDA in isolation or
as a substitute for analysis of our results as reported under
GAAP. Because EBITDA excludes some, but not all, items that
affect net income and net cash provided by operating activities
and is defined differently by different companies in our
industry, our definition of EBITDA may not be comparable to
similarly titled measures of other companies.
Management compensates for the limitations of EBITDA as an
analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes.
Operating Margin. We define operating margin
as total operating revenues, which consist of natural gas and
NGL sales plus service fee revenues, less product purchases,
which consist primarily of producer payments and other natural
gas purchases, and operating expense. Management reviews
operating margin monthly for consistency and trend analysis.
Based on this monthly analysis, management takes appropriate
action to maintain positive trends or to reverse negative
trends. Management uses operating margin as an important
performance measure of the core profitability of our operations.
The GAAP measure most directly comparable to operating margin is
net income. Our non-GAAP financial measure of operating margin
should not be considered as an alternative to GAAP net income.
Operating margin is not a presentation made in accordance with
GAAP and has important limitations as an analytical tool. You
should not consider operating margin in isolation or as a
substitute for analysis of our results as reported under GAAP.
Because operating margin excludes some, but not all, items that
affect net income and is defined differently by different
companies in our industry, our definition of operating margin
may not be comparable to similarly titled measures of other
companies, thereby diminishing its utility.
Management compensates for the limitations of operating margin
as an analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes.
We believe that investors benefit from having access to the same
financial measures that our management uses in evaluating our
operating results. Operating margin provides useful information
to investors because it is used as a supplemental financial
measure by our management and by external users of our financial
statements, including such investors, commercial banks and
others, to assess:
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
our operating performance and return on capital as compared to
other companies in the midstream energy sector, without regard
to financing or capital structure; and
|
|
|
|
the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Business
|
|
|
Targa Resources Partners LP
|
|
|
|
Dynegy
|
|
|
|
Targa
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Ten Months
|
|
|
|
Two Months
|
|
|
Nine Months
|
|
|
|
|
|
Nine Months
|
|
|
|
Years Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
October 31,
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
(Audited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions of dollars)
|
|
Reconciliation of
EBITDA to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
31.3
|
|
|
$
|
58.0
|
|
|
$
|
59.2
|
|
|
$
|
72.7
|
|
|
|
$
|
(1.5
|
)
|
|
$
|
11.1
|
|
|
|
|
|
|
|
|
|
Allocated interest expense from
parent(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
|
|
50.5
|
|
|
|
|
|
|
|
|
|
Changes in operating working
capital which provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
0.7
|
|
|
|
(0.7
|
)
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1.0
|
)
|
|
|
(2.7
|
)
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, including changes in
noncurrent assets and liabilities
|
|
|
(4.9
|
)
|
|
|
(3.8
|
)
|
|
|
(12.6
|
)
|
|
|
(17.1
|
)
|
|
|
|
5.5
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
26.1
|
|
|
$
|
50.8
|
|
|
$
|
48.2
|
|
|
$
|
57.2
|
|
|
|
$
|
15.6
|
|
|
$
|
62.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
EBITDA to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14.1
|
|
|
$
|
38.6
|
|
|
$
|
38.1
|
|
|
$
|
45.9
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.4
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
54.4
|
|
|
|
24.8
|
|
|
|
18.6
|
|
Deferred tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Depreciation and amortization
expense
|
|
|
12.0
|
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
11.3
|
|
|
|
|
9.2
|
|
|
|
41.7
|
|
|
|
54.8
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
26.1
|
|
|
$
|
50.8
|
|
|
$
|
48.2
|
|
|
$
|
57.2
|
|
|
|
$
|
15.6
|
|
|
$
|
62.7
|
|
|
$
|
72.8
|
|
|
$
|
62.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
operating margin to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14.1
|
|
|
$
|
38.6
|
|
|
$
|
38.1
|
|
|
$
|
45.9
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.4
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
12.0
|
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
11.3
|
|
|
|
|
9.2
|
|
|
|
41.7
|
|
|
|
54.8
|
|
|
|
41.7
|
|
Deferred income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Other, net
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
54.4
|
|
|
|
24.8
|
|
|
|
18.6
|
|
General and administrative expense
|
|
|
7.7
|
|
|
|
7.2
|
|
|
|
6.7
|
|
|
|
7.3
|
|
|
|
|
1.1
|
|
|
|
5.1
|
|
|
|
8.4
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
$
|
34.4
|
|
|
$
|
58.3
|
|
|
$
|
54.9
|
|
|
$
|
64.5
|
|
|
|
$
|
16.7
|
|
|
$
|
67.8
|
|
|
$
|
81.2
|
|
|
$
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Excludes non-cash amortization of debt issue costs of $0.8
million for the two months ended December 31, 2005 and
$3.9 million for the nine months ended September 30, 2006.
|
|
|
(3)
|
Gathering throughput represents the volume of natural gas
gathered and passed through natural gas gathering pipelines from
connections to producing wells and central delivery points.
|
|
(4)
|
Plant natural gas inlet represents the volume of natural gas
passing through the meter located at the inlet of a natural gas
processing plant.
|
68
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The historical financial statements included in this
prospectus reflect the results of operations of the North Texas
System to be contributed to us by Targa upon the closing of this
offering. We refer to the results of operations of the North
Texas System as the results of operations of the Predecessor
Business. The Predecessor Business was acquired by Targa as part
of Targas acquisition of substantially all of
Dynegys midstream business on October 31, 2005 (the
DMS Acquisition).
The following discussion analyzes the financial condition and
results of operations of the Predecessor Business. In the
discussion, the year ended December 31, 2005 is generally
presented and evaluated on a combined basis, combining the
results of operations reflected in the audited historical
financial statements of the Predecessor Business for the
10-months
prior to the DMS Acquisition (the Pre-Acquisition
Financial Statements) and the results of operations
reflected in the audited historical financial statements of the
Predecessor Business for the two-months after the DMS
Acquisition (the Post-Acquisition Financial
Statements). In certain circumstances, our discussion
identifies distinctions in operating and financial results for
the Predecessor Business associated with the change of ownership
resulting from the DMS Acquisition. You should read the
following discussion of the financial condition and results of
operations for the Predecessor Business in conjunction with the
historical combined financial statements and notes of the
Predecessor Business and the pro forma financial statements for
Targa Resources Partners LP included elsewhere in this
prospectus.
As used in this prospectus, unless we indicate otherwise, the
terms our, we, us and
similar terms refer to Targa Resources Partners LP, together
with our subsidiaries, after giving effect to the Formation
Transactions described in this prospectus, and the term
Targa refers to Targa Resources, Inc. and its
subsidiaries and affiliates (other than us). In certain
circumstances and for ease of reading we discuss the financial
results of the Predecessor Business as being our
financial results during historic periods when this business was
owned by Dynegy or Targa, respectively.
Overview
We are a Delaware limited partnership recently formed by Targa
to own, operate, acquire and develop a diversified portfolio of
complementary midstream energy assets. Concurrent with the
closing of this offering, Targa will contribute to us the
entities holding the North Texas System. The North Texas System
consists of two wholly-owned natural gas processing plants and
an extensive network of integrated gathering pipelines that
serve a 14-county natural gas producing region in the
Fort Worth Basin in North Central Texas. This producing
region includes production from the Barnett Shale formation and
production from shallower formations including the Bend
Conglomerate, Caddo, Atoka, Marble Falls, and other
Pennsylvanian and upper Mississippian formations (referred to as
the other Fort Worth Basin formations). The
natural gas processing plants consist of the Chico processing
and fractionation facilities and the Shackelford processing
facility.
Factors
That Significantly Affect Our Results
Our results of operations are substantially impacted by changes
in commodity prices as well as increases and decreases in the
volume of natural gas that we gather and transport through our
pipeline systems, which we refer to as throughput volume.
Throughput volumes and capacity utilization rates generally are
driven by wellhead production, our competitive position on a
regional basis and more broadly by prices and demand for natural
gas and NGLs.
Our processing contract arrangements can have a significant
impact on our profitability. We process natural gas under a
combination of
percent-of-proceeds
contracts (representing approximately 96% of our gathered
natural gas volumes) and keep-whole contracts (representing
approximately 4% of our gathered natural gas volumes), each of
which exposes us to commodity price risk. We attempt to mitigate
this risk through hedging activities which can materially impact
our results of operations. Please see
Quantitative and Qualitative Disclosures about
Market Risk Commodity Price Risk.
69
Actual contract terms are based upon a variety of factors,
including natural gas quality, geographic location, the
competitive commodity and pricing environment at the time the
contract is executed and customer requirements. Our gathering
and processing contract mix and, accordingly, our exposure to
natural gas and NGL prices, may change as a result of producer
preferences, competition, changes in production as wells decline
at different rates or are added, our expansion into regions
where different types of contracts are more common as well as
other market factors. For a more complete discussion of the
types of contracts under which we process natural gas, please
see Business Midstream Industry Overview.
The historical financial statements of the Predecessor Business
include certain items that will not materially impact our future
results of operations and liquidity and do not fully reflect a
number of other items that will materially impact future results
of operations and liquidity, including the items described below:
Affiliate Indebtedness and Expected
Borrowings. Affiliate indebtedness consists
of borrowings incurred by Targa and allocated to us for
financial reporting purposes as well as intercompany debt being
contributed to us together with the North Texas System. Prior to
the DMS Acquisition, the Predecessor Business was financed
internally and reflected no indebtedness on its balance sheet or
ongoing interest expense on its income statement. A substantial
portion of the DMS Acquisition was financed through borrowings
by Targa. Following the October 31, 2005 DMS Acquisition, a
significant portion of Targas acquisition borrowings were
allocated to the Predecessor Business, resulting in
approximately $868.9 million of allocated indebtedness and
corresponding levels of interest expense. This indebtedness was
incurred by Targa in connection with the DMS Acquisition and the
entity holding the North Texas System provides a guarantee of
this indebtedness. This indebtedness is also secured by a
collateral interest in both the equity of the entity holding the
North Texas System as well as its assets. In connection with
this offering, this guarantee will be terminated, the collateral
interest will be released and the allocated indebtedness will be
retired.
Upon the closing of this offering, we expect to borrow
approximately $342.5 million under our new credit facility
and recognize associated interest expense. The proceeds from
this borrowing, together with $322.9 million of the
proceeds from this offering, will be used to repay approximately
$665.4 million of affiliate indebtedness and the remaining
balance of this indebtedness will be retired and treated as a
capital contribution to us.
Impact of Our Hedging Activities. In an
effort to reduce the variability of our cash flows, we have
hedged the commodity price associated with approximately 95-65%
of our expected natural gas, 60-50% of our expected NGL and
95-60% of our expected condensate equity volumes through 2010 by
entering into derivative financial instruments including swaps
and purchased puts (or floors). The percentages of our expected
volumes that are hedged decreases over the term of the hedges.
With these arrangements, we have attempted to mitigate our
exposure to commodity price movements with respect to our
forecasted volumes for this period. For additional information
regarding our hedging activities, please see
Quantitative and Qualitative Disclosures about
Market Risk Commodity Price Risk. These
hedging arrangements were not entered into until the second
quarter of 2006; accordingly, there is no impact of our hedging
activities in the historical financial statements for the three
year period ended December 31, 2005. In addition, the
hedges we entered into in the second quarter of 2006 were
executed at prices that are materially higher than current
market prices. Accordingly, our results of operations are
realizing a significant benefit from these positions. We expect
this benefit to decline through the life of the hedges, which
cover decreasing volumes at declining prices through 2010.
General and Administrative
Expenses. The Predecessor Business recognized
general and administrative expenses as a result of allocations
from the consolidated general and administrative expenses of
Dynegy and Targa, respectively. Allocated general and
administrative expenses ranged from $7.2 million for the
year ended December 31, 2004 to $8.4 million for the
year ended December 31, 2005. In connection with this
offering we will enter into an omnibus agreement with Targa
pursuant to which our allocated general and administrative
expenses will be capped at $5.0 million per year for the
three years following the offering, subject to adjustment. For a
more complete description of this agreement, see Certain
Relationships and
70
Related Party Transactions Omnibus Agreement.
In addition to these allocated general and administrative
expenses, we expect to incur incremental general and
administrative expenses as a result of operating as a separate
publicly held limited partnership. These direct, incremental
general and administrative expenses are expected to be
approximately $2.5 million annually, are not subject to the
cap contained in the omnibus agreement and include costs
associated with annual and quarterly reports to unitholders, tax
return and
Schedule K-1
preparation and distribution, incremental independent auditor
fees, registrar and transfer agent fees and independent director
compensation. These incremental general and administrative
expenditures are not reflected in the historical financial
statements of the Predecessor Business.
Working Capital Adjustments. In the
historical financial statements of the Predecessor Business, all
intercompany transactions, including commodity sales and expense
reimbursements, were not cash settled with the Predecessor
Business respective parent, but were recorded as an
adjustment to parent equity on the balance sheet. The primary
intercompany transactions between the respective parent and the
Predecessor Business are natural gas and NGL sales, the
provision of operations and maintenance activities and the
provision of general and administrative services. Accordingly,
the working capital of the Predecessor Business does not reflect
any affiliate accounts receivable for intercompany commodity
sales or affiliate accounts payable for the personnel and
services provided by or paid for by the applicable parent on
behalf of the Predecessor Business.
Distributions to our
Unitholders. Following the closing of this
offering, we will make cash distributions to our unitholders and
our general partner at an initial distribution rate of
$0.3375 per common unit per quarter ($1.35 per common
unit on an annualized basis). Due to our cash distribution
policy, we expect that we will distribute to our unitholders
most of the cash generated by our operations. As a result, we
will rely upon external financing sources, including commercial
bank borrowings and other debt and equity issuances, to fund our
acquisition and expansion capital expenditures, as well as our
working capital needs. Historically, the North Texas System has
largely relied on internally generated cash flows for these
purposes.
General
Trends and Outlook
We expect our business to continue to be affected by the
following key trends. Our expectations are based on assumptions
made by us and information currently available to us. To the
extent our underlying assumptions about or interpretations of
available information prove to be incorrect, our actual results
may vary materially from our expected results.
Natural Gas Supply and
Outlook. Fluctuations in energy prices can
affect production rates and investments by third parties in the
development of new natural gas reserves. Generally, drilling and
production activity will increase as natural gas prices
increase. The prices we have realized for natural gas have risen
from an average of $4.97 per MMBtu for the year ended
December 31, 2003 to $5.43 per MMBtu for 2004 and
$7.11 per MMBtu for 2005. In 2006, the prices we have
realized for natural gas have declined to $6.09 per MMBtu for
the nine months ended September 30, 2006 from the highs
experienced in 2005. In part as a result of the prevailing
prices during these periods, the Fort Worth Basin has
experienced significant levels of drilling activity, providing
us with opportunities to access newly developed natural gas
supplies. Our largest supplier of natural gas in the
Fort Worth Basin is ConocoPhillips, which represented
approximately 34% of the natural gas supplied to our system for
the first nine months of 2006 and approximately 36% of the
natural gas supplied to our system in 2005. In addition, leasing
and permitting activity in the Fort Worth Basin/Bend Arch
is continuing to increase. The number of drilling permits have
increased in the Barnett Shale from 546 for the first six months
of 2004 to 1,231 for the first six months of 2006 and in the
other Fort Worth Basin formations from 313 for the first
six months of 2004 to 449 for the first six months of 2006. We
believe that current natural gas prices will continue to cause
relatively high levels of natural gas-related drilling in the
Fort Worth Basin/Bend Arch as producers seek to increase
their level of natural gas production.
Commodity Prices. Our operating income
generally improves in an environment of higher natural gas and
NGL prices, primarily as a result of our
percent-of-proceeds
contracts, which perform better in such an
71
environment. For the nine months ended September 30, 2006,
we sold an average of 75.2 BBtu/d of residue gas at an
average price of $6.09/MMBtu, as compared to 69.5 BBtu/d at
an average price of $7.11/MMBtu for the year ended
December 31, 2005, and 59.2 BBtu/d at an average price
of $5.43/MMBtu for the year ended December 31, 2004. For
the nine months ended September 30, 2006, we sold an
average of 15.1 MBbls/d of NGLs at an average price of
$37.84/Bbl, as compared to 14.5 MBbls/d at an average price
of $33.57/Bbl for the year ended December 31, 2005, and
13.2 MBbls/d at an average price of $26.71/Bbl for the year
ended December 31, 2004. Additionally, we separately sold
condensate during these periods. Our processing profitability is
largely dependent upon pricing and market demand for natural
gas, NGLs and condensate, which are beyond our control and have
been volatile. In a declining commodity price environment,
without taking into account our hedges, we will realize a
reduction in cash flows under our
percent-of-proceeds
contracts proportionate to average price declines. We have
attempted to mitigate our exposure to commodity price movements
by entering into hedging arrangements. For additional
information regarding our hedging activities, please see
Quantitative and Qualitative Disclosures about
Market Risk Commodity Price Risk.
Rising Operating Costs. The current
high levels of natural gas exploration, development and
production activities, both in the Fort Worth Basin and
more broadly across the United States, is increasing competition
for personnel and equipment. This increased competition is
placing upward pressure on the prices we pay for labor,
supplies, property, plant and equipment. We attempt to recover
increased costs from our customers. To the extent we are unable
to procure necessary supplies or to recover higher costs, our
operating results will be negatively impacted.
Our
Operations
Our results of operations are determined primarily by the
volumes of natural gas gathered, compressed, treated, processed,
transported and sold through our gathering, processing and
pipeline systems; the volumes of NGLs and residue natural gas
sold; and the level of natural gas and NGL prices. We generate
our revenues and our operating margins principally under
percent-of-proceeds
contractual arrangements. Under these arrangements, we generally
gather natural gas from producers at the wellhead or central
delivery points, transport the wellhead natural gas through our
gathering system, treat and process the natural gas, and then
sell the resulting residue natural gas and NGLs at index prices
based on published index market prices. We remit to the
producers either an agreed upon percentage of recovered volumes
or of the actual proceeds that we receive from our sales of the
residue natural gas and NGLs or an agreed upon percentage of the
proceeds based on index related prices for the natural gas and
NGLs. Under these types of arrangements, our revenues correlate
directly with the price of natural gas and NGLs. For the nine
months ended September 30, 2006, our
percent-of-proceeds
activities accounted for approximately 96% of our natural gas
throughput volumes. The balance of our throughput volumes are
processed under wellhead purchases and keep-whole contractual
arrangements.
Our Chico facility includes an NGL fractionator with the
capacity to fractionate up to 11,500 Bbls/d of the raw NGL
mix that results from the processing of natural gas at Chico.
This fractionation capability allows Chico to deliver raw NGL
mix to Mont Belvieu primarily through Chevrons WTLPG
Pipeline or separated NGL products to local and other markets
via truck.
We sell all of our processed natural gas, NGLs and high pressure
condensate to Targa at market-based rates pursuant to natural
gas, NGL and condensate purchase agreements. Low-pressure
condensate is sold to third parties. For a more complete
description of these arrangements, see Certain
Relationships and Related Party Transactions and
Business Market Access Chico
System Market Access.
How We
Evaluate Our Operations
Our profitability is a function of the difference between the
revenues we receive from our operations, including revenues from
the natural gas, NGLs and condensate we sell, and the costs
associated with conducting our operations, including the costs
of wellhead natural gas that we purchase as well as operating
and general and administrative costs. Because commodity price
movements tend to impact both revenues
72
and costs, increases or decreases in our revenues alone are not
necessarily indicative of increases or decreases in our
profitability. Our contract portfolio, the prevailing pricing
environment for natural gas and NGLs, and the natural gas and
NGL throughput on our system are important factors in
determining our profitability. Our profitability is also
affected by the NGL content in gathered wellhead natural gas,
demand for our products and changes in our customer mix.
Our management uses a variety of financial and operational
measurements to analyze our performance. These measurements
include the following: (1) throughput volumes, facility
efficiencies and fuel consumption, (2) operating margin,
(3) operating expenses, (4) general and administrative
expenses, (5) EBITDA and (6) distributable cash flow.
Throughput Volumes, Facility Efficiencies and Fuel
Consumption. Our profitability is impacted by
our ability to add new sources of natural gas supply to offset
the natural decline of existing volumes from natural gas wells
that are connected to our systems. This is achieved by
connecting new wells as well as by capturing supplies currently
gathered by third-parties. In addition, we seek to increase
operating margins by limiting volume losses and reducing fuel
consumption by increasing compression efficiency. With our
gathering systems extensive use of remote monitoring
capabilities, we monitor the volumes of natural gas received at
the wellhead or central delivery points along our gathering
systems, the volume of natural gas received at our processing
plant inlets and the volumes of NGLs and residue natural gas
recovered by our processing plants. This information is tracked
through our processing plants to determine customer settlements
and helps us increase efficiency and reduce fuel consumption.
As part of monitoring the efficiency of our operations, we
measure the difference between the volume of natural gas
received at the wellhead or central delivery points on our
gathering systems and the volume received at the inlet of our
processing plants as an indicator of fuel consumption and line
loss. We also track the difference between the volume of natural
gas received at the inlet of the processing plant and the NGL
and residue gas produced at the outlet of such plants to monitor
the fuel consumption and recoveries of the facilities. These
volume, recovery and fuel consumption measurements are an
important part of our operational efficiency analysis.
Operating Margin. We review performance
based on the non-generally accepted accounting principle
(non-GAAP) financial measure of operating margin. We
define operating margin as total operating revenues, which
consist of natural gas and NGL sales plus service fee revenues,
less product purchases, which consist primarily of producer
payments and other natural gas purchases, and operating expense.
Natural gas and NGL sales revenue includes settlement gains and
losses on commodity hedges. Our operating margin is impacted by
volumes and commodity prices as well as by our contract mix and
hedging program, which are described in more detail below. We
view our operating margin as an important performance measure of
the core profitability of our operations. We review our
operating margin monthly for consistency and trend analysis.
Operating margin should not be considered an alternative to, or
more meaningful than, net income, operating income, cash flows
from operating activities or any other measure of financial
performance presented in accordance with GAAP. Please see
Summary Non-GAAP Financial Measures.
Operating Expenses. Operating expenses
are costs associated with the operation of a specific asset.
Direct labor, ad valorem taxes, repair and maintenance,
utilities and contract services compose the most significant
portion of our operating expenses. These expenses generally
remain relatively stable independent of the volumes through our
systems but fluctuate depending on the scope of the activities
performed during a specific period.
EBITDA. EBITDA represents net income
before interest, income taxes, depreciation and amortization.
EBITDA is not a presentation made in accordance with GAAP.
Because EBITDA excludes some, but not all, items that affect net
income and is defined differently by different companies in our
industry, our definition of EBITDA may not be comparable to
similarly titled measures of other companies.
73
EBITDA is used as a supplemental financial measure by our
management and by external users of our financial statements
such as investors, commercial banks and others, to assess:
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the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
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the ability of our assets to generate cash sufficient to pay
interest costs and support our indebtedness;
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our operating performance and return on capital as compared to
those of other companies in the midstream energy sector, without
regard to financing or capital structure; and
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the viability of acquisitions and capital expenditure projects
and the overall rates of return on alternative investment
opportunities.
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EBITDA has important limitations as an analytical tool and
should not be considered an alternative to, or more meaningful
than, net income, operating income, cash flows from operating
activities or any other measure of financial performance
presented in accordance with GAAP as measures of operating
performance, liquidity or ability to service debt obligations.
Distributable Cash Flow. We define
distributable cash flow as EBITDA, less interest expense
excluding the amortization of debt issue costs, maintenance
capital expenditures and reserves. Distributable cash flow is
not a presentation made in accordance with GAAP. Distributable
cash flow is used as a supplemental financial measure by our
management and by external users of our financial statements,
such as investors, commercial banks, research analysts and
others, to assess our ability to make cash distributions to our
unitholders and our general partner.
Contract
Mix
We generate revenue based on the contractual arrangements we
have with our producer customers. These arrangements can be in
many forms which vary in the amount of commodity price risk they
carry. Substantially all of our revenues are generated under
percent-of-proceeds
arrangements pursuant to which we receive a portion of the
natural gas
and/or NGLs
as payment for services. Please see Business
Midstream Sector Overview for a more detailed discussion
of the contractual arrangements under which we operate. Set
forth below is a table summarizing our average contract mix for
the nine-months ended September 30, 2006, including the
potential impacts of changes in commodity prices on operating
margins:
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Percent of
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Contract Type
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Throughput
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Impact of Commodity Prices
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Percent-of-Proceeds
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96%
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Decreases in natural gas
and/or NGL
prices generate decreases in operating margins.
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Wellhead Purchases/Keep Whole
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4%
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Increases in natural gas prices
relative to NGL prices generate decreases in operating margins.
Decreases in NGL prices relative to natural gas prices generate
decreases in operating margins.
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At times, producer preferences, competitive forces and other
factors cause us to enter into more commodity price sensitive
contracts, such as wellhead purchases and keep-whole
arrangements. We prefer to enter into contracts with less
commodity price sensitivity, including fee-based and
percent-of-proceeds
arrangements.
74
Results
of Operations
The following table and discussion is a summary of our combined
results of operations for the three years ended
December 31, 2005 and the nine months ended
September 30, 2005 and 2006.
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Predecessor Business
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Dynegy
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Combined
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Targa
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Nine Months
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Ten Months
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Two Months
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Nine Months
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Year Ended
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Ended
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Ended
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Year Ended
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Ended
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Ended
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December 31,
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September 30,
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October 31,
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December 31,
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December 31,
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September 30,
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2003
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2004
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2005
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2005
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2005
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2005
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2006
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(Audited)
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(Unaudited)
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(Audited)
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(Unaudited)
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(Audited)
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(Unaudited)
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(in millions of dollars, except
operating and price data)
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Total operating revenues
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$
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196.8
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$
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258.6
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$
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249.7
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$
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293.3
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$
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368.4
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$
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75.1
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$
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290.9
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Product purchases
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147.3
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182.6
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179.0
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210.8
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265.7
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54.9
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205.2
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Operating expense
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15.1
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17.7
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15.8
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18.0
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21.5
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3.5
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17.9
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Depreciation and amortization
expense
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12.0
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12.2
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10.1
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11.3
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20.5
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9.2
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41.7
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General and administrative expense
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7.7
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7.2
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6.7
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7.3
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8.4
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1.1
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5.1
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Loss on sales of assets
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0.3
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Income from operations
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14.7
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38.6
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38.1
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45.9
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52.3
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6.4
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21.0
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Interest expense, net
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(11.5
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(11.5
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(54.4
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)
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Deferred income taxes(1)
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(2.0
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Cumulative effect of accounting
change
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(0.6
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Net income (loss)
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$
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14.1
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$
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38.6
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$
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38.1
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$
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45.9
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$
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40.8
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$
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(5.1
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$
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(35.4
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Financial data:
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Operating margin(2)
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$
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34.4
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$
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58.3
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$
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54.9
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$
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64.5
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$
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81.2
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$
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16.7
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$
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67.8
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EBITDA(2)
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26.1
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50.8
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48.2
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57.2
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72.8
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15.6
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62.7
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Operating data:
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Gathering throughput, MMcf/d(3)
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134.3
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152.0
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160.4
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161.2
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162.5
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168.8
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168.2
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Plant natural gas inlet, MMcf/d(4)
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128.6
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145.4
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155.4
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156.2
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157.2
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161.9
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161.6
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Gross NGL production, MBbls/d
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15.9
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17.2
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18.4
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18.5
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18.7
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19.8
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18.8
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Natural gas sales, BBtu/d
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42.0
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59.2
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68.4
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68.9
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69.5
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72.3
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75.2
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NGL sales, MBbl/d
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15.3
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13.2
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14.2
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14.3
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14.5
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15.4
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15.1
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Condensate sales, MBbl/d
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0.6
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0.7
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0.5
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0.5
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0.5
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0.5
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0.5
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Average realized prices:
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Natural gas, $/MMBtu
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4.97
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5.43
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6.39
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6.79
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7.11
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8.61
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6.09
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NGL, $/gal
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0.47
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0.64
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0.75
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0.78
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.80
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0.90
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0.90
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Condensate, $/Bbl
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29.86
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40.56
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52.61
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53.42
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54.03
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57.54
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62.66
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(1)
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In May 2006, Texas adopted a margin
tax, consisting of a 1% tax on the amount by which total revenue
exceeds cost of goods sold. The amount presented represents our
estimated liability for this tax.
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(2)
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EBITDA. We
define EBITDA as net income before interest, income taxes,
depreciation and amortization. EBITDA is used as a supplemental
financial measure by our management and by external users of our
financial statements such as investors, commercial banks and
others, to assess:
|
|
|
|
the financial
performance of our assets without regard to financing methods,
capital structure or historical cost basis;
|
75
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|
|
our operating
performance and return on capital as compared to other companies
in the midstream energy sector, without regard to financing or
capital structure; and
|
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|
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the viability of
acquisitions and capital expenditure projects and the overall
rates of return on alternative investment opportunities.
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The
economic substance behind managements use of EBITDA is to
measure the ability of our assets to generate cash sufficient to
pay interest costs, support our indebtedness, and make
distributions to our investors.
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The
GAAP measures most directly comparable to EBITDA are net cash
provided by operating activities and net income. Our non-GAAP
financial measure of EBITDA should not be considered as an
alternative to GAAP net cash provided by operating activities
and GAAP net income. EBITDA is not a presentation made in
accordance with GAAP and has important limitations as an
analytical tool. You should not consider EBITDA in isolation or
as a substitute for analysis of our results as reported under
GAAP. Because EBITDA excludes some, but not all, items that
affect net income and net cash provided by operating activities
and is defined differently by different companies in our
industry, our definition of EBITDA may not be comparable to
similarly titled measures of other companies.
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Management
compensates for the limitations of EBITDA as an analytical tool
by reviewing the comparable GAAP measures, understanding the
differences between the measures and incorporating these
learnings into managements decision-making processes.
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Operating
Margin. We define operating margin as total
operating revenues, which consist of natural gas and NGL sales
plus service fee revenues, less product purchases, which consist
primarily of producer payments and other natural gas purchases,
and operating expense. Management reviews operating margin
monthly for consistency and trend analysis. Based on this
monthly analysis, management takes appropriate action to
maintain positive trends or to reverse negative trends.
Management uses operating margin as an important performance
measure of the core profitability of our operations.
|
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|
|
The
GAAP measure most directly comparable to operating margin is net
income. Our non-GAAP financial measure of operating margin
should not be considered as an alternative to GAAP net income.
Operating margin is not a presentation made in accordance with
GAAP and has important limitations as an analytical tool. You
should not consider operating margin in isolation or as a
substitute for analysis of our results as reported under GAAP.
Because operating margin excludes some, but not all, items that
affect net income and is defined differently by different
companies in our industry, our definition of operating margin
may not be comparable to similarly titled measures of other
companies, thereby diminishing its utility.
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Management
compensates for the limitations of operating margin as an
analytical tool by reviewing the comparable GAAP measures,
understanding the differences between the measures and
incorporating these learnings into managements
decision-making processes.
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We
believe that investors benefit from having access to the same
financial measures that our management uses in evaluating our
operating results. Operating margin provides useful information
to investors because it is used as a supplemental financial
measure by our management and by external users of our financial
statements, including such investors, commercial banks and
others, to assess:
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|
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the financial
performance of our assets without regard to financing methods,
capital structure or historical cost basis;
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our operating
performance and return on capital as compared to other companies
in the midstream energy sector, without regard to financing or
capital structure; and
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the viability of
acquisitions and capital expenditure projects and the overall
rates of return on alternative investment opportunities.
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76
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Predecessor Business
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|
Targa Resources Partners LP
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Dynegy
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Targa
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Pro Forma
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Nine Months
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Ten Months
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Two Months
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Nine Months
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Nine Months
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Years Ended
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Ended
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Ended
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Ended
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Ended
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Year Ended
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Ended
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December 31,
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September 30,
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October 31,
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December 31,
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September 30,
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December 31,
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September 30,
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2003
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2004
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2005
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2005
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2005
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2006
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2005
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2006
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(Audited)
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|
(Audited)
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(Unaudited)
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(Audited)
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|
(Audited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(in millions of dollars)
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Reconciliation of
EBITDA to net cash provided by (used in) operating
activities:
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|
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Net cash provided by (used in)
operating activities
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|
$
|
31.3
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|
$
|
58.0
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|
$
|
59.2
|
|
|
$
|
72.7
|
|
|
|
$
|
(1.5
|
)
|
|
$
|
11.1
|
|
|
|
|
|
|
|
|
|
Allocated interest expense from
parent(a)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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10.7
|
|
|
|
50.5
|
|
|
|
|
|
|
|
|
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Changes in operating working
capital which provided (used) cash:
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|
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|
|
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|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
0.7
|
|
|
|
(0.7
|
)
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1.0
|
)
|
|
|
(2.7
|
)
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, including changes in
noncurrent assets and liabilities
|
|
|
(4.9
|
)
|
|
|
(3.8
|
)
|
|
|
(12.6
|
)
|
|
|
(17.1
|
)
|
|
|
|
5.5
|
|
|
|
1.5
|
|
|
|
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|
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|
|
|
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|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
26.1
|
|
|
$
|
50.8
|
|
|
$
|
48.2
|
|
|
$
|
57.2
|
|
|
|
$
|
15.6
|
|
|
$
|
62.7
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
Reconciliation of
EBITDA to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14.1
|
|
|
$
|
38.6
|
|
|
$
|
38.1
|
|
|
$
|
45.9
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.4
|
|
Add:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
54.4
|
|
|
|
24.8
|
|
|
|
18.6
|
|
Deferred tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Depreciation and amortization
expense
|
|
|
12.0
|
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
11.3
|
|
|
|
|
9.2
|
|
|
|
41.7
|
|
|
|
54.8
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
26.1
|
|
|
$
|
50.8
|
|
|
$
|
48.2
|
|
|
$
|
57.2
|
|
|
|
$
|
15.6
|
|
|
$
|
62.7
|
|
|
$
|
72.8
|
|
|
$
|
62.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
operating margin to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14.1
|
|
|
$
|
38.6
|
|
|
$
|
38.1
|
|
|
$
|
45.9
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
(35.4
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
0.4
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
12.0
|
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
11.3
|
|
|
|
|
9.2
|
|
|
|
41.7
|
|
|
|
54.8
|
|
|
|
41.7
|
|
Deferred income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Other, net
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
54.4
|
|
|
|
24.8
|
|
|
|
18.6
|
|
General and administrative expense
|
|
|
7.7
|
|
|
|
7.2
|
|
|
|
6.7
|
|
|
|
7.3
|
|
|
|
|
1.1
|
|
|
|
5.1
|
|
|
|
8.4
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
$
|
34.4
|
|
|
$
|
58.3
|
|
|
$
|
54.9
|
|
|
$
|
64.5
|
|
|
|
$
|
16.7
|
|
|
$
|
67.8
|
|
|
$
|
81.2
|
|
|
$
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Excludes non-cash amortization of debt issue costs of $0.8
million for the two months ended December 31, 2005 and
$3.9 million for the nine months ended September 30, 2006.
|
|
|
(3)
|
Gathering throughput represents the volume of natural gas
gathered and passed through natural gas gathering pipelines from
connections to producing wells and central delivery points.
|
|
(4)
|
Plant natural gas inlet represents the volume of natural gas
passing through the meter located at the inlet of a natural gas
processing plant.
|
77
Nine
Months Ended September 30, 2006 Compared to Nine Months
Ended September 30, 2005
Our results of operations for the nine months ended
September 30, 2005 were prepared on the same basis as the
Pre-Acquisition Financial Statements. Our results of operations
for the nine months ended September 30, 2006 were prepared
on the same basis as the Post-Acquisition Financial Statements.
Because different bases of accounting were followed in the
preparation of these results of operations, the reported results
of operations for the nine months ended September 30, 2005
and 2006 are not necessarily comparable. The primary differences
include debt and interest expense allocations, depreciation and
amortization, and general and administrative expense
allocations. The interim period results of operations and
related analyses for the Predecessor Business for the nine
months ended September 30, 2005 do not necessarily
represent the results that would have been achieved during this
period had the business been operated by Targa.
Total Operating Revenues. Revenues
increased by $41.2 million, or 16%, to $290.9 million
for the nine months ended September 30, 2006 compared to
$249.7 million for the nine months ended September 30,
2005. This increase was primarily due to the following factors:
|
|
|
|
|
a net increase attributable to commodity prices of
$21.4 million, consisting of increases in NGL and
condensate revenue of $26.0 million and $1.5 million,
respectively, partially offset by a decrease in natural gas
revenue of $6.1 million; and
|
|
|
|
a net increase attributable to volumes of $19.8 million,
consisting of increases in natural gas and NGL revenue of
$11.8 million and $8.1 million, respectively,
partially offset by a decrease in condensate revenue of
$0.1 million.
|
Average realized prices for natural gas decreased by
$0.30 per MMBtu, or 5%, to $6.09 per MMBtu for the
nine months ended September 30, 2006 compared to
$6.39 per MMBtu for the nine months ended
September 30, 2005. The average realized price for NGLs
increased by $0.15 per gallon, or 20%, to $0.90 per
gallon for the nine months ended September 30, 2006
compared to $0.75 per gallon for the nine months ended
September 30, 2005. The average realized price for
condensate increased by $10.05 per barrel, or 19%, to
$62.66 per Bbl for the nine months ended September 30,
2006 compared to $52.61 per barrel for the nine months
ended September 30, 2005.
Natural gas sales volumes increased by 6.8 BBtu/d, or 10%, to
75.2 BBtu/d for the nine months ended September 30,
2006 compared to 68.4 BBtu/d for the nine months ended
September 30, 2005. NGL sales volumes increased by
0.9 MBbl/d, or 6%, to 15.1 MBbl/d for the nine months
ended September 30, 2006 compared to 14.2 MBbl/d for
the nine months ended September 30, 2005. Condensate
volumes were flat with no change between the periods. The
increases in both natural gas and NGL sales volumes were
primarily due to higher field production as a result of new well
connections.
Product Purchases. Product purchases
increased by $26.2 million, or 15%, to $205.2 million
for the nine months ended September 30, 2006 compared to
$179.0 million for the nine months ended September 30,
2005. Higher commodity prices accounted for $17.5 million
of this increase and increased volumes accounted for
$8.7 million of this increase.
Operating Expenses. Operating expenses
increased by $2.1 million, or 13%, to $17.9 million
for the nine months ended September 30, 2006 compared to
$15.8 million for the nine months ended September 30,
2005. The increase was driven by higher costs in 2006 compared
to 2005 for labor, supplies and equipment incurred in the
expansion of our gathering system as well as increased costs for
these services.
Depreciation and
Amortization. Depreciation and amortization
expense increased by $31.6 million, or 313%, to
$41.7 million for the nine months ended September 30,
2006 compared to $10.1 million for the nine months ended
September 30, 2005. The increase is due to the higher
carrying value of property, plant and equipment as a result of
the DMS Acquisition.
General and Administrative. General and
administrative expense decreased by $1.6 million, or 24%,
to $5.1 million for the nine months ended
September 30, 2006 compared to $6.7 million for the
nine months ended September 30, 2005. The decrease was the
result of lower allocated costs following the DMS
78
Acquisition due to lower parent costs and to adjustments to the
factors used to allocate general and administrative expense.
Interest Expense. Interest expense for
the nine months ended September 30, 2006 was
$54.4 million compared to zero for the nine months ended
September 30, 2005. Interest expense recorded for the nine
months ended September 30, 2006 reflects an allocation of
debt and related interest expense incurred by Targa in
connection with the DMS Acquisition. Prior to the DMS
Acquisition, there was no allocation of debt or interest expense
to the Predecessor Business.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Our results of operations for the year ended December 31,
2005 are derived from the combination of the results of
operations reflected in the Pre-Acquisition Financial Statements
and the results of operations reflected in the Post-Acquisition
Financial Statements. The combined results of operations for the
Predecessor Business for the year ended December 31, 2005
are unaudited and do not necessarily represent the results that
would have been achieved during this period had the business
been operated by Targa for the entire year.
Total Operating Revenues. Combined
revenues increased by $109.8 million, or 42%, to
$368.4 million for the year ended December 31, 2005
compared to $258.6 million for the year ended
December 31, 2004. This increase was primarily due to the
following factors:
|
|
|
|
|
an increase attributable to commodity prices of
$81.3 million, consisting of increases in natural gas, NGL
and condensate revenue of $42.6 million, $36.2 million
and $2.5 million, respectively;
|
|
|
|
a net increase attributable to volumes of $29.2 million,
consisting of increases in natural gas and NGL revenue of
$19.9 million and $11.8 million, respectively,
partially offset by a decrease in condensate revenue of
$2.5 million; and
|
|
|
|
partially offset by a decrease in fee and other revenues of
$0.7 million.
|
Average realized prices for natural gas increased by
$1.68 per MMBtu, or 31%, to $7.11 per MMBtu for the
year ended December 31, 2005 compared to $5.43 per MMBtu
for the year ended December 31, 2004. The average realized
price for NGL increased by $0.16 per gallon, or 25%, to
$0.80 per gallon for the year ended December 31, 2005
compared to $0.64 per gallon for the year ended
December 31, 2004. The average realized price for
condensate increased by $13.47 per barrel, or 33%, to
$54.03 per barrel for the year ended December 31, 2005
compared to $40.56 per barrel for the year ended
December 31, 2004.
Natural gas sales volume increased by 10.3 BBtu/d, or 17%,
to 69.5 BBtu/d for the year ended December 31, 2005
compared to 59.2 BBtu/d for the year ended
December 31, 2004. Net NGL production increased by
1.3 MBbl/d, or 10%, to 14.5 MBbl/d for the year ended
December 31, 2005 compared to 13.2 MBbl/d for the year
ended December 31, 2004. The volume increases were
primarily attributable to additional well connections partially
offset by the natural decline in field production. Condensate
production decreased by 0.2 MBbl/d, or 29%, to
0.5 MBbl/d for the year ended December 31, 2005
compared to 0.7 MBbl/d for the year ended December 31,
2004.
Product Purchases. Product purchases
for the two months ended December 31, 2005 was
$54.9 million which, combined with the $210.8 million
recorded for the ten months ended October 31, 2005,
increased by $83.1 million, or 46%, to $265.7 million
for the year ended December 31, 2005 compared to
$182.6 million for the year ended December 31, 2004.
Higher commodity prices accounted for $63.6 million of this
increase and increased volumes accounted for $19.5 million
of this increase.
Operating Expenses. Combined operating
expenses of $21.5 million for the year ended
December 31, 2005 is an increase of $3.8 million, or
21%, compared to $17.7 million for the year ended
December 31, 2004. The combined operating expense consisted
of $3.5 million for the two months ended December 31,
2005 and $18.0 million for the ten months ended
October 31, 2005. The increase over 2004 was attributable
primarily to the impact of processing plant and gathering system
expansions.
79
Depreciation and
Amortization. Depreciation and amortization
expense for the two months ended December 31, 2005 was
$9.2 million which, combined with the $11.3 million
recorded for the ten months ended October 31, 2005, totals
a combined $20.5 million for the year ended
December 31, 2005 compared to $12.2 million for the
year ended December 31, 2004, for an increase of
$8.3 million, or 68%. The increase is due to the higher
carrying value of property, plant and equipment as a result of
the DMS Acquisition.
General and Administrative. Combined
general and administrative expense of $8.4 million for the
year ended December 31, 2005 is an increase of
$1.2 million, or 17%, compared to $7.2 million for the
year ended December 31, 2004. The allocated combined
general and administrative expense consisting of
$1.1 million for the two months ended December 31,
2005 and $7.3 million for the ten months ended
October 31, 2005 was attributable to higher allocable
corporate overhead expenses incurred during 2005 compared to
2004.
Interest Expense. Interest expense for
the year ended December 31, 2005 was $11.5 million
compared to none for the year ended December 31, 2004.
Interest expense in 2005 consists of an allocation of a portion
of the interest expense incurred by Targa as a result of
borrowing to fund the DMS Acquisition and was recognized in the
final two months of 2005. Prior to the DMS Acquisition, there
was no allocation of Dynegy indebtedness to the Predecessor
Business.
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2003
The following discussion is based on the audited results of
operations of the Predecessor Business for the years ended
December 31, 2003 and 2004. The results of operations for
the years ended December 31, 2003 and 2004 do not
necessarily represent the results that would have been achieved
during this period had the business been operated by Targa.
Total Operating Revenues. Revenues
increased by $61.8 million, or 31%, to $258.6 million
for the year ended December 31, 2004 compared to
$196.8 million for the year ended December 31, 2003.
This increase was primarily due to the following factors:
|
|
|
|
|
an increase attributable to commodity prices of $46.8 million,
consisting of increases in natural gas, NGL and condensate
revenue of $10.1 million, $34.0 million and $2.7 million,
respectively;
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a net increase attributable to volumes of $17.1 million
consisting of increases in natural gas and condensate revenue of
$31.5 million, $0.6 million, respectively, partially offset by a
decrease in NGL revenue of $15.0 million; and
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partially offset by a decrease in fee and other revenues of $2.1
million.
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Average realized prices for natural gas increased by
$0.46 per MMBtu, or 9%, to $5.43 per MMBtu for the
year ended December 31, 2004 compared to $4.97 per MMBtu
for the year ended December 31, 2003. The average realized
price for NGLs increased by $0.17 per gallon, or 36%, to
$0.64 per gallon for the year ended December 31, 2004
compared to $0.47 per gallon for the year ended
December 31, 2003. The average realized price for
condensate increased by $10.70 per barrel, or 36%, to
$40.56 per barrel for the year ended December 31, 2004
compared to $29.86 per barrel for the year ended
December 31, 2003.
Natural gas sales volume increased by 17.2 BBtu/d, or 41%,
to 59.2 BBtu/d for the year ended December 31, 2004
compared to 42.0 BBtu/d for the year ended
December 31, 2003. NGL sales volume decreased by 2.1
MBbl/d, or 14%, to 13.2 MBbl/d for the year ended
December 31, 2004 compared to 15.3 MBbl/d for the year
ended December 31, 2003. Condensate production increased by
0.1 MBbl/d, or 17%, to 0.7 MBbl/d for the year ended
December 31, 2004 compared to 0.6 MBbl/d for the year
ended December 31, 2003. The natural gas and condensate
volume increases were primarily attributable to additional well
connections partially offset by naturally declining field
production. The NGL volume decreases were primarily attributable
to a
take-in-kind
election in late 2003 by a significant producer and the natural
decline in field production, which was partially offset by
additional well connections.
80
Product Purchases. Product purchases
increased by $35.3 million, or 24%, to $182.6 million
for the year ended December 31, 2004 compared to
$147.3 million for the year ended December 31, 2003.
Higher commodity prices accounted for an increase of
$38.4 million, partially offset by $3.1 million due to
decreased volumes.
Operating Expenses. Operating expenses
increased by $2.6 million, or 17%, to $17.7 million
for the year ended December 31, 2004 compared to
$15.1 million for the year ended December 31, 2003.
The increase was primarily attributable to the impact of
processing plant expansions.
Depreciation and
Amortization. Depreciation and amortization
expenses increased by $0.2 million, or 2%, to
$12.2 million for the year ended December 31, 2004
compared to $12.0 million for the year ended
December 31, 2003.
General and Administrative. General and
administrative expense decreased $0.5 million, or 6%, to
$7.2 million for the year ended December 31, 2004
compared to $7.7 million for the year ended
December 31, 2003 as a result of lower allocable corporate
overhead expenses during 2004 compared to 2003.
Liquidity
and Capital Resources
Our ability to finance our operations, including to fund capital
expenditures and acquisitions, to meet our indebtedness
obligations, to refinance our indebtedness or to meet our
collateral requirements will depend on our ability to generate
cash in the future. Our ability to generate cash is subject to a
number of factors, some of which are beyond our control,
including commodity prices, particularly for natural gas and
NGLs, operating costs and maintenance capital expenditures.
Please see Risk Factors.
Historically, our cash generated from operations has been
sufficient to finance our operating expenditures and maintenance
and expansion capital expenditures, with remaining amounts being
distributed to Dynegy or Targa, during their respective periods
of ownership. After completion of this offering, we expect our
sources of liquidity to include:
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cash generated from operations;
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borrowings under our anticipated new credit facility;
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issuance of additional partnership units; and
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debt offerings.
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We believe that cash generated from these sources will be
sufficient to meet our short-term working capital requirements,
long-term capital expenditure requirements and our minimum
quarterly cash distributions for at least the next twelve months.
Working Capital. Working capital is the
amount by which current assets exceed current liabilities. Our
working capital requirements will be primarily driven by changes
in accounts receivable and accounts payable. These changes are
impacted by changes in the prices of commodities that we buy and
sell. In general, our working capital requirements increase in
periods of rising commodity prices and decrease in periods of
declining commodity prices. However, our working capital needs
do not necessarily change at the same rate as commodity prices
because both accounts receivable and accounts payable are
impacted by the same commodity prices. In addition, the timing
of payments received by our customers or paid to our suppliers
can also cause fluctuations in working capital because we settle
with most of our larger suppliers and customers on a monthly
basis and often near the end of the month. We expect that our
future working capital requirements will be impacted by these
same factors.
On the historical financial statements of the Predecessor
Business, all intercompany transactions, including commodity
sales and expense reimbursements, were not cash settled with the
Predecessor Business parent at the time, either Dynegy or
Targa, but were recorded as an adjustment to parent equity on
the balance sheet. The primary transactions between the
applicable parent and the Predecessor Business are natural gas
and NGL sales, the provision of operations and maintenance
activities and the provision of
81
general and administrative services. As a result of this
accounting treatment, the working capital of the Predecessor
Business does not reflect any affiliate accounts receivable for
intercompany commodity sales or any affiliate accounts payable
for the personnel and services provided by or paid for by the
applicable parent on behalf of the Predecessor Business.
We had negative working capital of $18.1 million as of
September 30, 2006, compared to negative working capital of
$31.4 million as of September 30, 2005. This
increasing working capital trend was attributable to the current
portion of commodity hedges and decreased accounts payable,
partially offset by the current portion of long-term debt. The
decrease in accounts payable was due to lower commodity prices,
partially offset by increased volumes, which decreased accounts
payable to our producers without an offsetting decrease in
receivables due to the accounting treatment discussed above.
We had negative working capital of $34.4 million as of
December 31, 2005, compared to negative working capital of
$20.5 million as of December 31, 2004. This declining
working capital trend was attributable to the current portion of
long-term debt and increased accounts payable. The increase in
accounts payable was due to increased volumes and higher
commodity prices which increased accounts payable to our
producers without an offsetting increase in receivables due to
the accounting treatment discussed above.
Cash Flow. Net cash provided by or used
in operating activities, investing activities and financing
activities for the years ended December 31, 2003, 2004 and
2005, and for the nine months ended September 30, 2005 and
2006 were as follows:
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Predecessor Business
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Dynegy
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Combined
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Targa
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Nine Months
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Ten Months
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Two Months
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Nine Months
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Ended
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Ended
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Year Ended
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Ended
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Ended
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Year Ended December 31,
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September 30,
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October 31,
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December 31,
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December 31,
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September 30,
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2003
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2004
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2005
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2005
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2005
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2005
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2006
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(Audited)
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(Unaudited)
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(Audited)
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(Unaudited)
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(Audited)
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(Unaudited)
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(in millions of dollars)
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Net cash provided by (used in):
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Operating activities
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$
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31.3
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$
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58.0
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$
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59.2
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$
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72.7
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$
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71.2
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$
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(1.5
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)
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$
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11.1
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Investing activities
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(14.6
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)
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(23.4
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)
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(14.2
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)
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(16.4
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)
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(18.5
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)
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(2.1
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)
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(17.7
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)
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Financing activities
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(16.7
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)
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(34.6
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)
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(45.0
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)
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(56.3
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)
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(52.7
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)
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3.6
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6.6
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The discussion of cash flows for the year ended
December 31, 2005 is derived from the sum of the cash flows
reflected in the Pre-Acquisition Financial Statements and the
cash flows reflected in the Post-Acquisition Financial
Statements. The combined financial information for the year
ended December 31, 2005 is unaudited. Because different
bases of accounting were followed in the Pre-Acquisition
Financial Statements and the Post-Acquisition Financial
Statements, the combined cash flow information for the year
ended December 31, 2005 is not prepared on the same basis
and, thus, is not in accordance with GAAP. The following
discussion based on the combined cash flows is presented for the
convenience of investors to facilitate the presentation of a
more meaningful discussion of the historical period. The
combined cash flows for the Predecessor Business for the year
ended December 31, 2005 do not necessarily represent the
cash flows that would have occurred during this period had the
business been operated by Targa for the entire year.
Cash flow information for the years ended December 31, 2003
and 2004 is based on Dynegys results of operations for the
Predecessor Business for the years ended December 31, 2003
and 2004. The results of operations for the years ended
December 31, 2003 and 2004 do not necessarily represent the
results that would have been achieved during this period had the
business been operated by Targa.
Operating Activities. Net cash provided by
operating activities decreased by $48.1 million, or 81%,
for the nine months ended September 30, 2006 compared to
the same period in the prior year. This decrease is
82
attributable to our net income, adjusted for non-cash charges,
as presented in the combined statements of cash flows and
changes in working capital as discussed above. Net cash provided
by operating activities increased by $13.2 million, or 23%,
for the year ended December 31, 2005 compared to the year
ended December 31, 2004. This increase is attributable to
our net income, adjusted for non-cash charges, as presented in
the combined statements of cash flows and changes in working
capital as discussed above.
Investing Activities. Net cash used in
investing activities was $17.7 million for the nine months
ended September 30, 2006 compared to $14.2 million for
the nine months ended September 30, 2005. The increase was
attributable to capital spending related to the refurbishment of
an additional cryogenic train at our Chico plant, the purchase
of an additional gathering system and other expansion
expenditures.
Net cash used in investing activities was $18.5 million for
the year ended December 31, 2005 compared to
$23.4 million for the year ended December 31, 2004.
The $4.9 million, or 21%, decrease is primarily due to the
completion of a major Barnett Shale gathering system expansion
project offset by an increase in major maintenance expenditures
of $1.2 million due to the increased size of our gathering
systems and the effect of higher utilization of our field
compression facilities.
Financing Activities. Net cash used in
financing activities represents the pass through of our net cash
flow to Dynegy prior to the October 31, 2005 DMS
Acquisition, and net cash provided by financing activities
represents the contribution to us by Targa of the net cash
required for principal and interest on allocated parent debt
following the DMS Acquisition.
Capital Requirements. The midstream
energy business can be capital intensive, requiring significant
investment to maintain and upgrade existing operations. A
significant portion of the cost of constructing new gathering
lines to connect to our gathering system is generally paid for
by the natural gas producer. However, we expect to make
significant expenditures during the next year for the
construction of additional natural gas gathering and processing
infrastructure.
We categorize our capital expenditures as either:
(i) maintenance expenditures or (ii) expansion
expenditures. Maintenance expenditures are those expenditures
that are necessary to maintain the service capability of our
existing assets including the replacement of system components
and equipment which is worn, obsolete or completing its useful
life, the addition of new sources of natural gas supply to our
systems to replace natural gas production declines and
expenditures to remain in compliance with environmental laws and
regulations. Expansion expenditures improve the service
capability of the existing assets, extend asset useful lives,
increase capacities from existing levels, reduce costs or
enhance revenues. Our planned capital expenditures for 2006 are
$15.0 million and $12.7 million for maintenance
expenditures and expansion expenditures, respectively. Through
September 30, 2006 we have expended $9.1 million and
$8.7 million of these amounts, respectively.
Over the three years ended December 31, 2005, our expansion
capital expenditures have averaged $8.1 million and ranged
from a high of $13.5 million to a low of $5.3 million.
We estimate that expansion capital expenditures will include
$1.8 million of remaining expenditures for projects that have
been initiated and will be completed in 2007. Given our
objective of growth through acquisitions, expansions of existing
assets and other internal growth projects, we anticipate that we
will invest significant amounts of capital to grow and acquire
assets. After the completion of this offering, expansion capital
expenditures may vary significantly based on investment
opportunities.
We expect to fund future capital expenditures with funds
generated from our operations, borrowings under our new credit
facility, the issuance of additional partnership units and debt
offerings.
Description of Credit Agreement In
connection with this offering, we will enter into a new 5-year
$500 million revolving credit facility with the option to
increase the size of the credit facility up to $750 million
in the future. We expect to borrow $342.5 million under
this new credit facility at the closing of this offering, the
proceeds of which will be paid to Targa to retire a portion of
our affiliate indebtedness. Our obligations under the revolving
credit facility will be secured at all times by substantially
all of our assets and will be guaranteed by our material,
domestic subsidiaries. We may prepay all advances at any time
without penalty. Indebtedness under the revolving credit
facility will bear interest, at our option, at
83
either (1) the higher of the lenders prime rate or
the federal funds rate plus 0.5%, plus an applicable margin
which ranges from 0% to 1.25% dependent on our total leverage
ratio, or (2) LIBOR plus an applicable margin which ranges
from 1.0% to 2.25% dependent upon our total leverage ratio. Our
credit facility will restrict our ability to make distributions
of available cash to unitholders if any default or event of
default (as defined in the credit agreement) exists. The credit
agreement will require us to maintain a leverage ratio (the
ratio of consolidated indebtedness to our consolidated EBITDA,
in each case as will be defined in the credit agreement) of not
more than 5.75 to 1.00 (stepping down to 5.00 to 1.00 within the
first three quarters after closing) and on a temporary basis for
not more than four consecutive quarters following the
consummation of certain acquisitions, not more than 0.50 more
than the leverage ratio then in effect; provided that after the
issuance of senior unsecured notes, the leverage ratio
limitation will be replaced by a requirement that we maintain a
senior secured leverage ratio of not more than 5.25 to 1.00
(stepping down to 4.50 to 1.00 within the first three quarters
after closing) and a total leverage ratio of 6.25 to 1.00
(stepping down to 5.50 to 1.00 within the first three quarters
after closing) (but still subject to automatic temporary
increases following the consummation of certain acquisitions as
described above). The credit agreement will also require us to
maintain an interest coverage ratio (the ratio of our
consolidated EBITDA to our consolidated interest expense, in
each case as will be defined in the credit agreement) of not
less than 2.25 to 1.00 determined as of the last day of each
quarter for the four-fiscal quarter period ending on the date of
determination. In addition, the credit agreement will contain
various covenants that may limit, among other things, our
ability to:
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grant liens;
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be liable for other indebtedness;
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engage in a merger, consolidation or dissolution;
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enter into transactions with affiliates;
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sell or otherwise dispose of our assets, businesses and
operations;
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materially alter the character of our business; and
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make acquisitions, investments and capital expenditures.
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Any subsequent replacement of our credit facility or any new
indebtedness could have similar or greater restrictions.
If an event of default exists under the credit agreement, the
lenders will be able to accelerate the maturity of the credit
agreement and exercise other rights and remedies. Each of the
following could be an event of default under the credit
agreement:
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failure to pay any principal when due or any interest or fees
within five business days of the due date;
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failure to perform or otherwise comply with the covenants in the
credit agreement;
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failure of any representation or warranty to be true and correct
in any material respect;
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failure to pay debt or perform or otherwise comply with
covenants in other material debt agreements;
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a change of control of our partnership; and
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other customary defaults, including specified bankruptcy or
insolvency events, the Employee Retirement Income Security Act
of 1974, or ERISA, violations, and material judgment defaults.
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84
Contractual Obligations. A summary of
our contractual cash obligations over the next several fiscal
years, as of December 31, 2005, is as follows:
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Payments Due By Period
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Less than
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More than
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Contractual Obligations
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Total
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1 year
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1-3 years
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4-5 years
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5 Years
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(in millions of dollars)
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Debt obligations(1)
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$
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868.9
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$
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4.9
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|
$
|
286.0
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|
$
|
9.9
|
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|
$
|
568.1
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|
Interest on debt obligations(2)
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322.4
|
|
|
|
60.6
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98.3
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81.4
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82.1
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Capacity payments(3)
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7.6
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2.5
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2.9
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2.2
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Asset retirement obligations
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1.5
|
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1.5
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$
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1,200.4
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$
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68.0
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$
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387.2
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$
|
93.5
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|
$
|
651.7
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(1)
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Represents required future
principal repayments of debt obligations allocated from Targa.
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(2)
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Represents interest expense on debt
obligations allocated from Targa, based on interest rates as of
December 31, 2005. We used an average rate of 6.8% to
estimate our interest on variable rate debt obligations.
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(3)
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Consists of capacity payments for
natural gas pipelines.
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Debt Obligations. Our debt obligations
consisted of the following at the dates indicated:
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December 31,
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2005
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2004
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(in millions
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of dollars)
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Allocated debt, less current
portion of $4.9(1)
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$
|
864.0
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$
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(1)
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Allocated debt presented above
represents indebtedness incurred by Targa in connection with the
DMS Acquisition that has been allocated to the North Texas
System. This indebtedness was incurred by Targa in connection
with the DMS Acquisition and the entity holding the North Texas
System provides a guarantee of this indebtedness. This
indebtedness is also secured by a collateral interest in both
the equity of the entity holding the North Texas System as well
as its assets. In connection with this offering, this guarantee
will be terminated, the collateral interest will be released and
the allocated indebtedness will be retired. The table above does
not reflect borrowings we expect to make at the closing of this
offering under our new credit facility.
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Available Credit. After the closing of
this offering, we anticipate having approximately
$157.5 million in borrowing capacity available under our
new credit facility.
Quantitative
and Qualitative Disclosures about Market Risk
Our principal market risks are our exposure to changes in
commodity prices, particularly to the prices of natural gas and
NGLs, as well as nonperformance by our customers.
Commodity Price Risk. Substantially all
of our revenues are derived from
percent-of-proceeds
contracts under which we receive a portion of the natural gas
and/or NGLs,
or equity volumes, as payment for services. The prices of
natural gas and NGLs are subject to fluctuations in response to
changes in supply, demand, market uncertainty and a variety of
additional factors beyond our control. We monitor these risks
and enter into hedging transactions designed to mitigate the
impact of commodity price fluctuations on our business.
The primary purpose of our commodity risk management activities
is to hedge our exposure to commodity price risk and reduce
fluctuations in our operating cash flow despite fluctuations in
commodity prices. In an effort to reduce the variability of our
cash flows, we have hedged the commodity price associated with
approximately 95-65% of our expected natural gas, 60-50% of our
expected NGL and
95-60% of
our expected condensate equity volumes through 2010 by entering
into derivative financial instruments including swaps and
purchased puts (or floors). The percentages of our expected
equity volumes that are hedged decrease over the term of the
hedges. With swaps, we typically receive an agreed fixed price
for a specified notional quantity of natural gas or NGLs, and we
pay the hedge counterparty a floating price for that same
quantity based upon published index prices. Since we receive
from our
85
customers substantially the same floating index price from the
sale of the underlying physical commodity, these transactions
are designed to effectively lock-in the agreed fixed price in
advance for the volumes hedged. In order to avoid having a
greater volume hedged than our actual equity volumes, we
typically limit our use of swaps to hedge the prices of up to
approximately 90% of our expected natural gas and NGL equity
volumes. We utilize purchased puts (or floors) to hedge
additional expected equity commodity volumes without creating
volumetric risk. We intend to continue to manage our exposure to
commodity prices in the future by entering into similar hedge
transactions using swaps, collars, purchased puts (or floors) or
other hedge instruments as market conditions permit.
We have tailored our hedges to generally match the NGL product
composition and the NGL and natural gas delivery points to those
of our physical equity volumes. Our NGL hedges cover baskets of
ethane, propane, normal butane, iso-butane and natural gasoline
based upon our expected equity NGL composition. We believe this
strategy avoids uncorrelated risks resulting from employing
hedges on crude oil or other petroleum products as
proxy hedges of NGL prices. Additionally, our NGL
hedges are based on published index prices for delivery at Mont
Belvieu, and our natural gas hedges are based on published index
prices for delivery at Waha and Mid-Continent, which closely
approximate our actual NGL and natural gas delivery points. We
hedge a portion of our condensate sales using crude oil hedges
that are based on the NYMEX futures contracts for West Texas
Intermediate light, sweet crude.
In April and May 2006, we entered into hedges for the third and
fourth quarters of 2006 and for 2007 through 2010 at prices that
are materially higher than current market prices. In November
2006, we entered into additional swaps at then market prices and
purchased puts (or floors). Our results of operations are
currently realizing a significant benefit from the positions
entered into in April and May of 2006. In our minimum estimated
EBITDA for the twelve months ended December 31, 2007
included elsewhere in this prospectus, we estimate that our
hedges will generate approximately $15 million in operating
income for the forecasted period. If future realized prices
remain comparable to current prices, we expect that this benefit
will decline materially over the life of the hedges, which cover
decreasing volumes at declining prices through 2010. For the
third quarter of 2006, the hedged volumes were 2,751 Bbls/d
of NGLs, 11,633 MMBtu/d of natural gas and 366 Bbls/d of
condensate. For the nine months ended September 30, 2006,
our operating revenue was increased by net hedge settlements of
$0.3 million. For a description of our hedges, please see
Summary of Our Hedges.
Our commodity price hedging transactions are typically
documented pursuant to a standard International Swap Dealers
Association (ISDA) form with customized credit and
legal terms. Our principal counterparties (or, if applicable,
their guarantors) have investment grade credit ratings. The
payment obligations in connection with substantially all of
these hedging transactions, and any additional credit exposure
due to a rise in natural gas and NGL prices relative to the
fixed prices set forth in the hedges, are expected to be secured
by a first priority lien in the collateral securing our senior
secured indebtedness that ranks equal in right of payment with
liens granted in favor of our senior secured lenders. As long as
this first priority lien is in effect, we expect to have no
obligation to post cash, letters of credit, or other additional
collateral to secure these hedges at any time even if our
counterpartys exposure to our credit increases over the
term of the hedge as a result of higher commodity prices or
because there has been a change in our creditworthiness. For
example, a 10% increase in natural gas, crude oil and NGL prices
over the term of our swaps would increase the credit exposure
that our swap counterparties have to us by approximately
$22.3 million; however, we would expect to post no
additional collateral. A purchased put (or floor) transaction
does not create credit exposure to us for our counterparties.
86
Summary
of Our Hedges
At December 31, 2005, we had no open commodity derivative
positions. During the second and fourth quarters of 2006, we
entered into the following hedging arrangements for a portion of
our forecast of equity volumes. Floor volumes and floor pricing
are based solely on purchased puts (or floors).
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Three months
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ended
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December 31,
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2006
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2007
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2008
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2009
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2010
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NGL Hedges
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NGL volume swaps
(Bbls/d)
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2,751
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2,416
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2,160
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1,948
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1,759
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Weighted average swap price (per
gallon)
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$
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1.01
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$
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0.99
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$
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0.95
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$
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0.91
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$
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0.88
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Natural Gas Hedges
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Natural gas volume
swaps (MMBtu/d)
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11,633
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13,612
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11,621
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10,452
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9,494
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Weighted average swap price (per
MMBtu)
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$
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8.03
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$
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8.63
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$
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8.47
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$
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7.99
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$
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7.41
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Natural gas volume
floors (MMBtu/d)
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870
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1,670
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1,415
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Weighted average floor price (per
MMBtu)
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$
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$
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6.55
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$
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6.67
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$
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6.55
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$
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Condensate Hedges
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Condensate volume
swaps (Bbls/d)
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366
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439
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384
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322
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301
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Weighted average swap price (per
barrel)
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$
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76.29
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$
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72.82
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$
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70.86
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$
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69.00
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$
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68.10
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Condensate volume
floors (Bbls/d)
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25
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55
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50
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Weighted average floor price (per
barrel)
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$
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$
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58.60
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$
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60.50
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$
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60.00
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$
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These contracts may expose us to the risk of financial loss in
certain circumstances. Our hedging arrangements provide us
protection on the hedged volumes if prices decline below the
prices at which these hedges are set. If prices rise above the
prices at which we have hedged, we will receive less revenues on
the hedged volumes than we would receive in the absence of
hedges. We have entered into these transactions with Merrill
Lynch Commodities Inc., whose obligations are guaranteed by
Merrill Lynch & Co. Inc., Morgan Stanley Capital Group
Inc. and J. Aron & Company, whose obligations are
guaranteed by The Goldman Sachs Group, Inc.
Interest Rate Risk. We may enter hedges
for a portion of our floating interest rate exposure under our
anticipated new credit facility.
Credit Risk. We are subject to risk of
losses resulting from nonpayment or nonperformance by our
customers. We will continue to closely monitor the
creditworthiness of customers to whom we grant credit and
establish credit limits in accordance with our credit policy. At
the closing of this offering, we will enter into natural gas,
NGL and condensate purchase agreements with Targa pursuant to
which Targa will purchase all of our natural gas for a term of
15 years, and all of our NGLs and high-pressure condensate for a
term of 15 years. We will also enter into an omnibus
agreement with Targa which will address, among other things, the
provision of general and administrative and operating services
to us. As of January 31, 2007, Moodys and
Standard & Poors assigned Targa corporate credit
ratings of B1 and B+, respectively, which are speculative
ratings. A speculative rating signifies a higher risk that Targa
will default on its obligations, including its obligations to
us, than does an investment grade rating. Any material
nonperformance under the omnibus and purchase agreements by
Targa could materially and adversely impact our ability to
operate and make distributions to our unitholders.
Critical
Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP
requires our management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from
these estimates. The policies and estimates discussed below are
considered by management to be critical to an understanding of
our financial
87
statements, because their application requires the most
significant judgments from management in estimating matters for
financial reporting that are inherently uncertain.
Revenue Recognition.
Our primary types of sales and service activities reported as
operating revenue include:
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sales of natural gas, NGLs and condensate; and
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natural gas processing, from which we generate revenue through
the compression, gathering, treating and processing of natural
gas.
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We recognize revenue when all of the following criteria are met:
(1) persuasive evidence of an exchange arrangement exists,
(2) delivery has occurred or services have been rendered,
(3) the price is fixed or determinable and
(4) collectibility is reasonably assured.
For processing services, we receive either fees or a percentage
of commodities as payment for these services, depending on the
type of contract. Under
percent-of-proceeds
contracts, we are paid for our services by keeping a percentage
of the NGLs extracted and the residue gas resulting from
processing natural gas. In
percent-of-proceeds
arrangements, we remit either a percentage of the proceeds
received from the sales of residue gas and NGLs or a percentage
of the residue gas or NGLs at the tailgate of the plant to the
producer. Under the terms of
percent-of-proceeds
and similar contracts, we may purchase the producers share
of the processed commodities for resale or deliver the
commodities to the producer at the tailgate of the plant.
Percent-of-value
and
percent-of-liquids
contracts are variations on this arrangement. Under keep-whole
contracts, we keep the NGLs extracted and return the processed
natural gas or value of the natural gas to the producer. Natural
gas or NGLs that we receive for services or purchase for resale
are in turn sold and recognized in accordance with the criteria
outlined above. Under fee-based contracts, we receive a fee
based on throughput volumes.
We generally report revenues gross in the combined statements of
operations, in accordance with EITF Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent. Except for fee-based contracts, we act as the
principal in these transactions where we receive natural gas or
NGLs, take title to the commodities, and incur the risks and
rewards of ownership.
Use of Estimates. The preparation of
financial statements in accordance with accounting principles
generally accepted in the United States of America requires
management to make estimates and judgments that affect our
reported financial positions and results of operations. We
review significant estimates and judgments affecting our
consolidated financial statements on a recurring basis and
record the effect of any necessary adjustments prior to their
publication. Estimates and judgments are based on information
available at the time such estimates and judgments are made.
Adjustments made with respect to the use of these estimates and
judgments often relate to information not previously available.
Uncertainties with respect to such estimates and judgments are
inherent in the preparation of financial statements. Estimates
and judgments are used in, among other things, (1) estimating
unbilled revenues and operating and general and administrative
costs, (2) developing fair value assumptions, including
estimates of future cash flows and discount rates, (3) analyzing
tangible and intangible assets for possible impairment, (4)
estimating the useful lives of our assets and (5) determining
amounts to accrue for contingencies, guarantees and
indemnifications. Actual results could differ materially from
our estimates.
Property, Plant, and
Equipment. Property, plant, and equipment is
stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets. The estimated service lives of our
functional asset groups are as follows:
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Asset Group
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Service Life
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(Years)
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Natural gas gathering systems and
processing facilities
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15 to 25
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Office and miscellaneous equipment
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3 to 7
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88
Expenditures for maintenance and repairs are generally expensed
as incurred. However, expenditures to refurbish (i.e., certain
repair and maintenance expenses) assets that extend the useful
lives or prevent environmental contamination are capitalized and
depreciated over the remaining useful life of the asset.
Our determination of the useful lives of property, plant and
equipment requires us to make various assumptions, including the
supply of and demand for hydrocarbons in the markets served by
our assets, normal wear and tear of the facilities, and the
extent and frequency of maintenance programs. From time to time,
we utilize consultants and other experts to assist us in
assessing the remaining lives of the crude oil or natural gas
production in the basins we serve.
We may capitalize certain costs directly related to the
construction of assets, including internal labor costs, interest
and engineering costs. Upon disposition or retirement of
property, plant and equipment, any gain or loss is charged to
operations.
In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, we
evaluate the recoverability of our property, plant and equipment
when events or circumstances such as economic obsolescence, the
business climate, legal and other factors indicate we may not
recover the carrying amount of the assets. We continually
monitor our businesses and the market and business environments
to identify indicators that may suggest an asset may not be
recoverable.
We evaluate an asset for recoverability by comparing the
carrying value of the asset with the assets expected
future undiscounted cash flows. These cash flow estimates
require us to make projections and assumptions for many years
into the future for pricing, demand, competition, operating cost
and other factors. We recognize an impairment loss when the
carrying amount of the asset exceeds its fair value as
determined by quoted market prices in active markets or present
value techniques if quotes are unavailable. The determination of
the fair value using present value techniques requires us to
make projections and assumptions regarding the probability of a
range of outcomes and the rates of interest used in the present
value calculations. Any changes we make to these projections and
assumptions could result in significant revisions to our
evaluation of recoverability of our property, plant and
equipment and the recognition of an impairment loss in our
Consolidated Statements of Income.
Price Risk Management (Hedging). We
account for derivative instruments in accordance with
SFAS 133 Accounting for Derivative Instruments and
Hedging Activities, as amended. Under SFAS 133,
all derivative instruments not qualifying for the normal
purchases and sales exception are recorded on the balance sheet
at fair value. If a derivative does not qualify as a hedge, or
is not designated as a hedge, the gain or loss on the derivative
is recognized currently in earnings. If a derivative qualifies
for hedge accounting and is designated as a hedge, the effective
portion of the unrealized gain or loss on the derivative is
deferred in accumulated other comprehensive income
(OCI), a component of partners capital, and
reclassified to earnings when the forecasted transaction occurs.
The relationship between the hedging instrument and the hedged
item must be highly effective in achieving the offset of changes
in cash flows attributable to the hedged risk both at the
inception of the contract and on an ongoing basis. Hedge
accounting is discontinued prospectively when a hedge instrument
becomes ineffective. Gains and losses deferred in OCI related to
cash flow hedges for which hedge accounting has been
discontinued remain deferred until the forecasted transaction
occurs. If it is probable that a hedged forecasted transaction
will not occur, deferred gains or losses on the hedging
instrument are reclassified to earnings immediately.
Our policy is to formally document all relationships between
hedging instruments and hedged items, as well as our risk
management objectives and strategy for undertaking the hedge.
This process includes specific identification of the hedging
instrument and the hedged item, the nature of the risk being
hedged and the manner in which the hedging instruments
effectiveness will be assessed. At the inception of the hedge
and on an ongoing basis, we will assess whether the derivatives
used in hedging transactions are highly effective in offsetting
changes in cash flows of hedged items. Hedge effectiveness is
measured on a quarterly basis. Any ineffective portion of the
unrealized gain or loss is reclassified to earnings in the
current period.
89
Estimated Useful Lives. The estimated
useful lives of our long-lived assets are used to compute
depreciation expense, future asset retirement obligations and in
impairment testing. Estimated useful lives are based, among
other things, on the assumption that we provide an appropriate
level of maintenance capital expenditures while the assets are
still in operation. Without these continued capital
expenditures, the useful lives of these assets could decrease
significantly. Estimated lives could be impacted by such factors
as future energy prices, environmental regulations, various
legal factors and competition. If the useful lives of these
assets were found to be shorter than originally estimated,
depreciation expense may increase, liabilities for future asset
retirement obligations may be insufficient and impairments in
carrying values of tangible and intangible assets may result.
Natural Gas Imbalance
Accounting. Quantities of natural gas
over-delivered or under-delivered related to imbalance
agreements with customers, producers or pipelines are recorded
monthly as other receivables or other payables using then
current market prices or the weighted average prices of natural
gas at the plant or system. These imbalances are settled with
deliveries of natural gas or with cash.
90
BUSINESS
Our
Partnership
We are a growth-oriented Delaware limited partnership recently
formed by Targa, a leading provider of midstream natural gas and
NGL services in the United States, to own, operate, acquire and
develop a diversified portfolio of complementary midstream
energy assets. We currently operate in the Fort Worth Basin
in north Texas and are engaged in the business of gathering,
compressing, treating, processing and selling natural gas and
fractionating and selling NGLs and NGL products. We intend to
leverage our relationship with Targa to acquire and construct
additional midstream energy assets and to utilize the
significant experience of Targas management team to
execute our growth strategy. At September 30, 2006, Targa
had total assets of $3.4 billion, with the North Texas
System to be contributed to us in connection with the offering
representing $1.1 billion of this amount. Targa intends,
but is not obligated, to offer us the opportunity to purchase
substantially all of its remaining businesses.
Our operations consist of an extensive network of approximately
3,950 miles of integrated gathering pipelines that gather
and compress natural gas received from approximately 2,650
receipt points in the Fort Worth Basin, two natural gas
processing plants that compress, treat and process the natural
gas and a fractionator that fractionates a portion of our raw
NGLs produced in our processing operations into NGL products. We
serve a fourteen-county natural gas producing region in the
Fort Worth Basin that includes production from the Barnett
Shale formation and other shallower formations including the
Bend Conglomerate, Caddo, Atoka, Marble Falls, and other
Pennsylvanian and upper Mississippian formations. The North
Texas System includes the following:
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the Chico system, located in the northeast part of the
Fort Worth Basin, which consists of:
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approximately 1,860 miles of natural gas gathering
pipelines with approximately 1,830 active connections to
producing wells and central delivery points;
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a cryogenic natural gas processing plant with throughput
capacity of approximately
215 MMcf/d
that can be increased by another 50 MMcf/d at a minimal
cost and in a short period of time as may be required to meet
production needs through the installation of an additional
refrigeration compressor unit that is on site (for the year
ended December 31, 2005 and the nine months ended
September 30, 2006, the average daily plant inlet volume
was 145.0 MMcf/d and 149.8 MMcf/d,
respectively); and
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an 11,500 Bbls/d fractionator located at the processing
plant that enables us, based on market conditions, to either
fractionate a portion of our raw NGL mix into separate NGL
products for sale into local and other markets or deliver raw
NGL mix to Mont Belvieu for fractionation primarily through
Chevrons WTLPG Pipeline;
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the Shackelford system, located on the western side of the
Fort Worth Basin, which consists of:
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approximately 2,090 miles of natural gas gathering
pipelines with approximately 820 active connections to producing
wells and central delivery points; and
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a cryogenic natural gas processing plant with throughput
capacity of approximately 13 MMcf/d (for the year ended
December 31, 2005 and the nine months ended
September 30, 2006, the average daily plant inlet volume
was 12.2 MMcf/d and 11.8 MMcf/d,
respectively); and
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a 32-mile,
10-inch
diameter natural gas pipeline connecting the Shackelford and
Chico systems, which we refer to as the Interconnect
Pipeline, that is used primarily to send natural gas
gathered in excess of the Shackelford systems processing
capacity to the Chico plant.
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91
Strategies
Our primary business objective is to increase our cash
distribution per unit over time. We intend to accomplish this
objective by executing the following strategies:
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Increasing the profitability of our existing
assets. With our extensive network of
gathering systems and two natural gas processing facilities, we
are well positioned to capitalize on the active development and
growing production from the Barnett Shale and the other
Fort Worth Basin formations. We are currently evaluating
opportunities to increase the profitability of our existing
operations by:
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Utilizing excess pipeline and plant capacity to connect and
process new supplies of natural gas at minimal incremental cost;
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Undertaking additional initiatives to improve operating
efficiencies and increase processing yields;
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Adding processing capacity by installing the refrigeration
compressor currently on site;
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Eliminating a bottleneck at our Chico fractionator to allow for
increased throughput;
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Pursuing pressure reduction projects to increase volumes of low
pressure gas to be gathered and processed;
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Continuing electronic flow measurement conversion of the
remaining 15% of our meters that do not have electronic flow
measurement; and
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Installing treating and filtration systems to decontaminate
condensate, as well as the addition of meters to allow pipeline
quality condensate to be shipped to Mont Belvieu through
Chevrons WTLPG Pipeline.
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Managing our contract mix to optimize
profitability. The majority of our operating
margin is generated pursuant to
percent-of-proceeds
or similar arrangements which, if unhedged, benefit us in
increasing commodity price environments and expose us to a
reduction in profitability in decreasing commodity price
environments. We believe that appropriately managed, our current
contract mix allows us to optimize the profitability of the
North Texas System over time. Although we expect to maintain
primarily
percent-of-proceeds
arrangements, we continually evaluate the market for attractive
fee based and other arrangements which will further reduce the
variability of our cash flows.
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Mitigating commodity price exposure through prudent
hedging arrangements. The primary purpose of
our commodity risk management activities is to hedge our
exposure to commodity price risk inherent in our contract mix
and reduce fluctuations in our operating cash flow despite
fluctuations in commodity prices. We have hedged the commodity
price associated with approximately 95-65% of our expected
natural gas, 60-50% of our expected NGL and 95-60% of our
expected condensate equity volumes through 2010. The percentages
of our expected volumes that are hedged decreases over the term
of the hedges. We have tailored our hedges to match our actual
NGL product composition and to approximate our actual NGL and
natural gas delivery points, as opposed to using crude oil
prices to try to approximate NGL prices. We intend to continue
to manage our exposure to commodity prices in the future by
entering into similar hedge transactions using swaps, collars,
purchased puts (or floors) or other hedge instruments as market
conditions permit.
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Capitalizing on organic expansion
opportunities. We continually evaluate
economically attractive organic expansion opportunities in
existing or new areas of operation that will allow us to
leverage our existing market position and leverage our core
competitiveness in the midstream energy industry. Examples of
this include the following:
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The expansion of our Chico processing facility to substantially
increase processing capacity in response to growth in production
from the Barnett Shale; and
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A potential fractionator expansion at our Chico facility to
allow us to increase our sales of NGL products into local
markets.
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92
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Focusing on producing regions with attractive
characteristics. We seek to focus on those
regions and supplies with attractive characteristics, including:
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regions where treating or processing is required to access
end-markets;
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regions where permitting, drilling and workover activity is high;
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regions with the potential for long-term acreage dedications;
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regions with a strong base of current production and the
potential for significant future development; and
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regions that can serve as a platform to expand into adjacent
areas with existing or new production.
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Pursuing strategic and accretive
acquisitions. We plan to pursue strategic and
accretive acquisition opportunities within the midstream energy
industry, both from Targa and from third parties. We will seek
acquisition opportunities in our existing areas of operation
with the opportunity for operational efficiencies and the
potential for higher capacity utilization and expansion of those
assets, as well as acquisitions in other related lines of our
midstream business and new geographic areas of operation.
Certain factors we will consider in deciding whether to acquire
assets include, but are not limited to, the economic
characteristics of the acquisition (such as return on capital
and cash flow stability), the region in which the assets are
located (both regions contiguous to our areas of operation and
other regions with attractive characteristics) and the
availability and sources of capital to finance the acquisition.
We intend to finance our expansion through a combination of debt
and equity, including commercial debt facilities and public and
private offerings of debt and equity.
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Leveraging our relationship with
Targa. Our relationship with Targa provides
us access to its extensive pool of operational, commercial and
risk management expertise which enables all of the strategies.
In addition, we intend to pursue acquisition opportunities as
well as organic growth opportunities with Targa and with
Targas assistance. We may also acquire assets or
businesses directly from Targa, which will provide us access to
a broader array of growth opportunities than those available to
many of our competitors.
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Competitive
Strengths
We believe that we are well positioned to execute our primary
business objective and business strategies successfully because
of the following competitive strengths:
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Affiliation with Targa. We expect that
our relationship with Targa will provide us with significant
business opportunities. After this offering, Targa will continue
to be a large gatherer and processor of natural gas in the
United States. Targa owns and operates a large integrated
platform of midstream assets in oil and natural gas producing
regions, including the Permian Basin in West Texas and Southeast
New Mexico and the onshore and offshore regions of the Texas and
Louisiana Gulf Coast. These operations are integrated with
Targas NGL logistics and marketing business that extends
services to customers across the southern, southeastern and
western United States. Targa has an experienced and
knowledgeable executive management team and an experienced and
knowledgeable commercial and operations teams. We believe
Targas relationships throughout the energy industry,
including with producers of natural gas in the United States,
will help facilitate implementation of our acquisition strategy
and other strategies. Targa has indicated that it intends to use
us as a growth vehicle to pursue the acquisition and expansion
of midstream natural gas, NGL and other complementary energy
businesses and assets and we expect to have the opportunity, but
not the obligation, to acquire such businesses and assets
directly from Targa in the future.
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Strategically located assets. We own
and operate one of the largest integrated natural gas gathering,
compression, treating and processing systems in the
Fort Worth Basin, an active natural gas producing area. In
particular, the Barnett Shale region of the Fort Worth
Basin is one of the most productive natural gas-producing
regions in North America. The Barnett Shale extends over
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93
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4,500 square miles and has generally long-lived,
predictable reserves. The other Fort Worth Basin formations
are well-established, mature plays that exhibit lower decline
rates than those of the Barnett Shale. Current high levels of
natural gas exploration, development and production activities
within both Barnett and non-Barnett areas of our operations
present significant organic growth opportunities to generate
additional throughput on our system. Increased natural gas
production in the Fort Worth Basin is likely to be driven
by natural gas prices, recent discoveries, infill drilling
opportunities and the implementation of new exploration and
production techniques. Furthermore, because infill drilling
activity is expected to take place within close proximity to our
existing infrastructure, a significant portion of incremental
volumes could be generated with limited additional capital
expenditures.
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High quality and efficient assets. Our
gathering and processing systems consist of high-quality assets
that have been well maintained, resulting in low cost, efficient
operations. We have implemented state of the art processing,
measurement and operations and maintenance technologies. These
applications have allowed us to proactively manage our
operations with fewer field personnel resulting in lower costs
and minimal downtime. As a result, we believe we have
established a reputation in the midstream business as a reliable
and cost-effective supplier of services to our customers and
have a track record of safe and efficient operation of our
facilities.
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Low maintenance capital
expenditures. Our maintenance capital
expenditures have averaged approximately $11 million over
the three years ended December 31, 2005. We believe that a
low level of maintenance capital expenditures is sufficient for
us to continue operations in a safe, prudent and cost-effective
manner.
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Prudent hedging arrangements. While our
percent-of-proceeds
gathering and processing contracts subject us to commodity price
risk, we have entered into long-term hedges covering
approximately 95-65% of our expected natural gas, 60-50% of our
expected NGL and 95-60% of our expected condensate equity
volumes through 2010. This strategy minimizes volumetric risk
while managing commodity price risk related to these
arrangements. For additional information regarding our hedging
activities, please see Managements Discussion and
Analysis of Financial Condition and Results of
Operation Quantitative and Qualitative Disclosures
about Market Risk Hedging Strategies. We
intend to continue to manage our exposure to commodity prices in
the future by entering into similar hedge transactions using
swaps, collars, purchased puts (or floors) or other hedge
instruments for existing and expected equity production as
market conditions permit.
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Strong producer customer base. We have
a strong producer customer base consisting of both major oil and
gas companies and independent producers. We believe we have a
reputation as a reliable operator by providing high quality
services and focusing on the needs of our customers. Targa also
has relationships throughout the energy industry, including with
producers of natural gas in the United States, and has
established a positive reputation in the energy business which
we believe will assist us in our primary business objectives.
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Comprehensive package of midstream
services. We provide a comprehensive package
of services to natural gas producers, including natural gas
gathering, compression, treating, processing and NGL
fractionating. These services are essential to gather, process
and treat wellhead gas to meet pipeline standards and to extract
natural gas liquids for sale into industrial and commercial
markets. We believe our ability to provide all of these services
provides us with an advantage in competing for new supplies of
natural gas because we can provide substantially all of the
services producers, marketers and others require to move natural
gas and NGLs from wellhead to market on a cost-effective basis.
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Experienced management team. Targa has
an experienced and knowledgeable executive management team with
an average of 27 years of experience in the energy industry
and that will own an 8.3% indirect ownership interest in us
following this offering. Targas executive management team
is committed to executing our business strategy and has a proven
track record of enhancing value through the acquisition,
optimization and integration of midstream assets. In addition,
Targas
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operations and commercial management team consists of
individuals with an average of 23 years of midstream
operating experience. Our relationship with Targa provides us
with access to significant operational, commercial, technical,
risk management and other expertise.
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While we have set forth our strategies and competitive strengths
above, our business involves numerous risks and uncertainties
which may prevent us from executing our strategies. These risks
include the adverse impact of changes in natural gas and NGL
prices on the amount we are able to distribute to you, our
inability to access sufficient additional production to replace
natural declines in production and our dependence on a single
natural gas producer for a significant portion of our natural
gas supply. For a more complete description of the risks
associated with an investment in us, please see Risk
Factors.
Our
Relationship with Targa Resources, Inc.
One of our principal strengths is our relationship with Targa, a
leading provider of midstream natural gas and NGL services in
the United States. Targa was formed in 2004 by its management
team, which consists of former members of senior management of
several midstream and other diversified energy companies, and
Warburg Pincus LLC, or Warburg Pincus, a private equity firm. In
April 2004, Targa purchased certain midstream natural gas
operations from ConocoPhillips Company, or ConocoPhillips, for
$247 million and, in October 2005, Targa purchased
substantially all of the midstream assets of Dynegy, Inc. and
its affiliates, or Dynegy, for approximately $2.5 billion.
These transactions formed a large-scale, integrated midstream
energy company with the ability to offer a wide range of
midstream services to a diverse group of natural gas and NGL
producers and customers. At September 30, 2006, Targa had
assets of $3.4 billion, with the North Texas System
representing $1.1 billion of this amount, and for the nine
months ended September 30, 2006 generated net cash provided
by operating activities of $202.1 million.
The assets acquired through the ConocoPhillips and Dynegy
transactions form a large-scale, integrated midstream energy
company with the ability to offer a wide range of midstream
services to a diverse group of natural gas and NGL producers and
customers. Following this offering, Targas businesses will
include:
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Natural Gas Gathering and Processing Division Targa
will continue to gather and process natural gas from the Permian
Basin in West Texas and Southeast New Mexico and the onshore and
offshore regions of the Texas and Louisiana Gulf Coast. Targa
will own approximately 6,680 miles of natural gas pipelines
with approximately 3,960 active connections to producing wells
and central delivery points, operate 14 processing plants (some
of which are jointly owned) and will have a partial interest in
six additional processing plants that are operated by others.
For the nine months ended September 30, 2006, these assets
processed an average inlet plant volume of 1,604.4 MMcf/d
of natural gas and produced an average of 78.6 MBbls/d of
NGLs, in each case, net to its ownership interests.
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NGL Logistics and Marketing Division Targa has a
significant, integrated NGL logistics and marketing business
with 13 storage, marine and transport terminals with an NGL
storage capacity of 730 MBbls, net NGL fractionation
capacity of approximately 287 MBbls/d and 43 operated
storage wells with a capacity of 103 MMBbls. This division
uses its extensive platform of integrated assets to fractionate,
store, terminal, transport, distribute and market NGLs,
typically under fee-based and margin-based arrangements. Its
assets are generally connected to and supplied, in part, by its
Natural Gas Gathering and Processing assets and are primarily
located in Southwest Louisiana and near Mont Belvieu, Texas, the
primary NGL hub in the United States. Targa will continue to
own, operate or lease assets in a number of other states,
including Alabama, Nevada, California, Florida, Mississippi,
Tennessee, New Jersey and Kentucky. The geographic diversity of
Targas assets provides it direct access to many NGL
end-users in both its geographic markets as well as markets
outside its operating regions via open-access regulated NGL
pipelines owned by third parties. Targa will also continue to
own 21 pressurized NGL barges, 80 transport tractors and 113
tank trailers and lease 897 railcars.
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Targa has indicated that it intends to use us as a growth
vehicle to pursue the acquisition and expansion of midstream
natural gas, NGL and other complementary energy businesses and
assets. We
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expect to have the opportunity to make acquisitions directly
from Targa in the future. Targa intends to offer us the
opportunity to purchase substantially all of its remaining
businesses, although it is not obligated to do so. While Targa
believes it will be in its best interest to contribute
additional assets to us given its significant ownership of
limited and general partner interests in us, Targa constantly
evaluates acquisitions and dispositions and may elect to
acquire, construct or dispose of midstream assets in the future
without offering us the opportunity to purchase or construct
those assets. Targa has retained such flexibility because it
believes it is in the best interests of its shareholders to do
so. We cannot say with any certainty which, if any,
opportunities to acquire assets from Targa may be made available
to us or if we will choose to pursue any such opportunity.
Moreover, Targa is not prohibited from competing with us and
constantly evaluates acquisitions and dispositions that do not
involve us. In addition, through our relationship with Targa, we
will have access to a significant pool of management talent,
strong commercial relationships throughout the energy industry
and access to Targas broad operational, commercial,
technical, risk management and administrative infrastructure.
Targa will retain a significant indirect interest in our
partnership through its ownership of a 39.9% limited partner
interest and a 2% general partner interest in us. We will enter
into an omnibus agreement with Targa that will govern our
relationship with them regarding certain reimbursement and
indemnification matters. Please see Certain Relationships
and Related Party Transactions Omnibus
Agreement. In addition, to carry out operations, our
general partner and its affiliates, which are indirectly owned
by Targa, employ approximately 860 people, some of whom will
provide direct support to our operations. We will not have any
employees. Please see Employees.
While our relationship with Targa is a significant advantage, it
is also a source of potential conflicts. For example, Targa is
not restricted from competing with us. Targa will retain
substantial midstream assets and may acquire, construct or
dispose of midstream or other assets in the future without any
obligation to offer us the opportunity to purchase or construct
those assets. Please see Conflicts of Interest and
Fiduciary Duties.
Midstream
Sector Overview
General. Natural gas gathering and
processing is a critical part of the natural gas value chain.
Natural gas gathering and processing systems create value by
collecting raw natural gas from the wellhead and separating dry
gas (primarily methane) from NGLs such as ethane, propane,
normal butane, isobutane and natural gasoline. Most natural gas
produced at the wellhead contains NGLs. Natural gas produced in
association with crude oil typically contains higher
concentrations of NGLs than natural gas produced from gas wells.
This rich, unprocessed, natural gas is generally not
acceptable for transportation in the nations interstate
transmission pipeline system or for commercial use. Processing
plants extract the NGLs, leaving residual dry gas that meets
interstate transmission pipeline and commercial quality
specifications. Furthermore, they produce marketable NGLs,
which, on an energy equivalent basis, usually have a greater
economic value as a raw material for petrochemicals and motor
gasolines than as a component of the natural gas stream.
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Gathering. At the initial stages of the
midstream value chain, a network of typically small diameter
pipelines known as gathering systems directly connect to
wellheads in the production area. These gathering systems
transport raw natural gas to a central location for processing
and treating. A large gathering system may involve thousands of
miles of gathering lines connected to thousands of wells.
Gathering systems are often designed to be highly flexible to
allow gathering of natural gas at different pressures, flowing
natural gas to multiple plants and quickly connecting new
producers, and most importantly scalable, to allow for
additional production without significant incremental capital
expenditures.
Compression. Since wells produce at
progressively lower field pressures as they deplete, it becomes
increasingly difficult to deliver the remaining production in
the ground against a higher pressure that exists in the
connecting gathering system. Natural gas compression is a
mechanical process in which a volume of natural gas at a given
pressure is compressed to a desired higher pressure, which
allows the natural gas to flow into a higher pressure system.
Field compression is typically used to allow a gathering system
to operate at a lower pressure or provide sufficient discharge
pressure to deliver natural gas into a higher pressure system.
If field compression is not installed, then the remaining
natural gas in the ground will not be produced because it cannot
overcome the higher gathering system pressure. In contrast, if
field compression is installed, then a well can continue
delivering natural gas that otherwise would not be produced.
Treating and Dehydration. After
gathering, the second process in the midstream value chain is
treating and dehydration. Natural gas contains various
contaminants, such as water vapor, carbon dioxide and hydrogen
sulfide, that can cause significant damage to intrastate and
interstate pipelines and therefore render the gas unacceptable
for transmission on such pipelines. In addition, end-users will
not purchase natural gas with a high level of these
contaminants. To meet downstream pipeline and end-user natural
gas quality standards, the natural gas is dehydrated to remove
the saturated water and is chemically treated to separate the
carbon dioxide and hydrogen sulfide from the gas stream.
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Processing. Once the contaminants are
removed, the next step involves the separation of pipeline
quality residue gas from NGLs, a method known as processing.
Most decontaminated rich natural gas is not suitable for
long-haul pipeline transportation or commercial use and must be
processed to remove the heavier hydrocarbon components. The
removal and separation of hydrocarbons during processing is
possible because of the differences in physical properties
between the components of the raw gas stream. There are four
basic types of natural gas processing methods, including
cryogenic expansion, lean oil absorption, straight refrigeration
and dry bed absorption. Cryogenic expansion represents the
latest generation of processing, incorporating extremely low
temperatures and high pressures to provide the best processing
and most economical extraction.
Natural gas is processed not only to remove NGLs that would
interfere with pipeline transportation or the end use of the
natural gas, but also to separate from the natural gas those
hydrocarbon liquids that could have a higher value as NGLs than
as natural gas. The principal components of residue gas are
methane and ethane but processors typically have the option
either to recover ethane from the residue gas stream for
processing into NGLs or reject ethane and leave it in the
residue gas stream, depending on whether the ethane is more
valuable being processed or left in the natural gas stream. The
residue gas is sold to industrial, commercial and residential
customers and electric utilities. The premium or discount in
value between natural gas and separated NGLs is known as the
frac spread. Because NGLs often serve as substitutes
for products derived from crude oil, NGL prices tend to move in
relation to crude prices.
Natural gas processing occurs under a contractual arrangement
between the producer or owner of the raw natural gas stream and
the processor. There are many forms of processing contracts
which vary in the amount of commodity price risk they carry. The
specific commodity exposure to natural gas or NGL prices is
highly dependent on the types of contracts. Processing contracts
can vary in length from one month to the life of the
field. Three typical processing contract types are
described below:
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Percent-of-Proceeds,
or
Percent-of-Value
or
Percent-of-Liquids. In
a percent-of-proceeds arrangement, the processor remits to the
producers a percentage of the proceeds from the sales of residue
gas and NGL products or a percentage of residue gas and NGL
products at the tailgate. The
percent-of-value
and
percent-of-liquids
are variations on this arrangement. These types of arrangements
expose the processor to some commodity price risk as the
revenues from the contracts are directly correlated with the
price of natural gas and NGLs.
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Keep-Whole. A keep-whole arrangement
allows the processor to keep 100% of the NGLs produced and
requires the return of the processed natural gas, or value of
the gas, to the producer or owner. A wellhead purchase contract
is a variation of this arrangement. Since some of the gas is
used during processing, the processor must compensate the
producer or owner for the gas shrink entailed in processing by
supplying additional gas or by paying an agreed value for the
gas utilized. These arrangements have the highest commodity
price exposure for the processor because the costs are dependent
on the price of natural gas and the revenues are based on the
price of NGLs. As a result, a processor with these types of
contracts benefits when the value of the NGLs is high relative
to the cost of the natural gas and is disadvantaged when the
cost of the natural gas is high relative to the value of the
NGLs.
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Fee-Based. Under a fee-based contract,
the processor receives a fee per gallon of NGLs produced or per
Mcf of natural gas processed. Under this arrangement, a
processor would have no commodity price risk exposure.
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Fractionation. Fractionation is the
separation of the heterogeneous mixture of extracted NGLs into
individual components for end-use sale. Fractionation is
accomplished by controlling the temperature of the stream of
mixed liquids in order to take advantage of the difference in
boiling points of separate products. As the temperature of the
stream is increased, the lightest component boils off the top of
the distillation tower as a gas where it then condenses into a
purity liquid that is routed to storage. The heavier components
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in the mixture are routed to the next tower where the process is
repeated until all components have been separated. Described
below are the five basic NGL components and their typical uses:
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Ethane. Ethane is used primarily as
feedstock in the production of ethylene, one of the basic
building blocks for a wide range of plastics and other chemical
products.
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Propane. Propane is used as heating
fuel, engine fuel and industrial fuel, for agricultural burning
and drying and as petrochemical feedstock for production of
ethylene and propylene.
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Normal Butane. Normal butane is
principally used for motor gasoline blending and as fuel gas,
either alone or in a mixture with propane, and feedstock for the
manufacture of ethylene and butadiene, a key ingredient of
synthetic rubber. Normal butane is also used to derive isobutane.
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Isobutane. Isobutane is principally
used by refiners to enhance the octane content of motor gasoline
and in the production of MTBE, an additive in cleaner burning
motor gasoline.
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Natural Gasoline. Natural gasoline is
principally used as a motor gasoline blend stock or
petrochemical feedstock.
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A typical barrel of NGLs consists of ethane, propane, normal
butane, isobutane and natural gasoline.
Transportation and Storage. Once the
raw natural gas has been conditioned or processed and the raw
NGL mix fractionated into individual NGL components, the natural
gas and NGL components are stored, transported and marketed to
end-use markets. Both the natural gas industry and the NGL
industry have hundreds of thousands of miles of intrastate and
interstate transmission pipelines in addition to a network of
barges, rails, trucks, terminals and storage to deliver natural
gas and NGLs to market. The bulk of the NGL storage capacity is
located near the refining and petrochemical complexes of the
Texas and Louisiana Gulf Coasts, with a second major
concentration in central Kansas. Each commodity system typically
has storage capacity located both throughout the pipeline
network and at major market centers to help temper seasonal
demand and daily supply-demand shifts.
Natural Gas Demand and
Production. Natural gas is a critical
component of energy consumption in the United States. According
to the Energy Information Administration, or the EIA, total
annual domestic consumption of natural gas is expected to
increase from approximately 22.2 trillion cubic feet, or Tcf, in
2005 to approximately 23.35 Tcf in 2010. The industrial and
electricity generation sectors are the largest users of natural
gas in the United States. During the last three years, these
sectors accounted for approximately 56% of the total natural gas
consumed in the United States. In 2005, natural gas represented
approximately 36% of all end-user commercial and residential
energy requirements. During the last three years, the United
States has on average consumed approximately 22.3 Tcf per year,
with average annual domestic production of approximately 18.5
Tcf during the same period. Driven by growth in natural gas
demand and high natural gas prices, domestic natural gas
production is projected to increase from 18.1 Tcf per year to
20.4 Tcf per year between 2005 and 2015. The graph below
represents projected U.S. natural gas production versus U.S.
natural gas consumption (in Tcf) through the year 2028.
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Our
System
Gathering
Systems
Our gathering network consists of approximately 3,950 miles
of pipelines that, in aggregate, gather wellhead natural gas
from approximately 2,650 meters for transport to the Chico and
Shackelford natural gas processing facilities. The gathering
network consists of two distinct systems: the Chico Gathering
System which gathers natural gas from Denton, Montague, Wise,
Clay, Jack, Palo Pinto and Parker counties on the eastern part
of the North Texas System; and the Shackelford Gathering System,
which gathers natural gas from Jack, Palo Pinto, Archer, Young,
Stephens, Eastland, Throckmorton, Shackelford and Haskell
counties on the western part of the North Texas System. The two
gathering systems are connected via a high-pressure
32-mile,
10-inch
diameter pipeline, or the Interconnect Pipeline. This
interconnection between the gathering systems allows us to send
natural gas in excess of the Shackelford systems
processing capacity to the Chico plant.
Chico Gathering System. The Chico
Gathering System consists of approximately 1,860 miles of
primarily low pressure gathering pipelines. The natural gas that
is gathered on the Chico Gathering System is either delivered
directly to the Chico plant, where it is compressed for
processing, or is compressed in the field at 13 compressor
stations and then transported via one of several high-pressure
pipelines to the Chico plant. For the year ended
December 31, 2005 and the nine months ended
September 30, 2006, this system gathered approximately
132.8 MMcf/d and 136.0 MMcf/d of natural gas,
respectively. As of June 30, 2006, there were approximately
1,830 active meters, both wellhead and central delivery points,
connected to the Chico Gathering System.
Shackelford Gathering System. The
Shackelford Gathering System consists of approximately
2,090 miles of natural gas gathering pipelines. The western
and southern portions of the Shackelford Gathering System gather
natural gas that is transported on intermediate-pressure
pipelines to the Shackelford plant. The approximately
18 MMcf/d of natural gas gathered from the northern and
eastern portions of the Shackelford Gathering System is
typically transported on the Interconnect Pipeline to the Chico
plant for processing. This natural gas is compressed at 18
compressor stations to achieve sufficient pressure to enter the
high pressure Interconnect Pipeline. For the year ended
December 31, 2005, and the nine months ended
September 30, 2006, this system gathered approximately
29.7 MMcf/d and 32.2 MMcf/d of natural gas,
respectively. As of June, 2006, there were approximately 820
active meters, including both wellhead and central delivery
points, connected to the Shackelford Gathering System.
Processing
Plants
Chico Processing Plant. The Chico
processing plant is located in Wise County, Texas, approximately
45 miles northwest of Fort Worth, Texas. The Chico
processing plant includes a
state-of-the-art
cryogenic processing train with a nameplate capacity of
150 MMcf/d that was installed in 2002 and that has operated
at throughputs of up to 165 MMcf/d. Plant inlet volumes
consist of separate high-pressure (830 psig),
intermediate-pressure (400 psig) and low-pressure (5 psig)
natural gas streams. The intermediate-pressure
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stream and low pressure stream are compressed to a plant
pressure of 830 psig. The three inlet streams are then
commingled for processing. The commingled stream is treated,
dehydrated and then processed. The Chico plant also includes a
residue recompression turbine waste heat recovery system, which
increases operating efficiency. The Chico plant also includes an
NGL fractionator with the capacity to fractionate up to 11,500
Bbls/d of raw NGL mix. This fractionation capability allows the
Chico facility to deliver raw NGL mix to Mont Belvieu primarily
through Chevrons WTLPG Pipeline or separated NGL products
to local markets via truck.
To increase Chicos processing capacity, we have
refurbished a 40 gallons per minute liquid product treater and
50 MMcf/d of the previously idle 100 MMcf/d Chico
cryogenic processing train. This stage of expansion of the Chico
facility was completed in August 2006. The remaining
50 MMcf/d capacity can be activated quickly and at minimal
cost as needed to meet production increases through installation
of a refrigeration compressor unit that is currently on site.
The expanded Chico plant now has a total effective treating and
processing capacity of 215 MMcf/d, which, with the
additional refrigeration compression, can be further increased
to 265 MMcf/d. Additionally, there could be additional need
for
CO2
treating which would require an additional capital investment of
approximately $2.5 million. We believe that the current
expanded capacity and the additional 50 MMcf/d of available
expansion capacity will be able to accommodate anticipated near-
and intermediate-term throughput growth.
Shackelford Processing Plant. The
Shackelford natural gas processing plant is located in
Shackelford County, Texas near Albany, Texas which is
approximately 120 miles west of Fort Worth, Texas. The
Shackelford plant is a cryogenic plant with a nameplate capacity
of 15 MMcf/d, but effective capacity is limited to
13 MMcf/d due to capacity constraints on the residue gas
pipeline that serves the facility. Plant inlet volumes are
compressed to 720 psig by three inlet compressors before being
dehydrated and processed. The Shackelford facility also includes
two 40,000 and two 12,600 gallon NGL storage tanks, an iron
sponge for hydrogen sulfide removal and inlet scrubbers.
Market
Access
Chico System Market Access. The Chico
processing plants location in northeastern Wise County
provides us and producers with several options for both NGL and
residue gas delivery. The primary outlet for NGLs is
Chevrons WTLPG Pipeline which delivers volumes from the
Chico plant to Mont Belvieu for fractionation. NGL products
produced at the Chico processing facility can be transported via
truck to local or other markets. Currently, approximately
602,300 gallons per day of NGLs are delivered from the Chico
processing facility by pipeline and approximately 118,800
gallons per day of NGL products are delivered from the Chico
processing facility by truck.
Low pressure condensate is composed of heavy hydrocarbons which
condense in the gathering system and are collected in low
pressure separators associated with field compressors and in low
pressure separators upstream of the processing plants. This
product is collected and shipped by trucks from various
locations in the system and sold as condensate at oil related
index prices. High pressure condensate is a mix of intermediate
and heavy hydrocarbons which condense in the high pressure
gathering lines between the compressor stations and the
processing plants. This condensate is collected in high pressure
separators prior to the plant and sold as NGLs via high pressure
trucks which move the product to an injection point on the WTLPG
Pipeline at Bridgeport to be shipped to Mont Belvieu.
Occasionally, this high pressure condensate product is shipped
via truck directly to Mont Belvieu.
Our connections to multiple inter-and intrastate natural gas
pipelines give the Chico plant and its customers the ability to
maximize realized prices by accessing major trading hubs and
end-use markets throughout the Gulf Coast, Midwest and northeast
regions of the United States. Currently, residue gas is shipped
via the:
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Natural Gas Pipeline Company of America which is owned by Kinder
Morgan, Inc. and serves the Midwest, specifically the Chicago
market;
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ET Fuel System which is owned by Energy Transfer Partners, L.P.
and has access to the Waha, Carthage and Katy hubs in Texas;
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Atmos Pipeline Texas (Atmos-Texas) which
is owned by Atmos Energy Corporation and has access to the Waha,
Carthage and Katy hubs in Texas; and
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Enbridge Pipelines (North Texas) L.P. which is owned by Enbridge
Energy Partners, L.P. and has access to several local residue
gas markets.
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Shackelford System Market
Access. Residue natural gas from the
Shackelford processing plant is delivered to the Carthage and
Katy hubs on Atmos-Texas and NGLs from the plant are delivered
to Mont Belvieu on the WTLPG Pipeline. Condensate from the
Shackelford system is handled similarly to the description above
for the Chico System.
Targa Intrastate Pipeline. Targa
Intrastate Pipeline LLC, or Targa Intrastate, our wholly-owned
subsidiary, holds a
41-mile,
6-inch
diameter intrastate pipeline that transports natural gas from
the Shackelford processing plant to an interconnect with
Atmos-Texas and a 1.65 mile,
10-inch
diameter intrastate pipeline that transports natural gas through
part of the Chico system in Denton County, Texas. Targa
Intrastate is regulated by the Railroad Commission of Texas.
Overview
of Fort Worth Basin/Bend Arch
Unless indicated otherwise, the information presented below is
based on information developed by us, either through general
research or our executive management teams experience in
the energy industry.
History. The Fort Worth Basin/Bend
Arch is a mature crude oil and natural gas producing basin
located in north central Texas. Drilling in the Fort Worth
Basin/Bend Arch first began in 1912 with the discovery of crude
oil. The Fort Worth Basin/Bend Arch has recently experienced a
significant increase in drilling activity and is exhibiting
year-over-year
production growth. Information contained in reports we obtained
from W.D. Von Gonten & Company (Von Gonten)
indicates that over its history the basin has produced in
aggregate approximately 2.2 billion Bbls of oil and 11.0
Tcf of natural gas, with natural gas production increasing over
time. These reports also indicate that (i) currently,
natural gas production averages approximately 2.1 Bcf/d in
the basin and (ii) due to the Fort Worth Basin/Bend
Archs maturity and its geologic character, existing
natural gas production, without the benefit of additional
drilling in the basin, is declining at approximately 5% to
10% per year, making the basin a relatively stable,
long-lived source of production volume. This base decline is
more than offset by some of the most active drilling in North
America, both in the Barnett Shale and other Fort Worth
Basin formations. The graph below
102
represents production volumes and drilling rig activity in the
Fort Worth Basin/Bend Arch between January 2002 and June 2006.
Barnett Shale. The most significant
recent development in the Fort Worth Basin/Bend Arch has
been the increase in drilling for and production of natural gas
from the Barnett Shale. Natural gas drilling in the Barnett
Shale began in 1982 with a well drilled by Mitchell Energy and
Development Corporation or Mitchell Energy in the Newark East
Field. Over the next 15 years, very little incremental
activity occurred in the area until Mitchell Energy began to
utilize a new fracture technique in the area in 1997. With the
increase in productivity and reduction in costs associated with
this new technique, drilling activity in the Barnett Shale
increased dramatically over the past several years. Other
advances in drilling and completion techniques also contributed
to the dramatic growth in activity, wells, and production over
the last 5 years. According to Von Gonten, average natural
gas production has increased from approximately 505 MMcf/d
in January 2002 to approximately
1.875 Bcf/d
in June 2006 and the number of wells drilled per year has
increased from 430 wells to 782 wells from 2002 to
2005.
Currently, producers are attempting to delineate extensions of
the productive Barnett Shale, which traditionally has been
defined on the south by the city of Fort Worth, on the
north by a phase change to oil, on the west by the disappearance
of the Viola limestone formation (which provides a bottom
fracturing barrier to seal off water that could be introduced
into the wells) and on the east by a fault in the shale. With
new completion and horizontal drilling techniques, the
requirement to have the Viola limestone to provide a lower
fracturing barrier has been mitigated. Therefore, producers are
beginning to expand Barnett Shale drilling outside of the
traditional core areas both to the north and west into Cooke and
Montague counties and to the south and west into Parker and Palo
Pinto counties. These new drilling locations are closer to our
existing infrastructure, which should provide attractive near-
and intermediate-term growth potential. New completions and
significant leasing, permitting and drilling activity now extend
beyond the conventional wisdom boundaries of the past.
Other Production. The other
Fort Worth Basin formations have also provided large
recoverable reserves and relatively low finding and development
costs. These shallower formations include the Atoka, Bend
Conglomerate, Caddo, Marble Falls and other Pennsylvanian and
upper Mississippian formations, among others and have produced,
according to Von Gonten, an aggregate of 8.7 Tcf of natural gas
and production and averaged approximately
270 MMcf/d
as of June 2006. According to Von Gonten, these other
Fort Worth Basin formations differ geologically from, have
more mature production than, and generally exhibit lower decline
rates than the Barnett Shale.
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Drilling in these formations continues to be strong. According
to Von Gonten, approximately 1,058 wells were drilled in
2005, up from 645 wells drilled in 2002. We continue to be
diversified in our gathering strategy as we secure new well
connections from these formations.
Leasing and Permitting Activity. In
addition to the significant historical drilling activity,
leasing and permitting activity in the Fort Worth
Basin/Bend Arch has continued to increase over the past few
years. The chart below sets forth the historical permitting
activity in the Fort Worth Basin/Bend Arch.
Rig availability in the Fort Worth Basin has been and we
believe will continue to be a limiting factor on the number of
wells drilled in that area.
Leading Producers. According to Von
Gonten, Devon Energy Corporation, or Devon, ConocoPhillips and
Encana Oil & Gas (USA) Inc., or Encana, are the largest
producers in the area with 51%, 8% and 6% of the current
production in the area, respectively. We believe Devon processes
most of its own equity natural gas production and that very
little of this equity production is processed by third-parties.
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ConocoPhillips is our largest customer. The following chart sets
forth the leading producers in our areas of operation.
One of the most significant recent developments in the
Fort Worth Basin/Bend Arch is the focus on new development
by the major and large independent exploration and production
companies. Due to the substantial potential reserves in the
region, we believe the majors are targeting the Fort Worth
Basin/Bend Arch, and the Barnett Shale specifically, as an area
of future production growth in the United States. It is possible
that the financial and technical resources to be dedicated by
the majors to enhance recovery techniques for natural gas in the
region will increase production at a greater rate than is
currently contemplated.
Natural Gas Supply. We believe that
continued drilling activity within the Fort Worth
Basin/Bend Arch will result in future natural gas discoveries,
which will increase our well connection opportunities for this
area. Using historical production reports filed by producers
with the State of Texas and reported by W.D. Von Gonten and
Company, we have determined that the number of wells completed
within the Fort Worth Basin/Bend Arch for the period from
2002 through August 31, 2006 was as follows:
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Year
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Wells Drilled(1)
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2002
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645
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2003
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834
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2004
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1,005
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2005
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1,058
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2006 (through August)
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616
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(1) |
Represents the number of completions during a particular period,
and as for other Fort Worth Basin formations completions,
the wells completed are only those within the area of our
operations.
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We typically do not obtain independent evaluations of reserves
dedicated to our pipeline systems due to the lack of publicly
available producer reserve information. Accordingly, we do not
have reserve estimates of total natural gas supply dedicated to
us or the anticipated life of such producing reserves. However,
we
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have analyzed natural gas production trends for the Bend Arch
and Fort Worth Basin, using information filed by producers
with the State of Texas. We believe this information provides a
valuable perspective of the number of producing wells and
associated production trends adjacent to our pipelines, as well
as potential drilling activity near our pipelines.
Using the data described above, Von Gonten constructed the
following chart, which illustrates natural gas production trends
from 1990 to 2005 from the wells within the Fort Worth
Basin in the following counties: Archer, Clay, Denton, Eastland,
Erath, Haskell, Hood, Jack, Johnson, Montague, Palo Pinto,
Parker, Shackelford, Somervell, Stephens, Tarrant, Throckmorton,
Wise, and Young. The chart depicts the historical levels of
natural gas production presented as average daily volume in
Bcf/year for
all wells in this area. Each band in the table reflects the
natural gas production resulting from natural gas wells
completed in the reservoir represented by such band. As a
result, each band reflects the reduction over time in natural
gas production due to the natural declines associated with
production of natural gas reserves. Collectively, the bands
represent the aggregate amount of natural gas production for
each year based on the cumulative effect of production from
wells producing from each respective reservoir.
Source: Petroleum Information/Dwight LLC (IHS Inc.)
Note: Chart reflects production reservoirs in the Bend Arch
& Fort Worth Basin
Customers
and Contracts
We gather and process natural gas for approximately
420 customers. During the nine months ended
September 30, 2006, no customer, other than ConocoPhillips
and Encana, which represented 33.5% and 6.7% of our volumes,
respectively, represented more than 3% of our volumes. This
diverse customer base enhances the stability of our volumes
while positioning us to benefit from the continued drilling
expected in the Fort Worth Basin/Bend Arch, regardless of
which producer is driving the activity. Our reputation of
providing reliable, high-quality service should allow our system
to attract a significant portion of the volumes produced by the
new entrants, including the major and large independent
exploration and production companies into the Fort Worth
Basin, in general, and in the Barnett Shale, in particular.
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We have a long-term strategic relationship with ConocoPhillips,
as a result of its recent acquisition of Burlington Resources,
which is the second largest producer in our areas of operation.
Subject to limited exceptions, all of ConocoPhillips
production from leases covering a 30,000 acre area in Wise and
Denton counties has been committed to us for gathering and
processing through a prior agreement with Burlington Resources
entities. ConocoPhillips is under no obligation to deliver
minimum volumes or to continue to develop its leasehold position
under its agreement with us. This commitment extends through
2015, with a ten year renewal, at ConocoPhillips option.
Generally, in the event a lease of the dedicated acreage should
terminate before the expiration of the primary term of the
agreement, then the agreement will be canceled with respect to
that leasehold dedication contemporaneously with such
termination. Pursuant to the agreement, we process natural gas
received under a percent-of-proceeds arrangement and also
receive a volume-based fee for the gathering services we provide.
We currently have approximately 2,650 receipt points receiving
natural gas production from individual wells or groups of wells.
Approximately 69% of these receipt points are located on our
Chico Gathering System and approximately 31% are located on our
Shackelford Gathering System. The natural gas supplied to us is
generally dedicated to us under individually negotiated term
contracts that provide for the commitment by the producer of all
natural gas produced from designated properties. Generally, the
initial term of these purchase agreements is for 3 to
10 years or, in some cases, the life of the lease.
We process natural gas under a combination of
percent-of-proceeds contracts (representing approximately 96% of
our natural gas volumes) and keep-whole contracts (representing
approximately 4% of our natural gas volumes), each of which
exposes us to commodity price risk. In an effort to reduce the
variability of our cash flows, we have hedged the commodity
price associated with approximately 95-65% of our expected
natural gas,
60-50% of
our expected NGL and 95-60% of our expected condensate equity
volumes through 2010.
Much of the natural gas gathered historically in the Fort Worth
Basin was contracted on a keep-whole basis until the
late 1990s. In the late 1990s, gatherers and processors,
including our predecessor, began to shift new contracts and
renegotiate older contracts from keep-whole to
percent-of-proceeds contracts which had relatively less
variability and risk. In addition, the equity gas and NGLs
received as fee for reprocessing under percent-of-proceeds
contracts may be hedged to provide even less price variability.
Due to local producer desires and the competitive situation in
the Fort Worth Basin, fee-based contracts have not generally
been available at attractive rates relative to available
percent-of-proceeds terms. This trend may change in the future
and we will continue to evaluate the market for attractive
fee-based contract arrangements which may further reduce the
variability of our cash flows.
Competition
Our gathering, processing and fractionation system competes with
several systems located in the Fort Worth Basin. Our
competitors include but are not limited to gathering and
processing systems owned by Devon, Enbridge,
J-W Operating,
Davis Gas Processing, Hanlon Gas Processing, and Upham Oil and
Gas. A number of the gathering and processing competitors in the
region are smaller entities with assets serving a particular
field, producer or limited area but lack a basin-wide presence.
As for the larger competitors, Devon and Enbridges
operations are the most extensive and are closest in proximity
to our area of operations, based on publicly available
information. Devons processing capacity is greater than
ours, while Enbridges is approximately the same. Devon
almost exclusively gathers and processes its own production.
Competition within the Fort Worth Basin may increase as new
ventures are formed or as existing competitors expand their
operations. Competitive factors include processing and fuel
efficiencies, operational costs, commercial terms offered to
producers and capital expenditures required for new producer
connections, along with the location and available capacity of
gathering systems and processing plants.
Safety
and Maintenance Regulation
We are subject to regulation by the United States Department of
Transportation, referred to as DOT, under the Accountable
Pipeline and Safety Partnership Act of 1996, referred to as the
Hazardous Liquid
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Pipeline Safety Act, and comparable state statutes with respect
to design, installation, testing, construction, operation,
replacement and management of pipeline facilities. The Hazardous
Liquid Pipeline Safety Act covers petroleum and petroleum
products and requires any entity that owns or operates pipeline
facilities to comply with such regulations, to permit access to
and copying of records and to file certain reports and provide
information as required by the United States Secretary of
Transportation. These regulations include potential fines and
penalties for violations. We believe that we are in material
compliance with these Hazardous Liquid Pipeline Safety Act
regulations.
We are also subject to the Natural Gas Pipeline Safety Act of
1968, referred to as NGPSA, and the Pipeline Safety Improvement
Act of 2002. The NGPSA regulates safety requirements in the
design, construction, operation and maintenance of gas pipeline
facilities while the Pipeline Safety Improvement Act establishes
mandatory inspections for all United States oil and natural gas
transportation pipelines and some gathering lines in
high-consequence areas within 10 years. The DOT has
developed regulations implementing the Pipeline Safety
Improvement Act that will require pipeline operators to
implement integrity management programs, including more frequent
inspections and other safety protections in areas where the
consequences of potential pipeline accidents pose the greatest
risk to people and their property. We currently estimate we will
incur costs of approximately $1 million between 2006 and
2010 to implement integrity management program testing along
certain segments of our natural gas pipelines. This does not
include the costs, if any, of any repair, remediation,
preventative or mitigating actions that may be determined to be
necessary as a result of the testing program.
States are largely preempted by federal law from regulating
pipeline safety but may assume responsibility for enforcing
federal intrastate pipeline regulations and inspection of
intrastate pipelines. In practice, states vary considerably in
their authority and capacity to address pipeline safety. We do
not anticipate any significant problems in complying with
applicable state laws and regulations. Our natural gas pipelines
have continuous inspection and compliance programs designed to
keep the facilities in compliance with pipeline safety and
pollution control requirements.
In addition, we are subject to a number of federal and state
laws and regulations, including the federal Occupational Safety
and Health Act, referred to as OSHA, and comparable state
statutes, whose purpose is to protect the health and safety of
workers, both generally and within the pipeline industry. In
addition, the OSHA hazard communication standard, the EPA
community
right-to-know
regulations under Title III of the federal Superfund
Amendment and Reauthorization Act and comparable state statutes
require that information be maintained concerning hazardous
materials used or produced in our operations and that this
information be provided to employees, state and local government
authorities and citizens. We and the entities in which we own an
interest are also subject to OSHA Process Safety Management
regulations, which are designed to prevent or minimize the
consequences of catastrophic releases of toxic, reactive,
flammable or explosive chemicals. These regulations apply to any
process which involves a chemical at or above the specified
thresholds or any process which involves flammable liquid or
gas, pressurized tanks, caverns and wells in excess of 10,000
pounds at various locations. Flammable liquids stored in
atmospheric tanks below their normal boiling point without the
benefit of chilling or refrigeration are exempt. We have an
internal program of inspection designed to monitor and enforce
compliance with worker safety requirements. We believe that we
are in material compliance with all applicable laws and
regulations relating to worker health and safety.
Regulation
of Operations
Regulation of pipeline gathering and transportation services,
natural gas sales and transportation of NGLs may affect certain
aspects of our business and the market for our products and
services.
Gathering
Pipeline Regulation
Section 1(b) of the Natural Gas Act exempts natural gas
gathering facilities from the jurisdiction of FERC. We believe
that our natural gas pipelines meet the traditional tests FERC
has used to establish a pipelines status as a gatherer not
subject to FERC jurisdiction. The distinction between
FERC-regulated
108
transmission services and federally unregulated gathering
services, however, is the subject of substantial, on-going
litigation, so the classification and regulation of our
gathering facilities are subject to change based on future
determinations by FERC, the courts or Congress. State regulation
of gathering facilities generally includes various safety,
environmental and, in some circumstances, nondiscriminatory take
requirements, and complaint-based rate regulation. Natural gas
gathering may receive greater regulatory scrutiny at both the
state and federal levels now that FERC has taken a more
light-handed approach to regulation of the gathering activities
of interstate pipeline transmission companies and a number of
such companies have transferred gathering facilities to
unregulated affiliates.
The TRRC has adopted regulations that generally allow natural
gas producers and shippers to file complaints with the TRRC in
an effort to resolve grievances relating to pipeline access and
rate discrimination. Our natural gas gathering operations could
be adversely affected in the future should they become subject
to the application of state or federal regulation of rates and
services. Our gathering operations also may be or become subject
to safety and operational regulations relating to the design,
installation, testing, construction, operation, replacement and
management of gathering facilities. Additional rules and
legislation pertaining to these matters are considered and
adopted from time to time. We cannot predict what effect, if
any, such changes might have on our operations, but the industry
could be required to incur additional capital expenditures and
increased costs depending on future legislative and regulatory
changes.
Our gathering and purchasing operations are subject to ratable
take and common purchaser statutes in Texas. The Texas ratable
take statutes generally require gatherers to take, without undue
discrimination, natural gas production that may be tendered to
the gatherer for handling. Similarly, Texas common purchaser
statutes generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These
statutes are designed to prohibit discrimination in favor of one
producer over another producer or one source of supply over
another source of supply. These statutes have the effect of
restricting our right as an owner of gathering facilities to
decide with whom we contract to purchase or gather natural gas.
Texas has adopted a complaint-based regulation of natural gas
gathering activities, which allows 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. We cannot predict whether such a
complaint will be filed against us in the future.
On October 30, 2006, the Texas Natural Gas Pipeline
Competition Study Advisory Committee submitted a Natural Gas
Pipeline Competition Study (Study) to the Governor
of Texas and the Texas Legislature. The Study recommends, among
other things, that the Legislature give the TRRC the ability to
use either a cost-of-service method or a market-based method for
setting rates for natural gas gathering
and/or
transmission in formal rate proceedings. The Study also
recommends that the Legislature give the TRRC specific authority
to enforce its statutory duty to prevent discrimination in
natural gas gathering and transportation, to enforce the
requirement that parties participate in an informal complaint
process, and to punish purchasers, transporters, and gatherers
for retaliating against shippers and sellers. We have no way of
knowing what portions of the Study, if any, will be adopted by
the Legislature and implemented by the TRRC. We cannot predict
what effect, if any, the proposed changes, if implemented, might
have on our operations.
Intrastate
Pipeline Regulation
Our subsidiary, Targa Intrastate Pipeline Company LLC, or Targa
Intrastate, owns and operates a
41-mile,
6-inch
diameter intrastate pipeline that transports natural gas from
our Shackelford processing plant to an interconnect with
Atmos Texas. Targa Intrastate also owns a
1.65 mile,
10-inch
diameter intrastate pipeline that transports natural gas from a
third party gathering system into the Chico system in Denton
County, Texas. Targa Intrastate is subject to rate regulation
under the Texas Utilities Code, as implemented by the TRRC, and
has a tariff on file with the TRRC. Generally, the TRRC is
vested with authority to ensure that rates, operations and
services of gas utilities, including intrastate pipelines, are
just and reasonable, and not discriminatory. The rates we charge
for intrastate transportation services are deemed just and
reasonable under Texas law, unless challenged in a complaint. We
cannot predict whether
109
such a complaint will be filed against us or whether the TRRC
will change its regulation of these rates. Failure to comply
with the Texas Utilities Code can result in the imposition of
administrative, civil and criminal remedies.
Sales
of Natural Gas and NGLs
The price at which we buy and sell natural gas currently is not
subject to federal regulation and, for the most part, is not
subject to state regulation. The price at which we sell NGLs is
not subject to federal or state regulation. Our sales of natural
gas and NGLs are affected by the availability, terms and cost of
pipeline transportation. As noted above, the price and terms of
access to pipeline transportation can be subject to extensive
federal and state regulation. The FERC is continually proposing
and implementing new rules and regulations affecting those
segments of the natural gas industry, most notably interstate
natural gas transmission companies that remain subject to the
FERCs jurisdiction. Any such initiatives also could affect
the intrastate transportation of natural gas under certain
circumstances. The stated purpose of many of FERCs
regulatory changes is to promote competition among the various
sectors of the natural gas industry, and these initiatives
generally reflect more light-handed regulation. We cannot
predict the ultimate impact of FERC regulatory changes to our
natural gas marketing operations, including impacts related to
the availability and reliability of transportation service on
interstate pipelines. We do not believe that we will be affected
by any such FERC action materially differently than other
natural gas marketers with whom we compete.
Environmental
Matters
General
Our operation of pipelines, plants and other facilities for
gathering, treating, transporting or processing natural gas,
NGLs and other products is subject to stringent and complex
federal, state and local laws and regulations governing the
discharge of materials into the environment or otherwise
relating to the protection of the environment.
As an owner or operator of these facilities, we must comply with
these laws and regulations at the federal, state and local
levels. These laws and regulations can restrict or impact our
business activities in many ways, such as:
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requiring the installation of pollution control equipment or
otherwise restricting the way we can handle or dispose of our
wastes;
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limiting or prohibiting construction activities in sensitive
areas such as wetlands, coastal regions or areas inhabited by
endangered species;
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requiring remedial action to mitigate pollution conditions
caused by our operations or attributable to former
operations; and
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enjoining the operations of facilities deemed in non-compliance
with permits issued pursuant to such environmental laws and
regulations.
|
Failure to comply with these laws and regulations may trigger a
variety of administrative, civil and criminal enforcement
measures, including the assessment of monetary penalties, the
imposition of remedial requirements and the issuance of orders
enjoining future operations or imposing additional compliance
requirements on such operations. Certain environmental statutes
impose strict joint and several liability for costs required to
clean up and restore sites where hazardous substances have been
disposed or otherwise released. Moreover, it is not uncommon for
neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the
release of hazardous substances, hydrocarbons or other waste
products into the environment.
The trend in environmental regulation is to place more
restrictions and limitations on activities that may affect the
environment, and thus there can be no assurance as to the amount
or timing of future expenditures for environmental compliance or
remediation, and actual future expenditures may be different
110
from the amounts we currently anticipate. We try to anticipate
future regulatory requirements that might be imposed and plan
accordingly to remain in compliance with changing environmental
laws and regulations and to minimize the costs of such
compliance. We also actively participate in industry groups that
help formulate recommendations for addressing existing or future
regulations.
We do not believe that compliance with federal, state or local
environmental laws and regulations will have a material adverse
effect on our business, financial position or results of
operations. In addition, we believe that the various
environmental activities in which we are presently engaged are
not expected to materially interrupt or diminish our operational
ability to gather, compress, treat, process and fractionate
natural gas. We cannot assure you, however, that future events,
such as changes in existing laws, the promulgation of new laws,
or the development or discovery of new facts or conditions will
cause us to incur significant costs. Below is a discussion of
the material environmental laws and regulations that relate to
our business. We believe that we are in substantial compliance
with all of these environmental laws and regulations.
We or the entities in which we own an interest inspect the
pipelines regularly using equipment rented from third-party
suppliers. Third parties also assist us in interpreting the
results of the inspections.
Air
Emissions
Our operations are subject to the federal Clean Air Act and
comparable state laws and regulations. These laws and
regulations regulate emissions of air pollutants from various
industrial sources, including our processing plants and
compressor stations, and also impose various monitoring and
reporting requirements. Such laws and regulations may require
that we obtain pre-approval for the construction or modification
of certain projects or facilities expected to produce or
significantly increase air emissions, obtain and strictly comply
with air permits containing various emissions and operational
limitations, and utilize specific emission control technologies
to limit emissions. Our failure to comply with these
requirements could subject us to monetary penalties,
injunctions, conditions or restrictions on operations, and
potentially criminal enforcement actions. We believe that we are
in substantial compliance with these requirements. We may be
required to incur certain capital expenditures in the future for
air pollution control equipment in connection with obtaining and
maintaining operating permits and approvals for air emissions.
We believe, however, that our operations will not be materially
adversely affected by such requirements, and the requirements
are not expected to be any more burdensome to us than to any
other similarly situated companies.
In February 2005, the Kyoto Protocol to the United Nations
Framework Convention on Climate Change entered into force.
Pursuant to the Protocol, adopting countries are required to
implement national programs to reduce emissions of certain
gases, generally referred to as greenhouse gases, which are
suspected of contributing to global warming. The Bush
administration has indicated it will not support ratification of
the Protocol, and Congress has not actively considered recent
proposed legislation directed at reducing greenhouse gas
emissions. However, there has been support in various regions of
the United States for legislation that requires reductions in
greenhouse gas emissions, and some states, although not those in
which we currently operate, have already adopted regulatory
initiatives or legislation to reduce emissions of greenhouse
gases. For example, California recently adopted the
California Global Warming Solutions Act of 2006,
which requires the California Air Resources Board to achieve a
25% reduction in emissions of greenhouse gases from sources in
California by 2020. The oil and natural gas exploration and
production industry is a direct source of certain greenhouse gas
emissions, namely carbon dioxide and methane, and future
restrictions on such emissions would likely adversely impact our
future operations, results of operations and financial
condition. Currently, our operations are not adversely impacted
by existing state and local climate change initiatives and, at
this time, it is not possible to accurately estimate how
potential future laws or regulations addressing greenhouse gas
emissions would impact our business.
111
Hazardous
Substances and Waste
Our operations are subject to environmental laws and regulations
relating to the management and release of hazardous substances
or solid and hazardous wastes (including petroleum
hydrocarbons). These laws generally regulate the generation,
storage, treatment, transportation and disposal of solid and
hazardous waste, and may impose strict, joint and several
liability for the investigation and remediation of areas, at a
facility where hazardous substances may have been released or
disposed. For instance, the Comprehensive Environmental
Response, Compensation, and Liability Act, referred to as CERCLA
or the Superfund law, and comparable state laws impose
liability, without regard to fault or the legality of the
original conduct, on certain classes of persons that contributed
to the release of a hazardous substance into the
environment. These persons include current and prior owners or
operators of the site where the release occurred and companies
that disposed or arranged for the disposal of the hazardous
substances found at the site. Under CERCLA, these persons may be
subject to joint and several strict liability for the costs of
cleaning up the hazardous substances that have been released
into the environment, for damages to natural resources and for
the costs of certain health studies. CERCLA also authorizes the
EPA and, in some instances, third parties to act in response to
threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they
incur. It is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property
damage allegedly caused by hazardous substances or other
pollutants released into the environment. Despite the
petroleum exclusion of CERCLA Section 101(14)
that currently encompasses natural gas, we may nonetheless
handle hazardous substances within the meaning of
CERCLA, or similar state statutes, in the course of our ordinary
operations and, as a result, may be jointly and severally liable
under CERCLA for all or part of the costs required to clean up
sites at which these hazardous substances have been released
into the environment.
We also generate solid wastes, including hazardous wastes, that
are subject to the requirements of the Resource Conservation and
Recovery Act, referred to as RCRA, and comparable state
statutes. While RCRA regulates both solid and hazardous wastes,
it imposes strict requirements on the generation, storage,
treatment, transportation and disposal of hazardous wastes.
Certain petroleum production wastes are excluded from
RCRAs hazardous waste regulations. However, it is possible
that these wastes, which could include wastes currently
generated during our operations, will in the future be
designated as hazardous wastes and therefore be
subject to more rigorous and costly disposal requirements. Any
such changes in the laws and regulations could have a material
adverse effect on our maintenance capital expenditures and
operating expenses.
We currently own or lease, and our predecessor has in the past
owned or leased, properties where hydrocarbons are being or have
been handled for many years. Although we have utilized operating
and disposal practices that were standard in the industry at the
time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties owned or leased by us or on
or under the other locations where these hydrocarbons and wastes
have been taken for treatment or disposal. In addition, certain
of these properties have been operated by third parties whose
treatment and disposal or release of hydrocarbons or other
wastes was not under our control. These properties and wastes
disposed thereon may be subject to CERCLA, RCRA and analogous
state laws. Under these laws, we could be required to remove or
remediate previously disposed wastes (including wastes disposed
of or released by prior owners or operators), to clean up
contaminated property (including contaminated groundwater) or to
perform remedial operations to prevent future contamination. We
are not currently aware of any facts, events or conditions
relating to such requirements that could materially impact our
operations or financial condition.
Water
The Federal Water Pollution Control Act of 1972, also referred
to as the Clean Water Act, or CWA, and analogous state laws
impose restrictions and strict controls regarding the discharge
of pollutants into navigable waters. Pursuant to the CWA and
analogous state laws, permits must be obtained to discharge
pollutants into state and federal waters. The CWA can impose
substantial civil and criminal penalties for non-compliance.
State laws for the control of water pollution may also provide
varying civil and criminal penalties and liabilities. In
addition, some states maintain groundwater protection programs
that require
112
permits for discharges or operations that may impact groundwater
conditions. The EPA has promulgated regulations that require us
to have permits in order to discharge certain storm water
run-off. The EPA has entered into agreements with certain states
in which we operate whereby the permits are issued and
administered by the respective states. These permits may require
us to monitor and sample the storm water run-off. We believe
that compliance with existing permits and compliance with
foreseeable new permit requirements will not have a material
adverse effect on our financial condition or results of
operations.
Title to
Properties and
Rights-of-Way
Our real property falls into two categories: (1) parcels
that we own in fee and (2) parcels in which our interest
derives from leases, easements,
rights-of-way,
permits or licenses from landowners or governmental authorities
permitting the use of such land for our operations. Portions of
the land on which our plants and other major facilities are
located are owned by us in fee title, and we believe that we
have satisfactory title to these lands. The remainder of the
land on which our plant sites and major facilities are located
are held by us pursuant to ground leases between us, as lessee,
and the fee owner of the lands, as lessors. We, or our
predecessors, have leased these lands for many years without any
material challenge known to us relating to the title to the land
upon which the assets are located, and we believe that we have
satisfactory leasehold estates to such lands. Other than a
dispute with respect to the validity of a lease for a compressor
station site, we have no knowledge of any challenge to the
underlying fee title of any material lease, easement,
right-of-way,
permit or license held by us or to our title to any material
lease, easement,
right-of-way,
permit or lease, and we believe that we have satisfactory title
to all of our material leases, easements,
rights-of-way,
permits and licenses.
Some of the leases, easements,
rights-of-way,
permits and licenses to be transferred to us require the consent
of the grantor of such rights, which in certain instances is a
governmental entity. Our general partner expects to obtain,
prior to the closing of this offering, sufficient third-party
consents, permits and authorizations for the transfer of the
assets necessary to enable us to operate our business in all
material respects as described in this prospectus. With respect
to any material consents, permits or authorizations that have
not been obtained prior to closing of this offering, the closing
of this offering will not occur unless reasonable basis exist
that permit our general partner to conclude that such consents,
permits or authorizations will be obtained within a reasonable
period following the closing, or the failure to obtain such
consents, permits or authorizations will have no material
adverse effect on the operation of our business.
Targa initially may continue to hold record title to portions of
certain assets until we make the appropriate filings in the
jurisdictions in which such assets are located and obtain any
consents and approvals that are not obtained prior to transfer.
Such consents and approvals would include those required by
federal and state agencies or political subdivisions. In some
cases, Targa may, where required consents or approvals have not
been obtained, temporarily hold record title to property as
nominee for our benefit and in other cases may, on the basis of
expense and difficulty associated with the conveyance of title,
cause its affiliates to retain title, as nominee for our
benefit, until a future date. We anticipate that there will be
no material change in the tax treatment of our common units
resulting from the holding by Targa of title to any part of such
assets subject to future conveyance or as our nominee.
Employees
To carry out its operations, Targa employs approximately 860
people, some of whom provide direct support for our operations.
None of these employees are covered by collective bargaining
agreements. Targa considers its employee relations to be good.
Legal
Proceedings
We are not a party to any legal proceeding other than legal
proceedings arising in the ordinary course of our business. We
are a party to various administrative and regulatory proceedings
that have arisen in the ordinary course of our business. Please
see Regulation of Operations
Intrastate Natural Gas Pipeline Regulation and
Environmental Matters.
113
Recent
Developments Involving Targa, Inc.
As a result of Hurricane Rita, the West Cameron 229A platform
owned by Targa Midstream Services Limited Partnership, or TMS, a
subsidiary of Targa, was damaged and sank in late September
2005. Following the hurricane, TMS informed the U.S. Coast Guard
that the platform had been damaged and caused a system of buoys
to be installed which marked the sunken platform, which was
outside of principal shipping lanes. On November 12, 2005,
the submerged wreckage was struck by an integrated tug barge
owned by K-Sea Transportation, or K-Sea. As much as 25,000
barrels of No. 6 fuel oil entered the Gulf of Mexico as a
result of the collision. TMS filed suit in federal district
court in Galveston on November 21, 2005 seeking to hold
K-Sea responsible for damage to the platform and K-Sea filed a
counterclaim to recover its alleged damages of approximately
$90 million.
K-Sea has recently made demands against TMS, under admiralty
law, seeking to secure any judgment K-Sea obtains in an amount
equal to 1.5 times K-Seas claimed damages, or
$135 million. TMS has challenged the validity of such
demands. K-Sea has asserted that it believes it has the right to
attach TMS assets located in jurisdictions where TMS has not
qualified to do business pursuant to provisions of applicable
admiralty laws in order to secure its claim, including financial
accounts, equipment and other assets. On or about
February 2, 2007, K-Sea filed an action in the Southern
District of New York seeking attachment of TMS financial
accounts located in such jurisdiction.
TMS does not believe that any attachment is likely to be
successful. In the event that attachment is made, TMS would seek
to invalidate the action as inappropriate under admiralty law
and request immediate reversal of any such order. If a reversal
of any successful attachment is not obtained, then, in order to
obtain release of its funds, TMS believes it could post a letter
of credit with K-Sea under Targas existing credit
facilities.
TMS expects that any losses for which it may be responsible will
ultimately be covered by insurance, less a $1 million
deductible, and as such, would not have a material adverse
effect on TMS or Targa. Targa is unable to predict the actions
that may be taken by K-Sea in this litigation, the time it may
take for the court to address any claim for attachment against
TMSs assets in jurisdictions where TMS is not qualified to
do business, the posting of a letter of credit in substitution
therefore or any temporary impact on Targas credit. None
of us, our general partners or any of our subsidiaries are
involved in the K-Sea litigation action, and none of the assets
to be contributed to us are the subject of such attachment
orders.
TMS believes that the demands being made by K-Sea referenced
above are without merit and expects that any losses arising out
of such claims for which TMS is responsible would not have a
material adverse effect on Targa, TMS or us. K-Seas claims
have been asserted against TMS and have not been made against
us, our general partner or our subsidiaries or any of the assets
being contributed to us in connection with the offering.
114
MANAGEMENT
Management
of Targa Resources Partners LP
Targa Resources GP LLC, our general partner, will manage our
operations and activities. Our general partner is not elected by
our unitholders and will not be subject to re-election on a
regular basis in the future. Unitholders will not be entitled to
elect the directors of our general partner or directly or
indirectly participate in our management or operation. Our
general partner owes a fiduciary duty to our unitholders, but
our partnership agreement contains various provisions modifying
and restricting the fiduciary duty. Our general partner will be
liable, as general partner, for all of our debts (to the extent
not paid from our assets), except for indebtedness or other
obligations that are made expressly nonrecourse to it. Our
general partner therefore may cause us to incur indebtedness or
other obligations that are nonrecourse to it.
The directors of our general partner will oversee our
operations. Upon the closing of this offering, our general
partner will have seven directors. Targa will elect all members
to the board of directors of our general partner which will have
three directors that are independent as defined under the
independence standards established by The NASDAQ Global Market.
The NASDAQ Global Market does not require a listed limited
partnership like us to have a majority of independent directors
on the board of directors of our general partner or to establish
a compensation committee or a nominating committee.
In addition, our general partner will have an audit committee of
at least three directors who meet the independence and
experience standards established by The NASDAQ Global Market and
the Securities Exchange Act of 1934, as amended.
Messrs. Evans, Pearl and Sullivan will serve as the initial
members of the audit committee. The audit committee will assist
the board in its oversight of the integrity of our financial
statements and our compliance with legal and regulatory
requirements and partnership policies and controls. The audit
committee will have the sole authority to retain and terminate
our independent registered public accounting firm, approve all
auditing services and related fees and the terms thereof, and
pre-approve any non-audit services to be rendered by our
independent registered public accounting firm. The audit
committee will also be responsible for confirming the
independence and objectivity of our independent registered
public accounting firm. Our independent registered public
accounting firm will be given unrestricted access to the audit
committee.
Compensation decisions, including oversight of the long-term
incentive plan described below, will be made by the board of
directors of our general partner. While the board may establish
a compensation committee in the future, it has no current plans
to do so.
Three independent members of the board of directors of our
general partner will serve on a conflicts committee to review
specific matters that the board believes may involve conflicts
of interest. Messrs. Evans, Pearl and Sullivan will serve as the
initial members of the conflicts committee. The conflicts
committee will determine if the resolution of the conflict of
interest is fair and reasonable to us. The members of the
conflicts committee may not be officers or employees of our
general partner or directors, officers, or employees of its
affiliates, and must meet the independence and experience
standards established by The NASDAQ Global Market and the
Securities Exchange Act of 1934, as amended, to serve on an
audit committee of a board of directors, and certain other
requirements. Any matters approved by the conflicts committee in
good faith will be conclusively deemed to be fair and reasonable
to us, approved by all of our partners, and not a breach by our
general partner of any duties it may owe us or our unitholders.
All of our executive management personnel are employees of Targa
and will devote their time as needed to conduct our business and
affairs. These officers of Targa Resources GP LLC will manage
the
day-to-day
affairs of our business. We will also utilize a significant
number of employees of Targa to operate our business and provide
us with general and administrative services. We will reimburse
Targa for allocated expenses of operational personnel who
perform services for our benefit, allocated general and
administrative expenses and certain direct expenses. Please see
Reimbursement of Expenses of Our General
Partner.
115
Directors
and Executive Officers
The following table shows information regarding the current
directors and executive officers of Targa Resources GP LLC.
Directors are elected for one-year terms.
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Name
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Age(1)
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Position with Targa Resources GP LLC
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Rene R. Joyce
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|
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58
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Chief Executive Officer and
Director
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Joe Bob Perkins
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46
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President
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James W. Whalen
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64
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President Finance and
Administration and Director
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Roy E. Johnson
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62
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Executive Vice President
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Michael A. Heim
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58
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Executive Vice President and Chief
Operating Officer
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Jeffrey J. McParland
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52
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Executive Vice President, Chief
Financial Officer, Treasurer
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Paul W. Chung
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46
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Executive Vice President, General
Counsel and Secretary
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Peter R. Kagan
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38
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Director
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Chansoo Joung
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46
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Director
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Robert B. Evans
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58
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Director
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Barry R. Pearl
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57
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Director
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William D. Sullivan
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49
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Director
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(1) |
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As of November 1, 2006. |
Our directors hold office until the earlier of their death,
resignation, removal or disqualification or until their
successors have been elected and qualified. Officers serve at
the discretion of the board of directors. There are no family
relationships among any of our directors or executive officers.
Rene R. Joyce has served as a director and Chief
Executive Officer of our general partner since October 2006 and
of Targa since its formation in February 2004 and was a
consultant for the Targa predecessor company during 2003.
Mr. Joyce has also served as a member of Targas board
of directors since February 2004. He is also a member of the
supervisory directors of Core Laboratories N.V. Mr. Joyce
served as a consultant in the energy industry from 2000 through
2003 providing advice to various energy companies and investors
regarding their operations, acquisitions and dispositions.
Mr. Joyce served as President of onshore pipeline
operations of Coral Energy, LLC, a subsidiary of Shell Oil
Company, or Shell, from 1998 through 1999, and President of
energy services of Coral Energy Holding, L.P., or Coral, a
subsidiary of Shell which was the gas and power marketing joint
venture between Shell and Tejas Gas Corporation, or Tejas,
during 1999. Mr. Joyce served as President of various
operating subsidiaries of Tejas, a natural gas pipeline company,
from 1990 until 1998 when Tejas was acquired by Shell.
Joe Bob Perkins has served as President of our general
partner since October 2006 and of Targa since February 2004 and
was a consultant for the Targa predecessor company during 2003.
Mr. Perkins also served as a consultant in the energy
industry from 2002 through 2003 and was an active partner in RTM
Media (an outdoor advertising firm) during such time period.
Mr. Perkins served as President and Chief Operating
Officer, for the Wholesale Businesses, Wholesale Group, and
Power Generation Group of Reliant Resources, Inc. and its
parent/predecessor companies, from 1998 to 2002, and Vice
President, Corporate Planning and Development, Houston
Industries from 1996 to 1998. He served as Vice President,
Business Development, of Coral from 1995 to 1996 and as
Director, Business Development, of Tejas from 1994 to 1995.
Prior to 1994, Mr. Perkins held various positions with the
consulting firm of McKinsey & Company and with an
exploration and production company.
James W. Whalen was appointed as a director of our
general partner on February 8, 2007 and has served as
President-Finance and Administration of our general partner
since October 2006 and of Targa since January 2006 and as a
director of Targa since May 2004. Since November 2005
Mr. Whalen has served as President Finance and
Administration for various Targa subsidiaries. Between October
2002 and October 2005, Mr. Whalen served as the Senior Vice
President and Chief Financial Officer of Parker Drilling
Company. Between January 2002 and October 2002, he was the Chief
Financial Officer of
116
Diversified Diagnostic Products, Inc. He served as Chief
Commercial Officer of Coral from February 1998 through January
2000. Previously, he served as Chief Financial Officer for Tejas
from 1992 to 1998. Mr. Whalen is also a director of
Equitable Resources, Inc.
Roy E. Johnson has served as Executive Vice President of
our general partner since October 2006 and of Targa since April
2004 and was a consultant for the Targa predecessor company
during 2003. Mr. Johnson also served as a consultant in the
energy industry from 2000 through 2003 providing advice to
various energy companies and investors regarding their
operations, acquisitions and dispositions. He served as Vice
President, Business Development and President of the
International Group, of Tejas from 1995 to 2000. In these
positions, he was responsible for acquisitions, pipeline
expansion and development projects in North and South America.
Mr. Johnson served as President of Louisiana Resources
Company, a company engaged in intrastate natural gas
transmission, from 1992 to 1995. Prior to 1992, Mr. Johnson
held various positions with a number of different companies in
the upstream and downstream energy industry.
Michael A. Heim has served as Executive Vice President
and Chief Operating Officer of our general partner since October
2006 and of Targa since April 2004 and was a consultant for the
Targa predecessor company during 2003. Mr. Heim also served
as a consultant in the energy industry from 2001 through 2003
providing advice to various energy companies and investors
regarding their operations, acquisitions and dispositions.
Mr. Heim served as Chief Operating Officer and Executive
Vice President of Coastal Field Services, a subsidiary of The
Coastal Corp., or Coastal, a diversified energy company, from
1997 to 2001 and President of Coastal States Gas Transmission
Company from 1997 to 2001. In these positions, he was
responsible for Coastals midstream gathering, processing,
and marketing businesses. Prior to 1997, he served as an officer
of several other Coastal exploration and production, marketing,
and midstream subsidiaries.
Jeffrey J. McParland has served as Executive Vice
President, Chief Financial Officer and Treasurer of our general
partner since October 2006 and of Targa since April 2004 and was
a consultant for the Targa predecessor company during 2003.
Mr. McParland served as a director of our general partner
between October 2006 and February 2007. Mr. McParland
served as Secretary of Targa since February 2004 until May 2004,
at which time he was elected as Assistant Secretary.
Mr. McParland served as Senior Vice President, Finance,
Dynegy Inc., a company engaged in power generation, the
midstream natural gas business and energy marketing, from 2000
to 2002. In this position, he was responsible for corporate
finance and treasury operations activities. He served as Senior
Vice President, Chief Financial Officer and Treasurer of
PG&E Gas Transmission, a midstream natural gas and regulated
natural gas pipeline company, from 1999 to 2000. Prior to 1999,
he worked in various engineering and finance positions with
companies in the power generation and engineering and
construction industries.
Paul W. Chung has served as Executive Vice President,
General Counsel and Secretary of our general partner since
October 2006 and of Targa since May 2004. Mr. Chung served
as Executive Vice President and General Counsel of Coral from
1999 to April 2004; Shell Trading North America Company, a
subsidiary of Shell, from 2001 to April 2004; and Coral Energy,
LLC from 1999 to 2001. In these positions, he was responsible
for all legal and regulatory affairs. He served as Vice
President and Assistant General Counsel of Tejas from 1996 to
1999. Prior to 1996, Mr. Chung held a number of legal
positions with different companies, including the law firm of
Vinson & Elkins L.L.P.
Peter R. Kagan was appointed as a director of our general
partner on February 8, 2007 and has served as a director of
Targa since February 2004. Mr. Kagan is a Managing Director
of Warburg Pincus LLC, where he has been employed since 1997,
and became a partner of Warburg Pincus & Co. in 2002.
He is also a director of Antero Resources Corporation, Broad Oak
Energy, Inc., Fairfield Energy Limited, MEG Energy Corp. and
Universal Space Network, Inc.
Chansoo Joung was appointed as a director of our general
partner on February 8, 2007 and has served as a Director of
Targa since December 31, 2005. Mr. Joung is a Member
and Managing Director of Warburg Pincus LLC, where he has been
employed since 2005, and became a partner of Warburg
Pincus & Co. in 2005. Prior to joining Warburg Pincus,
Mr. Joung was head of the Americas Natural Resources Group
in the investment banking division of Goldman Sachs. He joined
Goldman Sachs in 1987 and served in the Corporate Finance and
Mergers and Acquisitions departments and also founded and led
the
117
European Energy Group. He is a director of Broad Oak Energy and
Floridian Natural Gas Storage Company.
Robert B. Evans was appointed as a director of our
general partner on February 8, 2007. Mr. Evans was the
President and Chief Executive Officer of Duke Energy Americas, a
business unit of Duke Energy Corp., from January 2004 to March
2006, after which he retired. Mr. Evans served as the
transition executive for Energy Services, a business unit of
Duke Energy, during 2003. Mr. Evans also served as
President of Duke Energy Gas Transmission beginning in 1998 and
was named President and Chief Executive Officer in 2002. Prior
to his employment at Duke Energy, Mr. Evans served as Vice
President of marketing and regulatory affairs for Texas Eastern
Transmission and Algonquin Gas Transmission from 1996 to 1998.
Barry R. Pearl was appointed as a director of our general
partner on February 8, 2007. Mr. Pearl is president of
WesPac Pipelines, a private developer and operator of petroleum
infrastructure facilities, and is a director of Seaspan
Corporation and Kayne Anderson Energy Development Company.
Mr. Pearl served as President and Chief Executive Officer
of TEPPCO Partners from May 2002 until December 2005 and as
President and Chief Operating Officer from February 2001 through
April 2002. Mr. Pearl served as Vice President of finance
and Chief Financial Officer of Maverick Tube Corporation from
June 1998 until December 2000. From 1984 to 1998, Mr. Pearl
was Vice President of operations, Senior Vice President of
business development and planning and Senior Vice President and
Chief Financial Officer of Santa Fe Pacific Pipeline Partners,
L.P.
William D. Sullivan was appointed as a director of
our general partner on February 8, 2007. Mr. Sullivan
served as President and Chief Executive Officer of Leor Energy
LP from June 15, 2005 to August 5, 2005. Between 1981
and August 2003, Mr. Sullivan was employed in various
capacities by Anadarko Petroleum Corporation, including serving
as Executive Vice President, Exploration and Production between
August 2001 and August 2003. Since Mr. Sullivans
departure from Anadarko Petroleum Corporation in August 2003, he
has served on various private energy company boards.
Mr. Sullivan is a director of St. Mary Land &
Exploration Company and Legacy Reserves GP, LLC.
Reimbursement
of Expenses of our General Partner
Our general partner will not receive any management fee or other
compensation for its management of our partnership under the
omnibus agreement with Targa or otherwise. Under the terms of
the omnibus agreement, we will reimburse Targa up to
$5 million annually for the provision of various general
and administrative services for our benefit, subject to
increases in the Consumer Price Index or as a result of an
expansion of our operations. This limit on the amount of
reimbursement will expire in 2010. Our obligation to reimburse
Targa for operational expenses and certain direct expenses,
including insurance coverage expense, is not subject to this
cap. The partnership agreement provides that our general partner
will determine the expenses that are allocable to us. Please see
Certain Relationships and Related Party
Transactions Omnibus Agreement.
Executive
Compensation
Targa Resources GP LLC was formed on October 23, 2006.
Accordingly, our general partner has not accrued any obligations
with respect to management incentive or retirement benefits for
its directors and officers for the 2004 or 2005 fiscal years.
The compensation of the executive officers of Targa Resources GP
LLC will be set by Targa. The officers of our general partner
and employees of Targa providing services to us are
participating in employee benefit plans and arrangements
sponsored by Targa. Targa Resources GP LLC has not entered into
any employment agreements with any of its officers. The
Compensation Committee of Targa Resources Investments Inc., or
Targa Investments, has granted awards to Targas key
employees and the board of directors of our general partner has
granted awards to our outside directors pursuant to the
long-term incentive plans described below.
118
Director
Compensation
The independent and non-management members of the board of
directors of Targa Resources GP LLC will receive an annual cash
retainer of $34,000, an additional $1,500 for each board meeting
attended and an additional $1,500 for each committee meeting
attended ($750 if not at a regularly scheduled committee meeting
held by teleconference). The chairman of Targa Resources GP
LLCs audit committee will receive an additional cash
retainer of $20,000. Payment of director fees will generally be
made twice annually, at the second regularly scheduled meeting
of the Board and the final meeting of the Board. Each member of
the Board will be reimbursed by us for
out-of-pocket
expenses in connection with attending meetings of the board or
committees thereof.
Compensation
Discussion and Analysis
We do not directly employ any of the persons responsible for
managing our business and we do not have a compensation
committee. Any compensation decisions that are required to be
made by our general partner, Targa Resources GP LLC, will be
made by its board of directors. All of our executive officers
are employees of Targa Resources LLC, a wholly-owned subsidiary
of Targa Resources, Inc., or Targa. All of the outstanding
equity of Targa is held indirectly by Targa Investments. Our
reimbursement for the compensation of executive officers will be
based on Targas methodology used for allocating general
and administration expenses during a period pursuant to the
terms of, and subject to the limitations contained in, the
omnibus agreement.
During 2006, our executive officers were not specifically
compensated for time expended with respect to our business or
assets. Accordingly, we are not presenting any compensation for
historical periods. Following the consummation of this offering,
we currently expect our Chief Executive Officer (our principal
executive officer), our Chief Financial Officer (our principal
financial officer) and three other persons
(Messrs. Perkins, Whalen and Heim) constitute our most
highly compensated executive officers for 2007 (collectively,
the named executive officers) will have
substantially less than a majority of their compensation
allocated to us. Compensation paid or awarded by us in 2007 with
respect to our named executive officers will reflect only the
portion of compensation paid by Targa Resources LLC that is
allocated to us pursuant to Targas allocation methodology
and subject to the terms of the omnibus agreement. Targa
Investments indirectly owns all of the outstanding equity of
Targa and has ultimate decision making authority with respect to
the compensation of our named executive officers. Under the
terms of Targa Investments stockholders agreement,
compensatory arrangements with our named executive officers are
required to be submitted to a vote of Targa Investments
stockholders unless such arrangements have been approved by the
Compensation Committee of Targa Investments. The elements of
compensation discussed below, and Targa Investments
decisions with respect to determinations on payments, will not
be subject to approvals by the board of directors of our general
partner. Awards under our long term incentive plan will be made
by the board of directors of our general partner with respect to
grants to our independent and non-management directors and
Targas independent directors. Awards of cash-settled
performance units to our executive officers will be made by the
Compensation Committee of Targa Investments pursuant to a
separate plan adopted by Targa Investments, as described below.
With respect to compensation objectives and decisions regarding
our named executive officers for 2007, the Compensation
Committee of Targa Investments has approved the compensation of
our named executive officers based on Targa Investments
business priorities, which have been used to develop performance
based criteria for both discretionary cash awards and long-term
incentive compensation. Targa Investments senior
management typically consults with compensation consultants and
reviews market data for determining relevant compensation levels
and compensation program elements through the review of and, in
certain cases, participation in, various relevant compensation
surveys. Senior management then submits a proposal to Peter F.
Kagan, a director and chairman of the Compensation Committee of
Targa Investments, for the compensation to be paid or awarded to
executives and employees. Mr. Kagan considers
managements proposal (which he may request management to
modify) and the resulting recommendation is then submitted to
the Compensation Committee of Targa Investments for
consideration. Targa Investments has consulted with compensation
consultants with respect to determining 2007 compensation for
the named
119
executive officers and has established compensation criteria for
the named executive officers as discussed above. All
compensation determinations are discretionary and, as noted
above, subject to Targa Investments decision-making
authority.
The elements of Targa Investments compensation program
discussed below are intended to provide a total incentive
package designed to drive performance and reward contributions
in support of the business strategies of Targa and its
affiliates at the corporate, partnership and individual levels.
The primary elements of Targa Investments compensation
program are a combination of annual cash and long-term
equity-based compensation. For 2007, elements of compensation
for our named executive officers are expected to be the
following:
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annual base salary;
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discretionary annual cash awards;
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performance awards under Targas long-term incentive plan;
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Targas contributions under its 401(k) and profit sharing
plan; and
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Targas other benefit plans on the same basis as all other
Targa employees.
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As discussed above, the portion of 2007 base salaries paid by
Targa Resources LLC allocable to us and reported as compensation
to our named executive officers by us after the consummation of
this offering will be based on Targas methodology used for
allocating general and administration expenses, subject to the
limitations in the omnibus agreement. Targa Investments has
established these salaries based on historical salaries paid to
our named executive officers for services rendered to Targa, the
extent of their equity ownership in Targa, market data and
responsibilities of our named executive officers that may or may
not be related to our business.
The discretionary cash awards for each of our named executive
officers to be paid in 2007 for services to Targa and its
affiliates during 2006, has also been determined by Targa
Investments. The cash awards, in combination with base salaries
and long-term incentive awards, are intended to yield
competitive total cash compensation levels for the executive
officers and drive performance in support of Targas
business strategies as well as our own. The portion of any
discretionary cash awards paid by Targa Resources LLC allocable
to us will be based on Targas methodology used for
allocating general and administrative expenses, subject to the
limitations in the omnibus agreement. It is Targa
Investments general policy to pay these awards during the
first quarter.
In connection with our initial public offering, Targa
Investments has issued to our executive officers cash-settled
performance unit awards linked to the performance of our common
units that will vest in August of 2010, with the amounts vesting
under such awards dependent on our performance compared to a
peer-group consisting of us and 12 other publicly traded
partnerships. These performance unit awards will be made
pursuant to a plan adopted by Targa Investments and administered
by Targa Resources LLC. The cost of such awards will be
allocated to us pursuant to Targas allocation methodology
and subject to the terms of the omnibus agreement. Targa
Investments Compensation Committee will have the ability
to modify the peer-group in the event a peer company is no
longer determined to be one of our peers. The cash settlement
value of each performance unit award will be the value of an
equivalent common unit at the time of vesting plus associated
distributions over the vesting period, which may be higher or
lower than our common unit price at the time of our initial
public offering. If our performance equals or exceeds the
performance for the median of the group, 100% of the award will
vest. If we rank tenth in the group, 50% of the award will vest,
between tenth and seventh, 50% to 100% will vest, and for a
performance ranking lower than tenth, no amounts will vest. Our
named executive officers have received an initial award of
performance units equal to approximately 70% to 100% of their
base salary divided by the initial public offering price in this
offering, or approximately 15,000 performance units to
Mr. Joyce, 10,800 performance units to Mr. Perkins,
10,800 performance units to Mr. Whalen, 10,000 performance
units to Mr. Heim and 8,200 performance units to
Mr. McParland.
120
The equity-based awards we have made in connection with our
initial public offering to each of our non-management and
independent directors under our long-term incentive plan have
been determined by Targa Investments and have been approved by
the board of directors of our general partner. Each of these
directors has received an initial award of 2,000 restricted
units. The awards to our independent and non-management
directors consist of restricted units and will settle with the
delivery of common units. We will make similar grants under our
long-term incentive plan to the independent directors of Targa
Resources, Inc. All of these awards will be subject to three
year vesting, without a performance condition, and will vest
ratably on each anniversary of the grant.
The equity-based awards to both our named executive officers and
the directors of our general partner are intended to align their
long-term interests with those of our unitholders. As discussed
above, a portion of the equity-based awards to be granted to our
named executive officers will be allocated to us upon completion
of this offering, and a portion of any future awards under the
Targa plan will be allocable to us in accordance with the
allocation of general and administrative expenses pursuant to
the omnibus agreement. Initially, officers and employees of
Targa will participate in the Targa plan and the independent and
non-management directors of our general partner and the
independent directors of Targa Investments will participate in
our plan. Over time, employees of Targa may begin to participate
in our plan.
Our named executive officers are also owners of 12.9% of
the fully diluted equity of Targa Investments. This equity was
received through a combination of investment and equity grants.
Targa Resources LLC generally does not pay for perquisites for
any of our named executive officers, other than parking
subsidies, and expects this policy to continue. Targa Resources
LLC also makes contributions under its 401(k) plan for the
benefit of our named executive officers in the same manner as
for other Targa Resources LLC employees. It makes the following
contributions to its plan for the benefit of employees:
(i) 3% of the employees annual pay, (ii) an
amount equal to the employees contributions to the plan up
to 5% of the employees annual pay and (iii) a
discretionary amount depending on Targas performance
(2.25% of the employees pay for 2007).
Compensation Mix. We believe that each
of the base salary, cash awards, and equity awards fit the
overall compensation objectives of us and of Targa, as stated
above, i.e., to provide competitive compensation opportunities
to align and drive employee performance in support of
Targas business strategies as well as our own and to
attract, motivate and retain high quality talent with the skills
and competencies required by Targa and us.
Long-Term
Incentive Plan
General. Targa Resources GP LLC has
adopted a long-term incentive plan, or the Plan, for employees,
consultants and directors of Targa Resources GP LLC and its
affiliates who perform services for us, including officers,
directors and employees of Targa. The summary of the Plan
contained herein does not purport to be complete and is
qualified in its entirety by reference to the Plan. The Plan
provides for the grant of restricted units, phantom units, unit
options and substitute awards and, with respect to unit options
and phantom units, the grant of distribution equivalent rights,
or DERs. Subject to adjustment for certain events, an aggregate
of 1,680,000 common units may be delivered pursuant to awards
under the Plan. However, units that are cancelled, forfeited or
are withheld to satisfy Targa Resources GP LLCs tax
withholding obligations or payment of an awards exercise
price are available for delivery pursuant to other awards. The
Plan will be administered by the board of director of Targa
Resources GP LLC. Administration of the Plan may be delegated to
the compensation committee of the board of directors if one is
established.
Restricted Units and Performance
Units. A restricted unit is a common unit
that is subject to forfeiture. Upon vesting, the grantee
receives a common unit that is not subject to forfeiture. A
performance unit is a notional unit that entitles the grantee to
receive upon the vesting of the performance unit cash equal to
the fair market value of a common unit or, in the discretion of
the board of directors, a common unit. The board of directors
may make grants of restricted units and performance units under
the Plan to eligible individuals containing such terms,
consistent with the Plan, as the board of directors may
determine,
121
including the period over which restricted units and performance
units granted will vest. The board of directors may, in its
discretion, base vesting on the grantees completion of a
period of service or upon the achievement of specified financial
objectives or other criteria. In addition, the restricted and
performance units will vest automatically upon a change of
control (as defined in the Plan) of us or our general partner,
subject to any contrary provisions in the award agreement.
If a grantees employment, consulting or board membership
terminates for any reason, the grantees restricted units
and performance units will be automatically forfeited unless,
and to the extent, the award agreement or the board of directors
provides otherwise. Common units to be delivered with respect to
these awards may be common units acquired by Targa Resources GP
LLC in the open market, common units already owned by Targa
Resources GP LLC, common units acquired by Targa Resources GP
LLC directly from us or any other person, or any combination of
the foregoing. Targa Resources GP LLC will be entitled to
reimbursement by us for the cost incurred in acquiring common
units. If we issue new common units with respect to these
awards, the total number of common units outstanding will
increase.
Distributions made by us with respect to awards of restricted
units may, in the board of directorss discretion, be
subject to the same vesting requirements as the restricted
units. The board of directors, in its discretion, may also grant
tandem DERs with respect to performance units on such terms as
it deems appropriate. DERs are rights that entitle the grantee
to receive, with respect to a performance unit, cash equal to
the cash distributions made by us on a common unit. However,
DERs may be credited and paid in such other manner, including
units, as the board of directors may provide.
We intend for the restricted units and performance units granted
under the Plan to serve as a means of incentive compensation for
performance and not primarily as an opportunity to participate
in the equity appreciation of the common units. Therefore,
participants will not pay any consideration for the common units
they receive with respect to these types of awards, and neither
we nor our general partner will receive remuneration for the
units delivered with respect to these awards.
Unit Options. The Plan also permits the
grant of options covering common units. Unit options may be
granted to such eligible individuals and with such terms as the
board of directors may determine, consistent with the Plan;
however, a unit option must have an exercise price equal to the
fair market value of a common unit on the date of grant.
Upon exercise of a unit option, Targa Resources GP LLC will
acquire common units in the open market at a price equal to the
prevailing price on the principal national securities exchange
upon which the common units are then traded, or directly from us
or any other person, or use common units already owned by the
general partner, or any combination of the foregoing. Targa
Resources GP LLC will be entitled to reimbursement by us for the
difference between the cost incurred by Targa Resources GP LLC
in acquiring the common units and the proceeds received by Targa
Resources GP LLC from an optionee at the time of exercise. Thus,
we will bear the cost of the unit options. If we issue new
common units upon exercise of the unit options, the total number
of common units outstanding will increase, and Targa Resources
GP LLC will remit the proceeds it received from the optionee
upon exercise of the unit option to us.
Replacement Awards. The board of
directors, in its discretion, may grant replacement awards to
eligible individuals who, in connection with an acquisition made
by us, Targa Resources GP LLC or an affiliate, have forfeited an
equity-based award in their former employer. A replacement award
that is an option may have an exercise price less than the value
of a common unit on the date of grant of the award.
Termination of Long-Term Incentive
Plan. Targa Resources GP LLCs board of
directors, in its discretion, may terminate the Plan at any time
with respect to the common units for which a grant has not
theretofore been made. The Plan will automatically terminate on
the earlier of the 10th anniversary of the date it was
initially approved by our unitholders or when common units are
no longer available for delivery pursuant to awards under the
Plan. Targa Resources GP LLCs board of directors will also
have the right to alter or amend the Plan or any part of it from
time to time and the board of directors may amend any award;
provided, however, that no change in any outstanding award may
be made that would materially impair the rights of the
participant without the consent of the affected participant.
Subject to unitholder
122
approval, if required by the rules of the principal national
securities exchange upon which the common units are traded, the
board of directors of Targa Resources GP LLC may increase the
number of common units that may be delivered with respect to
awards under the Plan.
Targa
Long-Term Incentive Plan
As discussed above, Targa Investments has adopted a long term
incentive plan for employees, consultants and directors of Targa
Investments and its affiliates. The Targa plan provides for the
grant of phantom units which are cash-settled performance unit
awards linked to the performance of our common units.
123
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our
units that will be issued upon the consummation of this offering
and the related transactions and held by:
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each person who then will beneficially own 5% or more of the
then outstanding units;
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all of the directors of Targa Resources GP LLC;
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each named executive officer of Targa Resources GP LLC; and
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all directors and officers of Targa Resources GP LLC as a group.
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Percentage of
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Total Common
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Percentage of
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Percentage of
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and
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Common Units
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Common Units
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Subordinated
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Subordinated
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Subordinated
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to be
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to be
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Units to be
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Units to be
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Units to be
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Beneficially
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Beneficially
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Beneficially
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Beneficially
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Beneficially
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Name of Beneficial Owner(1)
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Owned(5)
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Owned
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Owned(6)
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Owned
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Owned
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Targa Resources Investments
Inc.(2)
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11,528,231
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100
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%
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40.70
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%
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Rene R. Joyce
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199,438
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1.73
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%
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*
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Joe Bob Perkins
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183,299
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1.59
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%
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*
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Michael A. Heim
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157,937
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1.37
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%
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*
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Jeffrey J. McParland
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141,797
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1.23
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%
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*
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Roy E. Johnson
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146,409
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1.27
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%
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*
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James W. Whalen
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138,339
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1.20
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%
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*
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Paul W. Chung
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138,339
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1.20
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%
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*
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Peter R. Kagan(3)
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*
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*
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Chansoo Joung(4)
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*
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*
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Robert B. Evans
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*
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*
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Barry R. Pearl
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*
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*
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William D. Sullivan
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*
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*
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All directors and executive
officers as a group (12 persons)
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1,105,558
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9.59
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%
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3.90
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%
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* |
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Less than 1%. |
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(1) |
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Unless otherwise indicated, the address for all beneficial
owners in this table is 1000 Louisiana, Suite 4300,
Houston, Texas 77002. The nature of the beneficial ownership for
all the shares is sole voting and investment power. |
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(2) |
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The units attributed to Targa Resources Investments Inc. are
held by two indirect wholly-owned subsidiaries, Targa
GP Inc. and Targa LP Inc. |
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(3) |
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Warburg Pincus Private Equity VIII, L.P.
(WP VIII) and Warburg Pincus Private
Equity IX, L.P. (WP IX) in the aggregate
beneficially own 73.6% of Targa Resources Investments Inc. The
general partner of WP VIII is Warburg Pincus Partners, LLC
(WP Partners LLC) and the general partner of
WP IX is Warburg Pincus IX, LLC, of which
WP Partners LLC is sole member. Warburg Pincus &
Co. (WP) is the managing member of WP Partners
LLC. WP VIII and WP IX are managed by Warburg Pincus
LLC (WP LLC). The address of the Warburg Pincus
entities is 466 Lexington Avenue, New York, New York 10017.
Peter R. Kagan, one of our directors, is a general partner
of WP and a Managing Director and member of WP LLC.
Charles R. Kaye and Joseph P. Landy are Managing
General Partners of WP and Managing Members of WP LLC and
may be deemed to control the Warburg Pincus entities.
Messrs. Kagan, Kaye and Landy disclaim beneficial ownership
of all shares held by the Warburg Pincus entities. |
124
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(4) |
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Warburg Pincus Private Equity VIII, L.P. (WP VIII)
and Warburg Pincus Private Equity IX, L.P. (WP IX)
in the aggregate beneficially own 73.6% of Targa Resources
Investments Inc. The general partner of WP VIII is Warburg
Pincus Partners, LLC (WP Partners LLC) and the
general partner of WP IX is Warburg Pincus IX, LLC, of which WP
Partners LLC is sole member. Warburg Pincus & Co.
(WP) is the managing member of WP Partners LLC. WP
VIII and WP IX are managed by Warburg Pincus LLC (WP
LLC). The address of the Warburg Pincus entities is 466
Lexington Avenue, New York, New York 10017. Chansoo Joung, one
of our directors, is a general partner of WP. Mr. Juong
disclaims beneficial ownership of all shares held by the Warburg
Pincus entities. Charles R. Kaye and Joseph P. Landy
are Managing General Partners of WP and Managing Members of
WP LLC and may be deemed to control the Warburg Pincus
entities. Messrs. Kagan, Kaye and Landy disclaim beneficial
ownership of all shares held by the Warburg Pincus entities. |
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(5) |
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Does not include common units that may be purchased in the
directed unit program. |
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(6) |
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The subordinated units presented as being beneficially owned by
the directors and executive officers of Targa Resources GP LLC
represent the number of units held indirectly by Targa Resources
Investments Inc. that are attributable to such directors and
officers based on their ownership of equity interests in Targa
Resources Investments Inc. |
125
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
After this offering, our general partner and its affiliates will
own 11,528,231 subordinated units representing an aggregate
39.9% limited partner interest in us. In addition, our general
partner will own a 2% general partner interest in us and the
incentive distribution rights.
Distributions
and Payments to Our General Partner and its Affiliates
The following table summarizes the distributions and payments to
be made by us to our general partner and its affiliates in
connection with the formation, ongoing operation and any
liquidation of Targa Resources Partners LP. These distributions
and payments were determined by and among affiliated entities
and, consequently, are not the result of arms-length
negotiations.
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Formation Stage |
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The consideration received by Targa and its subsidiaries for the
contribution of the assets and liabilities to us |
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11,528,231 subordinated units;
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578,127 general partner units (629,555 general
partner units if the underwriters exercise their option to
purchase additional common units in full); |
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the incentive distribution rights; |
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approximately $322.9 million payment from the
proceeds of this offering to retire a portion of our affiliate
indebtedness; and |
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approximately $342.5 million payment from the
proceeds of borrowings under our new credit facility to retire
an additional portion of our affiliate indebtedness. |
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In connection with the DMS Acquisition on October 31, 2005,
Targa allocated approximately $1.1 billion to the North
Texas System. |
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Operational Stage |
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Distributions of available cash to our general partner and its
affiliates |
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We will generally make cash distributions 98% to our limited
partner unitholders pro rata, including our general partner and
its affiliates, as the holders of 11,528,231 subordinated units,
and 2% to our general partner. In addition, if distributions
exceed the minimum quarterly distribution and other higher
target distribution levels, our general partner will be entitled
to increasing percentages of the distributions, up to 50% of the
distributions above the highest target distribution level. |
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Assuming we have sufficient available cash to pay the full
minimum quarterly distribution on all of our outstanding units
for four quarters, our general partner and its affiliates would
receive an annual distribution of approximately
$0.8 million on their general partner units and
$15.6 million on their subordinated units. |
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Payments to our general partner and its affiliates |
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We will reimburse Targa for the payment of certain operating
expenses and for the provision of various general and
administrative services for our benefit. Please see
Omnibus |
126
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Agreement Reimbursement of Operating and
General and Administrative Expense. |
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Withdrawal or removal of our general partner |
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If our general partner withdraws or is removed, its general
partner interest and its incentive distribution rights will
either be sold to the new general partner for cash or converted
into common units, in each case for an amount equal to the fair
market value of those interests. Please see The
Partnership Agreement Withdrawal or Removal of the
General Partner. |
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Liquidation Stage |
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Liquidation |
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Upon our liquidation, the partners, including our general
partner, will be entitled to receive liquidating distributions
according to their respective capital account balances. |
Agreements
Governing the Transactions
We and other parties have entered into or will enter into the
various documents and agreements that will effect the offering
transactions, including the vesting of assets in, and the
assumption of liabilities by, us and our subsidiaries, and the
application of the proceeds of this offering. These agreements
will not be the result of arms-length negotiations, and
they, or any of the transactions that they provide for, may not
be effected on terms at least as favorable to the parties to
these agreements as they could have obtained from unaffiliated
third parties. All of the transaction expenses incurred in
connection with these transactions, including the expenses
associated with transferring assets into our subsidiaries, will
be paid from the proceeds of this offering.
Omnibus
Agreement
Upon the closing of this offering, we will enter into an omnibus
agreement with Targa, our general partner and others that will
address the reimbursement of our general partner for costs
incurred on our behalf, competition and indemnification matters.
Any or all of the provisions of the omnibus agreement, other
than the indemnification provisions described below, will be
terminable by Targa at its option if our general partner is
removed without cause and units held by our general partner and
its affiliates are not voted in favor of that removal. The
omnibus agreement will also terminate in the event of a change
of control of us or our general partner.
Reimbursement
of Operating and General and Administrative
Expense
Under the omnibus agreement, we will reimburse Targa for the
payment of certain operating expenses, including compensation
and benefits of operating personnel, and for the provision of
various general and administrative services for our benefit with
respect to the assets contributed to us at the closing of this
offering. Specifically, we will reimburse Targa for the
following expenses:
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general and administrative expenses, which are capped at
$5 million annually for three years, subject to increases
based on increases in the Consumer Price Index and subject to
further increases in connection with expansions of our
operations through the acquisition or construction of new assets
or businesses with the concurrence of our conflicts committee;
thereafter, our general partner will determine the general and
administrative expenses to be allocated to us in accordance with
our partnership agreement; and
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operations and certain direct expenses, which are not subject to
the $5 million cap for general and administrative expenses.
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Pursuant to these arrangements, Targa will perform centralized
corporate functions for us, such as legal, accounting, treasury,
insurance, risk management, health, safety and environmental,
information
127
technology, human resources, credit, payroll, internal audit,
taxes, engineering and marketing. We will reimburse Targa for
the direct expenses to provide these services as well as other
direct expenses it incurs on our behalf, such as compensation of
operational personnel performing services for our benefit and
the cost of their employee benefits, including 401(k), pension
and health insurance benefits.
Competition
Targa will not be restricted, under either our partnership
agreement or the omnibus agreement, from competing with us.
Targa may acquire, construct or dispose of additional midstream
energy or other assets in the future without any obligation to
offer us the opportunity to purchase or construct those assets.
Indemnification
Under the omnibus agreement, Targa will indemnify us for three
years after the closing of this offering against certain
potential environmental claims, losses and expenses associated
with the operation of the North Texas System and occurring
before the closing date of this offering that are not reserved
on the books of the Predecessor Business as of the closing date
of this offering. Targas maximum liability for this
indemnification obligation will not exceed $10.0 million
and Targa will not have any obligation under this
indemnification until our aggregate losses exceed $250,000. We
have agreed to indemnify Targa against environmental liabilities
related to the North Texas System arising or occurring after the
closing date of this offering.
Additionally, Targa will indemnify us for losses attributable to
rights-of-way,
certain consents or governmental permits, preclosing litigation
relating to the North Texas System and income taxes attributable
to pre-closing operations that are not reserved on the books of
the Predecessor Business as of the closing date of this
offering. Targa will not have any obligation under these
indemnifications until our aggregate losses exceed $250,000. We
will indemnify Targa for all losses attributable to the
postclosing operations of the North Texas System. Targas
obligations under this additional indemnification will survive
for three years after the closing of this offering, except that
the indemnification for income tax liabilities will terminate
upon the expiration of the applicable statute of limitations.
Contracts
with Affiliates
NGL and Condensate Purchase
Agreement. At or prior to the closing of this
offering, we will enter into an NGL and high pressure condensate
purchase agreement pursuant to which (i) we will be
obligated to sell all volumes of NGLs (other than high-pressure
condensate) that we own or control to Targa Liquids Marketing
and Trade and (ii) we will have the right to sell to Targa
Liquids Marketing and Trade or third parties the volumes of
high-pressure condensate that we own or control, in each case at
a price based on the prevailing market price less
transportation, fractionation and certain other fees. This
agreement will have an initial term of 15 years and will
automatically extend for a term of five years, unless the
agreement is otherwise terminated by either party. Furthermore,
either party may elect to terminate the agreement if either
party ceases to be an affiliate of Targa.
Natural Gas Purchase Agreement. At or
prior to the closing of this offering, we will enter into a
natural gas purchase agreement at a price based on TGMs
sale price for such natural gas, less TGMs costs and
expenses associated therewith. This agreement will have an
initial term of 15 years and will automatically extend for
a term of five years, unless the agreement is otherwise
terminated by either party. Furthermore, either party may elect
to terminate the agreement if either party ceases to be an
affiliate of Targa.
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CONFLICTS
OF INTEREST AND FIDUCIARY DUTIES
Conflicts
of Interest
Conflicts of interest exist and may arise in the future as a
result of the relationships between our general partner and its
affiliates (including Targa) on the one hand, and our
partnership and our limited partners, on the other hand. The
directors and officers of Targa Resources GP LLC have fiduciary
duties to manage Targa and our general partner in a manner
beneficial to its owners. At the same time, our general partner
has a fiduciary duty to manage our partnership in a manner
beneficial to us and our unitholders.
Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us or any other partner, on the
other hand, our general partner will resolve that conflict. Our
partnership agreement contains provisions that modify and limit
our general partners fiduciary duties to our unitholders.
Our partnership agreement also restricts the remedies available
to unitholders for actions taken that, without those
limitations, might constitute breaches of fiduciary duty.
Our general partner will not be in breach of its obligations
under the partnership agreement or its duties to us or our
unitholders if the resolution of the conflict is:
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approved by the conflicts committee, although our general
partner is not obligated to seek such approval;
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approved by the vote of a majority of the outstanding common
units, excluding any common units owned by our general partner
or any of its affiliates;
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on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
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fair and reasonable to us, taking into account the totality of
the relationships among the parties involved, including other
transactions that may be particularly favorable or advantageous
to us.
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Our general partner may, but is not required to, seek the
approval of such resolution from the conflicts committee of its
board of directors. If our general partner does not seek
approval from the conflicts committee and its board of directors
determines that the resolution or course of action taken with
respect to the conflict of interest satisfies either of the
standards set forth in the third or fourth bullet points above,
then it will be presumed that, in making its decision, the board
of directors acted in good faith, and in any proceeding brought
by or on behalf of any limited partner or the partnership, the
person bringing or prosecuting such proceeding will have the
burden of overcoming such presumption. Unless the resolution of
a conflict is specifically provided for in our partnership
agreement, our general partner or the conflicts committee may
consider any factors it determines in good faith to consider
when resolving a conflict. When our partnership agreement
provides that someone act in good faith, it requires that person
to believe he is acting in the best interests of the partnership.
Conflicts of interest could arise in the situations described
below, among others.
Targa
is not limited in its ability to compete with us, which could
cause conflicts of interest and limit our ability to acquire
additional assets or businesses which in turn could adversely
affect our results of operations and cash available for
distribution to our unitholders.
Neither our partnership agreement nor the omnibus agreement
between us and Targa will prohibit Targa from owning assets or
engaging in businesses that compete directly or indirectly with
us. In addition, Targa may acquire, construct or dispose of
additional midstream or other assets in the future, without any
obligation to offer us the opportunity to purchase or construct
any of those assets. Targa is a large, established participant
in the midstream energy business, and has significantly greater
resources and experience than we have, which factors may make it
more difficult for us to compete with these entities with
respect to commercial activities as well as for acquisitions
candidates. As a result, competition from these entities could
adversely impact our results of operations and cash available
for distribution.
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Neither
our partnership agreement nor any other agreement requires Targa
to pursue a business strategy that favors us or utilizes our
assets or dictates what markets to pursue or grow. Targas
directors have a fiduciary duty to make these decisions in the
best interests of the owners of Targa, which may be contrary to
our interests.
Because certain of the directors of our general partner are also
directors
and/or
officers of Targa, such directors have fiduciary duties to Targa
that may cause them to pursue business strategies that
disproportionately benefit Targa or which otherwise are not in
our best interests.
Our
general partner is allowed to take into account the interests of
parties other than us, such as Targa, in resolving conflicts of
interest.
Our partnership agreement contains provisions that reduce the
standards to which our general partner would otherwise be held
by state fiduciary duty law. For example, our partnership
agreement permits our general partner to make a number of
decisions in its individual capacity, as opposed to in its
capacity as our general partner. This entitles our general
partner to consider only the interests and factors that it
desires, and it has no duty or obligation to give any
consideration to any interest of, or factors affecting, us, our
affiliates or any limited partner.
We
will have no employees and will rely on the employees of Targa
and its affiliates.
All of our executive management personnel will be employees of
Targa and will devote a portion of their time to our business
and affairs. We will also utilize a significant number of
employees of Targa to operate our business and provide us with
general and administrative services for which we will reimburse
Targa for allocated expenses of operational personnel who
perform services for our benefit and we will reimburse Targa for
allocated general and administrative expenses. Affiliates of our
general partner and Targa will also conduct businesses and
activities of their own in which we will have no economic
interest. If these separate activities are significantly greater
than our activities, there could be material competition for the
time and effort of the officers and employees who provide
services to Targa.
Our
partnership agreement limits our general partners
fiduciary duties to holders of our units and restricts the
remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of
fiduciary duty.
Although our general partner has a fiduciary duty to manage us
in a manner beneficial to us and our unitholders, the directors
and officers of our general partner have a fiduciary duty to
manage our general partner in a manner beneficial to its owner,
Targa. Our partnership agreement contains provisions that reduce
the standards to which our general partner would otherwise be
held by state fiduciary duty laws. For example, our partnership
agreement:
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permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and factors that it desires, and it has no
duty or obligation to give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner.
Examples include:
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the exercise of its right to reset the target distribution
levels of its incentive distribution rights at higher levels and
receive, in connection with this reset, a number of Class B
units that are convertible at any time following the first
anniversary of the issuance of these Class B units into
common units;
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its limited call right;
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its rights to vote and transfer the units it owns;
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its registration rights; and
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its determination whether or not to consent to any merger or
consolidation of the partnership or amendment to the partnership
agreement;
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provides that our general partner will not have any liability to
us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith, meaning it
believed the decision was in the best interests of our
partnership;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of our general partner acting in good
faith and not involving a vote of unitholders must be on terms
no less favorable to us than those generally being provided to
or available from unrelated third parties or must be fair
and reasonable to us, as determined by our general partner
in good faith and that, in determining whether a transaction or
resolution is fair and reasonable, our general
partner may consider the totality of the relationships between
the parties involved, including other transactions that may be
particularly advantageous or beneficial to us;
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for any acts or omissions unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that the general partner or
those other persons acted in bad faith or engaged in fraud or
willful misconduct or, in the case of a criminal matter, acted
with knowledge that the conduct was criminal; and
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provides that in resolving conflicts of interest, it will be
presumed that in making its decision the general partner or the
conflicts committee acted in good faith, and in any proceeding
brought by or on behalf of any limited partner or us, the person
bringing or prosecuting such proceeding will have the burden of
overcoming such presumption.
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If you purchase any common units, you will agree to become bound
by the provisions in the partnership agreement, including the
provisions discussed above.
Except
in limited circumstances, our general partner has the power and
authority to conduct our business without unitholder
approval.
Under our partnership agreement, our general partner has full
power and authority to do all things, other than those items
that require unitholder approval or with respect to which our
general partner has sought conflicts committee approval, on such
terms as it determines to be necessary or appropriate to conduct
our business including, but not limited to, the following:
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the making of any expenditures, the lending or borrowing of
money, the assumption or guarantee of or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness, including indebtedness that is convertible into
our securities, and the incurring of any other obligations;
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the purchase, sale or other acquisition or disposition of our
securities, or the issuance of additional options, rights,
warrants and appreciation rights relating to our securities;
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the mortgage, pledge, encumbrance, hypothecation or exchange of
any or all of our assets;
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the negotiation, execution and performance of any contracts,
conveyances or other instruments;
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the distribution of our cash;
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the selection and dismissal of employees and agents, outside
attorneys, accountants, consultants and contractors and the
determination of their compensation and other terms of
employment or hiring;
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the maintenance of insurance for our benefit and the benefit of
our partners;
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the formation of, or acquisition of an interest in, the
contribution of property to, and the making of loans to, any
limited or general partnerships, joint ventures, corporations,
limited liability companies or other relationships;
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the control of any matters affecting our rights and obligations,
including the bringing and defending of actions at law or in
equity and otherwise engaging in the conduct of litigation,
arbitration or mediation and the incurring of legal expense and
the settlement of claims and litigation;
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the indemnification of any person against liabilities and
contingencies to the extent permitted by law;
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the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies
having jurisdiction over our business or assets; and
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the entering into of agreements with any of its affiliates to
render services to us or to itself in the discharge of its
duties as our general partner.
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Our partnership agreement provides that our general partner must
act in good faith when making decisions on our
behalf, and our partnership agreement further provides that in
order for a determination by our general partner to be made in
good faith, our general partner must believe that
the determination is in our best interests. Please see The
Partnership Agreement Voting Rights for
information regarding matters that require unitholder approval.
Our
general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings, issuance
of additional partnership securities and the creation, reduction
or increase of reserves, each of which can affect the amount of
cash that is distributed to our unitholders.
The amount of cash that is available for distribution to
unitholders is affected by decisions of our general partner
regarding such matters as:
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amount and timing of asset purchases and sales;
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cash expenditures;
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borrowings;
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the issuance of additional units; and
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the creation, reduction or increase of reserves in any quarter.
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In addition, our general partner may use an amount equal to four
times the amount needed to pay the minimum quarterly
distribution on our units, which would not otherwise constitute
available cash from operating surplus, in order to permit the
payment of cash distributions on its units and incentive
distribution rights. All of these actions may affect the amount
of cash distributed to our unitholders and the general partner
and may facilitate the conversion of subordinated units into
common units. Please see Provisions of Our Partnership
Agreement Relating to Cash Distributions.
In addition, borrowings by us and our affiliates do not
constitute a breach of any duty owed by the general partner to
our unitholders, including borrowings that have the purpose or
effect of:
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enabling our general partner or its affiliates to receive
distributions on any subordinated units held by them or the
incentive distribution rights; or
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hastening the expiration of the subordination period.
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For example, in the event we have not generated sufficient cash
from our operations to pay the minimum quarterly distribution on
our common units and our subordinated units, our partnership
agreement permits us to borrow funds, which would enable us to
make this distribution on all outstanding units. Please see
Provisions of Our Partnership Agreement Related to Cash
Distributions Subordination Period.
Our partnership agreement provides that we and our subsidiaries
may borrow funds from our general partner and its affiliates.
Our general partner and its affiliates may not borrow funds from
us, our operating partnership, or its operating subsidiaries.
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Our
general partner determines which costs incurred by Targa are
reimbursable by us.
We will reimburse our general partner and its affiliates for
costs incurred in managing and operating us, including costs
incurred in rendering corporate staff and support services to
us. The partnership agreement provides that our general partner
will determine the expenses that are allocable to us in good
faith.
Our
partnership agreement does not restrict our general partner 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.
Our partnership agreement allows our general partner to
determine, in good faith, any amounts to pay itself or its
affiliates for any services rendered to us. Our general partner
may also enter into additional contractual arrangements with any
of its affiliates on our behalf. Neither our partnership
agreement nor any of the other agreements, contracts or
arrangements between us, on the one hand, and our general
partner and its affiliates, on the other hand, that will be in
effect as of the closing of this offering will be the result of
arms-length negotiations. Similarly, agreements, contracts
or arrangements between us and our general partner and its
affiliates that are entered into following the closing of this
offering will not be required to be negotiated on an
arms-length basis, although, in some circumstances, our
general partner may determine that the conflicts committee of
our general partner may make a determination on our behalf with
respect to one or more of these types of situations.
Our general partner will determine, in good faith, the terms of
any of these transactions entered into after the sale of the
common units offered in this offering.
Our general partner and its affiliates will have no obligation
to permit us to use any facilities or assets of our general
partner or its affiliates, except as may be provided in
contracts entered into specifically dealing with that use. There
is no obligation of our general partner or its affiliates to
enter into any contracts of this kind.
Our
general partner intends to limit its liability regarding our
obligations.
Our general partner intends to limit its liability under
contractual arrangements so that the other party has recourse
only to our assets, and not against our general partner or its
assets. The partnership agreement provides that any action taken
by our general partner to limit its liability is not a breach of
our general partners fiduciary duties, even if we could
have obtained more favorable terms without the limitation on
liability.
Our
general partner may exercise its right to call and purchase
common units if it and its affiliates own more than 80% of the
common units.
Our general partner may exercise its right to call and purchase
common units as provided in the partnership agreement or assign
this right to one of its affiliates or to us. Our general
partner is not bound by fiduciary duty restrictions in
determining whether to exercise this right. As a result, a
common unitholder may have his common units purchased from him
at an undesirable time or price. Please see The
Partnership Agreement Limited Call Right.
Common
unitholders will have no right to enforce obligations of our
general partner and its affiliates under agreements with
us.
Any agreements between us on the one hand, and our general
partner and its affiliates, on the other, will not grant to the
unitholders, separate and apart from us, the right to enforce
the obligations of our general partner and its affiliates in our
favor.
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Our
general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
The attorneys, independent accountants and others who have
performed services for us regarding this offering have been
retained by our general partner. Attorneys, independent
accountants and others who perform services for us are selected
by our general partner or the conflicts committee and may
perform services for our general partner and its affiliates. We
may retain separate counsel for ourselves or the holders of
common units in the event of a conflict of interest between our
general partner and its affiliates, on the one hand, and us or
the holders of common units, on the other, depending on the
nature of the conflict. We do not intend to do so in most cases.
Our
general partner may elect to cause us to issue Class B
units to it in connection with a resetting of the target
distribution levels related to our general partners
incentive distribution rights without the approval of the
conflicts committee of our general partner or our unitholders.
This ability may result in lower distributions to our common
unitholders in certain situations.
Our general partner has the right, at a time when there are no
subordinated units outstanding and it has received incentive
distributions at the highest level to which it is entitled (48%)
for each of the prior four consecutive fiscal quarters, to reset
the initial cash target distribution levels at higher levels
based on the distribution at the time of the exercise of the
reset election. Following a reset election by our general
partner, the minimum quarterly distribution amount will be reset
to an amount equal to the average cash distribution amount per
common unit for the two fiscal quarters immediately preceding
the reset election (such amount is referred to as the
reset minimum quarterly distribution) and the target
distribution levels will be reset to correspondingly higher
levels based on percentage increases above the reset minimum
quarterly distribution amount. We anticipate that our general
partner would exercise this reset right in order to facilitate
acquisitions or internal growth projects that would not be
sufficiently accretive to cash distributions per common unit
without such conversion; however, it is possible that our
general partner could exercise this reset election at a time
when we are experiencing declines in our aggregate cash
distributions or at a time when our general partner expects that
we will experience declines in our aggregate cash distributions
in the foreseeable future. In such situations, our general
partner may be experiencing, or may be expected to experience,
declines in the cash distributions it receives related to its
incentive distribution rights and may therefore desire to be
issued our Class B units, which are entitled to specified
priorities with respect to our distributions and which therefore
may be more advantageous for the general partner to own in lieu
of the right to receive incentive distribution payments based on
target distribution levels that are less certain to be achieved
in the then current business environment. As a result, a reset
election may cause our common unitholders to experience dilution
in the amount of cash distributions that they would have
otherwise received had we not issued new Class B units to
our general partner in connection with resetting the target
distribution levels related to our general partners
incentive distribution rights. Please see Provisions of
Our Partnership Agreement Related to Cash
Distributions General Partner Interest and Incentive
Distribution Rights.
Fiduciary
Duties
Our general partner is accountable to us and our unitholders as
a fiduciary. Fiduciary duties owed to unitholders by our general
partner are prescribed by law and the partnership agreement. The
Delaware Revised Uniform Limited Partnership Act, which we refer
to in this prospectus as the Delaware Act, provides that
Delaware limited partnerships may, in their partnership
agreements, modify, restrict or expand the fiduciary duties
otherwise owed by a general partner to limited partners and the
partnership.
Our partnership agreement contains various provisions modifying
and restricting the fiduciary duties that might otherwise be
owed by our general partner. We have adopted these restrictions
to allow our general partner or its affiliates to engage in
transactions with us that would otherwise be prohibited by
state-law fiduciary duty standards and to take into account the
interests of other parties in addition to our interests when
resolving conflicts of interest. We believe this is appropriate
and necessary because our general partners board of
directors will have fiduciary duties to manage our general
partner in a manner
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beneficial to its owners, as well as to you. Without these
modifications, the general partners ability to make
decisions involving conflicts of interest would be restricted.
The modifications to the fiduciary standards enable the general
partner to take into consideration all parties involved in the
proposed action, so long as the resolution is fair and
reasonable to us. These modifications also enable our general
partner to attract and retain experienced and capable directors.
These modifications are detrimental to our common unitholders
because they restrict the remedies available to unitholders for
actions that, without those limitations, might constitute
breaches of fiduciary duty, as described below, and permit our
general partner to take into account the interests of third
parties in addition to our interests when resolving conflicts of
interest. The following is a summary of the material
restrictions of the fiduciary duties owed by our general partner
to the limited partners:
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State-law fiduciary duty standards |
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Fiduciary duties are generally considered to include an
obligation to act in good faith and with due care and loyalty.
The duty of care, in the absence of a provision in a partnership
agreement providing otherwise, would generally require a general
partner to act for the partnership in the same manner as a
prudent person would act on his own behalf. The duty of loyalty,
in the absence of a provision in a partnership agreement
providing otherwise, would generally prohibit a general partner
of a Delaware limited partnership from taking any action or
engaging in any transaction where a conflict of interest is
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The Delaware Act generally provides that a limited partner may
institute legal action on behalf of the partnership to recover
damages from a third party where a general partner has refused
to institute the action or where an effort to cause a general
partner to do so is not likely to succeed. In addition, the
statutory or case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself and all
other similarly situated limited partners to recover damages
from a general partner for violations of its fiduciary duties to
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Partnership agreement modified standards |
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Our partnership agreement contains provisions that waive or
consent to conduct by our general partner and its affiliates
that might otherwise raise issues about compliance with
fiduciary duties or applicable law. For example, our partnership
agreement provides that when our general partner is acting in
its capacity as our general partner, as opposed to in its
individual capacity, it must act in good faith and
will not be subject to any other standard under applicable law.
In addition, when our general partner is acting in its
individual capacity, as opposed to in its capacity as our
general partner, it may act without any fiduciary obligation to
us or the unitholders whatsoever. These standards reduce the
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In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement
further provides that our general partner and the officers and
directors of our general partner will not be liable for monetary
damages to us, our limited partners or assignees for errors of
judgment or for any acts or omissions unless there has been a
final and non-appealable judgment by a court of competent
jurisdiction determining that the general partner or the
officers and directors of our general partner acted in bad faith
or engaged in fraud or willful |
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misconduct or, in the case of a criminal matter, acted with
knowledge that the indemnitees conduct was unlawful. |
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Special provisions regarding affiliated
transactions. Our partnership agreement
generally provides that affiliated transactions and resolutions
of conflicts of interest not involving a vote of unitholders and
that are not approved by the conflicts committee of the board of
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on terms no less favorable to us than those
generally being provided to or available from unrelated third
parties; or
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fair and reasonable to us, taking into
account the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to us). |
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If our general partner does not seek approval from the conflicts
committee and the board of directors of our general partner
determines that the resolution or course of action taken with
respect to the conflict of interest satisfies either of the
standards set forth in the bullet points above, then it will be
presumed that, in making its decision, the board of directors,
which may include board members affected by the conflict of
interest, acted in good faith and in any proceeding brought by
or on behalf of any limited partner or the partnership, the
person bringing or prosecuting such proceeding will have the
burden of overcoming such presumption. These standards reduce
the obligations to which our general partner would otherwise be
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By purchasing our common units, each common unitholder
automatically agrees to be bound by the provisions in the
partnership agreement, including the provisions discussed above.
This is in accordance with the policy of the Delaware Act
favoring the principle of freedom of contract and the
enforceability of partnership agreements. The failure of a
limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against that
person.
We must indemnify our general partner and the officers,
directors, managers of our general partner and certain other
specified persons, to the fullest extent permitted by law,
against liabilities, costs and expenses incurred by our general
partner or these other persons. We must provide this
indemnification unless there has been a final and non-
appealable judgment by a court of competent jurisdiction
determining that these persons acted in bad faith or engaged in
fraud or willful misconduct. We must also provide this
indemnification for criminal proceedings unless our general
partner or these other persons acted with knowledge that their
conduct was unlawful. Thus, our general partner could be
indemnified for its negligent acts if it meets the requirements
set forth above. To the extent these provisions purport to
include indemnification for liabilities arising under the
Securities Act, in the opinion of the SEC, such indemnification
is contrary to public policy and, therefore, unenforceable.
Please see The Partnership Agreement
Indemnification.
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DESCRIPTION
OF THE COMMON UNITS
The
Units
The common units and the subordinated units are separate classes
of limited partner interests in us. The holders of units are
entitled to participate in partnership distributions and
exercise the rights or privileges available to limited partners
under our partnership agreement. For a description of the
relative rights and preferences of holders of common units and
subordinated units in and to partnership distributions, please
see this section and Our Cash Distribution Policy and
Restrictions on Distributions. For a description of the
rights and privileges of limited partners under our partnership
agreement, including voting rights, please see The
Partnership Agreement.
Transfer
Agent and Registrar
Duties. ComputerShare Trust Company,
N.A. will serve as registrar and transfer agent for the common
units. We will pay all fees charged by the transfer agent for
transfers of common units except the following that must be paid
by unitholders:
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surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges;
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special charges for services requested by a common
unitholder; and
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other similar fees or charges.
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There will be no charge to unitholders for disbursements of our
cash distributions. We will indemnify the transfer agent, its
agents and each of their stockholders, directors, officers and
employees against all claims and losses that may arise out of
acts performed or omitted for its activities in that capacity,
except for any liability due to any gross negligence or
intentional misconduct of the indemnified person or entity.
Resignation or Removal. The transfer
agent may resign, by notice to us, or be removed by us. The
resignation or removal of the transfer agent will become
effective upon our appointment of a successor transfer agent and
registrar and its acceptance of the appointment. If no successor
has been appointed and has accepted the appointment within
30 days after notice of the resignation or removal, our
general partner may act as the transfer agent and registrar
until a successor is appointed.
Transfer
of Common Units
By transfer of common units in accordance with our partnership
agreement, each transferee of common units shall be admitted as
a limited partner with respect to the common units transferred
when such transfer and admission is reflected in our books and
records. Each transferee:
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represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement;
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automatically agrees to be bound by the terms and conditions of,
and is deemed to have executed, our partnership
agreement; and
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gives the consents and approvals contained in our partnership
agreement, such as the approval of all transactions and
agreements that we are entering into in connection with our
formation and this offering.
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A transferee will become a substituted limited partner of our
partnership for the transferred common units automatically upon
the recording of the transfer on our books and records.
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We may, at our discretion, treat the nominee holder of a common
unit as the absolute owner. In that case, the beneficial
holders rights are limited solely to those that it has
against the nominee holder as a result of any agreement between
the beneficial owner and the nominee holder.
Common units are securities and are transferable according to
the laws governing transfers of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to become a substituted limited partner in
our partnership for the transferred common units.
Until a common unit has been transferred on our books, we and
the transfer agent may treat the record holder of the unit as
the absolute owner for all purposes, except as otherwise
required by law or stock exchange regulations.
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THE
PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement. The form of our partnership agreement is
included in this prospectus as Appendix A. We will provide
prospective investors with a copy of our partnership agreement
upon request at no charge.
We summarize the following provisions of our partnership
agreement elsewhere in this prospectus:
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with regard to distributions of available cash, please see
Provisions of Our Partnership Agreement Relating to Cash
Distributions;
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with regard to the fiduciary duties of our general partner,
please see Conflicts of Interest and Fiduciary
Duties;
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with regard to the transfer of common units, please see
Description of the Common Units Transfer of
Common Units; and
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with regard to allocations of taxable income and taxable loss,
please see Material Tax Consequences.
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Organization
and Duration
Our partnership was organized on October 23, 2006 and will
have a perpetual existence unless terminated pursuant to the
terms of our partnership agreement.
Purpose
Our purpose under the partnership agreement is limited to any
business activity that is approved by our general partner and
that lawfully may be conducted by a limited partnership
organized under Delaware law; provided, that our general partner
shall not cause us to engage, directly or indirectly, in any
business activity that the general partner determines would
cause us to be treated as an association taxable as a
corporation or otherwise taxable as an entity for federal income
tax purposes.
Although our general partner has the ability to cause us and our
subsidiaries to engage in activities other than the business of
gathering, compressing, treating, processing, transporting and
selling natural gas and the business of transporting and selling
NGLs, our general partner has no current plans to do so and may
decline to do so free of any fiduciary duty or obligation
whatsoever to us or the limited partners, including any duty to
act in good faith or in the best interests of us or the limited
partners. Our general partner is authorized in general to
perform all acts it determines to be necessary or appropriate to
carry out our purposes and to conduct our business.
Power of
Attorney
Each limited partner, and each person who acquires a unit from a
unitholder, by accepting the common unit, automatically grants
to our general partner and, if appointed, a liquidator, a power
of attorney to, among other things, execute and file documents
required for our qualification, continuance or dissolution. The
power of attorney also grants our general partner the authority
to amend, and to make consents and waivers under, our
partnership agreement.
Cash
Distributions
Our partnership agreement specifies the manner in which we will
make cash distributions to holders of our common units and other
partnership securities as well as to our general partner in
respect of its general partner interest and its incentive
distribution rights. For a description of these cash
distribution provisions, please see Provisions of Our
Partnership Agreement Relating to Cash Distributions.
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Capital
Contributions
Unitholders are not obligated to make additional capital
contributions, except as described below under
Limited Liability.
Our general partner has the right, but not the obligation, to
contribute a proportionate amount of capital to us to maintain
its 2% general partner interest if we issue additional units.
Our general partners 2% interest, and the percentage of
our cash distributions to which it is entitled, will be
proportionately reduced if we issue additional units in the
future and our general partner does not contribute a
proportionate amount of capital to us to maintain its 2% general
partner interest. Our general partner will be entitled to make a
capital contribution in order to maintain its 2% general partner
interest in the form of the contribution to us of common units
based on the current market value of the contributed common
units.
Voting
Rights
The following is a summary of the unitholder vote required for
the matters specified below. Matters requiring the approval of a
unit majority require:
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during the subordination period, the approval of a majority of
the common units, excluding those common units held by our
general partner and its affiliates, and a majority of the
subordinated units, voting as separate classes; and
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after the subordination period, the approval of a majority of
the common units and Class B units, if any, voting as a
class.
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In voting their common, Class B and subordinated units, our
general partner and its affiliates will have no fiduciary duty
or obligation whatsoever to us or the limited partners,
including any duty to act in good faith or in the best interests
of us or the limited partners.
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Issuance of additional units |
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No approval right. |
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Amendment of the partnership agreement |
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Certain amendments may be made by the general partner without
the approval of the unitholders. Other amendments generally
require the approval of a unit majority. Please see
Amendment of the Partnership Agreement. |
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Merger of our partnership or the sale of all or substantially
all of our assets |
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Unit majority in certain circumstances. Please see
Merger, Consolidation, Conversion, Sale or
Other Disposition of Assets. |
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Dissolution of our partnership |
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Unit majority. Please see Termination and
Dissolution. |
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Continuation of our business upon dissolution |
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Unit majority. Please see Termination and
Dissolution. |
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Withdrawal of the general partner |
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Under most circumstances, the approval of a majority of the
common units, excluding common units held by our general partner
and its affiliates, is required for the withdrawal of our
general partner prior to December 31, 2016 in a manner that
would cause a dissolution of our partnership. Please see
Withdrawal or Removal of the General
Partner. |
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Removal of the general partner |
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Not less than
662/3%
of the outstanding units, voting as a single class, including
units held by our general partner and its affiliates. Please see
Withdrawal or Removal of the General
Partner. |
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Transfer of the general partner interest |
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Our general partner may transfer all, but not less than all, of
its general partner interest in us without a vote of our
unitholders to |
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an affiliate or another person in connection with its merger or
consolidation with or into, or sale of all or substantially all
of its assets, to such person. The approval of a majority of the
common units, excluding common units held by the general partner
and its affiliates, is required in other circumstances for a
transfer of the general partner interest to a third party prior
to December 31, 2016. See Transfer of
General Partner Units. |
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Transfer of incentive distribution rights |
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Except for transfers to an affiliate or another person as part
of our general partners merger or consolidation, sale of
all or substantially all of its assets or the sale of all of the
ownership interests in such holder, the approval of a majority
of the common units, excluding common units held by the general
partner and its affiliates, is required in most circumstances
for a transfer of the incentive distribution rights to a third
party prior to December 31, 2016. Please see
Transfer of Incentive Distribution
Rights. |
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Transfer of ownership interests in our general partner |
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No approval required at any time. Please see
Transfer of Ownership Interests in the General
Partner. |
Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware Act
and that he otherwise acts in conformity with the provisions of
the partnership agreement, his liability under the Delaware Act
will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common
units plus his share of any undistributed profits and assets. If
it were determined, however, that the right, or exercise of the
right, by the limited partners as a group:
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to remove or replace the general partner;
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to approve some amendments to the partnership agreement; or
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to take other action under the partnership agreement;
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constituted participation in the control of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as the general
partner. This liability would extend to persons who transact
business with us who reasonably believe that the limited partner
is a general partner. Neither the partnership agreement nor the
Delaware Act specifically provides for legal recourse against
the general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this
does not mean that a limited partner could not seek legal
recourse, we know of no precedent for this type of a claim in
Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair
value of the assets of the limited partnership. For the purpose
of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of
property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was
in violation of the Delaware Act shall be liable to the limited
partnership for the amount of the distribution for three years.
Under the Delaware Act, a substituted limited partner of a
limited partnership is liable for the obligations of his
assignor to make contributions to
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the partnership, except that such person is not obligated for
liabilities unknown to him at the time he became a limited
partner and that could not be ascertained from the partnership
agreement.
Our subsidiaries conduct business in Texas, although we may have
subsidiaries that conduct business in other states in the
future. Maintenance of our limited liability as a limited
partner of the operating partnership may require compliance with
legal requirements in the jurisdictions in which the operating
partnership conducts business, including qualifying our
subsidiaries to do business there.
Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly
established in many jurisdictions. If, by virtue of our
partnership interest in our operating partnership or otherwise,
it were determined that we were conducting business in any state
without compliance with the applicable limited partnership or
limited liability company statute, or that the right or exercise
of the right by the limited partners as a group to remove or
replace the general partner, to approve some amendments to the
partnership agreement, or to take other action under the
partnership agreement constituted participation in the
control of our business for purposes of the statutes of
any relevant jurisdiction, then the limited partners could be
held personally liable for our obligations under the law of that
jurisdiction to the same extent as the general partner under the
circumstances. We will operate in a manner that the general
partner considers reasonable and necessary or appropriate to
preserve the limited liability of the limited partners.
Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities for the
consideration and on the terms and conditions determined by our
general partner without the approval of the unitholders.
It is possible that we will fund acquisitions through the
issuance of additional common units, subordinated units or other
partnership securities. Holders of any additional common units
we issue will be entitled to share equally with the
then-existing holders of common units in our distributions of
available cash. In addition, the issuance of additional common
units or other partnership securities may dilute the value of
the interests of the then-existing holders of common units in
our net assets.
In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
securities that, as determined by our general partner, may have
special voting rights to which the common units are not
entitled. In addition, our partnership agreement does not
prohibit the issuance by our subsidiaries of equity securities,
which may effectively rank senior to the common units.
Upon the issuance of additional partnership securities, our
general partner will be entitled, but not required, to make
additional capital contributions to the extent necessary to
maintain its 2% general partner interest in us. Our general
partners 2% interest in us will be reduced if we issue
additional units in the future (other than the issuance of
common units upon exercise by the underwriters of the option to
purchase additional common units, the issuance of units issued
in connection with a reset of the incentive distribution target
levels relating to our general partners incentive
distribution rights or the issuance of units upon conversion of
outstanding partnership securities) and our general partner does
not contribute a proportionate amount of capital to us to
maintain its 2% general partner interest. Moreover, our general
partner will have the right, which it may from time to time
assign in whole or in part to any of its affiliates, to purchase
common units, subordinated units or other partnership 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 the percentage interest of the
general partner and its affiliates, including such interest
represented by common units and subordinated units, that existed
immediately prior to each issuance. The holders of common units
will not have preemptive rights to acquire additional common
units or other partnership securities.
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Amendment
of the Partnership Agreement
General. Amendments to our partnership
agreement may be proposed only by or with the consent of our
general partner. However, our general partner will have no duty
or obligation to propose any amendment and may decline to do so
free of any fiduciary duty or obligation whatsoever to us or the
limited partners, including any duty to act in good faith or in
the best interests of us or the limited partners. In order to
adopt a proposed amendment, other than the amendments discussed
below, our general partner is required to seek written approval
of the holders of the number of units required to approve the
amendment or call a meeting of the limited partners to consider
and vote upon the proposed amendment. Except as described below,
an amendment must be approved by a unit majority.
Prohibited Amendments. No amendment may
be made that would:
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enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or
class of limited partner interests so affected; or
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enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by us to our general partner
or any of its affiliates without the consent of our general
partner, which consent may be given or withheld at its option.
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The provision of our partnership agreement preventing the
amendments having the effects described in any of the clauses
above can be amended upon the approval of the holders of at
least 90% of the outstanding units voting together as a single
class (including units owned by our general partner and its
affiliates). Upon completion of the offering, our general
partner and its affiliates will own approximately 40.7% of the
outstanding common and subordinated units.
No Unitholder Approval. Our general
partner may generally make amendments to our partnership
agreement without the approval of any limited partner or
assignee to reflect:
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a change in our name, the location of our principal place of our
business, our registered agent or our registered office;
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the admission, substitution, withdrawal or removal of partners
in accordance with our partnership agreement;
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a change that our general partner determines to be necessary or
appropriate to qualify or continue our qualification as a
limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or
to ensure that neither we nor the operating partnership nor any
of its subsidiaries will be treated as an association taxable as
a corporation or otherwise taxed as an entity for federal income
tax purposes;
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a change in our fiscal year and related changes;
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an amendment that is necessary, in the opinion of our counsel,
to prevent us or our general partner or the directors, officers,
agents or trustees of our general partner from in any manner
being subjected to the provisions of the Investment Company Act
of 1940, the Investment Advisors Act of 1940, or plan
asset regulations adopted under the Employee Retirement
Income Security Act of 1974, or ERISA, whether or not
substantially similar to plan asset regulations currently
applied or proposed;
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an amendment that our general partner determines to be necessary
or appropriate for the authorization of additional partnership
securities or rights to acquire partnership securities,
including any amendment that our general partner determines is
necessary or appropriate in connection with:
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the adjustments of the minimum quarterly distribution, first
target distribution, second target distribution and third target
distribution in connection with the reset of our general
partners incentive distribution rights as described under
Provisions of Our Partnership Agreement
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Relating to Cash Distributions General
Partners Right to Reset Incentive Distribution
Levels;
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the implementation of the provisions relating to our general
partners right to reset its incentive distribution rights
in exchange for Class B units; or
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any modification of the incentive distribution rights made in
connection with the issuance of additional partnership
securities or rights to acquire partnership securities, provided
that, any such modifications and related issuance of partnership
securities have received approval by a majority of the members
of the conflicts committee of our general partner;
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any amendment expressly permitted in our partnership agreement
to be made by our general partner acting alone;
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an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our
partnership agreement;
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any amendment that our general partner determines to be
necessary or appropriate for the formation by us of, or our
investment in, any corporation, partnership or other entity, as
otherwise permitted by our partnership agreement;
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conversions into, mergers with or conveyances to another limited
liability entity that is newly formed and has no assets,
liabilities or operations at the time of the conversion, merger
or conveyance other than those it receives by way of the
conversion, merger or conveyance; or
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any other amendments substantially similar to any of the matters
described in the clauses above.
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In addition, our general partner may make amendments to our
partnership agreement without the approval of any limited
partner if our general partner determines that those amendments:
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do not adversely affect the limited partners (or any particular
class of limited partners) in any material respect;
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are necessary or appropriate to satisfy any requirements,
conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute;
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are necessary or appropriate to facilitate the trading of
limited partner interests or to comply with any rule,
regulation, guideline or requirement of any securities exchange
on which the limited partner interests are or will be listed for
trading;
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are necessary or appropriate for any action taken by our general
partner relating to splits or combinations of units under the
provisions of our partnership agreement; or
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are required to effect the intent expressed in this prospectus
or the intent of the provisions of our partnership agreement or
are otherwise contemplated by our partnership agreement.
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Opinion of Counsel and Unitholder
Approval. For amendments of the type not
requiring unitholder approval, our general partner will not be
required to obtain an opinion of counsel that an amendment will
not result in a loss of limited liability to the limited
partners or result in our being treated as an association
taxable as a corporation or otherwise taxable as an entity for
federal income tax purposes in connection with any of the
amendments. No amendments to our partnership agreement other
than those described above under No Unitholder
Approval will become effective without the approval of
holders of at least 90% of the outstanding units voting as a
single class unless we first obtain an opinion of counsel to the
effect that the amendment will not affect the limited liability
under applicable law of any of our limited partners.
In addition to the above restrictions, any amendment that would
have a material adverse effect on the rights or preferences of
any type or class of outstanding units in relation to other
classes of units will require the approval of at least a
majority of the type or class of units so affected. Any
amendment that reduces the voting percentage required to take
any action is required to be approved by the affirmative vote of
limited
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partners whose aggregate outstanding units constitute not less
than the voting requirement sought to be reduced.
Merger,
Consolidation, Conversion, Sale or Other Disposition of
Assets
A merger, consolidation or conversion of us requires the prior
consent of our general partner. However, our general partner
will have no duty or obligation to consent to any merger,
consolidation or conversion and may decline to do so free of any
fiduciary duty or obligation whatsoever to us or the limited
partners, including any duty to act in good faith or in the best
interest of us or the limited partners. Please see
Management Management of Targa Resources
Partners LP.
In addition, the partnership agreement generally prohibits our
general partner without the prior approval of the holders of a
unit majority, from causing us to, among other things, sell,
exchange or otherwise dispose of all or substantially all of our
assets in a single transaction or a series of related
transactions, including by way of merger, consolidation or other
combination, or approving on our behalf the sale, exchange or
other disposition of all or substantially all of the assets of
our subsidiaries. Our general partner may, however, mortgage,
pledge, hypothecate or grant a security interest in all or
substantially all of our assets without that approval. Our
general partner may also sell all or substantially all of our
assets under a foreclosure or other realization upon those
encumbrances without that approval. Finally, our general partner
may consummate any merger without the prior approval of our
unitholders if we are the surviving entity in the transaction,
our general partner has received an opinion of counsel regarding
limited liability and tax matters, the transaction would not
result in a material amendment to the partnership agreement,
each of our units will be an identical unit of our partnership
following the transaction, and the partnership securities to be
issued do not exceed 20% of our outstanding partnership
securities immediately prior to the transaction.
If the conditions specified in the partnership agreement are
satisfied, our general partner may convert us or any of our
subsidiaries into a new limited liability entity or merge us or
any of our subsidiaries into, or convey all of our assets to, a
newly formed entity if the sole purpose of that conversion,
merger or conveyance is to effect a mere change in our legal
form into another limited liability entity, our general partner
has received an opinion of counsel regarding limited liability
and tax matters, and the governing instruments of the new entity
provide the limited partners and the general partner with the
same rights and obligations as contained in the partnership
agreement. The unitholders are not entitled to dissenters
rights of appraisal under the partnership agreement or
applicable Delaware law in the event of a conversion, merger or
consolidation, a sale of substantially all of our assets or any
other similar transaction or event.
Termination
and Dissolution
We will continue as a limited partnership until terminated under
our partnership agreement. We will dissolve upon:
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the election of our general partner to dissolve us, if approved
by the holders of units representing a unit majority;
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there being no limited partners, unless we are continued without
dissolution in accordance with applicable Delaware law;
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the entry of a decree of judicial dissolution of our
partnership; or
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the withdrawal or removal of our general partner or any other
event that results in its ceasing to be our general partner
other than by reason of a transfer of its general partner
interest in accordance with our partnership agreement or
withdrawal or removal following approval and admission of a
successor.
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Upon a dissolution under the last clause above, the holders of a
unit majority may also elect, within specific time limitations,
to continue our business on the same terms and conditions
described in our
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partnership agreement by appointing as a successor general
partner an entity approved by the holders of units representing
a unit majority, subject to our receipt of an opinion of counsel
to the effect that:
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the action would not result in the loss of limited liability of
any limited partner; and
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neither our partnership, our operating partnership nor any of
our other subsidiaries would be treated as an association
taxable as a corporation or otherwise be taxable as an entity
for federal income tax purposes upon the exercise of that right
to continue.
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Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are continued as a new limited
partnership, the liquidator authorized to wind up our affairs
will, acting with all of the powers of our general partner that
are necessary or appropriate to liquidate our assets and apply
the proceeds of the liquidation as described in Provisions
of Our Partnership Agreement Relating to Cash
Distributions Distributions of Cash Upon
Liquidation. The liquidator may defer liquidation or
distribution of our assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a
sale would be impractical or would cause undue loss to our
partners.
Withdrawal
or Removal of the General Partner
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior to
December 31, 2016 without obtaining the approval of the
holders of at least a majority of the outstanding common units,
excluding common units held by the general partner and its
affiliates, and furnishing an opinion of counsel regarding
limited liability and tax matters. On or after December 31,
2016, 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.
Notwithstanding the information above, our general partner may
withdraw without unitholder approval upon 90 days
notice to the limited partners if at least 50% of the
outstanding common units are held or controlled by one person
and its affiliates other than the general partner and its
affiliates. In addition, the partnership agreement permits our
general partner in some instances to sell or otherwise transfer
all of its general partner interest in us without the approval
of the unitholders. Please see Transfer of
General Partner Units and Transfer of
Incentive Distribution Rights.
Upon withdrawal of our general partner under any circumstances,
other than as a result of a transfer by our general partner of
all or a part of its general partner interest in us, the holders
of a unit majority, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is
not elected, or is elected but an opinion of counsel regarding
limited liability and tax matters cannot be obtained, we will be
dissolved, wound up and liquidated, unless within a specified
period after that withdrawal, the holders of a unit majority
agree in writing to continue our business and to appoint a
successor general partner. Please see
Termination and Dissolution.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
662/3%
of the outstanding units, voting together as a single class,
including units held by our general partner and its affiliates,
and we receive an opinion of counsel regarding limited liability
and tax matters. Any removal of our general partner is also
subject to the approval of a successor general partner by the
vote of the holders of a majority of the outstanding common
units and Class B units, if any, voting as a separate
class, and subordinated units, voting as a separate class. The
ownership of more than
331/3%
of the outstanding units by our general partner and its
affiliates would give them the practical ability to prevent our
general partners removal. At the closing of this offering,
our general partner and its affiliates will own 40.7% of the
outstanding common and subordinated units.
Our partnership agreement also provides that if our general
partner is removed as our general partner under circumstances
where cause does not exist and units held by the general partner
and its affiliates are not voted in favor of that removal:
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the subordination period will end, and all outstanding
subordinated units will immediately convert into common units on
a
one-for-one
basis;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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our general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests
based on the fair market value of those interests at that time.
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In the event of removal of a general partner under circumstances
where cause exists or withdrawal of a general partner where that
withdrawal violates our partnership agreement, a successor
general partner will have the option to purchase the general
partner interest and incentive distribution rights of the
departing general partner for a cash payment equal to the fair
market value of those interests. Under all other circumstances
where a general partner withdraws or is removed by the limited
partners, the departing general partner will have the option to
require the successor general partner to purchase the general
partner interest of the departing general partner and its
incentive distribution rights for fair market value. In each
case, this fair market value will be determined by agreement
between the departing general partner and the successor general
partner. If no agreement is reached, an independent investment
banking firm or other independent expert selected by the
departing general partner and the successor general partner will
determine the fair market value. Or, if the departing general
partner and the successor general partner cannot agree upon an
expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value.
If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partner interest and its incentive
distribution rights will automatically convert into common units
equal to the fair market value of those interests as determined
by an investment banking firm or other independent expert
selected in the manner described in the preceding paragraph.
In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Transfer
of General Partner Units
Except for transfer by our general partner of all, but not less
than all, of its general partner units to:
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an affiliate of our general partner (other than an
individual); or
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another entity as part of the merger or consolidation of our
general partner with or into another entity or the transfer by
our general partner of all or substantially all of its assets to
another entity,
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our general partner may not transfer all or any of its general
partner units to another person prior to December 31, 2016
without the approval of the holders of at least a majority of
the outstanding common units, excluding common units held by our
general partner and its affiliates. As a condition of this
transfer, the transferee must assume, among other things, the
rights and duties of our general partner, agree to be bound by
the provisions of our partnership agreement, and furnish an
opinion of counsel regarding limited liability and tax matters.
Our general partner and its affiliates may at any time, transfer
units to one or more persons, without unitholder approval,
except that they may not transfer subordinated units to us.
Transfer
of Ownership Interests in the General Partner
At any time, Targa may sell or transfer all or part of their
membership interests in our general partner to an affiliate or
third party without the approval of our unitholders.
147
Transfer
of Incentive Distribution Rights
Our general partner or its affiliates or a subsequent holder may
transfer its incentive distribution rights to an affiliate of
the holder (other than an individual) or another entity as part
of the merger or consolidation of such holder with or into
another entity, the sale of all of the ownership interest in the
holder or the sale of all or substantially all of its assets to,
that entity without the prior approval of the unitholders. Prior
to December 31, 2016, other transfers of incentive
distribution rights will require the affirmative vote of holders
of a majority of the outstanding common units, excluding common
units held by our general partner and its affiliates. On or
after December 31, 2016, the incentive distribution rights
will be freely transferable.
Change of
Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove our general partner or otherwise change the management of
our general partner. If any person or group other than our
general partner and its affiliates acquires beneficial ownership
of 20% or more of any class of units, that person or group loses
voting rights on all of its units. This loss of voting rights
does not apply to any person or group that acquires the units
from our general partner or its affiliates and any transferees
of that person or group approved by our general partner or to
any person or group who acquires the units with the prior
approval of the board of directors of our general partner.
Our partnership agreement also provides that 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 that removal:
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the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a
one-for-one
basis;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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our general partner will have the right to convert its general
partner units and its incentive distribution rights into common
units or to receive cash in exchange for those interests based
on the fair market value of those interests at that time.
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Limited
Call Right
If at any time our general partner and its affiliates own more
than 80% of the then-issued and outstanding limited partner
interests of any class, our general partner will have the right,
which it may assign in whole or in part to any of its affiliates
or to us, to acquire all, but not less than all, of the limited
partner interests of the class held by unaffiliated persons as
of a record date to be selected by our general partner, on at
least 10 but not more than 60 days notice. The purchase
price in the event of this purchase is the greater of:
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the highest price paid by either of our general partner or any
of its affiliates for any limited partner interests of the class
purchased within the 90 days preceding the date on which
our general partner first mails notice of its election to
purchase those limited partner interests; and
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the current market price as of the date three days before the
date the notice is mailed.
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As a result of our general partners right to purchase
outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests
purchased at a price that may be lower than market prices at
various times prior to such purchase or lower than a unitholder
may anticipate the market price to be in the future. The tax
consequences to a unitholder of the exercise of this call right
are the same as a sale by that unitholder of his common units in
the market. Please see Material Tax
Consequences Disposition of Common Units.
148
Meetings;
Voting
Except as described below regarding a person or group owning 20%
or more of any class of units then outstanding, record holders
of units on the record date will be entitled to notice of, and
to vote at, meetings of our limited partners and to act upon
matters for which approvals may be solicited.
Our general partner does not anticipate that any meeting of
unitholders will be called in the foreseeable future. Any action
that is required or permitted to be taken by the unitholders may
be taken either at a meeting of the unitholders or without a
meeting if consents in writing describing the action so taken
are signed by holders of the number of units necessary to
authorize or take that action at a meeting. Meetings of the
unitholders may be called by our general partner or by
unitholders owning at least 20% of the outstanding units of the
class for which a meeting is proposed. Unitholders may vote
either in person or by proxy at meetings. The holders of a
majority of the outstanding units of the class or classes for
which a meeting has been called represented in person or by
proxy will constitute a quorum unless any action by the
unitholders requires approval by holders of a greater percentage
of the units, in which case the quorum will be the greater
percentage.
Each record holder of a unit has a vote according to his
percentage interest in us, although additional limited partner
interests having special voting rights could be issued. Please
see Issuance of Additional Securities.
However, if at any time any person or group, other than our
general partner and its affiliates, or a direct or subsequently
approved transferee of our general partner or its affiliates,
acquires, in the aggregate, beneficial ownership of 20% or more
of any class of units then outstanding, that person or group
will lose voting rights on all of its units and the units may
not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of unitholders,
calculating required votes, determining the presence of a quorum
or for other similar purposes. Common units held in nominee or
street name account will be voted by the broker or other nominee
in accordance with the instruction of the beneficial owner
unless the arrangement between the beneficial owner and his
nominee provides otherwise. Except as our partnership agreement
otherwise provides, subordinated units will vote together with
common units and Class B units as a single class.
Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of common
units under our partnership agreement will be delivered to the
record holder by us or by the transfer agent.
Status as
Limited Partner
By transfer of common units in accordance with our partnership
agreement, each transferee of common units shall be admitted as
a limited partner with respect to the common units transferred
when such transfer and admission is reflected in our books and
records. Except as described under Limited
Liability, the common units will be fully paid, and
unitholders will not be required to make additional
contributions.
Non-Citizen
Assignees; Redemption
If we are or become subject to federal, state or local laws or
regulations that, in the reasonable determination of our general
partner, create a substantial risk of cancellation or forfeiture
of any property that we have an interest in because of the
nationality, citizenship or other related status of any limited
partner, we may redeem the units held by the limited partner at
their current market price. In order to avoid any cancellation
or forfeiture, our general partner may require each limited
partner to furnish information about his nationality,
citizenship or related status. If a limited partner fails to
furnish information about his nationality, citizenship or other
related status within 30 days after a request for the
information or our general partner determines after receipt of
the information that the limited partner is not an eligible
citizen, the limited partner may be treated as a non-citizen
assignee. A non-citizen assignee is entitled to an interest
equivalent to that of a limited partner for the right to share
in allocations and distributions from us, including liquidating
distributions. A non-citizen assignee does not have the right to
direct the voting of his units and may not receive distributions
in-kind upon our liquidation.
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Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages or similar
events:
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our general partner;
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any departing general partner;
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any person who is or was an affiliate of a general partner or
any departing general partner;
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any person who is or was a director, officer, member, partner,
fiduciary or trustee of any entity set forth in the preceding
three bullet points;
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any person who is or was serving as director, officer, member,
partner, fiduciary or trustee of another person at the request
of our general partner, any departing general partner, an
affiliate of our general partner or an affiliate of any
departing general partner; and
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any person designated by our general partner.
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Any indemnification under these provisions will only be out of
our assets. Unless it otherwise agrees, our general partner will
not be personally liable for, or have any obligation to
contribute or lend funds or assets to us to enable us to
effectuate, indemnification. We may purchase insurance against
liabilities asserted against and expenses incurred by persons
for our activities, regardless of whether we would have the
power to indemnify the person against liabilities under our
partnership agreement.
Reimbursement
of Expenses
Our partnership agreement requires us to reimburse our general
partner for all direct and indirect expenses it incurs or
payments it makes on our behalf and all other expenses allocable
to us or otherwise incurred by our general partner in connection
with operating our business. These expenses include salary,
bonus, incentive compensation and other amounts paid to persons
who perform services for us or on our behalf and expenses
allocated to our general partner by its affiliates. The general
partner is entitled to determine in good faith the expenses that
are allocable to us.
Books and
Reports
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. For tax and fiscal reporting purposes, our fiscal year is
the calendar year.
We will furnish or make available to record holders of common
units, within 120 days after the close of each fiscal year,
an annual report containing audited financial statements and a
report on those financial statements by our independent public
accountants. Except for our fourth quarter, we will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
150
Right to
Inspect Our Books and Records
Our partnership agreement provides that a limited partner can,
for a purpose reasonably related to his interest as a limited
partner, upon reasonable written demand stating the purpose of
such demand and at his own expense, have furnished to him:
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a current list of the name and last known address of each
partner;
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a copy of our tax returns;
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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 partner became a partner;
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copies of our partnership agreement, our certificate of limited
partnership, related amendments and powers of attorney under
which they have been executed;
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information regarding the status of our business and financial
condition; and
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any other information regarding our affairs as is just and
reasonable.
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Our general partner may, and intends to, keep confidential from
the limited partners trade secrets or other information the
disclosure of which our general partner believes in good faith
is not in our best interests or that we are required by law or
by agreements with third parties to keep confidential.
Registration
Rights
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units, subordinated units or other partnership
securities proposed to be sold by our general partner or any of
its affiliates or their assignees if an exemption from the
registration requirements is not otherwise available. These
registration rights continue for two years following any
withdrawal or removal of our general partner. We are obligated
to pay all expenses incidental to the registration, excluding
underwriting discounts and a structuring fee. Please see
Units Eligible for Future Sale.
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UNITS
ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered hereby, Targa will
hold an aggregate of 11,528,231 subordinated units. All of
the subordinated units will convert into common units at the end
of the subordination period and some may convert earlier. The
sale of these units could have an adverse impact on the price of
the common units or on any trading market that may develop.
The common units sold in the offering will generally be freely
transferable without restriction or further registration under
the Securities Act, except that any common units owned by an
affiliate of ours may not be resold publicly except
in compliance with the registration requirements of the
Securities Act or under an exemption under Rule 144 or
otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three-month period, the greater
of:
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1% of the total number of the securities outstanding; or
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the average weekly reported trading volume of the common units
for the four calendar weeks prior to the sale.
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Sales under Rule 144 are also subject to specific manner of
sale provisions, holding period requirements, notice
requirements and the availability of current public information
about us. A person who is not deemed to have been an affiliate
of ours at any time during the three months preceding a sale,
and who has beneficially owned his common units for at least two
years, would be entitled to sell common units under
Rule 144 without regard to the public information
requirements, volume limitations, manner of sale provisions and
notice requirements of Rule 144.
The partnership agreement does not restrict our ability to issue
any partnership securities at any time. Any issuance of
additional common units or other equity securities would result
in a corresponding decrease in the proportionate ownership
interest in us represented by, and could adversely affect the
cash distributions to and market price of, common units then
outstanding. Please see The Partnership
Agreement Issuance of Additional Securities.
Under our partnership agreement, our general partner and its
affiliates have the right to cause us to register under the
Securities Act and state securities laws the offer and sale of
any common units, subordinated units or other partnership
securities that they hold. Subject to the terms and conditions
of our partnership agreement, these registration rights allow
our general partner and its affiliates or their assignees
holding any units or other partnership securities to require
registration of any of these units or other partnership
securities and to include them in a registration by us of other
units, including units offered by us or by any unitholder. Our
general partner will continue to have these registration rights
for two years following its withdrawal or removal as our general
partner. In connection with any registration of this kind, we
will indemnify each unitholder participating in the registration
and its officers, directors and controlling persons from and
against any liabilities under the Securities Act or any state
securities laws arising from the registration statement or
prospectus. We will bear all costs and expenses incidental to
any registration, excluding any underwriting discounts and a
structuring fee. Except as described below, our general partner
and its affiliates may sell their units or other partnership
interests in private transactions at any time, subject to
compliance with applicable laws.
Targa, our partnership, our operating partnership, our general
partner and the directors and executive officers of our general
partner, have agreed not to sell any common units they
beneficially own for a period of 180 days from the date of
this prospectus. For a description of these
lock-up
provisions, please see Underwriting.
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MATERIAL
TAX CONSEQUENCES
This section is a discussion of the material tax considerations
that may be relevant to prospective unitholders who are
individual citizens or residents of the United States and,
unless otherwise noted in the following discussion, is the
opinion of Vinson & Elkins L.L.P., counsel to our
general partner and us, as to all material tax matters and all
legal conclusions insofar as it relates to matters of United
States federal income tax law and legal conclusions with respect
to those matters. This section is based upon current provisions
of the Internal Revenue Code, existing and proposed regulations
and current administrative rulings and court decisions, all of
which are subject to change. Later changes in these authorities
may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise
requires, references in this section to us or
we are references to Targa Resources Partners LP and
our operating partnership.
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 urge each prospective unitholder to
consult, and depend on, his own tax advisor in analyzing the
federal, state, local and foreign tax consequences particular to
him of the ownership or disposition of common units.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Vinson & Elkins
L.L.P. and are based on the accuracy of the representations made
by us.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. Instead, we
will rely on opinions of Vinson & Elkins L.L.P. Unlike
a ruling, an opinion of counsel represents only that
counsels best legal judgment and does not bind the IRS or
the courts. Accordingly, the opinions and statements made herein
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, principally legal, accounting and related fees, will
result in a reduction in cash available for distribution to our
unitholders and our general partner and thus will be borne
indirectly by our unitholders and our general partner.
Furthermore, the tax treatment of us, or of an investment in us,
may be significantly modified by future legislative or
administrative changes or court decisions. Any modifications may
or may not be retroactively applied.
For the reasons described below, Vinson & Elkins L.L.P.
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 see
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 see
Disposition of Common Units
Allocations Between Transferors and Transferees); and
(3) whether our method for depreciating Section 743
adjustments is sustainable in certain cases (please see
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
partners 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 year consists of qualifying
income. Qualifying income includes income and gains
derived from the
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transportation, storage, processing and marketing of crude oil,
natural gas and products thereof. Other types of qualifying
income include interest (other than from a financial business),
dividends, gains from the sale of real property and gains from
the sale or other disposition of capital assets held for the
production of income that otherwise constitutes qualifying
income. We estimate that less than 1% 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,
Vinson & Elkins L.L.P. 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 our
operating partnership 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 Vinson & Elkins L.L.P. on such
matters. It is the opinion of Vinson & Elkins L.L.P.
that, based upon the Internal Revenue Code, its regulations,
published revenue rulings and court decisions and the
representations described below, we will be classified as a
partnership and our operating partnership will be disregarded as
an entity separate from us for federal income tax purposes.
In rendering its opinion, Vinson & Elkins L.L.P. has
relied on factual representations made by us and our general
partner. The representations made by us and our general partner
upon which Vinson & Elkins L.L.P. has relied are:
(a) Neither we nor the operating partnership has elected or
will elect to be treated as a corporation; and
(b) For each taxable year, more than 90% of our gross
income will be income that Vinson & Elkins L.L.P. 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 that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery, we will be
treated as if we had transferred all of our assets, subject to
liabilities, to a newly formed corporation, on the first day 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
unitholders tax basis in his common units, or taxable
capital gain, after the unitholders tax basis in his
common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a
unitholders 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 Vinson & Elkins
L.L.P.s opinion that we will be classified as a
partnership for federal income tax purposes.
Limited
Partner Status
Unitholders who have become limited partners of Targa Resources
Partners LP will be treated as partners of Targa Resources
Partners LP for federal income tax purposes. Also, unitholders
whose common units are held in street name or by a nominee and
who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common
units will be treated as partners of Targa Resources Partners LP
for federal income tax purposes.
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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 see
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 appear to be fully taxable as ordinary income.
These holders are urged to consult their own tax advisors with
respect to their tax consequences of holding common units in
Targa Resources Partners LP.
The references to unitholders in the discussion that
follows are to persons who are treated as partners in Targa
Resources Partners LP 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, except to the extent the amount of
any such cash distribution exceeds his tax basis in his common
units immediately before the distribution. Our cash
distributions in excess of a unitholders 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. Any reduction in a unitholders 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
unitholders 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 see
Limitations on Deductibility of Losses.
A decrease in a unitholders 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 unitholders 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 unitholders realization of
ordinary income, which will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the
unitholders tax basis for the share of Section 751
Assets deemed relinquished in the exchange.
Ratio of Taxable Income to
Distributions. We estimate that a purchaser
of common units in this offering who owns those common units
from the date of closing of this offering through the record
date for distributions for the period ending December 31,
2009, will be allocated, on a cumulative basis, an amount of
federal taxable income for that period that will be 20% or less
of the cash distributed with respect to that period. Thereafter,
we anticipate that the ratio of allocable taxable income to cash
distributions to the unitholders will increase. These estimates
are based upon the assumption that gross income from operations
will approximate the amount required to make the minimum
quarterly distribution on all units and other assumptions with
respect to capital expenditures, cash flow, net working capital,
and anticipated cash distributions. These estimates and
assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political
uncertainties beyond our control. Further, the estimates are
based on current tax law and tax reporting positions that we
will adopt and with which the IRS could disagree. Accordingly,
we cannot assure you that these estimates will prove to be
correct. The actual
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percentage of distributions that will constitute taxable income
could be higher or lower than our estimate and any differences
could be material and could materially affect the value of the
common units. For example, the ratio of allocable taxable income
to cash distributions to a purchaser of common units in this
offering will be greater, and perhaps substantially greater,
than our estimate with respect to the period described above if:
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gross income from operations exceeds the amount required to make
the minimum quarterly distribution on all units, yet we only
distribute the minimum quarterly distribution on all
units; or
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we make a future offering of common units and use the proceeds
of the offering in a manner that does not produce substantial
additional deductions during the period described above, such as
to repay indebtedness outstanding at the time of this offering
or to acquire property that is not eligible for depreciation or
amortization for federal income tax purposes or that is
depreciable or amortizable at a rate significantly slower than
the rate applicable to our assets at the time of this offering.
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Basis of Common Units. A
unitholders 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 unitholders
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 that is recourse to our general partner, but will have
a share, generally based on his share of profits, of our
nonrecourse liabilities. Please see
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 unitholders stock is owned directly or
indirectly by or for 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 unitholders at risk amount will increase
or decrease as the tax basis of the unitholders 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 trade or business activities in which the
taxpayer does not materially participate, only to the extent of
the taxpayers 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 only be available to offset our passive
income generated in the future and will not be available to
offset income from other passive activities or investments,
including our investments or investments in other publicly
traded partnerships, or salary or active business income.
Passive losses that are not deductible because they exceed a
unitholders 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 loss
limitations are applied after other applicable limitations on
deductions, including the at risk rules and the basis limitation.
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A unitholders share of our net income may be offset by any
of our suspended passive losses, but it may not be offset by any
other current or carryover losses from other passive activities,
including those attributable to other publicly traded
partnerships.
Limitations on Interest Deductions. The
deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders 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 investment income to its
unitholders. In addition, the unitholders 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, local or foreign income tax on behalf of any unitholder
or our general partner or any former unitholder, we are
authorized to pay those taxes from our funds. That payment, if
made, will be treated as a distribution of cash to the partner
on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are
authorized to treat the payment as a distribution to all current
unitholders. We are authorized to amend our 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 our partnership
agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax
on behalf of an individual partner in which event the partner
would be required to file a claim in order to obtain a credit or
refund.
Allocation of Income, Gain, Loss and
Deduction. In general, if we have a net
profit, our items of income, gain, loss and deduction will be
allocated among our general partner and the unitholders in
accordance with their percentage interests in us. At any time
that distributions are made to the common units in excess of
distributions to the subordinated units, or incentive
distributions are made to our general partner, gross income will
be allocated to the recipients to the extent of these
distributions. If we have a net loss for the entire year, that
loss will be allocated first to 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 this offering. In the event we issue additional common units
or engage in certain other transactions in the future
reverse Section 704(c) allocations, similar to
the Section 704(c) allocations described above, will be
made to all holders of partnership interests, including
purchasers of common units in this offering, to account for the
difference between the book basis for purposes of
maintaining capital accounts and the fair market value of all
property held by us at the time of the future transaction. 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
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negative capital accounts nevertheless result, items of our
income and gain will be allocated in an amount and manner as is
needed 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 partners
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 partners share of an
item of income, gain, loss or deduction only if the allocation
has substantial economic effect. In any other case, a
partners 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:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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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 partners 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 treated for tax
purposes as a partner with respect to those units during the
period of the loan and may recognize gain or loss from the
disposition. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Vinson & Elkins L.L.P. 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 are urged to modify any applicable brokerage
account agreements to prohibit their brokers from borrowing
their units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of
partnership interests. Please also read
Disposition of Common Units
Recognition of Gain or Loss.
Alternative Minimum Tax. Each
unitholder will be required to take into account his
distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The
current minimum tax rate for noncorporate taxpayers is 26% on
the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective unitholders are
urged to 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
is currently 35.0% and the maximum United States federal income
tax rate for net capital gains of an individual is currently
15.0% if the asset disposed of was held for more than twelve
months at the time of disposition.
Section 754 Election. We will make
the election permitted by Section 754 of the Internal
Revenue Code. That election is irrevocable without the consent
of the IRS. The election will generally permit us to adjust a
common unit purchasers 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
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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
unitholders 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.
Where the remedial allocation method is adopted (which we will
adopt as to property other than certain goodwill properties),
the Treasury Regulations under Section 743 of the Internal
Revenue Code require a portion of the Section 743(b)
adjustment that is attributable to recovery property under
Section 168 of the Internal Revenue Code to be depreciated
over the remaining cost recovery period for the
Section 704(c) built-in gain. If we elect a method other
than the remedial method with respect to a goodwill property,
Treasury
Regulation Section 1.197-2(g)(3)
generally requires that the Section 743(b) adjustment
attributable to an amortizable Section 197 intangible,
which includes goodwill property, should be treated as a
newly-acquired asset placed in service in the month when the
purchaser acquires the common unit. Under Treasury
Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the 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. If we elect a method other than the remedial method, the
depreciation and amortization methods and useful lives
associated with the Section 743(b) adjustment, therefore,
may differ from the methods and useful lives generally used to
depreciate the inside basis in such properties. Under our
partnership agreement, the general partner is authorized to take
a position to preserve the uniformity of units even if that
position is not consistent with these and any other Treasury
Regulations. If we elect a method other than the remedial method
with respect to a goodwill property, the common basis of such
property is not amortizable. Please see
Uniformity of Units.
Although Vinson & Elkins L.L.P. is unable to opine as
to the validity of this approach because there is no direct or
indirect controlling 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 methods
employed by other publicly traded partnerships but is arguably
inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets, and Treasury
Regulation Section 1.197-2(g)(3).
To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please see
Uniformity of Units. A unitholders
tax basis for his common units is reduced by his share of our
deductions (whether or not such deductions were claimed on an
individuals income tax return) so that any position we
take that understates deductions will overstate the common
unitholders basis in his common units, which may cause the
unitholder to understate gain or overstate loss on any sale of
such units. Please see Disposition of Common
Units Recognition of Gain or Loss. The IRS may
challenge our position with respect to depreciating or
amortizing the Section 743(b) adjustment we take to
preserve the uniformity of the units. If such a challenge were
sustained, the gain from the sale of units might be increased
without the benefit of additional deductions.
A Section 754 election is advantageous if the
transferees 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 transferees 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
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may be affected either favorably or unfavorably by the election.
A basis adjustment is required regardless of whether a
Section 754 election is made in the case of a transfer of
an interest in us if we have a substantial built-in loss
immediately after the transfer, or if we distribute property and
have a substantial basis reduction. Generally a built-in loss or
a basis reduction is substantial if it exceeds $250,000.
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 nonamortizable or 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 see Disposition of
Common Units Allocations Between Transferors and
Transferees.
Initial Tax Basis, Depreciation and
Amortization. The tax basis of our assets
will be used for purposes of computing depreciation and cost
recovery deductions and, ultimately, gain or loss on the
disposition of these assets. The federal income tax burden
associated with the difference between the fair market value of
our assets and their tax basis immediately prior to this
offering will be borne by our general partner. Please see
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. Because our general partner may determine not
to adopt the remedial method of allocation with respect to any
difference between the tax basis and the fair market value of
goodwill immediately prior to this or any future offering, we
may not be entitled to any amortization deductions with respect
to any goodwill conveyed to us on formation or held by us at the
time of any future offering. Please see
Uniformity of Units. 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
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely be
required to recapture some or all of those deductions as
ordinary income upon a sale of his interest in us. Please see
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction and
Disposition of Common Units
Recognition of Gain or Loss.
The costs we incur 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
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not be amortized by us. The underwriting discounts and
commissions we incur will be treated as syndication expenses.
Valuation and Tax Basis of Our
Properties. The federal income tax
consequences of the ownership and disposition of units will
depend in part on our estimates of the relative fair market
values, and the initial tax bases, of our assets. Although we
may from time to time consult with professional appraisers
regarding valuation matters, we will make many of the relative
fair market value estimates ourselves. These estimates 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 unitholders
tax basis for the units sold. A unitholders 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 unitholders 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 unitholders tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholders 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 twelve months
will generally be taxed at a maximum rate of 15%. However, a
portion of this gain or loss 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 losses may offset capital
gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gains in the
case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a 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, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partners tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partners entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling, a common
unitholder will be unable to select high or low basis common
units to sell as would be the case with corporate stock, but,
according to the regulations, may designate specific common
units sold for purposes of determining the holding period of
units transferred. A unitholder electing to use the actual
holding period of common units transferred must consistently use
that identification method for all subsequent sales or exchanges
of common units. A unitholder considering the purchase of
additional units or a sale of common units purchased in separate
transactions is urged to consult his tax advisor as to the
possible consequences of this ruling and application of the
regulations.
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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:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract with respect to the partnership
interest or substantially identical property.
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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
the Treasury is also authorized to issue regulations that treat
a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and
Transferees. In general, our taxable income
and losses will be determined annually, will be prorated on a
monthly basis and will be subsequently apportioned among the
unitholders in proportion to the number of units owned by each
of them as of the opening of the applicable exchange on the
first business day of the month, which we refer to in this
prospectus as the Allocation Date. However, gain or
loss realized on a sale or other disposition of our assets other
than in the ordinary course of business will be allocated among
the unitholders on the Allocation Date in the month in which
that gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and
deduction realized after the date of transfer.
The use of this method may not be permitted under existing
Treasury Regulations. Accordingly, Vinson & Elkins
L.L.P. is unable to opine on the validity of this method of
allocating income and deductions between unitholders. If this
method is not allowed under the Treasury Regulations, or only
applies to transfers of less than all of the unitholders
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 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 any of his units is generally required to notify us in
writing of that sale within 30 days after the sale (or, if
earlier, January 15 of the year following the sale). A purchaser
of units who purchases units from another unitholder is also
generally required to notify us in writing of that purchase
within 30 days after the purchase. Upon receiving such
notifications, we are required to notify the IRS of that
transaction and to furnish specified information to the
transferor and transferee. Failure to notify us of a purchase
may, in some cases, lead to the imposition of substantial
penalties. 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 who will
satisfy such requirements.
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
twelve-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 twelve months of our taxable income or loss being
includable in his taxable income for the year of termination. We
would be required to make new tax elections after a termination,
including a new election under Section 754 of the Internal
Revenue Code, and a termination would result in a deferral of
our deductions for depreciation. A termination could also result
in penalties if we were unable to determine that the termination
had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation
enacted before the termination.
162
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)
and Treasury Regulation
Section 1.197-2(g)(3).
Any non-uniformity could have a negative impact on the value of
the units. Please see 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 of the
Internal Revenue Code, even though that position may be
inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets, and Treasury Regulation
Section 1.197-2(g)(3).
Please see 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 see
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 and
other foreign persons 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.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence, they will be required to file federal tax returns
to report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. Moreover, under rules applicable to publicly
traded partnerships, we will withhold at the highest applicable
effective tax rate from cash distributions made quarterly to
foreign unitholders. Each foreign unitholder must obtain a
taxpayer identification number from the IRS and submit that
number to our transfer agent on a
Form W-8BEN
or applicable substitute form in order to obtain credit for
these withholding taxes. A change in applicable law may require
us to change these procedures.
163
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 corporations 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. Because a
foreign unitholder is considered to be engaged in business in
the United States by virtue of the ownership of units, under
this ruling a foreign unitholder who sells or otherwise disposes
of a unit generally will be subject to federal income tax on
gain realized on the sale or disposition of units. 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 each unitholders
share of income, gain, loss and deduction. We cannot assure you
that those positions will in all cases yield a result that
conforms to the requirements of the Internal Revenue Code,
Treasury Regulations or administrative interpretations of the
IRS. Neither we nor Vinson & Elkins L.L.P. 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 years tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholders 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. Our 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.
164
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.
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.
For individuals, a substantial understatement of income tax in
any taxable year exists if the amount of the understatement
exceeds the greater of 10% of the tax required to be shown on
the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to
penalty generally is reduced if any portion is attributable to a
position adopted on the return:
(1) for which there is, or was, substantial
authority; or
(2) as to which there is a reasonable basis and the
pertinent facts of that position are disclosed on the return.
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 and to
take other actions as may be appropriate to permit unitholders
to avoid liability for this penalty. More stringent rules apply
to tax shelters, which we do not believe includes us.
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%.
Reportable Transactions. If we were to
engage in a reportable transaction, we (and possibly
you and others) would be required to make a detailed disclosure
of the transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a listed transaction or
that it produces certain
165
kinds of losses for partnerships, individuals,
S corporations, and trusts in excess of $2 million in
any single year, or $4 million in any combination of tax
years. Our participation in a reportable transaction could
increase the likelihood that our federal income tax information
return (and possibly your tax return) would be audited by the
IRS. Please see Information Returns and Audit
Procedures.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions of the American Jobs Creation Act of 2004:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related
Penalties,
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
State,
Local, Foreign and Other Tax Considerations
In addition to federal income taxes, you may be subject to other
taxes, such as state, local and foreign income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in
which you are a resident. Although an analysis of those various
taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We will
initially own property or do business in Texas. Currently, Texas
does not impose a personal income tax on individuals. However,
current law may change. Moreover, we may also own property or do
business in other jurisdictions in the future. Although you may
not be required to file a return and pay taxes in some
jurisdictions because your income from that jurisdiction falls
below the filing and payment requirement, you might be required
to file income tax returns and to pay income taxes in other
jurisdictions in which we do business or own property, now or in
the future, and may be subject to penalties for failure to
comply with those requirements. In some jurisdictions, tax
losses may not produce a tax benefit in the year incurred and
may not be available to offset income in subsequent taxable
years. Some jurisdictions may require us, or we may elect, to
withhold a percentage of income from amounts to be distributed
to a unitholder who is not a resident of the jurisdiction.
Withholding, the amount of which may be greater or less than a
particular unitholders income tax liability to the
jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will be treated as if distributed to
unitholders for purposes of determining the amounts distributed
by us. Please see Tax Consequences of Unit
Ownership Entity-Level Collections. Based
on current law and our estimate of our future operations, the
general partner anticipates that any amounts required to be
withheld will not be material.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local and foreign, as well as United States federal tax
returns, that may be required of him. Vinson & Elkins
L.L.P. has not rendered an opinion on the state, local or
foreign tax consequences of an investment in us.
166
INVESTMENT
IN TARGA RESOURCES PARTNERS LP BY EMPLOYEE BENEFIT
PLANS
An investment in us by an employee benefit plan is subject to
additional considerations because the investments of these plans
are subject to the fiduciary responsibility and prohibited
transaction provisions of ERISA and restrictions imposed by
Section 4975 of the Internal Revenue Code. For these
purposes the term employee benefit plan includes,
but is not limited to, qualified pension, profit-sharing and
stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other
things, consideration should be given to:
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whether the investment is prudent under
Section 404(a)(1)(B) of ERISA;
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whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of
ERISA; and
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whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return. Please see Material Tax
Consequences Tax-Exempt Organizations and Other
Investors.
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The person with investment discretion with respect to the assets
of an employee benefit plan, often called a fiduciary, should
determine whether an investment in us is authorized by the
appropriate governing instrument and is a proper investment for
the plan.
Section 406 of ERISA and Section 4975 of the Internal
Revenue Code prohibit employee benefit plans, and also IRAs that
are not considered part of an employee benefit plan, from
engaging in specified transactions involving plan
assets with parties that are parties in
interest under ERISA or disqualified persons
under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units
is a prohibited transaction, a fiduciary of an employee benefit
plan should consider whether the plan will, by investing in us,
be deemed to own an undivided interest in our assets, with the
result that our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction
rules, as well as the prohibited transaction rules of the
Internal Revenue Code.
The Department of Labor regulations provide guidance with
respect to whether the assets of an entity in which employee
benefit plans acquire equity interests would be deemed
plan assets under some circumstances. Under these
regulations, an entitys assets would not be considered to
be plan assets if, among other things:
(a) the equity interests acquired by employee benefit plans
are publicly offered securities i.e., the equity
interests are widely held by 100 or more investors independent
of the issuer and each other, freely transferable and registered
under some provisions of the federal securities laws;
(b) the entity is an operating
company, i.e., it is primarily engaged in the
production or sale of a product or service other than the
investment of capital either directly or through a
majority-owned subsidiary or subsidiaries; or
(c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the
value of each class of equity interest is held by the employee
benefit plans referred to above, IRAs and other employee benefit
plans not subject to ERISA, including governmental plans.
Our assets should not be considered plan assets
under these regulations because it is expected that the
investment will satisfy the requirements in (a) above.
Plan fiduciaries contemplating a purchase of common units should
consult with their own counsel regarding the consequences under
ERISA and the Internal Revenue Code in light of the serious
penalties imposed on persons who engage in prohibited
transactions or other violations.
167
UNDERWRITING
Citigroup Global Markets Inc., Goldman, Sachs & Co.,
UBS Securities LLC and Merrill Lynch, Pierce, Fenner &
Smith Incorporated are acting as joint bookrunning managers of
the offering and representatives of the underwriters named
below. Subject to the terms and conditions stated in the
underwriting agreement dated the date of this prospectus, each
underwriter named below has severally agreed to purchase, and we
have agreed to sell to that underwriter, the number of units set
forth opposite the underwriters name.
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Number of
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Underwriter
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Common Units
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Citigroup Global Markets Inc.
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3,360,000
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Goldman, Sachs & Co.
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3,360,000
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UBS Securities LLC
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3,360,000
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Merrill Lynch, Pierce,
Fenner & Smith
Incorporated
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1,680,000
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A.G. Edwards & Sons, Inc.
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1,008,000
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Credit Suisse Securities (USA) LLC
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1,008,000
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Lehman Brothers Inc.
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1,008,000
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Wachovia Capital Markets, LLC
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1,008,000
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Raymond James & Associates,
Inc.
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336,000
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RBC Capital Markets Corporation
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336,000
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Sanders Morris Harris Inc.
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336,000
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Total
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16,800,000
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The underwriting agreement provides that the obligations of the
underwriters to purchase the units included in this offering are
subject to approval of legal matters by counsel and to other
conditions. The underwriters are obligated to purchase all the
units (other than those covered by their option to purchase
additional units described below) if they purchase any of the
units.
The underwriters propose to offer some of the units directly to
the public at the public offering price set forth on the cover
page of the prospectus and some of the units to dealers at the
public offering price less a concession not to exceed
$0.7245 per unit. If all of the units are not sold at the
initial offering price, the representatives may change the
public offering price and the other selling terms. The
representatives have advised us that the underwriters do not
intend sales to discretionary accounts to exceed five percent of
the total number of our units offered by them.
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to
2,520,000 additional common units at the public offering price
less the underwriting discount. The underwriters may exercise
the option solely for the purpose of covering over-allotments,
if any, in connection with this offering. To the extent the
option is exercised, each underwriter must purchase a number of
additional units approximately proportionate to that
underwriters initial purchase commitment.
We, our general partner, all of the officers and directors of
our general partner and our principal beneficial unitholders
have agreed that, for a period of 180 days from the date of
this prospectus, we and they will not, without the prior written
consent of Citigroup Global Markets Inc., dispose of or hedge
any of our common units or any securities convertible into or
exchangeable for our common units. Notwithstanding the
foregoing, if (1) during the last 17 days of the
180-day
period, we issue an earnings release or material news or a
material event relating to us occurs; or (2) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period, the restrictions described above shall continue to apply
until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
168
Citigroup Global Markets Inc. in its sole discretion may release
any of the securities subject to these
lock-up
agreements at any time without notice. Citigroup Global Markets
Inc. has no present intent or arrangement to release any of the
securities subject to these lock-up agreements. The release of
any lock-up is considered on a case by case basis. Factors in
deciding whether to release common units may include the length
of time before the lock-up expires, the number of units
involved, the reason for the requested release, market
conditions, the trading price of our common units, historical
trading volumes of our common units and whether the person
seeking the release is an officer, director or affiliate
of us.
At our request, the underwriters have reserved up to 5% of the
common units for sale at the initial offering price to persons
who are directors, officers and employees of our general
partner, or who are otherwise associated with us through a
directed unit program. The number of common units available for
sale to the general public will be reduced by the number of
directed units purchased by participants in the program. Any
directed units not purchased will be offered by the underwriters
to the general public on the same basis as all other common
units offered. We have agreed to indemnify the underwriters
against certain liabilities and expenses, including liabilities
under the Securities Act, in connection with the sales of the
directed units. Participants in the directed unit program who
purchase more than $100,000 worth of directed units will be
subject to a 180 day lock-up agreement following this
offering.
Prior to this offering, there has been no public market for our
common units. Consequently, the initial public offering price
for the units was determined by negotiations between our general
partner and the representatives. Among the factors considered in
determining the initial public offering price were our record of
operations, our current financial condition, our future
prospects, our markets, the economic conditions in and future
prospects for the industry in which we compete, our management,
and currently prevailing general conditions in the equity
securities markets, including current market valuations of
publicly traded partnerships considered comparable to our
partnership. We cannot assure you, however, that the prices at
which the units will sell in the public market after this
offering will not be lower than the initial public offering
price or that an active trading market in our common units will
develop and continue after this offering.
Our common units have been approved for listing on The NASDAQ
Global Market under the symbol NGLS.
The following table shows the underwriting discounts and
commissions that we are to pay to the underwriters in connection
with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters option to
purchase additional common units.
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No Exercise
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Full Exercise
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Per unit
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$
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1.2075
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$
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1.2075
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Total
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$
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20,286,000
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$
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23,328,900
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We will pay a structuring fee equal to an aggregate of 0.40% of
the gross proceeds from this offering, or approximately
$1.4 million, to Citigroup Global Markets Inc., Goldman,
Sachs & Co., UBS Securities LLC and Merrill Lynch &
Co. for evaluation, analysis and structuring of our partnership.
We estimate that our portion of the total expenses of this
offering, excluding underwriting discounts and commissions and
structuring fees, will be approximately $4.0 million.
In connection with the offering, the representatives on behalf
of the underwriters, may purchase and sell common units in the
open market. These transactions may include short sales,
syndicate covering transactions and stabilizing transactions.
Short sales involve syndicate sales of common units in excess of
the number of units to be purchased by the underwriters in the
offering, which creates a syndicate short position.
Covered short sales are sales of units made in an
amount up to the number of units represented by the
underwriters option to purchase additional common units.
In determining the source of units to close out the covered
syndicate short position, the underwriters will consider, among
other things, the price of units available for purchase in the
open market as compared to the price at which they may purchase
units through their option to purchase additional common units.
Transactions to close out the covered syndicate short position
involve either purchases of the common units in the open market
after the distribution has
169
been completed or the exercise of their option to purchase
additional common units. The underwriters may also make
naked short sales of units in excess of their option
to purchase additional common units. The underwriters must close
out any naked short position by purchasing common units in the
open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of the units in the open market after
pricing that could adversely affect investors who purchase in
the offering. Stabilizing transactions consist of bids for or
purchases of units in the open market while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from a
syndicate member when an underwriter repurchases units
originally sold by that syndicate member in order to cover
syndicate short positions or make stabilizing purchases.
Any of these activities, as well as purchases by the
underwriters for their own accounts, may have the effect of
preventing or retarding a decline in the market price of the
units. They may also cause the price of the units to be higher
than the price that would otherwise exist in the open market in
the absence of these transactions. The underwriters may conduct
these transactions on The NASDAQ Global Market or otherwise. If
the underwriters commence any of these transactions, they may
discontinue them at any time.
The underwriters have performed from time to time and are
performing investment banking and advisory services for Targa
for which they have received and will receive customary fees and
expenses. In addition, affiliates of Merrill Lynch, Pierce,
Fenner & Smith Incorporated own an approximate 6.6% fully
diluted, indirect ownership interest in Targa. Affiliates of
Citigroup Global Markets Inc., Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Lehman Brothers Inc., Wachovia Capital Markets, LLC and Credit
Suisse Securities (USA) LLC are lenders under Targas
credit facility, a portion of which will be repaid using the net
proceeds from this offering that are paid to Targa. In addition,
affiliates of some of the underwriters are lenders under our new
credit facility.
We have entered into swap transactions with affiliates of
Goldman, Sachs, & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Wachovia Capital Markets,
LLC and Credit Suisse Securities (USA) LLC. For a description of
these transactions, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Quantitative and Qualitative Disclosure
about Market Risk Commodity Price Risk. We
have agreed to pay these counterparties a fee in an amount we
believe to be customary in connection with these transactions.
In addition, the underwriters or their affiliates may, from time
to time, engage in other transactions with and perform other
services for Targa or us in the ordinary course of their
business.
A prospectus in electronic format may be made available by one
or more of the underwriters. The representatives may agree to
allocate a number of units to underwriters for sale to their
online brokerage account holders. The representatives will
allocate units to underwriters that may make Internet
distributions on the same basis as other allocations. In
addition, units may be sold by the underwriters to securities
dealers who resell units to online brokerage account holders.
Other than the prospectus in electronic format, the information
on any underwriters web site and any information contained
in any other web site maintained by an underwriter is not part
of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed
by us or any underwriter in its capacity as an underwriter and
should not be relied upon by investors.
We, our general partner and Targa have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, and to contribute to payments the
underwriters may be required to make because of any of those
liabilities.
Because the National Association of Securities Dealers views the
units offered by this prospectus as interests in a direct
participation program, the offering is being made in compliance
with Rule 2810 of the NASDs Conduct Rules. Investor
suitability with respect to the units should be judged similarly
to the suitability with respect to other securities that are
listed for trading on a national securities exchange.
170
VALIDITY
OF THE COMMON UNITS
The validity of the common units will be passed upon for us by
Vinson & Elkins L.L.P., Houston, Texas. Certain legal
matters in connection with the common units offered hereby will
be passed upon for the underwriters by Baker Botts L.L.P.,
Houston, Texas.
EXPERTS
The financial statements of Targa North Texas LP as of
December 31, 2005 and for the two months then ended,
included in this prospectus have been so included in reliance on
the report (which contains an explanatory paragraph relating to
significant transactions with related parties described in
Note 9 to the financial statements) of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
The financial statements of the North Texas System as of
December 31, 2004 and for the ten months ended
October 31, 2005, and the years ended December 31,
2004 and 2003 included in this prospectus have been so included
in reliance on the report (which contains an explanatory
paragraph relating to significant transactions with related
parties described in Note 9 to the financial statements) of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
The financial statements of Targa Resources Partners, LP as of
October 23, 2006 and Targa Resources GP, LLC as of
October 23, 2006 included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or
the SEC, a registration statement on
Form S-1
regarding the common units. This prospectus does not contain all
of the information found in the registration statement. For
further information regarding us and the common units offered by
this prospectus, you may desire to review the full registration
statement, including its exhibits and schedules, filed under the
Securities Act. The registration statement of which this
prospectus forms a part, including its exhibits and schedules,
may be inspected and copied at the public reference room
maintained by the SEC at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of the materials may also be
obtained from the SEC at prescribed rates by writing to the
public reference room maintained by the SEC at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. You may
obtain information on the operation of the public reference room
by calling the SEC at
1-800-SEC-0330.
The SEC maintains a web site on the Internet at
http://www.sec.gov. Our registration statement, of which this
prospectus constitutes a part, can be downloaded from the
SECs web site.
We intend to furnish our unitholders annual reports containing
our audited financial statements and furnish or make available
quarterly reports containing our unaudited interim financial
information for the first three fiscal quarters of each of our
fiscal years.
FORWARD-LOOKING
STATEMENTS
Some of the information in this prospectus may contain
forward-looking statements. These statements can be identified
by the use of forward-looking terminology including
may, believe, expect,
anticipate, estimate,
continue, or other similar words. These statements
discuss future expectations, contain projections of results of
operations or of financial condition, or state other
forward-looking information. These forward-looking
statements involve risks and uncertainties. When considering
these forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in this prospectus.
The risk factors and other factors noted throughout this
prospectus could cause our actual results to differ materially
from those contained in any forward-looking statement.
171
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
TARGA RESOURCES PARTNERS LP
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
|
|
TARGA NORTH TEXAS LP AUDITED
COMBINED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-9
|
|
|
|
|
F-11
|
|
|
|
|
F-12
|
|
|
|
|
F-13
|
|
|
|
|
F-14
|
|
|
|
|
F-15
|
|
|
|
|
|
|
TARGA NORTH TEXAS LP UNAUDITED
COMBINED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-29
|
|
|
|
|
F-30
|
|
|
|
|
F-31
|
|
|
|
|
F-32
|
|
|
|
|
F-33
|
|
|
|
|
|
|
TARGA RESOURCES PARTNERS LP
AUDITED BALANCE SHEET
|
|
|
|
|
|
|
|
F-40
|
|
|
|
|
F-41
|
|
|
|
|
F-42
|
|
|
|
|
|
|
TARGA RESOURCES GP LLC AUDITED
BALANCE SHEET
|
|
|
|
|
|
|
|
F-43
|
|
|
|
|
F-44
|
|
|
|
|
F-45
|
|
F-1
TARGA
RESOURCES PARTNERS LP
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
Introduction
The unaudited pro forma condensed financial information has been
prepared by applying pro forma adjustments to give effect to the
Formation Transactions described elsewhere in this prospectus to
the historical audited and unaudited financial statements of
Targa North Texas LP, which owns the North Texas System. We
refer to the results of operation of the North Texas System as
results of operation of the Predecessor Business. Targa
Resources Partners LP (the Partnership) will own and
operate the Predecessor Business effective with the closing of
this initial public offering. The unaudited pro forma combined
financial statements for the Partnership have been derived from
the historical combined financial statements of the Predecessor
Business and are qualified in their entirety by reference to
such historical combined financial statements and the related
notes contained therein. The Unaudited Pro Forma Combined Income
Statement for the year ended December 31, 2005 combines the
results of operations reflected in the audited financial
statements of the Predecessor Business for the ten months ended
October 31, 2005 with the results of operations for the two
months ended December 31, 2005. The unaudited pro forma
combined financial statements should be read in conjunction with
the notes accompanying these pro forma combined financial
statements and with the historical combined financial statements
and related notes of Predecessor Business set forth elsewhere in
this prospectus.
The unaudited pro forma condensed combined balance sheet and the
unaudited pro forma condensed combined income statement and
comprehensive income were derived by adjusting the historical
combined financial statements of the Predecessor Business. The
adjustments were based upon currently available information and
certain estimates and assumptions; therefore, actual adjustments
will differ from the pro forma adjustments. However, management
believes that the assumptions provide a reasonable basis for
presenting the significant effects of the transactions as
contemplated and that the pro forma adjustments give appropriate
effect to those assumptions and are properly applied in the
unaudited pro forma combined financial statements.
The unaudited pro forma condensed combined financial statements
are not necessarily indicative of the results that actually
would have occurred if the Partnership had assumed the
operations of the Predecessor Business on the dates indicated or
which would be obtained in the future.
F-2
TARGA
RESOURCES PARTNERS LP
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Formation
|
|
|
|
|
|
|
Business
|
|
|
Transaction
|
|
|
Partnership
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(in millions of dollars)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
352.8
|
(a)
|
|
$
|
|
|
|
|
|
|
|
|
|
(21.7
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
342.5
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
(4.2
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
(665.4
|
)(f)
|
|
|
|
|
Trade receivables
|
|
|
1.2
|
|
|
|
|
|
|
|
1.2
|
|
Inventory
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
Assets from risk management
activities
|
|
|
15.1
|
|
|
|
(0.7
|
)(g)
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
16.9
|
|
|
$
|
(0.7
|
)
|
|
$
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,073.0
|
|
|
|
|
|
|
$
|
1,073.0
|
|
Intangible assets, net and deferred
charges
|
|
|
18.9
|
|
|
|
4.2
|
(e)
|
|
|
4.2
|
|
|
|
|
|
|
|
|
(18.9
|
)(g)
|
|
|
|
|
Long-term assets from risk
management activities
|
|
|
17.5
|
|
|
|
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,126.3
|
|
|
$
|
(15.4
|
)
|
|
$
|
1,110.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS
CAPITAL
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2.1
|
|
|
$
|
|
|
|
$
|
2.1
|
|
Accrued liabilities
|
|
|
27.9
|
|
|
|
|
|
|
|
27.9
|
|
Current maturities of long term debt
|
|
|
4.9
|
|
|
|
(4.9
|
)(g)
|
|
|
|
|
Liabilities from risk management
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
$
|
34.9
|
|
|
$
|
(4.9
|
)
|
|
$
|
30.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
860.3
|
|
|
$
|
(665.4
|
)(f)
|
|
$
|
342.5
|
|
|
|
|
|
|
|
|
(194.9
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
342.5
|
(d)
|
|
|
|
|
Deferred income tax
|
|
|
2.3
|
|
|
|
|
|
|
|
2.3
|
|
Other long-term liabilities
|
|
|
1.6
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long term
liabilities
|
|
$
|
864.2
|
|
|
$
|
(517.8
|
)
|
|
$
|
346.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners capital excluding
accumulated other comprehensive income
|
|
|
194.8
|
|
|
|
(194.8
|
)(g)
|
|
|
|
|
Common unitholders
|
|
|
|
|
|
|
352.8
|
(a)
|
|
|
327.1
|
|
|
|
|
|
|
|
|
(21.7
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)(c)
|
|
|
|
|
Subordinated unitholders
|
|
|
|
|
|
|
357.8
|
(g)
|
|
|
357.8
|
|
General partner interest
|
|
|
|
|
|
|
17.9
|
(g)
|
|
|
17.9
|
|
Accumulated other comprehensive
income
|
|
|
32.4
|
|
|
|
(0.7
|
)(g)
|
|
|
31.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
partners capital
|
|
$
|
1,126.3
|
|
|
$
|
(15.4
|
)
|
|
$
|
1,110.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed
financial statements
F-3
TARGA
RESOURCES PARTNERS LP
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Business Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Months
|
|
|
Two Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
Formation
|
|
|
|
|
|
|
October 31,
|
|
|
December 31,
|
|
|
Basis
|
|
|
|
|
|
Transaction
|
|
|
Partnership
|
|
|
|
2005
|
|
|
2005
|
|
|
Adjustment
|
|
|
Combined
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(in millions of dollars, except units and per unit data)
|
|
|
Operating revenues:
|
|
$
|
293.3
|
|
|
$
|
75.1
|
|
|
$
|
|
|
|
$
|
368.4
|
|
|
$
|
|
|
|
$
|
368.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product purchases
|
|
|
210.8
|
|
|
|
54.9
|
|
|
|
|
|
|
|
265.7
|
|
|
|
|
|
|
|
265.7
|
|
Operating expenses
|
|
|
18.0
|
|
|
|
3.5
|
|
|
|
|
|
|
|
21.5
|
|
|
|
|
|
|
|
21.5
|
|
Depreciation and amortization
expense
|
|
|
11.3
|
|
|
|
9.2
|
|
|
|
34.3
|
(h)
|
|
|
54.8
|
|
|
|
|
|
|
|
54.8
|
|
General and administrative expense
|
|
|
7.3
|
|
|
|
1.1
|
|
|
|
|
|
|
|
8.4
|
|
|
|
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
247.4
|
|
|
|
68.7
|
|
|
|
34.3
|
|
|
|
350.4
|
|
|
|
|
|
|
|
350.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
45.9
|
|
|
|
6.4
|
|
|
|
(34.3
|
)
|
|
|
18.0
|
|
|
|
|
|
|
|
18.0
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense allocated from
parent
|
|
|
|
|
|
|
11.5
|
|
|
|
|
|
|
|
11.5
|
|
|
|
(11.5
|
)(i)
|
|
|
|
|
Other interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.8
|
(i)
|
|
|
24.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
45.9
|
|
|
$
|
(5.1
|
)
|
|
$
|
(34.3
|
)
|
|
$
|
6.5
|
|
|
$
|
(13.3
|
)
|
|
$
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partners interest in
net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in
net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per limited
partner unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of limited
partner units outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,328,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed
financial statements
F-4
TARGA
RESOURCES PARTNERS LP
UNAUDITED
PRO FORMA CONDENSED INCOME STATEMENT
Nine
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Formation
|
|
|
|
|
|
|
Business
|
|
|
Transaction
|
|
|
Partnership
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(in millions of dollars, except units and per unit data)
|
|
|
Operating revenues
|
|
$
|
290.9
|
|
|
|
|
|
|
$
|
290.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product purchases
|
|
|
205.2
|
|
|
|
|
|
|
|
205.2
|
|
Operating expense
|
|
|
17.9
|
|
|
|
|
|
|
|
17.9
|
|
Depreciation and amortization
expense
|
|
|
41.7
|
|
|
|
|
|
|
|
41.7
|
|
General and administrative expense
|
|
|
5.1
|
|
|
|
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
269.9
|
|
|
|
|
|
|
|
269.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
21.0
|
|
|
|
|
|
|
|
21.0
|
|
Other (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense allocated from
parent
|
|
|
54.4
|
|
|
|
(54.4
|
)(i)
|
|
|
|
|
Other interest expense
|
|
|
|
|
|
|
18.6
|
(i)
|
|
|
18.6
|
|
Deferred income tax expense
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(35.4
|
)
|
|
$
|
35.8
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partners interest in
net income
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in
net income
|
|
|
|
|
|
|
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of limited
partner units outstanding
|
|
|
|
|
|
|
|
|
|
|
28,328,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed
financial statements
F-5
TARGA
RESOURCES PARTNERS LP
NOTES TO
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
|
|
1.
|
Basis of
Presentation, the Offering and Formation Transactions
|
The historical financial information is derived from the
historical combined financial statements of the Predecessor
Business. The unaudited pro forma condensed financial
information has been prepared by applying pro forma adjustments
to the historical audited and unaudited financial statements of
Targa North Texas LP. The pro forma adjustments have been
prepared as if the transactions to be effected at the closing of
this offering had taken place on September 30, 2006, in the
case of the pro forma balance sheet, or as of January 1,
2005, in the case of the pro forma income statement for the year
ended December 31, 2005 and the nine months ended
September 30, 2006.
The pro forma financial statements reflect certain of the
Formation Transactions that are discussed elsewhere in this
prospectus as follows:
|
|
|
|
|
Targa will contribute the North Texas System to us;
|
|
|
|
we will issue to Targa 11,528,231 subordinated units,
representing a 39.9% limited partner interest in us;
|
|
|
|
we will issue to our general partner, Targa Resources GP LLC,
578,127 general partner units representing its initial 2%
general partner interest in us, and all of our incentive
distribution rights, which incentive distribution rights will
entitle our general partner to increasing percentages of the
cash we distribute in excess of $0.3881 per unit per
quarter;
|
|
|
|
we will issue 16,800,000 common units to the public in this
offering, representing a 58.1% limited partner interest in us,
and will use the proceeds to pay expenses associated with this
offering, the Formation Transactions, and our new credit
facility and to pay $322.9 million to Targa to retire a
portion of our affiliate indebtedness;
|
|
|
|
we will borrow approximately $342.5 million under our new
$500 million credit facility, the proceeds of which will be
paid to Targa to retire an additional portion of our affiliate
indebtedness; and
|
|
|
|
the remaining affiliate indebtedness will be retired and treated
as a capital contribution to us.
|
Our affiliate indebtedness consists of borrowings incurred by
Targa and allocated to us for financial reporting purposes as
well as intercompany indebtedness to be contributed to us
together with the North Texas System.
Upon completion of this offering, we anticipate incurring
incremental general and administrative expenses of approximately
$2.5 million per year. These estimated incremental expenses
relate to being a publicly traded limited partnership and
include compensation and benefit expenses of our executive
management personnel, costs associated with annual and quarterly
reports to unitholders, tax return and
Schedule K-1
preparation and distribution, investor relations activities,
registrar and transfer agent fees, incremental director and
officer liability insurance costs and director compensation. The
unaudited pro forma financial statements do not reflect this
anticipated incremental general and administrative expense.
|
|
2.
|
Pro Forma
Adjustments and Assumptions
|
(a) Reflects the gross proceeds to us of
$352.8 million from the issuance and sale of
16,800,000 common units.
(b) Reflects payment of estimated underwriting discounts
and structuring fees of $21.7 million, which will be
allocated to the common units.
(c) Reflects payment of $4.0 million in estimated
expenses associated with this offering and the other Formation
Transactions, which will be allocated to the common units.
(d) Reflects approximately $342.5 million of
borrowings by us under our new credit facility.
(e) Reflects estimated fees and expenses of
$4.2 million associated with our new credit facility.
F-6
TARGA
RESOURCES PARTNERS LP
NOTES TO
UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS (Continued)
(f) Reflects the payment to Targa of the net proceeds from
the offering and borrowings under our new credit facility to
retire affiliate indebtedness as follows (in millions):
|
|
|
|
|
Gross proceeds from sale of common
units
|
|
$
|
352.8
|
|
Borrowings under our new credit
facility
|
|
|
342.5
|
|
Discounts, fees and other offering
expenses
|
|
|
(25.7
|
)
|
Estimated fees and expenses of new
credit facility
|
|
|
(4.2
|
)
|
|
|
|
|
|
Total reduction in affiliate
indebtedness
|
|
$
|
665.4
|
|
|
|
|
|
|
(g) Reflects the retirement of the remaining affiliate
indebtedness and the corresponding increase in Targas
capital contribution to us. Also reflects the contribution to us
by Targa of the Predecessor Business in exchange for our general
partner units and subordinated limited partner units.
|
|
|
|
|
Calculation of Targas equity
contribution (in millions):
|
|
|
|
|
Affiliate indebtedness
|
|
$
|
865.2
|
|
Total reduction in affiliate
indebtedness
|
|
|
(665.4
|
)
|
|
|
|
|
|
Remaining affiliate indebtedness
(including current portion) retired and contributed to us
|
|
|
199.8
|
|
Total partner capital excluding
accumulated other comprehensive income
|
|
|
194.8
|
|
Unamortized allocated debt issue
costs
|
|
|
(18.9
|
)
|
|
|
|
|
|
Equity contribution of Targa
|
|
$
|
375.7
|
|
|
|
|
|
|
|
|
|
|
|
Targas capital is allocated
as follows (in millions):
|
|
|
|
|
$357.8 million for 11,528,231
subordinated units
|
|
|
|
|
$17.9 million for 578,127
general partner units
|
|
|
|
|
(h) Reflects on a net basis the depreciation expense
adjustment to give effect as of January 1, 2005 to the
increase in carrying value of our property, plant and equipment
due to the purchase price allocation of the DMS Acquisition
calculated as follows (in millions):
|
|
|
|
|
Depreciation on stepped-up basis
|
|
$
|
54.8
|
|
Depreciation recorded
|
|
|
(20.5
|
)
|
|
|
|
|
|
Pro forma adjustment for
additional depreciation
|
|
$
|
34.3
|
|
|
|
|
|
|
(i) Reflects the reversal of interest associated with
allocated debt and interest expense under the new credit
facility discussed in (d) as though the borrowing occurred
effective January 1, 2005. Interest expense is calculated
assuming an estimated annual interest rate of 7%. A
one percentage point change in the interest rate would
change pro forma interest expense by $3.4 million for the
year ended December 31, 2005 and $2.6 million for the
nine months ended September 30, 2006.
F-7
TARGA
RESOURCES PARTNERS LP
NOTES TO
UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Pro Forma
Net Income Per Unit
|
Pro forma net income per unit is determined by dividing the pro
forma net income that would have been allocated to the common
and subordinated unitholders, which is 98% of the pro forma net
income, by the number of common and subordinated units expected
to be outstanding (28,328,231). All units were assumed to have
been outstanding since January 1, 2005. Basic and diluted
pro forma net income per unit are equivalent as there are no
dilutive units at the date of closing of the offering. Pursuant
to the partnership agreement, to the extent that the quarterly
distributions exceed certain targets, the general partner is
entitled to receive certain incentive distributions that will
result in more net income proportionately being allocated to the
general partner than to the holders of common and subordinated
units. The pro forma net income per unit calculations assume
that no incentive distributions were made to the general partner
because no such distribution would have been paid based upon the
pro forma available cash from operating surplus for the periods.
F-8
Report of
Independent Registered Public Accounting Firm
To the
Partners of Targa North Texas LP:
In our opinion, the accompanying combined balance sheet and the
related combined statements of operations and comprehensive
income (loss), of changes in partners capital/net parent
equity, and of cash flows present fairly, in all material
respects, the financial position of Targa North Texas LP (the
Partnership) at December 31, 2005 and the
results of its operations and its cash flows for the
two months ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Partnerships management. Our responsibility is to
express an opinion on these financial statements based on our
audit. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 9 to the financial statements, the
Partnership has engaged in significant transactions with other
subsidiaries of its parent company, Targa Resources Inc., a
related party.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 13, 2006
F-9
Report of
Independent Registered Public Accounting Firm
To the
Partners of Targa North Texas LP:
In our opinion, the accompanying combined balance sheets and the
related combined statements of operations and comprehensive
income (loss), of changes in partners capital/net parent
equity, and of cash flows present fairly, in all material
respects, the financial position of the North Texas System
(TNT LP Predecessor) at December 31, 2004 and
2003, and the results of its operations and its cash flows for
the ten months ended October 31, 2005, and the years
ended December 31, 2004 and 2003 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 9 to the financial statements, the
North Texas System has engaged in significant transactions with
other subsidiaries of its parent company, Dynegy Inc., a related
party.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 13, 2006
F-10
TARGA
NORTH TEXAS LP
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
(in thousands of dollars)
|
|
ASSETS (Collateral for Parent
debt See
Note 6)
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Trade receivables, net of
allowances of $0 and $15
|
|
$
|
1,525
|
|
|
|
$
|
1,185
|
|
Inventory
|
|
|
1,155
|
|
|
|
|
423
|
|
Assets from risk management
activities
|
|
|
34
|
|
|
|
|
|
|
Deposits
|
|
|
630
|
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,344
|
|
|
|
|
2,299
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, at
cost
|
|
|
1,106,107
|
|
|
|
|
337,046
|
|
Accumulated depreciation
|
|
|
(9,126
|
)
|
|
|
|
(145,856
|
)
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
1,096,981
|
|
|
|
|
191,190
|
|
|
|
|
|
|
|
|
|
|
|
Debt issue costs allocated from
Parent
|
|
|
22,494
|
|
|
|
|
|
|
Long-term assets from risk
management activities
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (collateral for
Parent debt See Note 6)
|
|
$
|
1,122,843
|
|
|
|
$
|
193,489
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS
CAPITAL/NET PARENT EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,145
|
|
|
|
$
|
4,324
|
|
Accrued liabilities
|
|
|
30,595
|
|
|
|
|
18,458
|
|
Current maturities of debt
allocated from Parent
|
|
|
4,932
|
|
|
|
|
|
|
Liabilities from risk management
activities
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
37,725
|
|
|
|
|
22,782
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt allocated from
Parent
|
|
|
863,960
|
|
|
|
|
|
|
Long-term liabilities from risk
management activities
|
|
|
72
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
1,541
|
|
|
|
|
1,897
|
|
Commitments and contingencies (see
Note 7)
|
|
|
|
|
|
|
|
|
|
Partners capital/net parent
equity:
|
|
|
|
|
|
|
|
|
|
General partner
|
|
|
109,772
|
|
|
|
|
|
|
Limited partner
|
|
|
109,773
|
|
|
|
|
|
|
Net parent equity
|
|
|
|
|
|
|
|
168,810
|
|
|
|
|
|
|
|
|
|
|
|
Total partners capital/net
parent equity
|
|
|
219,545
|
|
|
|
|
168,810
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
partners capital/net parent equity
|
|
$
|
1,122,843
|
|
|
|
$
|
193,489
|
|
|
|
|
|
|
|
|
|
|
|
See notes to combined financial statements
F-11
TARGA
NORTH TEXAS LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
Ten
|
|
|
|
|
|
|
Two Months
|
|
|
|
Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
October 31,
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands of dollars)
|
|
Revenues from third parties
|
|
$
|
22,192
|
|
|
|
$
|
8,732
|
|
|
$
|
12,039
|
|
|
$
|
10,736
|
|
Revenues from affiliates
|
|
|
52,952
|
|
|
|
|
284,603
|
|
|
|
246,516
|
|
|
|
186,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
75,144
|
|
|
|
|
293,335
|
|
|
|
258,555
|
|
|
|
196,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product purchases from third
parties
|
|
|
54,981
|
|
|
|
|
209,835
|
|
|
|
182,234
|
|
|
|
147,074
|
|
Product purchases from affiliates
|
|
|
11
|
|
|
|
|
1,024
|
|
|
|
278
|
|
|
|
266
|
|
Operating expense
|
|
|
3,494
|
|
|
|
|
18,035
|
|
|
|
17,702
|
|
|
|
15,084
|
|
Depreciation and amortization
expense
|
|
|
9,150
|
|
|
|
|
11,262
|
|
|
|
12,201
|
|
|
|
11,992
|
|
General and administrative expense
|
|
|
1,063
|
|
|
|
|
7,273
|
|
|
|
7,230
|
|
|
|
7,652
|
|
Loss (gain) on sale of assets
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
329
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,699
|
|
|
|
|
247,397
|
|
|
|
219,974
|
|
|
|
182,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,445
|
|
|
|
|
45,938
|
|
|
|
38,581
|
|
|
|
14,698
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense allocated from
parent
|
|
|
(11,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
|
(5,097
|
)
|
|
|
|
45,938
|
|
|
|
38,581
|
|
|
|
14,698
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(5,097
|
)
|
|
|
|
45,938
|
|
|
|
38,581
|
|
|
|
14,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest
rate swaps
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
settled periods
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(5,164
|
)
|
|
|
$
|
45,938
|
|
|
$
|
38,581
|
|
|
$
|
14,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to combined financial statements
F-12
TARGA
NORTH TEXAS LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Targa North
|
|
|
|
|
|
|
Targa North Texas LP
|
|
|
Texas LP
|
|
|
|
|
|
|
General
|
|
|
Limited
|
|
|
Predecessor
|
|
|
|
|
|
|
Partner
|
|
|
Partner
|
|
|
Equity
|
|
|
Total
|
|
|
|
(in thousands of dollars)
|
|
|
Balance, December 31,
2002
|
|
$
|
|
|
|
$
|
|
|
|
$
|
167,345
|
|
|
$
|
167,345
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
(16,674
|
)
|
|
|
(16,674
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
14,131
|
|
|
|
14,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2003
|
|
|
|
|
|
|
|
|
|
$
|
164,802
|
|
|
$
|
164,802
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
(34,573
|
)
|
|
|
(34,573
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
38,581
|
|
|
|
38,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
168,810
|
|
|
|
168,810
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
(56,268
|
)
|
|
|
(56,268
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
45,938
|
|
|
|
45,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31,
2005
|
|
|
|
|
|
|
|
|
|
|
158,480
|
|
|
|
158,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contribution
|
|
|
109,939
|
|
|
|
109,940
|
|
|
|
|
|
|
|
219,879
|
|
Other contributions
|
|
|
2,415
|
|
|
|
2,415
|
|
|
|
|
|
|
|
4,830
|
|
Other comprehensive loss
|
|
|
(34
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
(67
|
)
|
Net loss
|
|
|
(2,548
|
)
|
|
|
(2,549
|
)
|
|
|
|
|
|
|
(5,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
$
|
109,772
|
|
|
$
|
109,773
|
|
|
$
|
|
|
|
$
|
219,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to combined financial statements
F-13
TARGA
NORTH TEXAS LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP Predecessor
|
|
|
|
Two Months
|
|
|
|
Ten Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
October 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands of dollars)
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,097
|
)
|
|
|
$
|
45,938
|
|
|
$
|
38,581
|
|
|
$
|
14,131
|
|
Adjustments to reconcile net
income (loss) to cash flows provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
9,150
|
|
|
|
|
11,262
|
|
|
|
12,201
|
|
|
|
11,992
|
|
Accretion
|
|
|
35
|
|
|
|
|
187
|
|
|
|
204
|
|
|
|
197
|
|
Noncash amortization of debt issue
costs allocated from Parent
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sale of assets
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
329
|
|
|
|
(5
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
567
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(60
|
)
|
|
|
|
(280
|
)
|
|
|
683
|
|
|
|
(688
|
)
|
Inventory
|
|
|
(1,155
|
)
|
|
|
|
423
|
|
|
|
87
|
|
|
|
(331
|
)
|
Other assets
|
|
|
10
|
|
|
|
|
51
|
|
|
|
(574
|
)
|
|
|
18
|
|
Accounts payable
|
|
|
(845
|
)
|
|
|
|
(1,334
|
)
|
|
|
2,658
|
|
|
|
963
|
|
Other liabilities
|
|
|
(4,357
|
)
|
|
|
|
16,490
|
|
|
|
3,850
|
|
|
|
4,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
(1,471
|
)
|
|
|
|
72,705
|
|
|
|
58,019
|
|
|
|
31,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and
equipment
|
|
|
(2,134
|
)
|
|
|
|
(16,469
|
)
|
|
|
(23,664
|
)
|
|
|
(14,748
|
)
|
Proceeds from asset sales
|
|
|
8
|
|
|
|
|
32
|
|
|
|
218
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(2,126
|
)
|
|
|
|
(16,437
|
)
|
|
|
(23,446
|
)
|
|
|
(14,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions (distributions)
|
|
|
3,597
|
|
|
|
|
(56,268
|
)
|
|
|
(34,573
|
)
|
|
|
(16,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
3,597
|
|
|
|
|
(56,268
|
)
|
|
|
(34,573
|
)
|
|
|
(16,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment
allocated from Parent
|
|
$
|
907,634
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Debt issue costs allocated from
Parent
|
|
|
23,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt allocated from
Parent
|
|
|
870,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to combined financial statements
F-14
Targa
North Texas LP
Note 1
Organization and Operations
Targa North Texas LP (TNT LP) is a Delaware limited
partnership formed on November 28, 2005 to control, manage
and operate Targa Resources Inc. (Targa
Resources)s North Texas System. TNT LP is owned 50%
by its general partner, Targa North Texas GP LLC, a Delaware
limited liability company, and 50% by its sole limited partner,
Targa LP Inc., a Delaware corporation. The partnership agreement
requires all items of income and expense, and all distributions
to be allocated among the partners in accordance with their
ownership ratios. The general partner and limited partner are
indirect wholly-owned subsidiaries of Targa Resources.
Targa Resources acquired the North Texas System on
October 31, 2005 as part of its acquisition of
substantially all of Dynegy Inc. (Dynegy)s
midstream natural gas business (the DMS
acquisition). On December 1, 2005, in a series of
transactions, Targa Resources conveyed the North Texas System to
TNT LP.
Prior to October 31, 2005, the North Texas System was owned
by an indirect wholly-owned subsidiary of Dynegy, and is
presented in these financial statements as TNT LP
Predecessor.
The North Texas System consists of two wholly-owned natural gas
processing plants and an extensive network of integrated
gathering pipelines that serve a 14 county natural gas producing
region in the Fort Worth Basin in North Central Texas. The
natural gas processing facilities comprised the Chico processing
and fractionation facilities and the Shackelford processing
facility.
Note 2
Basis of Presentation
Targa Resources conveyance of the North Texas System to
TNT LP has been accounted for as a transfer of assets between
entities under common control in accordance with Statement of
Financial Accounting Standards (SFAS) 141,
Business Combinations. Therefore, Targa
Resources results of the North Texas System from
November 1, 2005 to December 1, 2005 have been
combined with TNT LPs results subsequent to
December 1, 2005 as TNT LPs combined results for the
two months ended December 31, 2005. Additionally, TNT
LPs financial position, results of operations and cash
flows as of and for the two months ended December 31, 2005
reflect Targa Resources allocation of the fair value of
the North Texas Assets and indebtedness related to the DMS
acquisition (See Note 4 and Note 6).
The accompanying financial statements and related notes present
TNT LPs financial position as of December 31, 2005;
TNT LPs results of operations, cash flows and changes in
partners capital for the two months ended
December 31, 2005; the combined financial position of TNT
LP Predecessor as of December 31, 2004; and the combined
results of operations, cash flows and changes in net equity of
parent of TNT LP Predecessor for the ten months ended
October 31, 2005 and the years ended December 31, 2004
and 2003. TNT LPs financial data has been separated from
the TNT LP Predecessor financial data by a bold black line.
In the accompanying financial statements and related notes,
references to the Parent are to Dynegy as of and
prior to October 31, 2005, and to Targa Resources
subsequent to October 31, 2005.
Throughout the periods covered by the combined financial
statements, the Parent has provided cash management services to
TNT LP and TNT LP Predecessor through a centralized treasury
system. As a result, all of TNT LP and TNT LP Predecessors
charges and cost allocations covered by the centralized treasury
system were deemed to have been paid to the Parent in cash,
during the period in which the cost was recorded in the combined
financial statements. In addition, cash receipts advanced by the
Parent in excess/deficit of charges and cash allocations are
reflected as contributions from/distributions to the Parent in
the combined statements of partners capital/net parent
equity. As a result of this accounting treatment, TNT LPs
working capital does not reflect any affiliate accounts
receivable for intercompany commodity
F-15
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
sales or any affiliate accounts payable for personnel and
services and for intercompany product purchases. Consequently,
TNT LP had a negative working capital balance of
$34.4 million at December 31, 2005. Despite the
negative working capital balance, on a combined basis,
TNT LP and TNT LP Predecessor generated operating cash
flow of $71.2 million for the twelve months ended
December 31, 2005. Such cash flow was sufficient to fund
investing cash flow of $18.6 million and distributions to
the Parent of $52.7 million during the period.
TNT LP and TNT LP Predecessor have been allocated general and
administrative expenses incurred by the Parent in order to
present financial statements on a stand-alone basis. See
Note 9 for a discussion of the amounts and method of
allocation. All of the allocations are not necessarily
indicative of the costs and expenses that would have resulted
had TNT LP and TNT LP Predecessor been operated as stand-alone
entities.
Note 3
Significant Accounting Policies
Cash and Cash Equivalents. See
centralized cash management in Note 9 Related
Party Transactions.
Asset Retirement Obligations. TNT LP
and TNT LP Predecessor account for asset retirement obligations
(AROs) using SFAS 143, Accounting for
Asset Retirement Obligations, as interpreted by
FIN 47, Accounting for Conditional Asset
Retirement Obligations. Asset retirement obligations
are legal obligations associated with the retirement of a
tangible long-lived asset that result from the assets
acquisition, construction, development
and/or
normal operation. An ARO is initially measured at its estimated
fair value. Upon initial recognition of an ARO, an entity
records an increase to the carrying amount of the related
long-lived asset and an offsetting ARO liability. The combined
cost of the asset and the capitalized asset retirement
obligation is depreciated using a systematic and rational
allocation method over the period during which the long-lived
asset is expected to provide benefits. After the initial period
of ARO recognition, the ARO will change as a result of either
the passage of time or revisions to the original estimates of
either the amounts of estimated cash flows or their timing.
Changes due to the passage of time increase the carrying amount
of the liability because there are fewer periods remaining from
the initial measurement date until the settlement date;
therefore, the present value of the discounted future settlement
amount increases. These changes are recorded as a period cost
called accretion expense. Upon settlement, AROs will be
extinguished by the entity at either the recorded amount or the
entity will incur a gain or loss on the difference between the
recorded amount and the actual settlement cost. TNT LP
Predecessor adopted SFAS 143 on January 1, 2003. See
Note 7 for information regarding TNT LP and TNT LP
Predecessors AROs.
Segment Information. SFAS 131,
Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting
information about operating segments. TNT LP operates in one
segment only, the natural gas gathering and processing segment,
as did TNT LP Predecessor.
Comprehensive Income. Comprehensive
income includes net income and other comprehensive income, which
includes unrealized gains and losses on derivative instruments
that are designated as hedges.
Debt Issue Costs. Costs incurred in
connection with the issuance of long-term debt are capitalized
and charged to interest expense over the term of the related
debt.
Environmental Liabilities. Liabilities
for loss contingencies, including environmental remediation
costs, arising from claims, assessments, litigation, fines, and
penalties and other sources are charged to expense when it is
probable that a liability has been incurred and the amount of
the assessment
and/or
remediation can be reasonably estimated.
F-16
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
Income Taxes. TNT LP and TNT LP
Predecessor are not subject to federal income taxes. As a
result, their earnings or losses for federal income tax purposes
have been included in the tax returns of their individual
partners or owners.
Natural Gas Imbalances. Quantities of
natural gas over-delivered or under-delivered related to
operational balancing agreements are recorded monthly as
inventory using weighted average prices at the time the
imbalance was created. Monthly, gas imbalances receivable are
valued at the lower of cost or market, gas imbalances payable
are valued at replacement cost. These imbalances are typically
settled in the following month with deliveries or receipts of
natural gas. Certain contracts require cash settlement of
imbalances on a current basis. Under these contracts, imbalance
cash-outs are recorded as a sale or purchase of natural gas, as
appropriate.
Price Risk Management (Hedging). TNT LP
accounts for derivative instruments in accordance with
SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. Under
SFAS 133, all derivative instruments not qualifying for the
normal purchases and sales exception are recorded on the balance
sheet at fair value. If a derivative does not qualify as a
hedge, or is not designated as a hedge, the gain or loss on the
derivative is recognized currently in earnings. If a derivative
qualifies for hedge accounting and is designated as a hedge, the
effective portion of the unrealized gain or loss on the
derivative is deferred in accumulated other comprehensive income
(OCI), a component of partners capital, and
reclassified to earnings when the forecasted transaction occurs.
The relationship between the hedging instrument and the hedged
item must be highly effective in achieving the offset of changes
in cash flows attributable to the hedged risk both at the
inception of the contract and on an ongoing basis. Hedge
accounting is discontinued prospectively when a hedge instrument
becomes ineffective. Gains and losses deferred in OCI related to
cash flow hedges for which hedge accounting has been
discontinued remain deferred until the forecasted transaction
occurs. If it is probable that a hedged forecasted transaction
will not occur, deferred gains or losses on the hedging
instrument are reclassified to earnings immediately.
TNT LPs policy is to formally document all relationships
between hedging instruments and hedged items, as well as its
risk management objectives and strategy for undertaking the
hedge. This process includes specific identification of the
hedging instrument and the hedged item, the nature of the risk
being hedged and the manner in which the hedging
instruments effectiveness will be assessed. At the
inception of the hedge and on an ongoing basis, TNT LP will
assess whether the derivatives used in hedging transactions are
highly effective in offsetting changes in cash flows of hedged
items. Hedge effectiveness is measured on a quarterly basis. Any
ineffective portion of the unrealized gain or loss is
reclassified to earnings in the current period.
TNT LP Predecessor did not engage in hedging activities.
Property, Plant and
Equipment. Property, plant, and equipment is
stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets. The estimated service lives of TNT
LP and TNT LP Predecessors functional asset groups are as
follows:
|
|
|
|
|
|
|
Range of
|
|
Asset Group
|
|
Years
|
|
|
Natural gas gathering systems and
processing facilities
|
|
|
15 to 25
|
|
Office and miscellaneous equipment
|
|
|
3 to 7
|
|
Expenditures for maintenance and repairs are expensed as
incurred. Expenditures to refurbish assets that extend the
useful lives or prevent environmental contamination are
capitalized and depreciated over the
F-17
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
remaining useful life of the asset. Upon disposition or
retirement of property, plant, and equipment, any gain or loss
is charged to operations.
Impairment of Long-Lived
Assets. Management reviews property, plant
and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable. The carrying amount is not recoverable
if it exceeds the undiscounted sum of the cash flows expected to
result from the use and eventual disposition of the asset.
Estimates of expected future cash flows represent
managements best estimate based on reasonable and
supportable assumptions. If the carrying amount is not
recoverable, the impairment loss is measured as the excess of
the assets carrying value over its fair value. Management
assesses the fair value of long-lived assets using commonly
accepted techniques, and may use more than one method,
including, but not limited to, recent third party comparable
sales, internally developed discounted cash flow analysis and
analysis from outside advisors. There were no indicators of
asset impairments as of December 31, 2005 and 2004.
Revenue Recognition. TNT LP and TNT LP
Predecessors primary types of sales and service activities
reported as operating revenue include:
|
|
|
|
|
sales of natural gas, NGLs and condensate; and
|
|
|
|
natural gas processing, from which we generate revenue through
the compression, gathering, treating, and processing of natural
gas.
|
TNT LP and TNT LP Predecessor recognize revenue associated when
all of the following criteria are met: (1) persuasive
evidence of an exchange arrangement exists, (2) delivery
has occurred or services have been rendered, (3) the price
is fixed or determinable and (4) collectibility is
reasonably assured.
For processing services, TNT LP and TNT LP Predecessor receive
either fees or a percentage of commodities as payment for these
services, depending on the type of contract. Under
percent-of-proceeds
contracts, TNT LP and TNT LP Predecessor are paid for their
services by keeping a percentage of the NGLs extracted and the
residue gas resulting from processing natural gas. In
percent-of-proceeds
arrangements, TNT LP and TNT LP Predecessor remit either a
percentage of the proceeds received from the sales of residue
gas and NGLs or a percentage of the residue gas or NGLs at the
tailgate of the plant to the producer. Under the terms of
percent-of-proceeds
and similar contracts, TNT LP and TNT LP Predecessor may
purchase the producers share of the processed commodities
for resale or deliver the commodities to the producer at the
tailgate of the plant.
Percent-of-value
and
percent-of-liquids
contracts are variations on this arrangement. Under keep-whole
contracts, TNT LP and TNT LP Predecessor keep the NGLs extracted
and return the processed natural gas or value of the natural gas
to the producer. Natural gas or NGLs that TNT LP and TNT LP
Predecessor receive for services or purchase for resale are in
turn sold and recognized in accordance with the criteria
outlined above. Under fee based contracts, TNT LP and TNT LP
Predecessor receive a fee-based on throughput volumes.
TNT LP and TNT LP Predecessor generally report revenues gross in
the combined statements of operations, in accordance with EITF
Issue
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent. Except for fee-based contracts, TNT LP and TNT LP
Predecessor act as the principal in these transactions where we
receive commodities, take title to the natural gas and NGLs, and
incur the risks and rewards of ownership.
Use of Estimates. TNT LP and TNT LP
Predecessors preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America requires management to make estimates
and judgments that affect their reported financial position and
results of operations. Management reviews significant estimates
and judgments affecting the combined financial statements on a
recurring basis and records the effect of any necessary
adjustments prior to their publication. Estimates and judgments
are based on information available at the time such estimates
and
F-18
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
judgments are made. Adjustments made with respect to the use of
these estimates and judgments often relate to information not
previously available. Uncertainties with respect to such
estimates and judgments are inherent in the preparation of
financial statements. Estimates and judgments are used in, among
other things, (1) estimating unbilled revenues and
operating and general and administrative costs
(2) developing fair value assumptions, including estimates
of future cash flows and discount rates, (3) analyzing
tangible and intangible assets for possible impairment,
(4) estimating the useful lives of assets and
(5) determining amounts to accrue for contingencies,
guarantees and indemnifications. Actual results could differ
materially from estimated amounts.
Recent Accounting Pronouncements. In
November 2004, the FASB issued SFAS 151, Inventory
Costs, an amendment of ARB No. 43,
Chapter 4, which clarifies the types of costs
that should be expensed rather than capitalized as inventory.
SFAS 151 also clarifies the circumstances under which fixed
overhead costs associated with operating facilities involved in
inventory processing should be capitalized. The provisions of
SFAS 151 are effective for fiscal years beginning after
June 15, 2005. TNT LPs adoption of SFAS 151 will
have no effect on its financial statements.
In December 2004, the FASB released its final revised standard
entitled SFAS No. 123(R), Share-Based
Payment, which will significantly change accounting
practice with respect to employee stock options and other stock
based compensation. SFAS 123(R) requires companies to
recognize, as an operating expense, the estimated fair value of
share-based payments to employees, including grants of employee
stock options. Because TNT LP does not have any employees, its
adoption of SFAS 123(R) on January 1, 2006 will only
be affected by the allocation of stock-based compensation cost
by the Parent. Such allocation is not expected to have a
material effect on TNT LPs financial statements.
In May 2005, the FASB issued SFAS 154, Accounting
Changes and Error Corrections, which changes the
requirements for the accounting for and reporting of a change in
accounting principle by requiring voluntary changes in
accounting principles to be reported using retrospective
application, unless impracticable to do so. It also applies to
changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific
transition provisions. Application is effective for accounting
changes and correction of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted. TNT
LPs financial statements will not be impacted by
SFAS 154.
In September 2005, the FASB ratified the consensus on Emerging
Issues Task Force (EITF)
No. 04-13,
Accounting for Purchases and Sale of Inventory With the
Same Counterparty.
EITF 04-13
relates to an entity that may sell inventory to another entity
in the same line of business from which it also purchases
inventory. This guidance is effective for new (including
renegotiated or modified) inventory arrangements entered into in
the first interim or annual reporting period beginning after
March 15, 2006. TNT LPs adoption of
EITF 04-13
on April 1, 2006 will have no effect on its financial
statements.
In September 2006, FASB issued SFAS 157 Fair Value
Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded
in these accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS 157 does
not require any new fair value measurements. However, for some
entities, the application of SFAS 157 will change current
practice. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. TNT LP has not
yet determined the impact this interpretation will have on its
financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108). Due to
diversity in practice among registrants, SAB 108 expresses
SEC staff views regarding the process by which misstatements in
financial statements are evaluated for purposes
F-19
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
of determining whether financial statement restatement is
necessary. SAB 108 is effective for fiscal years ending
after November 15, 2006, and early application is
encouraged. SAB 108 will have no effect on TNT LPs
results of operations or financial position.
Note 4
Change of Control
On October 31, 2005, Targa Resources completed the DMS
acquisition for $2,452 million in cash. Approximately
$1,067 million of the total purchase price was allocated to
the net assets of the North Texas System. Additionally,
$870.1 million of Targa Resources acquisition-related
long-term debt (see Note 6) and $23.3 million in
associated debt issue costs were allocated to the North Texas
System. The following presents the portion of the purchase price
and related long-term debt and debt issue costs allocated to the
North Texas System based on the estimated fair values of the
assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
2,105
|
|
Property, plant, and equipment
|
|
|
1,104,000
|
|
Debt issue costs
|
|
|
23,342
|
|
Current liabilities
|
|
|
(37,937
|
)
|
Long-term debt
|
|
|
(870,125
|
)
|
Asset retirement obligations
|
|
|
(1,506
|
)
|
|
|
|
|
|
Initial contribution
|
|
$
|
219,879
|
|
|
|
|
|
|
The following unaudited pro forma financial information presents
the combined results of operations of the North Texas System as
if the DMS acquisition had been completed on January 1 of the
years presented, after including certain pro forma adjustments
for interest expense on long-term debt allocated from the
Parent, and depreciation and amortization. The pro forma
information is not necessarily indicative of the results of
operations had the acquisition occurred on January 1, 2004
or the results of operations that may be obtained in the future.
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Revenue
|
|
$
|
368,479
|
|
|
$
|
258,555
|
|
Product purchases
|
|
|
(265,851
|
)
|
|
|
(182,512
|
)
|
Depreciation and amortization
|
|
|
(54,876
|
)
|
|
|
(54,876
|
)
|
Gain (loss) on sale of assets
|
|
|
32
|
|
|
|
(329
|
)
|
Other operating expense
|
|
|
(29,865
|
)
|
|
|
(24,932
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
17,919
|
|
|
|
(4,094
|
)
|
Interest expense
|
|
|
(69,252
|
)
|
|
|
(69,252
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(51,333
|
)
|
|
$
|
(73,346
|
)
|
|
|
|
|
|
|
|
|
|
F-20
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
Note 5
Property, Plant, and Equipment
Property, plant and equipment and accumulated depreciation were
as follows at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP Predecessor
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
(in thousands)
|
|
Gathering and processing systems
|
|
$
|
1,078,402
|
|
|
|
$
|
322,749
|
|
Other property and equipment
|
|
|
27,705
|
|
|
|
|
14,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,106,107
|
|
|
|
|
337,046
|
|
Accumulated depreciation
|
|
|
(9,126
|
)
|
|
|
|
(145,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,096,981
|
|
|
|
$
|
191,190
|
|
|
|
|
|
|
|
|
|
|
|
Note 6
Long-Term Debt
TNT LPs long-term debt, all of which has been allocated
from the Parent, consisted of the following at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP Predecessor
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
(in thousands)
|
|
Outstanding debt
|
|
$
|
868,892
|
|
|
|
$
|
|
|
Current maturities of debt
|
|
|
(4,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
863,960
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of Long-Term Debt from the Parent
The Parent debt was allocated to identifiable assets groups
which collateralize the debt based on the value of the acquired
assets. The collateralization base includes all the
Parents assets and equity interests. The senior unsecured
notes were allocated to identifiable tangible asset groups that
are guarantors of the notes.
The following table presents the components of Parents
acquisition-related debt that have been allocated to TNT LP, as
of December 31, 2005 (in thousands).
|
|
|
|
|
|
|
Allocated to
|
|
|
|
TNT LP
|
|
|
Senior secured term loan facility,
variable rate, due October 2011
|
|
$
|
491,894
|
|
Senior secured asset sale bridge
loan facility, variable rate, due October 2007
|
|
|
276,151
|
|
Senior unsecured notes,
81/2%
fixed rate, due November 2013
|
|
|
100,847
|
|
|
|
|
|
|
Total principal amount
|
|
|
868,892
|
|
Less current maturities of debt
|
|
|
(4,932
|
)
|
|
|
|
|
|
Long-term debt
|
|
$
|
863,960
|
|
|
|
|
|
|
F-21
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
The following table presents information regarding variable
interest rates paid on the Parent debt for the two months ended
December 31, 2005.
|
|
|
|
|
|
|
Range of
|
|
Weighted average
|
|
|
interest rates paid
|
|
interest rate paid
|
|
Senior secured term loan facility
|
|
6.34% to 6.64%
|
|
6.49%
|
Senior secured asset sale bridge
loan facility
|
|
6.34% to 6.83%
|
|
6.59%
|
Interest expense on long-term debt allocated to TNT LP is
settled through an adjustment to partners capital (see
Note 9 Related Party Transactions).
Debt
Maturity Table
The following table presents the scheduled maturities of
principal amounts of the Parents long-term debt allocated
to TNT LP (in thousands).
|
|
|
|
|
|
|
Allocated to
|
|
|
|
TNT LP
|
|
|
2006
|
|
$
|
4,932
|
|
2007
|
|
|
281,083
|
|
2008
|
|
|
4,932
|
|
2009
|
|
|
4,932
|
|
2010
|
|
|
4,932
|
|
Thereafter
|
|
|
568,081
|
|
|
|
|
|
|
|
|
$
|
868,892
|
|
|
|
|
|
|
Critical
Terms of Parent Debt Obligations
Senior
Secured Credit Facility
On October 31, 2005, the Parent entered into a
$2,500 million senior secured credit agreement with a
syndicate of financial institutions and other institutional
lenders. The credit agreement includes a
$300 million
senior secured letter of credit facility.
Borrowings under the senior secured credit agreement, other than
the senior secured synthetic letter of credit facility, bear
interest at a rate equal to an applicable margin plus, at the
Parents option, either (a) a base rate determined by
reference to the higher of (1) the prime rate of Credit
Suisse and (2) the federal funds rate plus
1/2
of 1% or (b) LIBOR as determined by reference to the costs
of funds for dollar deposits for the interest period relevant to
such borrowing adjusted for certain statutory reserves. The
initial applicable margin for borrowings under the senior
secured revolving credit facility is 1.25% with respect to base
rate borrowings and 2.25% with respect to LIBOR borrowings. Upon
repayment of the senior secured asset sale bridge loan facility,
the margin for borrowings under the senior secured revolving
credit facility will be 1.00% with respect to base rate
borrowings and 2.00% with respect to LIBOR borrowings. The
applicable margin for borrowings under the senior secured
revolving credit facility may fluctuate based upon the
Parents leverage ratio as defined in the credit agreement.
The Parent is required to pay a facility fee, quarterly in
arrears, to the lenders under the senior secured synthetic
letter of credit facility equal to (i) 2.25% of the amount
on deposit in the designated deposit account plus (ii) the
administrative cost incurred by the deposit account agent for
such quarterly period.
In addition to paying interest on outstanding principal under
the senior secured credit facilities, the Parent is required to
pay a commitment fee equal to 0.50% of the currently unutilized
commitments thereunder. The commitment fee rate may fluctuate
based upon the Parents leverage ratios.
F-22
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
All obligations under the Parents senior secured credit
agreement and certain secured hedging arrangements are
unconditionally guaranteed, subject to certain exceptions, by
each of its existing and future domestic restricted
subsidiaries, including TNT LP.
All obligations under the senior secured credit facilities and
certain secured hedging arrangements, and the guarantees of
those obligations, are secured by substantially all of the
following assets, subject to certain exceptions:
|
|
|
|
|
a pledge of TNT LPs general partner and limited partner
interests; and
|
|
|
|
a security interest in, and mortgages on, TNT LPs tangible
and intangible assets.
|
81/2% Senior
Notes due 2013
On October 31, 2005 the Parent completed the private
placement of $250 million in aggregate principal amount of
senior unsecured notes (the Notes).
Interest on the Notes accrues at the rate of
81/2% per
annum and is payable in arrears on May 1 and
November 1. Interest is computed on the basis of a
360-day year
comprising twelve
30-day
months. Additional interest may accrue on the Notes in certain
circumstances pursuant to a registration rights agreement.
The Notes are the Parents unsecured senior obligations,
and are guaranteed by TNT LP, subordinate to its guarantee of
the Parents borrowings under its senior secured credit
facility.
Interest
Rate Swaps
In connection with its Senior Secured Credit Facility, the
Parent entered into interest rate swaps with a notional amount
of $350 million. The interest rate swaps effectively fix
the interest rate on $350 million in borrowings under the
Senior Secured Credit Facility to a rate of 4.8% plus the
applicable LIBOR margin (2.25% at December 31,
2005) through November 2007.
The change in fair value of the interest rate swaps, together
with the related accumulated other comprehensive income and
interest expense has been allocated to TNT LP in the same
proportion as the allocation of the Parents borrowings
under its Senior Secured Credit Facility.
Note 7
Asset Retirement Obligations
As part of adopting SFAS 143 on January 1, 2003, TNT
LP Predecessor reversed its existing environmental liabilities
in the amount of $1.5 million. Because these liabilities
were originally recorded in connection with an asset purchase
transaction, the reversal resulted in a corresponding reduction
in property, plant, and equipment.
At January 1, 2003, TNT LP Predecessors future ARO
for property, plant, and equipment was $1.6 million. Its
adoption of SFAS 143 resulted in a cumulative effect charge
of $0.6 million, reflecting a $0.3 million decrease in
accumulated depreciation offset by $0.9 million in
accretion expense. Net of the reduction related to its
previously existing environmental liabilities, TNT LP
Predecessors adoption of SFAS 143 resulted in a
$0.8 million decrease in property, plant, and equipment.
Adopting SFAS No. 143 did not impact TNT LP
Predecessors cash flows.
F-23
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
The following table reflects the changes in TNT LP and TNT LP
Predecessors AROs during the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP Predecessor
|
|
|
|
Two Months Ended
|
|
|
|
Ten Months Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
October 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
2,054
|
|
|
|
$
|
1,897
|
|
|
$
|
1,838
|
|
|
$
|
1,641
|
|
Liabilities incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimate
|
|
|
(548
|
)
|
|
|
|
(30
|
)
|
|
|
(145
|
)
|
|
|
|
|
Accretion expense
|
|
|
35
|
|
|
|
|
187
|
|
|
|
204
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,541
|
|
|
|
$
|
2,054
|
|
|
$
|
1,897
|
|
|
$
|
1,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the purchase price allocation for the DMS
Acquisition, management revised the estimated remaining lives of
TNT LPs long-lived assets, which together with the revised
discount rate as of the acquisition date, resulted in a
$0.5 million downward revision in its ARO as of
October 31, 2005.
Note 8
Commitments and Contingencies
Contractual obligations pertain to a natural gas pipeline
capacity agreement on certain interstate pipelines entered into
during 2005 and AROs. Future non-cancelable commitments related
to these obligations are presented below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011+
|
|
|
Capacity payments
|
|
$
|
2.5
|
|
|
$
|
1.5
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
0.8
|
|
|
$
|
|
|
AROs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.5
|
|
|
$
|
1.5
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
0.8
|
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses related to capacity payments were
$0.1 million and $0.4 million for the two months ended
December 31, 2005 and the ten months ended October 31,
2005, respectively.
Environmental
For environmental matters, TNT LP and TNT LP Predecessor record
liabilities when remedial efforts are probable and the costs can
be reasonably estimated in accordance with the American
Institute of Certified Public Accountants Statement of Position
96-1, Environmental Remediation Liabilities.
Environmental reserves do not reflect managements
assessment of the insurance coverage that may be applicable to
the matters at issue. Management has assessed each of the
matters based on current information and made a judgment
concerning its potential outcome, considering the nature of the
claim, the amount and nature of damages sought and the
probability of success.
TNT LPs environmental liability at December 31, 2005
was $0.1 million, primarily for ground water assessment and
remediation.
Litigation
Summary
TNT LP is not a party to any legal proceeding other than legal
proceedings arising in the ordinary course of its business. TNT
LP is a party to various administrative and regulatory
proceedings that have arisen in the ordinary course of its
business.
F-24
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
Note 9
Related-Party Transactions
Sales to and purchases from
affiliates. TNT LP and TNT LP Predecessor
routinely conduct business with other subsidiaries of the
Parent. The related transactions result primarily from purchases
and sales of natural gas and natural gas liquids. In addition,
all of TNT LP and TNT LP Predecessors expenditures are
paid through the Parent, resulting in inter-company
transactions. Unlike sales transactions with third parties that
settle in cash, settlement of these sales transactions occurs
through adjustment to partners capital/net parent equity.
Allocation of costs. The employees
supporting TNT LP and TNT LP Predecessors operations are
employees of the Parent. TNT LP and TNT LP Predecessors
financial statements include costs allocated to them by the
Parent for centralized general and administrative services
performed by the Parent, as well as depreciation of assets
utilized by the Parents centralized general and
administrative functions. Costs were allocated to TNT LP
Predecessor based on its proportionate share of the
Parents assets, revenues and employees. Costs allocated to
TNT LP were based on identification of the Parents
resources which directly benefit TNT LP and its proportionate
share of costs based on TNT LPs estimated usage of shared
resources and functions. All of the allocations are based on
assumptions that management believes are reasonable; however,
these allocations are not necessarily indicative of the costs
and expenses that would have resulted if TNT LP and TNT LP
Predecessor had been operated as stand-alone entities. These
allocations are not settled in cash. Settlement of these
allocations occurs through adjustment to partners
capital/net parent equity.
Allocations of long-term debt, debt issue costs, interest
rate swaps and interest expense. TNT
LPs financial statements include long-term debt, debt
issue costs, interest rate swaps and interest expense allocated
from the Parent. The allocations were calculated in a manner
similar to the acquisition purchase price allocation, and based
on the fair value of acquired tangible assets plus related net
working capital and unconsolidated equity interests. These
allocations are not settled in cash. Settlement of these
allocations occurs through adjustment to partners capital.
F-25
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
The following table summarizes the sales to and purchases from
affiliates of the Parent, payments made or received by the
Parent on behalf of TNT LP and TNT LP Predecessor, and
allocations of costs from the Parent which are settled through
adjustment to partners capital/net parent equity.
Management believes these transactions are executed on terms
that are fair and reasonable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP Predecessor
|
|
|
|
Two Months
|
|
|
|
Ten Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
October 31,
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to affiliates
|
|
$
|
(52,952
|
)
|
|
|
$
|
(284,603
|
)
|
|
$
|
(246,516
|
)
|
|
$
|
(186,025
|
)
|
Purchases from affiliates
|
|
|
11
|
|
|
|
|
1,024
|
|
|
|
278
|
|
|
|
266
|
|
Payments made/received by the
Parent
|
|
|
44,781
|
|
|
|
|
220,038
|
|
|
|
204,435
|
|
|
|
161,433
|
|
Parent allocation of interest
expense
|
|
|
10,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent allocation of general and
administrative expense
|
|
|
1,063
|
|
|
|
|
7,273
|
|
|
|
7,230
|
|
|
|
7,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,597
|
|
|
|
|
(56,268
|
)
|
|
|
(34,573
|
)
|
|
|
(16,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contribution by Parent
(see Note 4)
|
|
|
219,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent allocation of debt
repayments
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions settled through
adjustments to partners capital/net parent equity
|
|
$
|
224,709
|
|
|
|
$
|
(56,268
|
)
|
|
$
|
(34,573
|
)
|
|
$
|
(16,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centralized Cash Management. The Parent
operates a cash management system whereby excess cash from most
of their various subsidiaries, held in separate bank accounts,
is swept to a centralized account. Cash distributions are deemed
to have occurred through partners capital/net parent
equity, and are reflected as an adjustment to partners
capital/net parent equity. Deemed net contributions of cash by
TNT LPs parent were $3.6 million for the two months
ended December 31, 2005. Net cash distributions to TNT LP
Predecessors parent were $56.3 million,
$34.6 million and $16.7 million for the ten months
ended October 31, 2005, and the years ended
December 31, 2004 and 2003, respectively.
Note 10
Significant Risks and Uncertainties
Nature
of Operations in Midstream Energy Industry
TNT LP operates in the midstream energy industry. Its business
activities include gathering, transporting and processing of
natural gas, NGL and crude oil. As such, its results of
operations, cash flows and financial condition may be affected
by (i) changes in the commodity prices of these hydrocarbon
products and (ii) changes in the relative price levels
among these hydrocarbon products. In general, the prices of
natural gas, NGL, 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 beyond
our control.
TNT LPs profitability could be impacted by a decline in
the volume of natural gas, NGL 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
F-26
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
development activities or otherwise, could result in a decline
in the volume of natural gas, NGL and crude oil handled by TNT
LPs facilities.
A reduction in demand for NGL products by the petrochemical,
refining or heating industries, whether because of
(i) general economic conditions, (ii) reduced demand
by consumers for the end products made with NGL products,
(iii) increased competition from petroleum-based products
due to the pricing differences, (iv) adverse weather
conditions, (v) government regulations affecting commodity
prices and production levels of hydrocarbons or the content of
motor gasoline or (vi) other reasons, could also adversely
affect TNT LPs results of operations, cash flows and
financial position.
Counterparty
Risk with Respect to Financial Instruments
Where TNT LP is exposed to credit risk in its financial
instrument transactions, management analyzes the
counterpartys financial condition prior to entering into
an agreement, establishes credit
and/or
margin limits and monitors the appropriateness of these limits
on an ongoing basis. Generally, management does not require
collateral and does not anticipate nonperformance by TNT
LPs counterparties.
Casualties
or Other Risks
The Parent maintains coverage in various insurance programs on
TNT LPs behalf, which provides it with property damage,
business interruption and other coverages which are customary
for the nature and scope of its operations.
Management believes that the Parent has adequate insurance
coverage, although insurance will not cover every type of
interruption that might occur. As a result of insurance market
conditions, premiums and deductibles for certain insurance
policies have increased substantially, and in some instances,
certain insurance may become unavailable, or available for only
reduced amounts of coverage. As a result, the Parent may not be
able to renew existing insurance policies or procure other
desirable insurance on commercially reasonable terms, if at all.
If TNT LP were to incur a significant liability for which it was
not fully insured, it could have a material impact on its
combined 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. Any event that interrupts the revenues generated by TNT
LPs combined operations, or which causes TNT LP to make
significant expenditures not covered by insurance, could reduce
its ability to meet its financial obligations.
F-27
Targa
North Texas LP
Notes to
Combined Financial
Statements (Continued)
Note 11
Subsequent Events
Hedging
During 2006, TNT LP entered into the following hedging
arrangements for a portion of its production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Commodity
|
|
Type
|
|
Daily Volume
|
|
Average Price
|
|
Index
|
|
Jul 06 Dec
10
|
|
Natural gas
|
|
Swap
|
|
|
3,832
|
|
|
MMBtu
|
|
$
|
8.27
|
|
|
per MMBtu
|
|
IF-WAHA
|
Jan 07 Dec
10
|
|
Natural gas
|
|
Swap
|
|
|
520
|
|
|
MMbtu
|
|
|
7.32
|
|
|
per MMBtu
|
|
IF-WAHA
|
Jan 07 Dec
09
|
|
Natural gas
|
|
Swap
|
|
|
383
|
|
|
MMbtu
|
|
|
7.45
|
|
|
per MMBtu
|
|
IF-WAHA
|
Jan 07 Dec
09
|
|
Natural gas
|
|
Floor
|
|
|
528
|
|
|
MMbtu
|
|
|
6.71
|
|
|
per MMBtu
|
|
IF-WAHA
|
Jul 06 Dec
10
|
|
Natural gas
|
|
Swap
|
|
|
5,711
|
|
|
MMBtu
|
|
|
8.23
|
|
|
per MMBtu
|
|
IF-NGPL MC
|
Jan 07 Dec
10
|
|
Natural gas
|
|
Swap
|
|
|
780
|
|
|
MMbtu
|
|
|
7.18
|
|
|
per MMBtu
|
|
IF-NGPL MC
|
Jan 07 Dec
09
|
|
Natural gas
|
|
Swap
|
|
|
570
|
|
|
MMbtu
|
|
|
7.20
|
|
|
per MMBtu
|
|
IF-NGPL MC
|
Jan 07 Dec
09
|
|
Natural gas
|
|
Floor
|
|
|
790
|
|
|
MMbtu
|
|
|
6.53
|
|
|
per MMBtu
|
|
IF-NGPL MC
|
Jul 06 Dec
10
|
|
NGL
|
|
Swap
|
|
|
2,147
|
|
|
Bbls
|
|
|
0.95
|
|
|
per gallon
|
|
MB-OPIS
|
Jul 06 Dec
10
|
|
Condensate
|
|
Swap
|
|
|
255
|
|
|
Bbls
|
|
|
73.05
|
|
|
per barrel
|
|
NY-WTI
|
Jan 07 Dec
10
|
|
Condensate
|
|
Swap
|
|
|
120
|
|
|
Bbls
|
|
|
66.31
|
|
|
per Bbl
|
|
NY-WTI
|
Jan 07 Dec
09
|
|
Condensate
|
|
Swap
|
|
|
43
|
|
|
Bbls
|
|
|
59.94
|
|
|
per Bbl
|
|
NY-WTI
|
These contracts may expose TNT LP to the risk of financial loss
in certain circumstances. These hedging arrangements provide TNT
LP with protection on the hedged volumes if prices decline below
the prices at which these hedges were set but, if prices
increased, the fixed price nature of the swap-related hedges
will cause TNT LP to receive less revenue on the hedged volumes
than it would receive in the absence of hedges.
Income
Taxes
On May 18, 2006, the Governor of Texas signed into law
House Bill 3 (HB-3) which modifies the existing
Texas franchise tax law. The modified franchise tax will be
computed by subtracting either costs of goods sold or
compensation expense, as defined in HB-3, from gross revenue to
arrive at a gross margin. The resulting gross margin will be
taxed at a one percent tax rate. HB-3 has also expanded the
definition of tax paying entities to include limited
partnerships thereby now subjecting TNT LP to a new state tax
expense. HB-3 becomes effective for activities occurring on or
after January 1, 2007. TNT LP believes that this tax should
still be accounted for as an income tax, following the
provisions of SFAS 109, because it has the characteristics
of an income tax.
During 2006, TNT LP will record a charge to deferred income tax
expense equal to one percent of the difference between the book
value and tax value of its property, plant, and equipment.
F-28
TARGA
NORTH TEXAS LP
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(in thousands of dollars)
|
|
|
ASSETS (collateral for Parent
debt See Note 4)
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
$
|
1,156
|
|
|
$
|
1,525
|
|
Inventory
|
|
|
571
|
|
|
|
1,155
|
|
Assets from risk management
activities
|
|
|
15,144
|
|
|
|
34
|
|
Deposits
|
|
|
|
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,871
|
|
|
|
3,344
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment
|
|
|
1,123,862
|
|
|
|
1,106,107
|
|
Accumulated depreciation
|
|
|
(50,857
|
)
|
|
|
(9,126
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
1,073,005
|
|
|
|
1,096,981
|
|
Debt issue costs allocated from
parent
|
|
|
18,886
|
|
|
|
22,494
|
|
Long-term assets from risk
management activities
|
|
|
17,558
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Total assets (collateral for
Parent debt see Note 4)
|
|
$
|
1,126,320
|
|
|
$
|
1,122,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS
CAPITAL
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,135
|
|
|
|
2,145
|
|
Accrued liabilities
|
|
|
27,919
|
|
|
|
30,595
|
|
Current maturities of debt
allocated from parent
|
|
|
4,932
|
|
|
|
4,932
|
|
Liabilities from risk management
activities
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,986
|
|
|
|
37,725
|
|
|
|
|
|
|
|
|
|
|
Long-term debt allocated from
parent
|
|
|
860,261
|
|
|
|
863,960
|
|
Deferred income taxes
|
|
|
2,262
|
|
|
|
|
|
Long-term liabilities from risk
management activities
|
|
|
|
|
|
|
72
|
|
Other long-term liabilities
|
|
|
1,649
|
|
|
|
1,541
|
|
Commitments and contingencies (see
Note 6)
|
|
|
|
|
|
|
|
|
Partners capital:
|
|
|
|
|
|
|
|
|
General partner
|
|
|
113,581
|
|
|
|
109,772
|
|
Limited partner
|
|
|
113,581
|
|
|
|
109,773
|
|
|
|
|
|
|
|
|
|
|
Total partners capital
|
|
|
227,162
|
|
|
|
219,545
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
partners capital
|
|
$
|
1,126,320
|
|
|
$
|
1,122,843
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited combined financial statements
F-29
TARGA
NORTH TEXAS LP
COMBINED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP Predecessor
|
|
|
|
Nine Months
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(in thousands of dollars)
|
|
Revenues from third parties
|
|
$
|
8,233
|
|
|
|
$
|
7,369
|
|
Revenues from affiliates
|
|
|
282,657
|
|
|
|
|
242,370
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
290,890
|
|
|
|
|
249,739
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Product purchases from third
parties
|
|
|
204,532
|
|
|
|
|
178,174
|
|
Product purchases from affiliates
|
|
|
670
|
|
|
|
|
909
|
|
Operating expense
|
|
|
17,905
|
|
|
|
|
15,823
|
|
Depreciation and amortization
expense
|
|
|
41,713
|
|
|
|
|
10,059
|
|
General and administrative expense
|
|
|
5,137
|
|
|
|
|
6,723
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,957
|
|
|
|
|
211,657
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
20,933
|
|
|
|
|
38,082
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
Interest expense allocated from
Parent
|
|
|
(54,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(33,436
|
)
|
|
|
|
38,082
|
|
Deferred income tax expense
|
|
|
(1,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(35,424
|
)
|
|
|
|
38,082
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Change in fair value of commodity
hedges
|
|
|
32,370
|
|
|
|
|
|
|
Reclassification adjustment for
settled periods
|
|
|
(343
|
)
|
|
|
|
|
|
Related income taxes
|
|
|
(274
|
)
|
|
|
|
|
|
Change in fair value of interest
rate swaps
|
|
|
921
|
|
|
|
|
|
|
Reclassification adjustment for
settled periods
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(2,929
|
)
|
|
|
$
|
38,082
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited combined financial statements
F-30
TARGA
NORTH TEXAS LP
STATEMENT
OF PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partner
|
|
|
Limited Partner
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
|
(in thousands of dollars)
|
|
|
Balance, December 31,
2005
|
|
$
|
109,772
|
|
|
$
|
109,773
|
|
|
$
|
219,545
|
|
Contributions
|
|
|
5,273
|
|
|
|
5,272
|
|
|
|
10,545
|
|
Other comprehensive income
|
|
|
16,248
|
|
|
|
16,248
|
|
|
|
32,496
|
|
Net loss
|
|
|
(17,712
|
)
|
|
|
(17,712
|
)
|
|
|
(35,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30,
2006
|
|
$
|
113,581
|
|
|
$
|
113,581
|
|
|
$
|
227,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited combined financial statements
F-31
TARGA
NORTH TEXAS LP
COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP
|
|
|
|
Predecessor
|
|
|
|
Nine Months
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
(in thousands of dollars)
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(35,424
|
)
|
|
|
$
|
38,082
|
|
Adjustments to reconcile net
income (loss) to cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
41,713
|
|
|
|
|
10,059
|
|
Accretion
|
|
|
108
|
|
|
|
|
168
|
|
Deferred income taxes
|
|
|
1,988
|
|
|
|
|
|
|
Amortization of debt issue costs
allocated from Parent
|
|
|
3,864
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
(31
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
369
|
|
|
|
|
(461
|
)
|
Inventory
|
|
|
584
|
|
|
|
|
423
|
|
Other assets
|
|
|
630
|
|
|
|
|
46
|
|
Accounts payable
|
|
|
(10
|
)
|
|
|
|
(1,075
|
)
|
Other liabilities
|
|
|
(2,675
|
)
|
|
|
|
11,972
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
11,147
|
|
|
|
|
59,183
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and
equipment
|
|
|
(17,769
|
)
|
|
|
|
(14,252
|
)
|
Proceeds from asset sales
|
|
|
32
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(17,737
|
)
|
|
|
|
(14,221
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
Contributions (distributions)
|
|
|
6,590
|
|
|
|
|
(44,962
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) in
financing activities
|
|
|
6,590
|
|
|
|
|
(44,962
|
)
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Debt issue cost allocated from
Parent
|
|
$
|
256
|
|
|
|
$
|
|
|
Repayment of long-term debt
allocated from Parent
|
|
|
3,699
|
|
|
|
|
|
|
See notes to unaudited combined financial statements
F-32
TARGA
NORTH TEXAS LP
(unaudited)
Note 1
Organization and Basis of Presentation
Targa North Texas LP (TNT LP) is a Delaware limited
partnership formed on November 28, 2005 to control, manage
and operate Targa Resources Inc. (Targa
Resources)s North Texas System. TNT LP is owned 50%
by its general partner, Targa North Texas GP LLC, a Delaware
limited liability company, and 50% by its sole limited partner,
Targa LP Inc., a Delaware corporation. The partnership agreement
requires all items of income and expense, and all distributions
to be allocated among the partners in accordance with their
ownership ratios. The general partner and limited partner are
indirect wholly-owned subsidiaries of Targa Resources.
Targa Resources acquired the North Texas System on
October 31, 2005 as part of its acquisition of
substantially all of the midstream natural gas business of
Dynegy Inc. (Dynegy). On December 1, 2005, in a
series of transactions, Targa Resources conveyed the North Texas
System to TNT LP.
Prior to October 31, 2005, the North Texas System was owned
by an indirect wholly-owned subsidiary of Dynegy, and is
presented in these financial statements as TNT LP
Predecessor.
The North Texas System consists of two wholly-owned natural gas
processing plants and an extensive network of integrated
gathering pipelines that serve a 14 county natural gas producing
region in the Fort Worth Basin in North Central Texas. The
natural gas processing facilities comprised the Chico processing
and fractionation facilities and the Shackelford processing
facility.
The accompanying unaudited combined financial statements include
the results of operations and cash flows of Targa North Texas LP
for the nine months ended September 30, 2006, and the
results of operations and cash flows of the North Texas System
derived from the accounts of the TNT LP Predecessor for the nine
months ended September 30, 2005.
The accompanying unaudited interim combined financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
combined financial information. Accordingly, they do not include
all the information and footnotes required by accounting
principles generally accepted in the United States of America
for complete combined financial statements. In the opinion of
management, they contain all adjustments, consisting only of
normal recurring adjustments, which management considers
necessary to present fairly the financial position as of
September 30, 2006 and December 31, 2005; and the
results of operations and cash flows for the nine month periods
ended September 30, 2006 and 2005. The results of
operations for the nine months ended September 30, 2006
should not be taken as indicative of the results to be expected
for the full year due to seasonality of portions of TNT
LPs business and maintenance activities. The interim
combined financial statements should be read in conjunction with
TNT LPs combined financial statements and notes for the
year ended December 31, 2005.
In the accompanying financial statements and related notes,
references to Parent are to Dynegy as of and prior
to October 31, 2005, and to Targa Resources subsequent to
October 31, 2005.
Throughout the periods covered by the combined financial
statements, the Parent has provided cash management services to
TNT LP and TNT LP Predecessor through a centralized treasury
system. As a result, all of TNT LP and TNT LP Predecessors
charges and cost allocations covered by the centralized treasury
system were deemed to have been paid to the Parent in cash,
during the period in which the cost was recorded in the combined
financial statements. In addition, cash receipts advanced by the
Parent in excess/deficit of charges and cash allocations are
reflected as contributions from/distributions to the Parent in
the combined statements of partners capital/net parent
equity. As a result of this accounting treatment, TNT LPs
working capital does not reflect any affiliate accounts
receivable for intercompany commodity sales or any affiliate
accounts payable for personnel and services and for intercompany
product purchases.
F-33
TARGA
NORTH TEXAS LP
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Consequently, TNT LP had a negative working capital balance of
$18.1 million at September 30, 2006. Despite the
negative working capital balance, TNT LP generated sufficient
operating cash flow to fund its working capital and allocated
debt service requirements.
TNT LP and TNT LP Predecessor have been allocated general and
administrative expenses incurred by the Parent in order to
present financial statements on a stand-alone basis. See
Note 7 for a discussion of the amounts and method of
allocation. All of the allocations are not necessarily
indicative of the costs and expenses that would have resulted
had TNT LP and TNT LP Predecessor been operated as stand-alone
entities.
Note 2
Recent Accounting Pronouncements
TNT LP adopted Statement of Financial Accounting Standards
(SFAS) 154, Accounting Changes and Error
Corrections, on January 1, 2006. SFAS 154
provides guidance on the accounting for and reporting of
accounting changes and error corrections. TNT LPs adoption
of SFAS 154 had no effect on its financial statements.
On April 1, 2006 TNT LP adopted the consensus on Financial
Accounting Standards Board (FASB) Emerging Issues
Task Force (EITF) 04-13, Accounting for
Purchases and Sale of Inventory With the Same
Counterparty.
EITF 04-13
requires that two or more inventory transactions with the same
counterparty should be viewed as a single non-monetary
transaction, if the transactions were entered into in
contemplation of one another. Exchanges of inventory between
entities in the same line of business should be accounted for at
fair value or recorded at carrying amounts, depending on the
classification of such inventory. TNT LPs adoption of
EITF 04-13
had no effect on its financial statements.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
(FIN 48) which clarifies the
accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice
associated with certain aspects of the recognition and
measurement related to accounting for income taxes. This
interpretation is effective for fiscal years beginning after
December 15, 2006. TNT LP has not yet determined the impact
this interpretation will have on its financial statements.
In September 2006, the FASB issued SFAS 157 Fair
Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in
these accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some
entities, the application of SFAS 157 will change current
practice. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. TNT LP has not
yet determined the impact this interpretation will have on its
financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin 108
(SAB 108). Due to diversity in practice among
registrants, SAB 108 expresses SEC staff views regarding
the process by which misstatements in financial statements are
evaluated for purposes of determining whether financial
statement restatement is necessary. SAB 108 is effective
for fiscal years ending after November 15, 2006, and early
application is encouraged. SAB 108 will have no effect on
TNT LPs financial statements.
Note 3
Change of Control
On October 31, 2005, Targa Resources completed the DMS
acquisition for $2,452 million in cash. Approximately
$1,067 million of the total purchase price was allocated to
the net assets of the North Texas
F-34
TARGA
NORTH TEXAS LP
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
System. Additionally, $870.1 million of Targa
Resources acquisition-related long-term debt (see
Note 4) and $23.3 million in associated debt
issue costs were allocated to the North Texas System. The
following presents the portion of the purchase price and related
long-term debt and debt issue costs allocated to the North Texas
System based on the estimated fair values of the assets acquired
and liabilities assumed (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
2,105
|
|
Property, plant, and equipment
|
|
|
1,104,000
|
|
Debt issue costs
|
|
|
23,342
|
|
Current liabilities
|
|
|
(37,937
|
)
|
Long-term debt
|
|
|
(870,125
|
)
|
Asset retirement obligations
|
|
|
(1,506
|
)
|
|
|
|
|
|
Initial contribution
|
|
$
|
219,879
|
|
|
|
|
|
|
The following unaudited pro forma financial information presents
the combined results of operations of the North Texas System for
the nine months ended September 30, 2005, as if the
acquisition from Dynegy had occurred on January 1, 2005,
after including certain pro forma adjustments for interest
expense on long-term debt allocated from Targa Resources and
depreciation and amortization. The pro forma information is not
necessarily indicative of the results of operations had the
acquisition occurred on January 1, 2005 or the results of
operations that may be obtained in the future.
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Revenue
|
|
$
|
249,739
|
|
Product purchases
|
|
|
(179,083
|
)
|
Depreciation and amortization
|
|
|
(41,157
|
)
|
Gain (loss) on sale of assets
|
|
|
31
|
|
Other operating expense
|
|
|
(22,198
|
)
|
|
|
|
|
|
Income from operations
|
|
|
7,332
|
|
Interest expense
|
|
|
(51,939
|
)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(44,607
|
)
|
|
|
|
|
|
F-35
TARGA
NORTH TEXAS LP
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Note 4
Long-Term Debt
The following table presents the components of Targa
Resources long-term debt that have been allocated to TNT
LP at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005
|
|
|
|
Allocated
|
|
|
Allocated
|
|
|
|
to TNT LP
|
|
|
to TNT LP
|
|
|
Senior secured term loan facility,
variable rate
|
|
$
|
488,195
|
|
|
$
|
491,894
|
|
Senior secured asset sale bridge
loan facility, variable rate
|
|
|
276,151
|
|
|
|
276,151
|
|
Senior unsecured notes,
81/2%
fixed rate
|
|
|
100,847
|
|
|
|
100,847
|
|
|
|
|
|
|
|
|
|
|
Subtotal debt
|
|
|
865,193
|
|
|
|
868,892
|
|
Current maturities of debt
|
|
|
(4,932
|
)
|
|
|
(4,932
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
860,261
|
|
|
$
|
863,960
|
|
|
|
|
|
|
|
|
|
|
The following table presents information regarding variable
interest rates paid on the Parent debt for the nine months ended
September 30, 2006.
|
|
|
|
|
|
|
Range of
|
|
Weighted average
|
|
|
interest rates paid
|
|
interest rate paid
|
|
Senior secured term loan facility
|
|
6.6% 7.7%
|
|
7.0%
|
Senior secured asset sale bridge
loan facility
|
|
6.8% 7.6%
|
|
7.1%
|
Note 5
Derivative Instruments and Hedging Activities
At September 30, 2006, TNT LPs accumulated other
comprehensive income (OCI) included unrealized gains
of $32.7 million ($32.4 million, net of tax) on its
open commodity hedges. OCI also included unrealized gains of
$0.7 million on interest rate swaps allocated from Targa
Resources.
At December 31, 2005, TNT LPs OCI included unrealized
losses of $0.1 million on interest rate swaps allocated
from Targa Resources.
During the nine months ended September 30, 2006, deferred
gains of $0.5 million on commodity hedges and
$0.2 million on interest rate swaps were reclassified from
OCI and credited to income.
Based on quoted market prices and rates for future periods as of
September 30, 2006, during the next twelve months TNT LP
expects to reclassify to earnings deferred net gains of
$15.0 million associated with commodity derivatives and
$0.6 million associated with interest rate swaps. The
amounts ultimately reclassified to earnings will vary depending
on the actual realized value upon settlement.
TNT LP had the following open derivatives at September 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Commodity
|
|
Type
|
|
Notional Amount
|
|
Average Price
|
|
Index
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Oct 06Dec 10
|
|
Natural gas
|
|
Swap
|
|
|
5,871,551
|
|
MMBtu
|
|
$8.37
per MMBtu
|
|
IF-WAHA
|
|
$
|
7,561
|
|
Oct 06Dec 10
|
|
Natural gas
|
|
Swap
|
|
|
8,756,711
|
|
MMBtu
|
|
8.35 per MMBtu
|
|
IF-NGPL MC
|
|
|
12,031
|
|
Oct 06Dec 10
|
|
NGL
|
|
Swap
|
|
|
3,278,547
|
|
Bbls
|
|
0.95 per gallon
|
|
MB-OPIS
|
|
|
10,404
|
|
Oct 06Dec 10
|
|
Condensate
|
|
Swap
|
|
|
386,526
|
|
Bbls
|
|
73.04 per barrel
|
|
NY-WTI
|
|
|
2,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,028
|
|
Oct-06Nov-07
|
|
Interest rates
|
|
Swap
|
|
$
|
138 million
|
|
|
|
|
|
3m USD LIBOR
|
|
|
674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
TARGA
NORTH TEXAS LP
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
The following table shows the balance sheet classification of
the fair value of TNT LPs open commodity derivatives and
allocated interest rate swaps at September 30, 2006.
|
|
|
|
|
|
|
(in thousands)
|
|
|
Current assets
|
|
$
|
15,144
|
|
Noncurrent assets
|
|
|
17,558
|
|
Current liabilities
|
|
|
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,702
|
|
|
|
|
|
|
Note 6
Commitments and Contingencies
Environmental
TNT LPs environmental liability at September 30, 2006
was $0.1 million, primarily for ground water assessment and
remediation.
Litigation
Summary
TNT LP is a party to various legal proceedings
and/or
regulatory proceedings, and certain claims, suits and complaints
arising in the ordinary course of business have been filed or
are pending against it. Management believes, all such matters
are without merit or involve amounts, which, if resolved
unfavorably, would not have a material effect on TNT LPs
financial position, results of operations, or cash flows.
Note 7
Related-Party Transactions
Sales to and purchases from Parent. TNT
LP and TNT LP Predecessor routinely conduct business with other
subsidiaries of the Parent. Transactions with such subsidiaries
result primarily from purchases and sales of natural gas and
natural gas liquids. In addition, all expenditures of TNT LP and
TNT LP Predecessor were paid through the Parent, resulting in
inter-company transactions. Unlike purchase and sales
transactions with third parties that settle in cash, settlement
of these sales and purchases occurs through adjustment to
partners capital (net parent equity of TNT LP Predecessor
for the nine months ended September 30, 2005).
Allocation of Parent long-term debt, debt issue costs,
interest rate swaps and interest expense. TNT
LPs financial statements include long-term debt, debt
issue costs, interest rate swaps and interest expense allocated
from the Parent. These allocations are not settled in cash.
Settlement of these allocations occurs through adjustment to
partners capital (net parent equity of TNT LP Predecessor
for the nine months ended September 30, 2005). See
Note 4 and Note 6 to our combined financial statements
and notes for the year ended December 31, 2005.
Allocation of Parent costs. The
employees supporting TNT LP and TNT LP Predecessors
operations are employees of the Parent. TNT LP and TNT LP
Predecessors financial statements include costs allocated
to them by the Parent for centralized general and administrative
services performed by the Parent, as well as depreciation of
assets utilized by the Parents centralized general and
administrative functions. Costs were allocated to TNT LP
Predecessor based on its proportionate share of the
Parents assets, revenues and employees. Costs allocated to
TNT LP were based on identification of the Parents
resources which directly benefit TNT LP and its proportionate
share of costs based on TNT LPs estimated usage of shared
resources and functions. All of the allocations are based on
assumptions that management believes are reasonable; however,
these allocations are not necessarily indicative of the costs
and expenses that would have resulted if TNT LP and TNT LP
Predecessor had been operated as stand-alone entities. These
F-37
TARGA
NORTH TEXAS LP
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
allocations are not settled in cash. Settlement of these
allocations occurs through adjustment to partners capital
(net parent equity of TNT LP Predecessor for the nine months
ended September 30, 2005).
The following table summarizes the sales to the Parent, payments
made or received by the Parent on behalf of TNT LP and TNT LP
Predecessor, and allocations of costs from the Parent, settled
through adjustment to partners capital/parent company
investment and not included in operating cash flows of TNT LP
and TNT LP Predecessor. Management believes these transactions
are executed on terms that are fair and reasonable.
|
|
|
|
|
|
|
|
|
|
|
|
TNT LP
|
|
|
|
TNT LP Predecessor
|
|
|
|
Nine Months
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Deemed cash
|
|
|
|
|
|
|
|
|
|
Sales to affiliates
|
|
$
|
(282,657
|
)
|
|
|
$
|
(242,370
|
)
|
Purchases from affiliates
|
|
|
670
|
|
|
|
|
909
|
|
Payments made/received by Parent
|
|
|
232,936
|
|
|
|
|
189,776
|
|
Parent allocation of general and
administrative expense
|
|
|
5,137
|
|
|
|
|
6,723
|
|
Parent allocation of interest
expense
|
|
|
50,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,590
|
|
|
|
|
(44,962
|
)
|
Noncash
|
|
|
|
|
|
|
|
|
|
Parent allocation of long-term
debt and debt issue costs
|
|
|
3,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions settled through
adjustments to partners capital/net parent equity
|
|
$
|
10,545
|
|
|
|
$
|
(44,962
|
)
|
|
|
|
|
|
|
|
|
|
|
Centralized Cash Management. The Parent
operates a cash management system whereby excess cash from most
of its various subsidiaries, held in separate bank accounts, is
swept to a centralized account managed by the Parent. Cash
contributions and distributions are deemed to have occurred
through the Parent, and are reflected as an adjustment to
partners capital/net parent equity. Deemed net
contributions of cash by the Parent were $6.6 million for
the nine months ended September 30, 2006. Deemed net
distributions of cash to the Parent were $45.0 million for
the nine months ended September 30, 2005.
Hedging Arrangements. An affiliate of Merrill
Lynch, Pierce, Fenner & Smith Incorporated
(Merrill Lynch is an equity investor in the holding
company that owns Targa Resources. During the nine months ended
September 30, 2006, TNT LP entered into commodity
derivative transactions with Merrill Lynch Commodities Inc., an
affiliate of Merrill Lynch. The transactions are shown in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Underlying
|
|
Type
|
|
Daily Volume
|
|
Average Price
|
|
Index
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jul 06 Dec
10
|
|
Natural gas
|
|
Swap
|
|
|
3,832
|
|
|
MMBtu
|
|
$
|
8.27
|
|
|
per MMBtu
|
|
IF-WA
|
Jul 06 Dec
10
|
|
Condensate
|
|
Swap
|
|
|
255
|
|
|
barrels
|
|
|
73.04
|
|
|
per barrel
|
|
NY-WTI
|
During the nine months ended September 30, 2006, Merrill
Lynch paid TNT LP $0.6 million to settle certain of these
hedge transactions.
Note 8
Income Taxes
On May 18, 2006, the Governor of Texas signed into law
House Bill 3 (HB-3) which modifies the existing
Texas franchise tax law. The modified franchise tax will be
computed by subtracting either costs of
F-38
TARGA
NORTH TEXAS LP
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
goods sold or compensation expense, as defined in HB-3, from
gross revenue to arrive at a gross margin. The resulting gross
margin will be taxed at a one percent tax rate. HB-3 has also
expanded the definition of tax paying entities to include
limited partnerships thereby now subjecting TNT LP to a new
state tax expense. HB-3 becomes effective for activities
occurring on or after January 1, 2007. Management believes
that this tax should still be accounted for as an income tax,
following the provisions of SFAS 109, because it has the
characteristics of an income tax.
During the nine months ended September 30, 2006, TNT LP
recorded a deferred income tax liability of $2.3 million
related to the new tax, consisting of deferred income tax
expense of $2.0 million related to the difference between
the book basis and tax basis of its property, plant, and
equipment, and a $0.3 million reduction to OCI.
Note 9
Subsequent Event
During November 2006, management entered into the following
hedging arrangements for a portion of TNT LPs production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Commodity
|
|
Type
|
|
Daily Volume
|
|
Average Price
|
|
Index
|
|
Jan. 07 Dec.
10
|
|
Natural gas
|
|
Swap
|
|
520
|
|
MMbtu
|
|
$
|
7.32
|
|
|
per MMBtu
|
|
IF-WAHA
|
Jan. 07 Dec.
09
|
|
Natural gas
|
|
Swap
|
|
383
|
|
MMbtu
|
|
|
7.45
|
|
|
per MMBtu
|
|
IF-WAHA
|
Jan. 07 Dec.
09
|
|
Natural gas
|
|
Floor
|
|
528
|
|
MMbtu
|
|
|
6.71
|
|
|
per MMBtu
|
|
IF-WAHA
|
Jan. 07 Dec.
10
|
|
Natural gas
|
|
Swap
|
|
780
|
|
MMbtu
|
|
|
7.18
|
|
|
per MMBtu
|
|
IF-NGPL MC
|
Jan. 07 Dec.
09
|
|
Natural gas
|
|
Swap
|
|
570
|
|
MMbtu
|
|
|
7.20
|
|
|
per MMBtu
|
|
IF-NGPL MC
|
Jan. 07 Dec.
09
|
|
Natural gas
|
|
Floor
|
|
790
|
|
MMbtu
|
|
|
6.53
|
|
|
per MMBtu
|
|
IF-NGPL MC
|
Jan. 07 Dec.
10
|
|
Condensate
|
|
Swap
|
|
120
|
|
Bbls
|
|
|
66.31
|
|
|
per Bbl
|
|
NY-WTI
|
Jan. 07 Dec.
09
|
|
Condensate
|
|
Swap
|
|
43
|
|
Bbls
|
|
|
59.94
|
|
|
per Bbl
|
|
NY-WTI
|
These contracts may expose TNT LP to the risk of financial loss
in certain circumstances. These hedging arrangements provide TNT
LP with protection on the hedged volumes if prices decline below
the prices at which these hedges were set but, if prices
increased, the fixed price nature of the swap-related hedges
will cause TNT LP to receive less revenue on the hedged volumes
than it would receive in the absence of hedges.
F-39
Report of
Independent Registered Public Accounting Firm
To the Partners of Targa Resources Partners LP:
In our opinion, the accompanying balance sheet presents fairly,
in all material respects, the financial position of Targa
Resources Partners LP (the Partnership) at
October 23, 2006 in conformity with accounting principles
generally accepted in the United States of America. This
financial statement is the responsibility of the
Partnerships management. Our responsibility is to express
an opinion on this financial statement based on our audit. We
conducted our audit of this statement in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the balance sheet is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the balance sheet, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 13, 2006
F-40
TARGA
RESOURCES PARTNERS LP
Targa Resources Partners LP (the Partnership) is a
Delaware limited partnership formed in October 2006, to acquire
the assets of Targa Resources Partners Predecessor.
The Partnership intends to offer 16,800,000 common units,
representing limited partner interests, pursuant to a public
offering and to concurrently issue 11,528,231 subordinated
units, representing additional limited partner interests, to
subsidiaries of Targa Resources, Inc. and 528,127 units
representing a 2% general partner interest to Targa Resources GP
LLC.
Targa Resources GP LLC, as general partner, contributed $20 and
Targa Resources, Inc., on behalf of Targa GP Inc. and Targa LP
Inc. for their limited partner shares, contributed $980 to the
Partnership on October 23, 2006. There have been no other
transactions involving the Partnership as of November 13,
2006.
F-42
Report of
Independent Registered Public Accounting Firm
To the Member of Targa Resources GP LLC:
In our opinion, the accompanying balance sheet presents fairly,
in all material respects, the financial position of Targa
Resources GP LLC (the Company) at October 23,
2006 in conformity with accounting principles generally accepted
in the United States of America. This financial statement is the
responsibility of the Companys management. Our
responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this
statement in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance
sheet, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance
sheet provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
November 13, 2006
F-43
TARGA
RESOURCES GP LLC
BALANCE
SHEET
October 23,
2006
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
Cash
|
|
$
|
980
|
|
Investment in Targa Resources
Partners LP
|
|
|
20
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,000
|
|
|
|
|
|
|
|
MEMBERS EQUITY
|
Members equity
|
|
$
|
1,000
|
|
|
|
|
|
|
Total members
equity
|
|
$
|
1,000
|
|
|
|
|
|
|
See accompanying note to balance sheet
F-44
TARGA
RESOURCES GP LLC
NOTE TO BALANCE SHEET
Targa Resources GP LLC (General Partner) is a
Delaware company, and a single member limited liability company,
formed in October 2006, to become the general partner of Targa
Resources Partners LP (Partnership). The General
Partner is an indirect wholly-owned subsidiary of Targa
Resources, Inc. The General Partner owns a 2% general partner
interest in the Partnership.
On October 23, 2006, Targa Resources, Inc. and its
subsidiaries contributed $1,000 to the General Partner in
exchange for a 100% ownership interest.
The General Partner has invested $20 in the Partnership. There
have been no other transactions involving the General Partner as
of November 13, 2006.
F-45
FIRST
AMENDED AND RESTATED
AGREEMENT
OF LIMITED PARTNERSHIP
OF
TARGA
RESOURCES PARTNERS LP
A-1
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
ARTICLE I
DEFINITIONS
|
|
Section 1.1
|
|
|
Definitions
|
|
|
1
|
|
|
Section 1.2
|
|
|
Construction
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE II
ORGANIZATION
|
|
Section 2.1
|
|
|
Formation
|
|
|
16
|
|
|
Section 2.2
|
|
|
Name
|
|
|
16
|
|
|
Section 2.3
|
|
|
Registered Office; Registered
Agent; Principal Office; Other Offices
|
|
|
16
|
|
|
Section 2.4
|
|
|
Purpose and Business
|
|
|
16
|
|
|
Section 2.5
|
|
|
Powers
|
|
|
17
|
|
|
Section 2.6
|
|
|
Power of Attorney
|
|
|
17
|
|
|
Section 2.7
|
|
|
Term
|
|
|
18
|
|
|
Section 2.8
|
|
|
Title to Partnership Assets
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE III
RIGHTS OF LIMITED PARTNERS
|
|
Section 3.1
|
|
|
Limitation of Liability
|
|
|
18
|
|
|
Section 3.2
|
|
|
Management of Business
|
|
|
18
|
|
|
Section 3.3
|
|
|
Outside Activities of the Limited
Partners
|
|
|
19
|
|
|
Section 3.4
|
|
|
Rights of Limited Partners
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
|
|
Section 4.1
|
|
|
Certificates
|
|
|
20
|
|
|
Section 4.2
|
|
|
Mutilated, Destroyed, Lost or
Stolen Certificates
|
|
|
20
|
|
|
Section 4.3
|
|
|
Record Holders
|
|
|
21
|
|
|
Section 4.4
|
|
|
Transfer Generally
|
|
|
21
|
|
|
Section 4.5
|
|
|
Registration and Transfer of
Limited Partner Interests
|
|
|
21
|
|
|
Section 4.6
|
|
|
Transfer of the General
Partners General Partner Interest
|
|
|
22
|
|
|
Section 4.7
|
|
|
Transfer of Incentive Distribution
Rights
|
|
|
22
|
|
|
Section 4.8
|
|
|
Restrictions on Transfers
|
|
|
23
|
|
|
Section 4.9
|
|
|
Citizenship Certificates;
Non-citizen Assignees
|
|
|
24
|
|
|
Section 4.10
|
|
|
Redemption of
Partnership Interests of Non-citizen Assignees
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
i
|
|
|
|
|
|
|
|
|
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
|
|
Section 5.1
|
|
|
Organizational Contributions
|
|
|
25
|
|
|
Section 5.2
|
|
|
Contributions by the General
Partner and its Affiliates
|
|
|
26
|
|
|
Section 5.3
|
|
|
Contributions by Initial Limited
Partners
|
|
|
26
|
|
|
Section 5.4
|
|
|
Interest and Withdrawal
|
|
|
27
|
|
|
Section 5.5
|
|
|
Capital Accounts
|
|
|
27
|
|
|
Section 5.6
|
|
|
Issuances of Additional
Partnership Securities
|
|
|
29
|
|
|
Section 5.7
|
|
|
Conversion of Subordinated Units
|
|
|
30
|
|
|
Section 5.8
|
|
|
Limited Preemptive Right
|
|
|
30
|
|
|
Section 5.9
|
|
|
Splits and Combinations
|
|
|
30
|
|
|
Section 5.10
|
|
|
Fully Paid and Non-Assessable
Nature of Limited Partner Interests
|
|
|
31
|
|
|
Section 5.11
|
|
|
Issuance of Class B Units in
Connection with Reset of Incentive Distribution Rights
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
|
|
Section 6.1
|
|
|
Allocations for Capital Account
Purposes
|
|
|
33
|
|
|
Section 6.2
|
|
|
Allocations for Tax Purposes
|
|
|
39
|
|
|
Section 6.3
|
|
|
Requirement and Characterization
of Distributions; Distributions to Record Holders
|
|
|
40
|
|
|
Section 6.4
|
|
|
Distributions of Available Cash
from Operating Surplus
|
|
|
41
|
|
|
Section 6.5
|
|
|
Distributions of Available Cash
from Capital Surplus
|
|
|
42
|
|
|
Section 6.6
|
|
|
Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels
|
|
|
43
|
|
|
Section 6.7
|
|
|
Special Provisions Relating to the
Holders of Subordinated Units and Class B Units
|
|
|
43
|
|
|
Section 6.8
|
|
|
Special Provisions Relating to the
Holders of Incentive Distribution Rights
|
|
|
44
|
|
|
Section 6.9
|
|
|
Entity-Level Taxation
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
|
|
Section 7.1
|
|
|
Management
|
|
|
45
|
|
|
Section 7.2
|
|
|
Certificate of Limited Partnership
|
|
|
46
|
|
|
Section 7.3
|
|
|
Restrictions on the General
Partners Authority
|
|
|
47
|
|
|
Section 7.4
|
|
|
Reimbursement of the General
Partner
|
|
|
47
|
|
|
Section 7.5
|
|
|
Outside Activities
|
|
|
48
|
|
|
Section 7.6
|
|
|
Loans from the General Partner;
Loans or Contributions from the Partnership or Group Members
|
|
|
48
|
|
|
Section 7.7
|
|
|
Indemnification
|
|
|
49
|
|
|
Section 7.8
|
|
|
Liability of Indemnitees
|
|
|
50
|
|
|
Section 7.9
|
|
|
Resolution of Conflicts of
Interest; Standards of Conduct and Modification of Duties
|
|
|
51
|
|
|
Section 7.10
|
|
|
Other Matters Concerning the
General Partner
|
|
|
52
|
|
|
Section 7.11
|
|
|
Purchase or Sale of Partnership
Securities
|
|
|
52
|
|
|
Section 7.12
|
|
|
Registration Rights of the General
Partner and its Affiliates
|
|
|
53
|
|
|
Section 7.13
|
|
|
Reliance by Third Parties
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
ii
|
|
|
|
|
|
|
|
|
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
|
|
Section 8.1
|
|
|
Records and Accounting
|
|
|
56
|
|
|
Section 8.2
|
|
|
Fiscal Year
|
|
|
56
|
|
|
Section 8.3
|
|
|
Reports
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE IX
TAX MATTERS
|
|
Section 9.1
|
|
|
Tax Returns and Information
|
|
|
56
|
|
|
Section 9.2
|
|
|
Tax Elections
|
|
|
57
|
|
|
Section 9.3
|
|
|
Tax Controversies
|
|
|
57
|
|
|
Section 9.4
|
|
|
Withholding
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE X
ADMISSION OF PARTNERS
|
|
Section 10.1
|
|
|
Admission of Limited Partners
|
|
|
57
|
|
|
Section 10.2
|
|
|
Admission of Successor General
Partner
|
|
|
58
|
|
|
Section 10.3
|
|
|
Amendment of Agreement and
Certificate of Limited Partnership
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
|
|
Section 11.1
|
|
|
Withdrawal of the General Partner
|
|
|
58
|
|
|
Section 11.2
|
|
|
Removal of the General Partner
|
|
|
60
|
|
|
Section 11.3
|
|
|
Interest of Departing General
Partner and Successor General Partner
|
|
|
60
|
|
|
Section 11.4
|
|
|
Termination of Subordination
Period, Conversion of Subordinated Units and Extinguishment of
Cumulative Common Unit Arrearages
|
|
|
61
|
|
|
Section 11.5
|
|
|
Withdrawal of Limited Partners
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE XII
DISSOLUTION AND LIQUIDATION
|
|
Section 12.1
|
|
|
Dissolution
|
|
|
62
|
|
|
Section 12.2
|
|
|
Continuation of the Business of
the Partnership After Dissolution
|
|
|
62
|
|
|
Section 12.3
|
|
|
Liquidator
|
|
|
63
|
|
|
Section 12.4
|
|
|
Liquidation
|
|
|
63
|
|
|
Section 12.5
|
|
|
Cancellation of Certificate of
Limited Partnership
|
|
|
64
|
|
|
Section 12.6
|
|
|
Return of Contributions
|
|
|
64
|
|
|
Section 12.7
|
|
|
Waiver of Partition
|
|
|
64
|
|
|
Section 12.8
|
|
|
Capital Account Restoration
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
iii
|
|
|
|
|
|
|
|
|
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
|
|
Section 13.1
|
|
|
Amendments to be Adopted Solely by
the General Partner
|
|
|
64
|
|
|
Section 13.2
|
|
|
Amendment Procedures
|
|
|
65
|
|
|
Section 13.3
|
|
|
Amendment Requirements
|
|
|
66
|
|
|
Section 13.4
|
|
|
Special Meetings
|
|
|
66
|
|
|
Section 13.5
|
|
|
Notice of a Meeting
|
|
|
67
|
|
|
Section 13.6
|
|
|
Record Date
|
|
|
67
|
|
|
Section 13.7
|
|
|
Adjournment
|
|
|
67
|
|
|
Section 13.8
|
|
|
Waiver of Notice; Approval of
Meeting
|
|
|
67
|
|
|
Section 13.9
|
|
|
Quorum and Voting
|
|
|
67
|
|
|
Section 13.10
|
|
|
Conduct of a Meeting
|
|
|
68
|
|
|
Section 13.11
|
|
|
Action Without a Meeting
|
|
|
68
|
|
|
Section 13.12
|
|
|
Right to Vote and Related Matters
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE XIV
MERGER, CONSOLIDATION OR CONVERSION
|
|
Section 14.1
|
|
|
Authority
|
|
|
69
|
|
|
Section 14.2
|
|
|
Procedure for Merger,
Consolidation or Conversion
|
|
|
69
|
|
|
Section 14.3
|
|
|
Approval by Limited Partners
|
|
|
70
|
|
|
Section 14.4
|
|
|
Certificate of Merger
|
|
|
71
|
|
|
Section 14.5
|
|
|
Effect of Merger, Consolidation or
Conversion
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
|
|
Section 15.1
|
|
|
Right to Acquire Limited Partner
Interests
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE XVI
GENERAL PROVISIONS
|
|
Section 16.1
|
|
|
Addresses and Notices; Written
Communications
|
|
|
74
|
|
|
Section 16.2
|
|
|
Further Action
|
|
|
74
|
|
|
Section 16.3
|
|
|
Binding Effect
|
|
|
74
|
|
|
Section 16.4
|
|
|
Integration
|
|
|
75
|
|
|
Section 16.5
|
|
|
Creditors
|
|
|
75
|
|
|
Section 16.6
|
|
|
Waiver
|
|
|
75
|
|
|
Section 16.7
|
|
|
Third-Party Beneficiaries
|
|
|
75
|
|
|
Section 16.8
|
|
|
Counterparts
|
|
|
75
|
|
|
Section 16.9
|
|
|
Applicable Law
|
|
|
75
|
|
|
Section 16.10
|
|
|
Invalidity of Provisions
|
|
|
75
|
|
|
Section 16.11
|
|
|
Consent of Partners
|
|
|
75
|
|
|
Section 16.12
|
|
|
Facsimile Signatures
|
|
|
75
|
|
iv
FIRST
AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF TARGA RESOURCES PARTNERS LP
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF TARGA RESOURCES PARTNERS LP dated as of
February , 2007, is entered into by and between
Targa Resources GP LLC, a Delaware limited liability company, as
the General Partner, and Targa GP Inc., a Delaware corporation
(Targa GP), and Targa LP Inc., a Delaware
corporation (Targa LP, and together with Targa GP,
the Organizational Limited Partners), together with
any other Persons who become Partners in the Partnership or
parties hereto as provided herein. In consideration of the
covenants, conditions and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.
The following definitions shall be for all purposes, unless
otherwise clearly indicated to the contrary, applied to the
terms used in this Agreement.
Acquisition means any transaction in which
any Group Member acquires (through an asset acquisition, merger,
stock acquisition or other form of investment) control over all
or a portion of the assets, properties or business of another
Person for the purpose of increasing the long-term operating
capacity or earnings of the Partnership Group from the operating
capacity or revenues of the Partnership Group existing
immediately prior to such transaction.
Additional Book Basis means the portion of
any remaining Carrying Value of an Adjusted Property that is
attributable to positive adjustments made to such Carrying Value
as a result of
Book-Up
Events. For purposes of determining the extent that Carrying
Value constitutes Additional Book Basis:
(a) Any negative adjustment made to the Carrying Value of
an Adjusted Property as a result of either a Book-Down Event or
a Book-Up
Event shall first be deemed to offset or decrease that portion
of the Carrying Value of such Adjusted Property that is
attributable to any prior positive adjustments made thereto
pursuant to a
Book-Up
Event or Book-Down Event.
(b) If Carrying Value that constitutes Additional Book
Basis is reduced as a result of a Book-Down Event and the
Carrying Value of other property is increased as a result of
such Book-Down Event, an allocable portion of any such increase
in Carrying Value shall be treated as Additional Book Basis;
provided, that the amount treated as Additional Book
Basis pursuant hereto as a result of such Book-Down Event shall
not exceed the amount by which the Aggregate Remaining Net
Positive Adjustments after such Book-Down Event exceeds the
remaining Additional Book Basis attributable to all of the
Partnerships Adjusted Property after such Book-Down Event
(determined without regard to the application of this
clause (b) to such Book-Down Event).
Additional Book Basis Derivative Items means
any Book Basis Derivative Items that are computed with reference
to Additional Book Basis. To the extent that the Additional Book
Basis attributable to all of the Partnerships Adjusted
Property as of the beginning of any taxable period exceeds the
Aggregate Remaining Net Positive Adjustments as of the beginning
of such period (the Excess Additional Book
Basis), the Additional Book Basis Derivative Items
for such period shall be reduced by the amount that bears the
same ratio to the amount of Additional Book Basis Derivative
Items determined without regard to this sentence as the Excess
Additional Book Basis bears to the Additional Book Basis as of
the beginning of such period.
Adjusted Capital Account means the Capital
Account maintained for each Partner as of the end of each fiscal
year of the Partnership, (a) increased by any amounts that
such Partner is obligated to restore under the standards set by
Treasury
Regulation Section 1.704-1(b)(2)(ii)(c)
(or is deemed obligated to restore under Treasury
Regulation Sections 1.704-2(g)
and 1.704-2(i)(5)) and (b) decreased by (i) the
amount of all losses and deductions that, as of the end of such
fiscal year, are reasonably expected to be allocated to such
Partner in subsequent years under Sections 704(e)(2) and
706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii),
and (ii) the amount of all distributions that, as of the
end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting
increases to such Partners Capital Account that are
reasonably expected to occur during (or prior to) the year in
which such distributions are reasonably expected to be made
(other than increases as a result of a minimum gain chargeback
pursuant to Section 6.1(d)(i) or 6.1(d)(ii)). The foregoing
definition of Adjusted Capital Account is intended to comply
with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith. The
Adjusted Capital Account of a Partner in respect of
a General Partner Unit, a Common Unit, a Subordinated Unit, a
Class B Unit or an Incentive Distribution Right or any
other Partnership Interest shall be the amount that such
Adjusted Capital Account would be if such General Partner Unit,
Common Unit, Subordinated Unit, Class B Unit, Incentive
Distribution Right or other Partnership Interest were the
only interest in the Partnership held by such Partner from and
after the date on which such General Partner Unit, Common Unit,
Class B Unit, Subordinated Unit, Incentive Distribution
Right or other Partnership Interest was first issued.
Adjusted Operating Surplus means, with
respect to any period, Operating Surplus generated with respect
to such period (a) less any net decrease in cash reserves
for Operating Expenditures with respect to such period not
relating to an Operating Expenditure made with respect to such
period, and (b) plus (i) any net decrease made in
subsequent periods in cash reserves for Operating Expenditures
initially established with respect to such period to the extent
such decrease results in a reduction in Adjusted Operating
Surplus in subsequent periods pursuant to clause (a) above and
(ii) any net increase in cash reserves for Operating
Expenditures with respect to such period required by any debt
instrument for the repayment of principal, interest or premium.
Adjusted Operating Surplus does not include that portion of
Operating Surplus included in clause (a)(i) of the
definition of Operating Surplus.
Adjusted Property means any property the
Carrying Value of which has been adjusted pursuant to
Section 5.5(d)(i) or 5.5(d)(ii).
Affiliate means, with respect to any Person,
any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common
control with, the Person in question. As used herein, the term
control means the possession, direct or indirect, of
the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting
securities, by contract or otherwise.
Aggregate Quantity of Class B Units has
the meaning assigned to such term in Section 5.11.
Aggregate Remaining Net Positive Adjustments
means, as of the end of any taxable period, the sum of the
Remaining Net Positive Adjustments of all the Partners.
Agreed Allocation means any allocation, other
than a Required Allocation, of an item of income, gain, loss or
deduction pursuant to the provisions of Section 6.1,
including a Curative Allocation (if appropriate to the context
in which the term Agreed Allocation is used).
Agreed Value of any Contributed Property
means the fair market value of such property or other
consideration at the time of contribution as determined by the
General Partner. The General Partner shall use such method as it
determines to be appropriate to allocate the aggregate Agreed
Value of Contributed Properties contributed to the Partnership
in a single or integrated transaction among each separate
property on a basis proportional to the fair market value of
each Contributed Property.
Agreement means this First Amended and
Restated Agreement of Limited Partnership of Targa Resources
Partners LP, as it may be amended, supplemented or restated from
time to time.
Associate means, when used to indicate a
relationship with any Person, (a) any corporation or
organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more
of any class of voting stock or other voting interest;
(b) any trust or other estate in which such
2
Person has at least a 20% beneficial interest or as to which
such Person serves as trustee or in a similar fiduciary
capacity; and (c) any relative or spouse of such Person, or
any relative of such spouse, who has the same principal
residence as such Person.
Available Cash means, with respect to any
Quarter ending prior to the Liquidation Date:
(a) all cash and cash equivalents of the Partnership Group
on hand on the date of determination of Available Cash with
respect to such Quarter, less
(b) the amount of any cash reserves established by the
General Partner to (i) provide for the proper conduct of
the business of the Partnership Group (including reserves for
future capital expenditures and for anticipated future credit
needs of the Partnership Group) subsequent to such Quarter,
(ii) comply with applicable law or any loan agreement,
security agreement, mortgage, debt instrument or other agreement
or obligation to which any Group Member is a party or by which
it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect
of any one or more of the next four Quarters; provided,
however, that the General Partner may not establish cash
reserves pursuant to (iii) above if the effect of such
reserves would be that the Partnership is unable to distribute
the Minimum Quarterly Distribution on all Common Units, plus any
Cumulative Common Unit Arrearage on all Common Units, with
respect to such Quarter; and, provided further, that
disbursements made by a Group Member or cash reserves
established, increased or reduced after the end of such Quarter
but on or before the date of determination of Available Cash
with respect to such Quarter shall be deemed to have been made,
established, increased or reduced, for purposes of determining
Available Cash, within such Quarter if the General Partner so
determines.
Notwithstanding the foregoing, Available Cash
with respect to the Quarter in which the Liquidation Date occurs
and any subsequent Quarter shall equal zero.
Board of Directors means the board of
directors or managers of a corporation or limited liability
company or the board of directors or board of managers of the
general partner of a limited partnership, as applicable.
Book Basis Derivative Items means any item of
income, deduction, gain or loss included in the determination of
Net Income or Net Loss that is computed with reference to the
Carrying Value of an Adjusted Property (e.g., depreciation,
depletion, or gain or loss with respect to an Adjusted Property).
Book-Down Event means an event that triggers
a negative adjustment to the Capital Accounts of the Partners
pursuant to Section 5.5(d).
Book-Tax Disparity means with respect to any
item of Contributed Property or Adjusted Property, as of the
date of any determination, the difference between the Carrying
Value of such Contributed Property or Adjusted Property and the
adjusted basis thereof for federal income tax purposes as of
such date. A Partners share of the Partnerships
Book-Tax Disparities in all of its Contributed Property and
Adjusted Property will be reflected by the difference between
such Partners Capital Account balance as maintained
pursuant to Section 5.5 and the hypothetical balance of
such Partners Capital Account computed as if it had been
maintained strictly in accordance with federal income tax
accounting principles.
Book-Up
Event means an event that triggers a positive
adjustment to the Capital Accounts of the Partners pursuant to
Section 5.5(d).
Business Day means Monday through Friday of
each week, except that a legal holiday recognized as such by the
government of the United States of America or the State of Texas
shall not be regarded as a Business Day.
Capital Account means the capital account
maintained for a Partner pursuant to Section 5.5. The
Capital Account of a Partner in respect of a
General Partner Unit, a Common Unit, a Subordinated Unit, a
Class B Unit, an Incentive Distribution Right or any
Partnership Interest shall be the amount that such Capital
Account would be if such General Partner Unit, Common Unit,
Subordinated Unit, Class B Unit, Incentive Distribution
Right or other Partnership Interest were the only interest
in the Partnership
3
held by such Partner from and after the date on which such
General Partner Unit, Common Unit, Class B Unit,
Subordinated Unit, Incentive Distribution Right or other
Partnership Interest was first issued.
Capital Contribution means any cash, cash
equivalents or the Net Agreed Value of Contributed Property that
a Partner contributes to the Partnership.
Capital Improvement means any
(a) addition or improvement to the capital assets owned by
any Group Member, (b) acquisition of existing, or the
construction of new, capital assets (including, without
limitation, gathering lines, treating facilities, processing
plants, fractionation facilities, pipelines, terminals, docks,
truck racks, tankage and other storage, distribution or
transportation facilities and related or similar midstream
assets or other assets that produce qualifying
income as defined by Section 7704 of the Code) or
(c) capital contributions by a Group Member to a Person in
which a Group Member has an equity interest to fund such Group
Members pro rata share of the cost of the acquisition of
existing, or the construction of new, capital assets (including,
without limitation, gathering lines, treating facilities,
processing plants, fractionation facilities, pipelines,
terminals, docks, truck racks, tankage and other storage,
distribution or transportation facilities and related or similar
midstream assets or other assets that produce qualifying
income as defined by Section 7704 of the Code) by
such Person, in each case if such addition, improvement,
acquisition or construction is made to increase the long-term
operating capacity or earnings of the Partnership Group, in the
case of clauses (a) and (b), or such Person, in the case of
clause (c), from the operating capacity or revenues of the
Partnership Group or such Person, as the case may be, existing
immediately prior to such addition, improvement, acquisition or
construction.
Capital Surplus has the meaning assigned to
such term in Section 6.3(a).
Carrying Value means (a) with respect to
a Contributed Property, the Agreed Value of such property
reduced (but not below zero) by all depreciation, amortization
and cost recovery deductions charged to the Partners
Capital Accounts in respect of such Contributed Property, and
(b) with respect to any other Partnership property, the
adjusted basis of such property for federal income tax purposes,
all as of the time of determination. The Carrying Value of any
property shall be adjusted from time to time in accordance with
Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership properties, as
deemed appropriate by the General Partner.
Cause means a court of competent jurisdiction
has entered a final, non-appealable judgment finding the General
Partner liable for actual fraud or willful misconduct in its
capacity as a general partner of the Partnership.
Certificate means (a) a certificate
(i) substantially in the form of Exhibit A to this
Agreement, (ii) issued in global form in accordance with
the rules and regulations of the Depositary or (iii) in
such other form as may be adopted by the General Partner, issued
by the Partnership evidencing ownership of one or more Common
Units or (b) a certificate, in such form as may be adopted
by the General Partner, issued by the Partnership evidencing
ownership of one or more other Partnership Securities.
Certificate of Limited Partnership means the
Certificate of Limited Partnership of the Partnership filed with
the Secretary of State of the State of Delaware as referenced in
Section 7.2, as such Certificate of Limited Partnership may
be amended, supplemented or restated from time to time.
Citizenship Certification means a properly
completed certificate in such form as may be specified by the
General Partner by which a Limited Partner certifies that he
(and if he is a nominee holding for the account of another
Person, that to the best of his knowledge such other Person) is
an Eligible Citizen.
claim (as used in Section 7.12(d)) has
the meaning assigned to such term in Section 7.12(d).
Class B Units means a Partnership
Security representing a fractional part of the
Partnership Interests of all Limited Partners, and having
the rights and obligations specified with respect to
Class B Units in this Agreement.
4
Closing Date means the first date on which
Common Units are sold by the Partnership to the Underwriters
pursuant to the provisions of the Underwriting Agreement.
Closing Price has the meaning assigned to
such term in Section 15.1(a).
Code means the Internal Revenue Code of 1986,
as amended and in effect from time to time. Any reference herein
to a specific section or sections of the Code shall be deemed to
include a reference to any corresponding provision of any
successor law.
Combined Interest has the meaning assigned to
such term in Section 11.3(a).
Commission means the United States Securities
and Exchange Commission.
Commodity Hedge Contract means any commodity
exchange, swap, forward, cap, floor, collar or other similar
agreement or arrangement entered into for the purpose of hedging
the Partnership Groups exposure to fluctuations in the
price of hydrocarbons.
Common Unit means a Partnership Security
representing a fractional part of the Partnership Interests
of all Limited Partners, and having the rights and obligations
specified with respect to Common Units in this Agreement. The
term Common Unit does not include a Subordinated
Unit or Class B Unit prior to its conversion into a Common
Unit pursuant to the terms hereof.
Common Unit Arrearage means, with respect to
any Common Unit, whenever issued, as to any Quarter within the
Subordination Period, the excess, if any, of (a) the
Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available
Cash distributed with respect to a Common Unit in respect of
such Quarter pursuant to Section 6.4(a)(i).
Conflicts Committee means a committee of the
Board of Directors of the General Partner composed entirely of
two or more directors, each of whom (a) is not a security
holder, officer or employee of the General Partner, (b) is
not an officer, director or employee of any Affiliate of the
General Partner, (c) is not a holder of any ownership
interest in the Partnership Group other than Common Units and
(d) meets the independence standards required of directors
who serve on an audit committee of a board of directors
established by the Securities Exchange Act and the rules and
regulations of the Commission thereunder and by the National
Securities Exchange on which the Common Units are listed or
admitted to trading.
Contributed Property means each property or
other asset, in such form as may be permitted by the Delaware
Act, but excluding cash, contributed to the Partnership. Once
the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no longer
constitute a Contributed Property, but shall be deemed an
Adjusted Property.
Contribution Agreement means that certain
Contribution and Conveyance Agreement, dated as of the Closing
Date, among the General Partner, the Partnership, the Operating
Partnership and certain other parties, together with the
additional conveyance documents and instruments contemplated or
referenced thereunder, as such may be amended, supplemented or
restated from time to time.
Converted Common Units has the meaning
assigned to such term in Section 6.1(d)(x)(B).
Cumulative Common Unit Arrearage means, with
respect to any Common Unit, whenever issued, and as of the end
of any Quarter, the excess, if any, of (a) the sum
resulting from adding together the Common Unit Arrearage as to
an Initial Common Unit for each of the Quarters within the
Subordination Period ending on or before the last day of such
Quarter over (b) the sum of any distributions theretofore
made pursuant to Section 6.4(a)(ii) and the second sentence
of Section 6.5 with respect to an Initial Common Unit
(including any distributions to be made in respect of the last
of such Quarters).
Curative Allocation means any allocation of
an item of income, gain, deduction, loss or credit pursuant to
the provisions of Section 6.1(d)(xi).
Current Market Price has the meaning assigned
to such term in Section 15.1(a).
5
Delaware Act means the Delaware Revised
Uniform Limited Partnership Act, 6 Del C.
Section 17-101,
et seq., as amended, supplemented or restated from time to time,
and any successor to such statute.
Departing General Partner means a former
general partner from and after the effective date of any
withdrawal or removal of such former general partner pursuant to
Section 11.1 or Section 11.2.
Depositary means, with respect to any Units
issued in global form, The Depository Trust Company and its
successors and permitted assigns.
Economic Risk of Loss has the meaning set
forth in Treasury
Regulation Section 1.752-2(a).
Eligible Citizen means a Person qualified to
own interests in real property in jurisdictions in which any
Group Member does business or proposes to do business from time
to time, and whose status as a Limited Partner the General
Partner determines does not or would not subject such Group
Member to a significant risk of cancellation or forfeiture of
any of its properties or any interest therein.
Estimated Incremental Quarterly Tax Amount
has the meaning assigned to such term in Section 6.9.
Event of Withdrawal has the meaning assigned
to such term in Section 11.1(a).
Expansion Capital Expenditures means cash
expenditures for Acquisitions or Capital Improvements, and shall
not include Maintenance Capital Expenditures.
Final Subordinated Units has the meaning
assigned to such term in Section 6.1(d)(x).
First Liquidation Target Amount has the
meaning assigned to such term in Section 6.1(c)(i)(E).
First Target Distribution means
$0.3881 per Unit per Quarter (or, with respect to the
period commencing on the Closing Date and ending on
March 31, 2007, it means the product of $0.3881 multiplied
by a fraction of which the numerator is the number of days in
such period, and of which the denominator is 90), subject to
adjustment in accordance with Sections 5.11, 6.6 and 6.9.
Fully Diluted Basis means, when calculating
the number of Outstanding Units for any period, a basis that
includes, in addition to the Outstanding Units, all Partnership
Securities and options, rights, warrants and appreciation rights
relating to an equity interest in the Partnership (a) that
are convertible into or exercisable or exchangeable for Units
that are senior to or pari passu with the Subordinated Units,
(b) whose conversion, exercise or exchange price is less
than the Current Market Price on the date of such calculation,
(c) that may be converted into or exercised or exchanged
for such Units prior to or during the Quarter immediately
following the end of the period for which the calculation is
being made without the satisfaction of any contingency beyond
the control of the holder other than the payment of
consideration and the compliance with administrative mechanics
applicable to such conversion, exercise or exchange and
(d) that were not converted into or exercised or exchanged
for such Units during the period for which the calculation is
being made; provided, however, that for purposes of
determining the number of Outstanding Units on a Fully Diluted
Basis when calculating whether the Subordination Period has
ended or Subordinated Units are entitled to convert into Common
Units pursuant to Section 5.7, such Partnership Securities,
options, rights, warrants and appreciation rights shall be
deemed to have been Outstanding Units only for the four Quarters
that comprise the last four Quarters of the measurement period;
provided, further, that if consideration will be paid to
any Group Member in connection with such conversion, exercise or
exchange, the number of Units to be included in such calculation
shall be that number equal to the difference between
(i) the number of Units issuable upon such conversion,
exercise or exchange and (ii) the number of Units that such
consideration would purchase at the Current Market Price.
General Partner means Targa Resources GP LLC,
a Delaware limited liability company, and its successors and
permitted assigns that are admitted to the Partnership as
general partner of the Partnership, in its capacity as general
partner of the Partnership (except as the context otherwise
requires).
General Partner Interest means the ownership
interest of the General Partner in the Partnership (in its
capacity as a general partner without reference to any Limited
Partner Interest held by it), which is
6
evidenced by General Partner Units, and includes any and all
benefits to which the General Partner is entitled as provided in
this Agreement, together with all obligations of the General
Partner to comply with the terms and provisions of this
Agreement.
General Partner Unit means a fractional part
of the General Partner Interest having the rights and
obligations specified with respect to the General Partner
Interest. A General Partner Unit is not a Unit.
Group means a Person that with or through any
of its Affiliates or Associates has any contract, arrangement,
understanding or relationship for the purpose of acquiring,
holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent
solicitation made to 10 or more Persons), exercising investment
power or disposing of any Partnership Interests with any
other Person that beneficially owns, or whose Affiliates or
Associates beneficially own, directly or indirectly,
Partnership Interests.
Group Member means a member of the
Partnership Group.
Group Member Agreement means the partnership
agreement of any Group Member, other than the Partnership, that
is a limited or general partnership, the limited liability
company agreement of any Group Member that is a limited
liability company, the certificate of incorporation and bylaws
or similar organizational documents of any Group Member that is
a corporation, the joint venture agreement or similar governing
document of any Group Member that is a joint venture and the
governing or organizational or similar documents of any other
Group Member that is a Person other than a limited or general
partnership, limited liability company, corporation or joint
venture, as such may be amended, supplemented or restated from
time to time.
Holder as used in Section 7.12, has the
meaning assigned to such term in Section 7.12(a).
IDR Reset Election has the meaning assigned
to such term in Section 5.11.
Incentive Distribution Right means a
non-voting Limited Partner Interest issued to the General
Partner, which Limited Partner Interest will confer upon the
holder thereof only the rights and obligations specifically
provided in this Agreement with respect to Incentive
Distribution Rights (and no other rights otherwise available to
or other obligations of a holder of a Partnership Interest).
Notwithstanding anything in this Agreement to the contrary, the
holder of an Incentive Distribution Right shall not be entitled
to vote such Incentive Distribution Right on any Partnership
matter except as may otherwise be required by law.
Incentive Distributions means any amount of
cash distributed to the holders of the Incentive Distribution
Rights pursuant to Sections 6.4(a)(v), (vi) and
(vii) and 6.4(b)(iii), (iv) and (v).
Incremental Income Taxes has the meaning
assigned to such term in Section 6.9.
Indemnified Persons has the meaning assigned
to such term in Section 7.12(d).
Indemnitee means (a) the General
Partner, (b) any Departing General Partner, (c) any
Person who is or was an Affiliate of the General Partner or any
Departing General Partner, (d) any Person who is or was a
member, partner, director, officer, fiduciary or trustee of any
Group Member, the General Partner or any Departing General
Partner or any Affiliate of any Group Member, the General
Partner or any Departing General Partner, (e) any Person
who is or was serving at the request of the General Partner or
any Departing General Partner or any Affiliate of the General
Partner or any Departing General Partner as an officer,
director, member, partner, fiduciary or trustee of another
Person; provided that a Person shall not be an Indemnitee
by reason of providing, on a
fee-for-services
basis, trustee, fiduciary or custodial services, and
(f) any Person the General Partner designates as an
Indemnitee for purposes of this Agreement.
Initial Common Units means the Common Units
sold in the Initial Offering.
Initial Limited Partner means the
Organizational Limited Partners and the General Partner (with
respect to the Subordinated Units and Incentive Distribution
Rights received by them pursuant to
7
Section 5.2) and the Underwriters upon the issuance by the
Partnership of Common Units as described in Section 5.3 in
connection with the Initial Offering.
Initial Offering means the initial offering
and sale of Common Units to the public, as described in the
Registration Statement.
Initial Unit Price means (a) with
respect to the Common Units and the Subordinated Units, the
initial public offering price per Common Unit at which the
Underwriters offered the Common Units to the public for sale as
set forth on the cover page of the prospectus included as part
of the Registration Statement and first issued at or after the
time the Registration Statement first became effective or
(b) with respect to any other class or series of Units, the
price per Unit at which such class or series of Units is
initially sold by the Partnership, as determined by the General
Partner, in each case adjusted as the General Partner determines
to be appropriate to give effect to any distribution,
subdivision or combination of Units.
Interim Capital Transactions means the
following transactions if they occur prior to the Liquidation
Date: (a) borrowings, refinancings or refundings of
indebtedness (other than for items purchased on open account in
the ordinary course of business) by any Group Member and sales
of debt securities of any Group Member; (b) sales of equity
interests of any Group Member (including the Common Units sold
to the Underwriters pursuant to the exercise of the
Over-Allotment Option); (c) sales or other voluntary or
involuntary dispositions of any assets of any Group Member other
than (i) sales or other dispositions of inventory, accounts
receivable and other assets in the ordinary course of business,
and (ii) sales or other dispositions of assets as part of
normal retirements or replacements; (d) capital
contributions received; or (e) corporate reorganizations or
restructurings.
Issue Price means the price at which a Unit
is purchased from the Partnership, net of any sales commission
or underwriting discount charged to the Partnership.
Limited Partner means, unless the context
otherwise requires, the Organizational Limited Partners prior to
their withdrawal from the Partnership, each Initial Limited
Partner, each additional Person that becomes a Limited Partner
pursuant to the terms of this Agreement and any Departing
General Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 11.3, in
each case, in such Persons capacity as limited partner of
the Partnership; provided, however, that when the term
Limited Partner is used herein in the context of any
vote or other approval, including Articles XIII and XIV,
such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right (solely with respect to its
Incentive Distribution Rights and not with respect to any other
Limited Partner Interest held by such Person) except as may
otherwise be required by law.
Limited Partner Interest means the ownership
interest of a Limited Partner in the Partnership, which may be
evidenced by Common Units, Class B Units, Subordinated
Units, Incentive Distribution Rights or other Partnership
Securities or a combination thereof or interest therein, and
includes any and all benefits to which such Limited Partner is
entitled as provided in this Agreement, together with all
obligations of such Limited Partner to comply with the terms and
provisions of this Agreement; provided, however, that
when the term Limited Partner Interest is used
herein in the context of any vote or other approval, including
Articles XIII and XIV, such term shall not, solely for such
purpose, include any Incentive Distribution Right except as may
otherwise be required by law.
Liquidation Date means (a) in the case
of an event giving rise to the dissolution of the Partnership of
the type described in clauses (a) and (b) of the first
sentence of Section 12.2, the date on which the applicable
time period during which the holders of Outstanding Units have
the right to elect to continue the business of the Partnership
has expired without such an election being made, and (b) in
the case of any other event giving rise to the dissolution of
the Partnership, the date on which such event occurs.
Liquidator means one or more Persons selected
by the General Partner to perform the functions described in
Section 12.4 as liquidating trustee of the Partnership
within the meaning of the Delaware Act.
Maintenance Capital Expenditures means cash
expenditures (including expenditures for the addition or
improvement to the capital assets owned by any Group Member or
for the acquisition of existing, or the
8
construction of new, capital assets) if such expenditures are
made to maintain, including over the long term, the operating
capacity or revenues of the Partnership Group.
Merger Agreement has the meaning assigned to
such term in Section 14.1.
Minimum Quarterly Distribution means
$0.3375 per Unit per Quarter (or with respect to the period
commencing on the Closing Date and ending on March 31,
2007, it means the product of $0.3375 multiplied by a fraction
of which the numerator is the number of days in such period and
of which the denominator is 90), subject to adjustment in
accordance with Sections 5.11, 6.6 and 6.9.
National Securities Exchange means an
exchange registered with the Commission under Section 6(a)
of the Securities Exchange Act.
Net Agreed Value means, (a) in the case
of any Contributed Property, the Agreed Value of such property
reduced by any liabilities either assumed by the Partnership
upon such contribution or to which such property is subject when
contributed, (b) in the case of any property distributed to
a Partner by the Partnership, the Partnerships Carrying
Value of such property (as adjusted pursuant to
Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such
Partner or Assignee upon such distribution or to which such
property is subject at the time of distribution, in either case,
as determined under Section 752 of the Code, and
(c) in the case of a contribution of Common Units by the
General Partner to the Partnership as a Capital Contribution
pursuant to Section 5.2(b), an amount per Common Unit
contributed equal to the Current Market Price per Common Unit as
of the date of the contribution.
Net Income means, for any taxable year, the
excess, if any, of the Partnerships items of income and
gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnerships items of loss and
deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year. The items included in the calculation of Net
Income shall be determined in accordance with
Section 5.5(b) and shall not include any items specially
allocated under Section 6.1(d); provided, that the
determination of the items that have been specially allocated
under Section 6.1(d) shall be made as if
Section 6.1(d)(xii) were not in this Agreement.
Net Loss means, for any taxable year, the
excess, if any, of the Partnerships items of loss and
deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnerships items of income
and gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year. The items included in the calculation of Net
Loss shall be determined in accordance with Section 5.5(b)
and shall not include any items specially allocated under
Section 6.1(d); provided, that the determination of
the items that have been specially allocated under
Section 6.1(d) shall be made as if Section 6.1(d)(xii)
were not in this Agreement.
Net Positive Adjustments means, with respect
to any Partner, the excess, if any, of the total positive
adjustments over the total negative adjustments made to the
Capital Account of such Partner pursuant to
Book-Up
Events and Book-Down Events.
Net Termination Gain means, for any taxable
year, the sum, if positive, of all items of income, gain, loss
or deduction recognized by the Partnership after the Liquidation
Date. The items included in the determination of Net Termination
Gain shall be determined in accordance with Section 5.5(b)
and shall not include any items of income, gain or loss
specially allocated under Section 6.1(d).
Net Termination Loss means, for any taxable
year, the sum, if negative, of all items of income, gain, loss
or deduction recognized by the Partnership after the Liquidation
Date. The items included in the determination of Net Termination
Loss shall be determined in accordance with Section 5.5(b)
and shall not include any items of income, gain or loss
specially allocated under Section 6.1(d).
9
Non-citizen Assignee means a Person whom the
General Partner has determined does not constitute an Eligible
Citizen and as to whose Partnership Interest the General Partner
has become the substituted limited partner, pursuant to
Section 4.9.
Nonrecourse Built-in Gain means with respect
to any Contributed Properties or Adjusted Properties that are
subject to a mortgage or pledge securing a Nonrecourse
Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to
Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and 6.2(b)(iii) if
such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other
consideration.
Nonrecourse Deductions means any and all
items of loss, deduction or expenditure (including any
expenditure described in Section 705(a)(2)(B) of the Code)
that, in accordance with the principles of Treasury
Regulation Section 1.704-2(b),
are attributable to a Nonrecourse Liability.
Nonrecourse Liability has the meaning set
forth in Treasury
Regulation Section 1.752-1(a)(2).
Notice of Election to Purchase has the
meaning assigned to such term in Section 15.1(b).
Omnibus Agreement means that certain Omnibus
Agreement, dated as of the Closing Date, among Targa Resources,
Inc., Targa Resources, LLC, the General Partner and the
Partnership, as such may be amended, supplemented or restated
from time to time.
Operating Expenditures means all Partnership
Group cash expenditures, including, but not limited to, taxes,
reimbursements of the General Partner in accordance with this
Agreement, interest payments, Maintenance Capital Expenditures,
non-Pro Rata repurchases of Units (other than those made with
the proceeds of an Interim Capital Transaction), subject to the
following:
(a) payments (including prepayments and prepayment
penalties) of principal of and premium on indebtedness shall not
constitute Operating Expenditures; and
(b) Operating Expenditures shall not include
(i) Expansion Capital Expenditures, (ii) payment of
transaction expenses (including taxes) relating to Interim
Capital Transactions or (iii) distributions to Partners.
Where capital expenditures consist of both Maintenance Capital
Expenditures and Expansion Capital Expenditures, the General
Partner, with the concurrence of the Conflicts Committee, shall
determine the allocation between the portion consisting of
Maintenance Capital Expenditures and the portion consisting of
Expansion Capital Expenditures and, with respect to the part of
such capital expenditures consisting of Maintenance Capital
Expenditures.
Operating Partnership means Targa Resources
Operating LP, a Delaware limited partnership, and any successors
thereto.
Operating Surplus means, with respect to any
period ending prior to the Liquidation Date, on a cumulative
basis and without duplication,
(a) the sum of (i) an amount equal to four times the
amount needed for any one Quarter for the Partnership to pay a
distribution on all Units, the General Partner Units and the
Incentive Distribution Rights at the same per Unit amount as was
distributed immediately preceding the date of determination (or
with respect to the period commencing on the Closing Date and
ending on March 31, 2007, it means the product of
(x) $1.35 multiplied by (y) a fraction of which the
numerator is the number of days in such period and the
denominator is 90 multiplied by (z) the number of Units and
General Partner Units Outstanding on the Record Date with
respect to such period), and (ii) all cash receipts of the
Partnership Group for the period beginning on the Closing Date
and ending on the last day of such period, but excluding cash
receipts from Interim Capital Transactions (except to the extent
specified in Section 6.5 and provided that cash receipts
from the termination of a Commodity Hedge Contract or interest
rate swap prior to its specified termination date shall be
included in Operating Surplus in equal quarterly installments
over the remaining scheduled life of such Commodity Hedge
Contract or interest rate swap), less
10
(b) the sum of (i) Operating Expenditures for the
period beginning on the Closing Date and ending on the last day
of such period and (ii) the amount of cash reserves
established by the General Partner to provide funds for future
Operating Expenditures; provided, however, that
disbursements made (including contributions to a Group Member or
disbursements on behalf of a Group Member) or cash reserves
established, increased or reduced after the end of such period
but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made,
established, increased or reduced, for purposes of determining
Operating Surplus, within such period if the General Partner so
determines.
Notwithstanding the foregoing, Operating
Surplus with respect to the Quarter in which the
Liquidation Date occurs and any subsequent Quarter shall equal
zero.
Opinion of Counsel means a written opinion of
counsel (who may be regular counsel to the Partnership or the
General Partner or any of its Affiliates) acceptable to the
General Partner.
Option Closing Date means the date or dates
on which any Common Units are sold by the Partnership to the
Underwriters upon exercise of the Over-Allotment Option.
Organizational Limited Partners means Targa
GP Inc. and Targa LP Inc. in their capacities as the
organizational limited partners of the Partnership pursuant to
this Agreement.
Outstanding means, with respect to
Partnership Securities, all Partnership Securities that are
issued by the Partnership and reflected as outstanding on the
Partnerships books and records as of the date of
determination; provided, however, that if at any time any
Person or Group (other than the General Partner or its
Affiliates) beneficially owns 20% or more of the Outstanding
Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not
be voted on any matter and shall not be considered to be
Outstanding when sending notices of a meeting of Limited
Partners to vote on any matter (unless otherwise required by
law), calculating required votes, determining the presence of a
quorum or for other similar purposes under this Agreement,
except that Units so owned shall be considered to be Outstanding
for purposes of Section 11.1(b)(iv) (such Units shall not,
however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided,
further, that the foregoing limitation shall not apply to
(i) any Person or Group who acquired 20% or more of the
Outstanding Partnership Securities of any class then Outstanding
directly from the General Partner or its Affiliates,
(ii) any Person or Group who acquired 20% or more of the
Outstanding Partnership Securities of any class then Outstanding
directly or indirectly from a Person or Group described in
clause (i) provided that the General Partner shall
have notified such Person or Group in writing that such
limitation shall not apply, or (iii) any Person or Group
who acquired 20% or more of any Partnership Securities issued by
the Partnership with the prior approval of the Board of
Directors of the General Partner.
Over-Allotment Option means the
over-allotment option granted to the Underwriters by the
Partnership pursuant to the Underwriting Agreement.
Partner Nonrecourse Debt has the meaning set
forth in Treasury
Regulation Section 1.704-2(b)(4).
Partner Nonrecourse Debt Minimum Gain has the
meaning set forth in Treasury
Regulation Section 1.704-2(i)(2).
Partner Nonrecourse Deductions means any and
all items of loss, deduction or expenditure (including any
expenditure described in Section 705(a)(2)(B) of the Code)
that, in accordance with the principles of Treasury
Regulation Section 1.704-2(i),
are attributable to a Partner Nonrecourse Debt.
Partners means the General Partner and the
Limited Partners.
Partnership means Targa Resources Partners
LP, a Delaware limited partnership.
Partnership Group means the Partnership and
its Subsidiaries treated as a single consolidated entity.
Partnership Interest means an interest
in the Partnership, which shall include the General Partner
Interest and Limited Partner Interests.
11
Partnership Minimum Gain means that amount
determined in accordance with the principles of Treasury
Regulation Section 1.704-2(d).
Partnership Security means any class or
series of equity interest in the Partnership (but excluding any
options, rights, warrants and appreciation rights relating to an
equity interest in the Partnership), including Common Units,
Class B Units, Subordinated Units, General Partner Units
and Incentive Distribution Rights.
Per Unit Capital Amount means, as of any date
of determination, the Capital Account, stated on a per Unit
basis, underlying any Unit held by a Person other than the
General Partner or any Affiliate of the General Partner who
holds Units.
Percentage Interest means as of any date of
determination (a) as to the General Partner with respect to
General Partner Units and as to any Unitholder with respect to
Units, the product obtained by multiplying (i) 100% less
the percentage applicable to clause (b) below by
(ii) the quotient obtained by dividing (A) the number
of General Partner Units held by the General Partner or the
number of Units held by such Unitholder, as the case may be, by
(B) the total number of Outstanding Units and General
Partner Units, and (b) as to the holders of other
Partnership Securities issued by the Partnership in accordance
with Section 5.6, the percentage established as a part of
such issuance. The Percentage Interest with respect to an
Incentive Distribution Right shall at all times be zero.
Person means an individual or a corporation,
firm, limited liability company, partnership, joint venture,
trust, unincorporated organization, association, government
agency or political subdivision thereof or other entity.
Pro Rata means (a) when used with
respect to Units or any class thereof, apportioned equally among
all designated Units in accordance with their relative
Percentage Interests, (b) when used with respect to
Partners and Assignees or Record Holders, apportioned among all
Partners and Assignees or Record Holders in accordance with
their relative Percentage Interests and (c) when used with
respect to holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in
accordance with the relative number or percentage of Incentive
Distribution Rights held by each such holder.
Purchase Date means the date determined by
the General Partner as the date for purchase of all Outstanding
Limited Partner Interests of a certain class (other than Limited
Partner Interests owned by the General Partner and its
Affiliates) pursuant to Article XV.
Quarter means, unless the context requires
otherwise, a fiscal quarter of the Partnership, or, with respect
to the fiscal quarter of the Partnership which includes the
Closing Date, the portion of such fiscal quarter after the
Closing Date.
Recapture Income means any gain recognized by
the Partnership (computed without regard to any adjustment
required by Section 734 or Section 743 of the Code)
upon the disposition of any property or asset of the
Partnership, which gain is characterized as ordinary income
because it represents the recapture of deductions previously
taken with respect to such property or asset.
Record Date means the date established by the
General Partner or otherwise in accordance with this Agreement
for determining (a) the identity of the Record Holders
entitled to notice of, or to vote at, any meeting of Limited
Partners or entitled to vote by ballot or give approval of
Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited
Partners or (b) the identity of Record Holders entitled to
receive any report or distribution or to participate in any
offer.
Record Holder means the Person in whose name
a Common Unit is registered on the books of the Transfer Agent
as of the opening of business on a particular Business Day, or
with respect to other Partnership Interests, the Person in
whose name any such other Partnership Interest is
registered on the books that the General Partner has caused to
be kept as of the opening of business on such Business Day.
12
Redeemable Interests means any
Partnership Interests for which a redemption notice has
been given, and has not been withdrawn, pursuant to
Section 4.10.
Registration Statement means the Registration
Statement on
Form S-1
as it has been or as it may be amended or supplemented from time
to time, filed by the Partnership with the Commission under the
Securities Act to register the offering and sale of the Common
Units in the Initial Offering.
Remaining Net Positive Adjustments means as
of the end of any taxable period, (i) with respect to the
Unitholders holding Common Units, Class B Units or
Subordinated Units, the excess of (a) the Net Positive
Adjustments of the Unitholders holding Common Units,
Class B Units or Subordinated Units as of the end of such
period over (b) the sum of those Partners Share of
Additional Book Basis Derivative Items for each prior taxable
period, (ii) with respect to the General Partner (as holder
of the General Partner Units), the excess of (a) the Net
Positive Adjustments of the General Partner as of the end of
such period over (b) the sum of the General Partners
Share of Additional Book Basis Derivative Items with respect to
the General Partner Units for each prior taxable period, and
(iii) with respect to the holders of Incentive Distribution
Rights, the excess of (a) the Net Positive Adjustments of
the holders of Incentive Distribution Rights as of the end of
such period over (b) the sum of the Share of Additional
Book Basis Derivative Items of the holders of the Incentive
Distribution Rights for each prior taxable period.
Required Allocations means (a) any
limitation imposed on any allocation of Net Losses or Net
Termination Losses under Section 6.1(b) or
Section 6.1(c)(ii) and (b) any allocation of an item
of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), Section 6.1(d)(ii),
Section 6.1(d)(iv), Section 6.1(d)(vii) or
Section 6.1(d)(ix).
Residual Gain or Residual
Loss means any item of gain or loss, as the case may
be, of the Partnership recognized for federal income tax
purposes resulting from a sale, exchange or other disposition of
a Contributed Property or Adjusted Property, to the extent such
item of gain or loss is not allocated pursuant to
Section 6.2(b)(i)(A) or Section 6.2(b)(ii)(A),
respectively, to eliminate Book-Tax Disparities.
Reset MQD has the meaning assigned to such
term in Section 5.11.
Reset Notice has the meaning assigned to such
term in Section 5.11.
Retained Converted Subordinated Unit has the
meaning assigned to such term in Section 5.5(c)(ii).
Second Liquidation Target Amount has the
meaning assigned to such term in Section 6.1(c)(i)(F).
Second Target Distribution means
$0.4219 per Unit per Quarter (or, with respect to the
period commencing on the Closing Date and ending on
March 31, 2007, it means the product of $0.4129 multiplied
by a fraction of which the numerator is equal to the number of
days in such period and of which the denominator is 90), subject
to adjustment in accordance with Section 5.11,
Section 6.6 and Section 6.9.
Securities Act means the Securities Act of
1933, as amended, supplemented or restated from time to time and
any successor to such statute.
Securities Exchange Act means the Securities
Exchange Act of 1934, as amended, supplemented or restated from
time to time and any successor to such statute.
Share of Additional Book Basis Derivative
Items means in connection with any allocation of
Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units,
Class B Units or Subordinated Units, the amount that bears
the same ratio to such Additional Book Basis Derivative Items as
the Unitholders Remaining Net Positive Adjustments as of
the end of such period bears to the Aggregate Remaining Net
Positive Adjustments as of that time, (ii) with respect to
the General Partner (as holder of the General Partner Units),
the amount that bears the same ratio to such Additional Book
Basis Derivative Items as the General Partners Remaining
Net Positive Adjustments as of the end of such period bears to
the Aggregate Remaining Net Positive Adjustment as of that time,
and (iii) with respect to the Partners holding Incentive
Distribution Rights, the amount that bears the same ratio to
such Additional Book Basis Derivative Items as the Remaining Net
Positive
13
Adjustments of the Partners holding the Incentive Distribution
Rights as of the end of such period bears to the Aggregate
Remaining Net Positive Adjustments as of that time.
Special Approval means approval by a majority
of the members of the Conflicts Committee acting in good faith.
Subordinated Unit means a Partnership
Security representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees
and having the rights and obligations specified with respect to
Subordinated Units in this Agreement. The term
Subordinated Unit does not include a Common Unit or
Class B Unit. A Subordinated Unit that is convertible into
a Common Unit shall not constitute a Common Unit until such
conversion occurs.
Subordination Period means the period
commencing on the Closing Date and ending on the first to occur
of:
(a) the first day of any Quarter beginning after
March 31, 2010 in respect of which
(i)(A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units, Subordinated
Units and General Partner Units and any other Outstanding Units
that are senior or equal in right of distribution to the
Subordinated Units with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all Outstanding Common Units,
Subordinated Units and General Partner Units and any other
Outstanding Units that are senior or equal in right of
distribution to the Subordinated Units during such periods and
(B) the Adjusted Operating Surplus generated during each of
the three consecutive, non-overlapping four-Quarter periods
immediately preceding such date equaled or exceeded the sum of
the Minimum Quarterly Distribution on all of the Common Units,
Subordinated Units and General Partner Units and any other Units
that are senior or equal in right of distribution to the
Subordinated Units that were Outstanding during such periods on
a Fully Diluted Basis and (ii) there are no Cumulative
Common Unit Arrearages;
(b) the first date on which there are no longer outstanding
any Subordinated Units due to the conversion of Subordinated
Units into Common Units pursuant to Section 5.7 or
otherwise; and
(c) the date on which the General Partner is removed as
general partner of the Partnership upon the requisite vote by
holders of Outstanding Units under circumstances where Cause
does not exist and Units held by the General Partner and its
Affiliates are not voted in favor of such removal.
Subsidiary means, with respect to any Person,
(a) a corporation of which more than 50% of the voting
power of shares entitled (without regard to the occurrence of
any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or
indirectly, at the date of determination, by such Person, by one
or more Subsidiaries of such Person or a combination thereof,
(b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership,
but only if more than 50% of the partnership interests of such
partnership (considering all of the partnership interests of the
partnership as a single class) is owned, directly or indirectly,
at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or
(c) any other Person (other than a corporation or a
partnership) in which such Person, one or more Subsidiaries of
such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority
ownership interest or (ii) the power to elect or direct the
election of a majority of the directors or other governing body
of such Person.
Surviving Business Entity has the meaning
assigned to such term in Section 14.2(b).
Target Distribution means, collectively, the
First Target Distribution, Second Target Distribution and Third
Target Distribution.
Third Liquidation Target Amount has the
meaning assigned to such term in Section 6.1(c)(i)(G).
Third Target Distribution means $0.50625 per
Unit per Quarter (or, with respect to the period commencing on
the Closing Date and ending on March 31, 2007, it means the
product of $0.50625
14
multiplied by a fraction of which the numerator is equal to the
number of days in such period and of which the denominator is
90), subject to adjustment in accordance with
Sections 5.11, 6.6 and 6.9.
Trading Day has the meaning assigned to such
term in Section 15.1(a).
transfer has the meaning assigned to such
term in Section 4.4(a).
Transfer Agent means such bank, trust company
or other Person (including the General Partner or one of its
Affiliates) as shall be appointed from time to time by the
General Partner to act as registrar and transfer agent for the
Common Units; provided, that if no Transfer Agent is
specifically designated for any other Partnership Securities,
the General Partner shall act in such capacity.
Underwriter means each Person named as an
underwriter in Schedule I to the Underwriting Agreement who
purchases Common Units pursuant thereto.
Underwriting Agreement means that certain
Underwriting Agreement dated as of February, 2007 among the
Underwriters, the Partnership, the General Partner, the
Operating Partnership and other parties thereto, providing for
the purchase of Common Units by the Underwriters.
Unit means a Partnership Security that is
designated as a Unit and shall include Common Units,
Class B Units and Subordinated Units but shall not include
(i) General Partner Units (or the General Partner Interest
represented thereby) or (ii) Incentive Distribution Rights.
Unit Majority means (i) during the
Subordination Period, at least a majority of the Outstanding
Common Units (excluding Common Units owned by the General
Partner and its Affiliates), voting as a class, and at least a
majority of the Outstanding Subordinated Units, voting as a
class, and (ii) after the end of the Subordination Period,
at least a majority of the Outstanding Common Units and
Class B Units, if any, voting as a single class.
Unitholders means the holders of Units.
Unpaid MQD has the meaning assigned to such
term in Section 6.1(c)(i)(B).
Unrealized Gain attributable to any item of
Partnership property means, as of any date of determination, the
excess, if any, of (a) the fair market value of such
property as of such date (as determined under
Section 5.5(d)) over (b) the Carrying Value of such
property as of such date (prior to any adjustment to be made
pursuant to Section 5.5(d) as of such date).
Unrealized Loss attributable to any item of
Partnership property means, as of any date of determination, the
excess, if any, of (a) the Carrying Value of such property
as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair
market value of such property as of such date (as determined
under Section 5.5(d)).
Unrecovered Initial Unit Price means at any
time, with respect to a Unit, the Initial Unit Price less the
sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any
distributions in kind) in connection with the dissolution and
liquidation of the Partnership theretofore made in respect of an
Initial Common Unit, adjusted as the General Partner determines
to be appropriate to give effect to any distribution,
subdivision or combination of such Units.
U.S. GAAP means United States generally
accepted accounting principles consistently applied.
Withdrawal Opinion of Counsel has the meaning
assigned to such term in Section 11.1(b).
Section 1.2 Construction.
Unless the context requires otherwise: (a) any
pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular form of
nouns, pronouns and verbs shall include the plural and vice
versa; (b) references to Articles and Sections refer to
Articles and Sections of this Agreement; (c) the terms
include, includes, including
or words of like import shall be deemed
15
to be followed by the words without limitation; and
(d) the terms hereof, herein or
hereunder refer to this Agreement as a whole and not
to any particular provision of this Agreement. The table of
contents and headings contained in this Agreement are for
reference purposes only, and shall not affect in any way the
meaning or interpretation of this Agreement.
ARTICLE II
ORGANIZATION
Section 2.1 Formation.
The General Partner and the Organizational Limited Partners have
previously formed the Partnership as a limited partnership
pursuant to the provisions of the Delaware Act and hereby amend
and restate the original Agreement of Limited Partnership of
Targa Resources Partners LP in its entirety. This amendment and
restatement shall become effective on the date of this
Agreement. Except as expressly provided to the contrary in this
Agreement, the rights, duties (including fiduciary duties),
liabilities and obligations of the Partners and the
administration, dissolution and termination of the Partnership
shall be governed by the Delaware Act. All
Partnership Interests shall constitute personal property of
the owner thereof for all purposes.
Section 2.2 Name.
The name of the Partnership shall be Targa Resources
Partners LP. The Partnerships business may be
conducted under any other name or names as determined by the
General Partner, including the name of the General Partner. The
words Limited Partnership, LP,
Ltd. or similar words or letters shall be included
in the Partnerships name where necessary for the purpose
of complying with the laws of any jurisdiction that so requires.
The General Partner may change the name of the Partnership at
any time and from time to time and shall notify the Limited
Partners of such change in the next regular communication to the
Limited Partners.
Section 2.3 Registered
Office; Registered Agent; Principal Office; Other Offices
Unless and until changed by the General Partner, the registered
office of the Partnership in the State of Delaware shall be
located at 1209 Orange Street, Wilmington, New Castle
County, Delaware 19801, and the registered agent for
service of process on the Partnership in the State of Delaware
at such registered office shall be The Corporation Trust
Company. The principal office of the Partnership shall be
located at 1000 Louisiana, Suite 4300, Houston,
Texas 77002, or such other place as the General Partner may
from time to time designate by notice to the Limited Partners.
The Partnership may maintain offices at such other place or
places within or outside the State of Delaware as the General
Partner shall determine necessary or appropriate. The address of
the General Partner shall be 1000 Louisiana,
Suite 4300, Houston, Texas 77002, or such other place as
the General Partner may from time to time designate by notice to
the Limited Partners.
Section 2.4 Purpose
and Business.
The purpose and nature of the business to be conducted by the
Partnership shall be to (a) engage directly in, or enter
into or form, hold and dispose of any corporation, partnership,
joint venture, limited liability company or other arrangement to
engage indirectly in, any business activity that is approved by
the General Partner and that lawfully may be conducted by a
limited partnership organized pursuant to the Delaware Act and,
in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership pursuant to the agreements
relating to such business activity, and (b) do anything
necessary or appropriate to the foregoing, including the making
of capital contributions or loans to a Group Member;
provided, however, that the General Partner shall not
cause the Partnership to engage, directly or indirectly, in any
business activity that the General Partner determines would
cause the Partnership to be treated as an association taxable as
a corporation or otherwise taxable as an entity for federal
income tax purposes. To the
16
fullest extent permitted by law, the General Partner shall have
no duty or obligation to propose or approve, and may decline to
propose or approve, the conduct by the Partnership of any
business free of any fiduciary duty or obligation whatsoever to
the Partnership or any Limited Partner and, in declining to so
propose or approve, shall not be required to act in good faith
or pursuant to any other standard imposed by this Agreement, any
Group Member Agreement, any other agreement contemplated hereby
or under the Delaware Act or any other law, rule or regulation
or at equity.
Section 2.5 Powers.
The Partnership shall be empowered to do any and all acts and
things necessary or appropriate for the furtherance and
accomplishment of the purposes and business described in
Section 2.4 and for the protection and benefit of the
Partnership.
Section 2.6 Power
of Attorney.
(a) Each Limited Partner hereby constitutes and appoints
the General Partner and, if a Liquidator shall have been
selected pursuant to Section 12.3, the Liquidator (and any
successor to the Liquidator by merger, transfer, assignment,
election or otherwise) and each of their authorized officers and
attorneys-in-fact,
as the case may be, with full power of substitution, as his true
and lawful agent and
attorney-in-fact,
with full power and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and
record in the appropriate public offices (A) all
certificates, documents and other instruments (including this
Agreement and the Certificate of Limited Partnership and all
amendments or restatements hereof or thereof) that the General
Partner or the Liquidator determines to be necessary or
appropriate to form, qualify or continue the existence or
qualification of the Partnership as a limited partnership (or a
partnership in which the limited partners have limited
liability) in the State of Delaware and in all other
jurisdictions in which the Partnership may conduct business or
own property; (B) all certificates, documents and other
instruments that the General Partner or the Liquidator
determines to be necessary or appropriate to reflect, in
accordance with its terms, any amendment, change, modification
or restatement of this Agreement; (C) all certificates,
documents and other instruments (including conveyances and a
certificate of cancellation) that the General Partner or the
Liquidator determines to be necessary or appropriate to reflect
the dissolution and liquidation of the Partnership pursuant to
the terms of this Agreement; (D) all certificates,
documents and other instruments relating to the admission,
withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, Article X,
Article XI or Article XII; (E) all certificates,
documents and other instruments relating to the determination of
the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and
(F) all certificates, documents and other instruments
(including agreements and a certificate of merger) relating to a
merger, consolidation or conversion of the Partnership pursuant
to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and
record all ballots, consents, approvals, waivers, certificates,
documents and other instruments that the General Partner or the
Liquidator determines to be necessary or appropriate to
(A) make, evidence, give, confirm or ratify any vote,
consent, approval, agreement or other action that is made or
given by the Partners hereunder or is consistent with the terms
of this Agreement or (B) effectuate the terms or intent of
this Agreement; provided, that when required by
Section 13.3 or any other provision of this Agreement that
establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any
action, the General Partner and the Liquidator may exercise the
power of attorney made in this Section 2.6(a)(ii) only
after the necessary vote, consent or approval of the Limited
Partners or of the Limited Partners of such class or series, as
applicable.
Nothing contained in this Section 2.6(a) shall be construed
as authorizing the General Partner to amend this Agreement
except in accordance with Article XIII or as may be
otherwise expressly provided for in this Agreement.
17
(b) The foregoing power of attorney is hereby declared to
be irrevocable and a power coupled with an interest, and it
shall survive and, to the maximum extent permitted by law, not
be affected by, the subsequent death, incompetency, disability,
incapacity, dissolution, bankruptcy or termination of any
Limited Partner and the transfer of all or any portion of such
Limited Partners Limited Partner Interest and shall extend
to such Limited Partners heirs, successors, assigns and
personal representatives. Each such Limited Partner hereby
agrees to be bound by any representation made by the General
Partner or the Liquidator acting in good faith pursuant to such
power of attorney; and each such Limited Partner, to the maximum
extent permitted by law, hereby waives any and all defenses that
may be available to contest, negate or disaffirm the action of
the General Partner or the Liquidator taken in good faith under
such power of attorney. Each Limited Partner shall execute and
deliver to the General Partner or the Liquidator, within
15 days after receipt of the request therefor, such further
designation, powers of attorney and other instruments as the
General Partner or the Liquidator may request in order to
effectuate this Agreement and the purposes of the Partnership.
Section 2.7 Term.
The term of the Partnership commenced upon the filing of the
Certificate of Limited Partnership in accordance with the
Delaware Act and shall continue in existence until the
dissolution of the Partnership in accordance with the provisions
of Article XII. The existence of the Partnership as a
separate legal entity shall continue until the cancellation of
the Certificate of Limited Partnership as provided in the
Delaware Act.
Section 2.8 Title
to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and
whether tangible or intangible, shall be deemed to be owned by
the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all
of the Partnership assets may be held in the name of the
Partnership, the General Partner, one or more of its Affiliates
or one or more nominees, as the General Partner may determine.
The General Partner hereby declares and warrants that any
Partnership assets for which record title is held in the name of
the General Partner or one or more of its Affiliates or one or
more nominees shall be held by the General Partner or such
Affiliate or nominee for the use and benefit of the Partnership
in accordance with the provisions of this Agreement;
provided, however, that the General Partner shall use
reasonable efforts to cause record title to such assets (other
than those assets in respect of which the General Partner
determines that the expense and difficulty of conveyancing makes
transfer of record title to the Partnership impracticable) to be
vested in the Partnership as soon as reasonably practicable;
provided, further, that, prior to the withdrawal or
removal of the General Partner or as soon thereafter as
practicable, the General Partner shall use reasonable efforts to
effect the transfer of record title to the Partnership and,
prior to any such transfer, will provide for the use of such
assets in a manner satisfactory to the General Partner. All
Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name
in which record title to such Partnership assets is held.
ARTICLE III
RIGHTS OF
LIMITED PARTNERS
Section 3.1 Limitation
of Liability.
The Limited Partners shall have no liability under this
Agreement except as expressly provided in this Agreement or the
Delaware Act.
Section 3.2 Management
of Business.
No Limited Partner, in its capacity as such, shall participate
in the operation, management or control (within the meaning of
the Delaware Act) of the Partnerships business, transact
any business in the
18
Partnerships name or have the power to sign documents for
or otherwise bind the Partnership. Any action taken by any
Affiliate of the General Partner or any officer, director,
employee, manager, member, general partner, agent or trustee of
the General Partner or any of its Affiliates, or any officer,
director, employee, manager, member, general partner, agent or
trustee of a Group Member, in its capacity as such, shall not be
deemed to be participation in the control of the business of the
Partnership by a limited partner of the Partnership (within the
meaning of
Section 17-303(a)
of the Delaware Act) and shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners under
this Agreement.
Section 3.3 Outside
Activities of the Limited Partners.
Subject to the provisions of Section 7.5, which shall
continue to be applicable to the Persons referred to therein,
regardless of whether such Persons shall also be Limited
Partners, any Limited Partner shall be entitled to and may have
business interests and engage in business activities in addition
to those relating to the Partnership, including business
interests and activities in direct competition with the
Partnership Group. Neither the Partnership nor any of the other
Partners shall have any rights by virtue of this Agreement in
any business ventures of any Limited Partner.
Section 3.4 Rights
of Limited Partners.
(a) In addition to other rights provided by this Agreement
or by applicable law, and except as limited by
Section 3.4(b), each Limited Partner shall have the right,
for a purpose reasonably related to such Limited Partners
interest as a Limited Partner in the Partnership, upon
reasonable written demand stating the purpose of such demand,
and at such Limited Partners own expense:
(i) to obtain true and full information regarding the
status of the business and financial condition of the
Partnership;
(ii) promptly after its becoming available, to obtain a
copy of the Partnerships federal, state and local income
tax returns for each year;
(iii) to obtain a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to obtain a copy of this Agreement and the Certificate
of Limited Partnership and all amendments thereto, together with
copies of the executed copies of all powers of attorney pursuant
to which this Agreement, the Certificate of Limited Partnership
and all amendments thereto have been executed;
(v) to obtain true and full information regarding the
amount of cash and a description and statement of the Net Agreed
Value of any other Capital Contribution by each Partner and that
each Partner has agreed to contribute in the future, and the
date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs
of the Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the
Limited Partners, for such period of time as the General Partner
deems reasonable, (i) any information that the General
Partner reasonably believes to be in the nature of trade secrets
or (ii) other information the disclosure of which the
General Partner in good faith believes (A) is not in the
best interests of the Partnership Group, (B) could damage
the Partnership Group or its business or (C) that any Group
Member is required by law or by agreement with any third party
to keep confidential (other than agreements with Affiliates of
the Partnership the primary purpose of which is to circumvent
the obligations set forth in this Section 3.4).
19
ARTICLE IV
CERTIFICATES;
RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF
PARTNERSHIP INTERESTS
Section 4.1 Certificates.
Upon the Partnerships issuance of Common Units,
Subordinated Units or Class B Units to any Person, the
Partnership shall issue, upon the request of such Person, one or
more Certificates in the name of such Person evidencing the
number of such Units being so issued. In addition, (a) upon
the General Partners request, the Partnership shall issue
to it one or more Certificates in the name of the General
Partner evidencing its General Partner Units and (b) upon
the request of any Person owning Incentive Distribution Rights
or any other Partnership Securities other than Common Units,
Subordinated Units or Class B Units, the Partnership shall
issue to such Person one or more certificates evidencing such
Incentive Distribution Rights or other Partnership Securities
other than Common Units, Subordinated Units or Class B
Units. Certificates shall be executed on behalf of the
Partnership by the Chairman of the Board, Chief Executive
Officer, President or any Executive Vice President, Senior Vice
President or Vice President and the Secretary or any Assistant
Secretary of the General Partner. No Common Unit Certificate
shall be valid for any purpose until it has been countersigned
by the Transfer Agent; provided, however, that if the
General Partner elects to issue Common Units in global form, the
Common Unit Certificates shall be valid upon receipt of a
certificate from the Transfer Agent certifying that the Common
Units have been duly registered in accordance with the
directions of the Partnership. Subject to the requirements of
Section 6.7(c) and Section 6.7(e), the Partners
holding Certificates evidencing Subordinated Units may exchange
such Certificates for Certificates evidencing Common Units on or
after the date on which such Subordinated Units are converted
into Common Units pursuant to the terms of Section 5.7.
Subject to the requirements of Section 6.7(e), the Partners
holding Certificates evidencing Class B Units may exchange
such Certificates for Certificates evidencing Common Units on or
after the period set forth in Section 5.11(f) pursuant to
the terms of Section 5.11.
Section 4.2 Mutilated,
Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the
Transfer Agent (for Common Units) or the General Partner (for
Partnership Securities other than Common Units), the appropriate
officers of the General Partner on behalf of the Partnership
shall execute, and the Transfer Agent (for Common Units) or the
General Partner (for Partnership Securities other than Common
Units) shall countersign and deliver in exchange therefor, a new
Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on
behalf of the Partnership shall execute and deliver, and the
Transfer Agent (for Common Units) shall countersign, a new
Certificate in place of any Certificate previously issued if the
Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance
satisfactory to the General Partner, that a previously issued
Certificate has been lost, destroyed or stolen;
(ii) requests the issuance of a new Certificate before the
General Partner has notice that the Certificate has been
acquired by a purchaser for value in good faith and without
notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the
General Partner a bond, in form and substance satisfactory to
the General Partner, with surety or sureties and with fixed or
open penalty as the General Partner may direct to indemnify the
Partnership, the Partners, the General Partner and the Transfer
Agent against any claim that may be made on account of the
alleged loss, destruction or theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by
the General Partner.
20
If a Limited Partner fails to notify the General Partner within
a reasonable period of time after he has notice of the loss,
destruction or theft of a Certificate, and a transfer of the
Limited Partner Interests represented by the Certificate is
registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner
shall be precluded from making any claim against the
Partnership, the General Partner or the Transfer Agent for such
transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate
under this Section 4.2, the General Partner may require the
payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the
Transfer Agent) reasonably connected therewith.
Section 4.3 Record
Holders.
The Partnership shall be entitled to recognize the Record Holder
as the Partner with respect to any Partnership Interest
and, accordingly, shall not be bound to recognize any equitable
or other claim to, or interest in, such
Partnership Interest on the part of any other Person,
regardless of whether the Partnership shall have actual or other
notice thereof, except as otherwise provided by law or any
applicable rule, regulation, guideline or requirement of any
National Securities Exchange on which such
Partnership Interests are listed or admitted to trading.
Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent
of any of the foregoing) is acting as nominee, agent or in some
other representative capacity for another Person in acquiring
and/or
holding Partnership Interests, as between the Partnership
on the one hand, and such other Persons on the other, such
representative Person shall be the Record Holder of such
Partnership Interest.
Section 4.4 Transfer
Generally.
(a) The term transfer, when used in this
Agreement with respect to a Partnership Interest, shall be
deemed to refer to a transaction (i) by which the General
Partner assigns its General Partner Units to another Person or
by which a holder of Incentive Distribution Rights assigns its
Incentive Distribution Rights to another Person, and includes a
sale, assignment, gift, pledge, encumbrance, hypothecation,
mortgage, exchange or any other disposition by law or otherwise
or (ii) by which the holder of a Limited Partner Interest
(other than an Incentive Distribution Right) assigns such
Limited Partner Interest to another Person who is or becomes a
Limited Partner, and includes a sale, assignment, gift, exchange
or any other disposition by law or otherwise, including any
transfer upon foreclosure of any pledge, encumbrance,
hypothecation or mortgage.
(b) No Partnership Interest shall be transferred, in
whole or in part, except in accordance with the terms and
conditions set forth in this Article IV. Any transfer or
purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed
to prevent a disposition by any stockholder, member, partner or
other owner of the General Partner of any or all of the shares
of stock, membership interests, partnership interests or other
ownership interests in the General Partner.
Section
4.5 Registration and Transfer of Limited Partner
Interests.
(a) The General Partner shall keep or cause to be kept on
behalf of the Partnership a register in which, subject to such
reasonable regulations as it may prescribe and subject to the
provisions of Section 4.5(b), the Partnership will provide
for the registration and transfer of Limited Partner Interests.
The Transfer Agent is hereby appointed registrar and transfer
agent for the purpose of registering Common Units and transfers
of such Common Units as herein provided. The Partnership shall
not recognize transfers of Certificates evidencing Limited
Partner Interests unless such transfers are effected in the
manner described in this Section 4.5. Upon surrender of a
Certificate for registration of transfer of any Limited Partner
Interests evidenced by a Certificate, and subject to the
provisions of Section 4.5(b), the appropriate officers of
the General Partner on behalf of the Partnership shall execute
and deliver, and in the case of Common Units, the Transfer Agent
shall countersign and deliver, in the name of the holder or the
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designated transferee or transferees, as required pursuant to
the holders instructions, one or more new Certificates
evidencing the same aggregate number and type of Limited Partner
Interests as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the
General Partner shall not recognize any transfer of Limited
Partner Interests until the Certificates evidencing such Limited
Partner Interests are surrendered for registration of transfer.
No charge shall be imposed by the General Partner for such
transfer; provided, that as a condition to the issuance
of any new Certificate under this Section 4.5, the General
Partner may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed with
respect thereto.
(c) Subject to (i) the foregoing provisions of this
Section 4.5, (ii) Section 4.3,
(iii) Section 4.8, (iv) with respect to any class
or series of Limited Partner Interests, the provisions of any
statement of designations or an amendment to this Agreement
establishing such class or series, (v) any contractual
provisions binding on any Limited Partner and
(vi) provisions of applicable law including the Securities
Act, Limited Partner Interests (other than the Incentive
Distribution Rights) shall be freely transferable.
(d) The General Partner and its Affiliates shall have the
right at any time to transfer their Subordinated Units,
Class B Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or
more Persons.
Section 4.6 Transfer
of the General Partners General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to
December 31, 2016, the General Partner shall not transfer
all or any part of its General Partner Interest (represented by
General Partner Units) to a Person unless such transfer
(i) has been approved by the prior written consent or vote
of the holders of at least a majority of the Outstanding Common
Units (excluding Common Units held by the General Partner and
its Affiliates) or (ii) is of all, but not less than all,
of its General Partner Interest to (A) an Affiliate of the
General Partner (other than an individual) or (B) another
Person (other than an individual) in connection with the merger
or consolidation of the General Partner with or into such other
Person or the transfer by the General Partner of all or
substantially all of its assets to such other Person.
(b) Subject to Section 4.6(c) below, on or after
December 31, 2016, the General Partner may transfer all or
any of its General Partner Interest without Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no
transfer by the General Partner of all or any part of its
General Partner Interest to another Person shall be permitted
unless (i) the transferee agrees to assume the rights and
duties of the General Partner under this Agreement and to be
bound by the provisions of this Agreement, (ii) the
Partnership receives an Opinion of Counsel that such transfer
would not result in the loss of limited liability of any Limited
Partner under the Delaware Act or cause the Partnership to be
treated as an association taxable as a corporation or otherwise
to be taxed as an entity for federal income tax purposes (to the
extent not already so treated or taxed) and (iii) such
transferee also agrees to purchase all (or the appropriate
portion thereof, if applicable) of the partnership or membership
interest of the General Partner as the general partner or
managing member, if any, of each other Group Member. In the case
of a transfer pursuant to and in compliance with this
Section 4.6, the transferee or successor (as the case may
be) shall, subject to compliance with the terms of
Section 10.3, be admitted to the Partnership as the General
Partner immediately prior to the transfer of the General Partner
Interest, and the business of the Partnership shall continue
without dissolution.
Section 4.7 Transfer
of Incentive Distribution Rights.
Prior to December 31, 2016, a holder of Incentive
Distribution Rights may transfer any or all of the Incentive
Distribution Rights held by such holder without any consent of
the Unitholders to (a) an Affiliate of such holder (other
than an individual) or (b) another Person (other than an
individual) in connection with (i) the merger or
consolidation of such holder of Incentive Distribution Rights
with or into such other Person, (ii) the transfer by such
holder of all or substantially all of its assets to such other
Person or
22
(iii) the sale of all the ownership interests in such
holder. Any other transfer of the Incentive Distribution Rights
prior to December 31, 2016 shall require the prior approval
of holders of at least a majority of the Outstanding Common
Units (excluding Common Units held by the General Partner and
its Affiliates). On or after December 31, 2016, the General
Partner or any other holder of Incentive Distribution Rights may
transfer any or all of its Incentive Distribution Rights without
Unitholder approval. Notwithstanding anything herein to the
contrary, (i) the transfer of Class B Units issued
pursuant to Section 5.11, or the transfer of Common Units
issued upon conversion of the Class B Units, shall not be
treated as a transfer of all or any part of the Incentive
Distribution Rights and (ii) no transfer of Incentive
Distribution Rights to another Person shall be permitted unless
the transferee agrees to be bound by the provisions of this
Agreement.
Section 4.8 Restrictions
on Transfers.
(a) Except as provided in Section 4.8(d) below, and
notwithstanding the other provisions of this Article IV, no
transfer of any Partnership Interests shall be made if such
transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the
Commission, any state securities commission or any other
governmental authority with jurisdiction over such transfer,
(ii) terminate the existence or qualification of the
Partnership under the laws of the jurisdiction of its formation,
or (iii) cause the Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not
already so treated or taxed).
(b) The General Partner may impose restrictions on the
transfer of Partnership Interests if it receives an Opinion
of Counsel that such restrictions are necessary to avoid a
significant risk of the Partnership becoming taxable as a
corporation or otherwise becoming taxable as an entity for
federal income tax purposes. The General Partner may impose such
restrictions by amending this Agreement; provided,
however, that any amendment that would result in the
delisting or suspension of trading of any class of Limited
Partner Interests on the principal National Securities Exchange
on which such class of Limited Partner Interests is then listed
or admitted to trading must be approved, prior to such amendment
being effected, by the holders of at least a majority of the
Outstanding Limited Partner Interests of such class.
(c) The transfer of a Subordinated Unit that has converted
into a Common Unit shall be subject to the restrictions imposed
by Section 6.7(c).
(d) The transfer of a Class B Unit that has converted
into a Common Unit shall be subject to the restrictions imposed
by Section 6.7(e).
(e) Nothing contained in this Article IV, or elsewhere
in this Agreement, shall preclude the settlement of any
transactions involving Partnership Interests entered into
through the facilities of any National Securities Exchange on
which such Partnership Interests are listed or admitted to
trading.
(f) Each certificate evidencing Partnership Interests
shall bear a conspicuous legend in substantially the following
form:
THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF
TARGA RESOURCES PARTNERS LP THAT THIS SECURITY MAY NOT BE
SOLD, OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH
TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR
STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY
OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION OVER SUCH
TRANSFER, (B) TERMINATE THE EXISTENCE OR QUALIFICATION OF
TARGA RESOURCES PARTNERS LP UNDER THE LAWS OF THE STATE OF
DELAWARE, OR (C) CAUSE TARGA RESOURCES PARTNERS LP TO
BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR
OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL INCOME TAX
PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED). TARGA
RESOURCES GP LLC, THE GENERAL PARTNER OF TARGA RESOURCES
PARTNERS LP, MAY IMPOSE ADDITIONAL
23
RESTRICTIONS ON THE TRANSFER OF THIS SECURITY IF IT RECEIVES AN
OPINION OF COUNSEL THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID
A SIGNIFICANT RISK OF TARGA RESOURCES PARTNERS LP BECOMING
TAXABLE AS A CORPORATION OR OTHERWISE BECOMING TAXABLE AS AN
ENTITY FOR FEDERAL INCOME TAX PURPOSES. THE RESTRICTIONS SET
FORTH ABOVE SHALL NOT PRECLUDE THE SETTLEMENT OF ANY
TRANSACTIONS INVOLVING THIS SECURITY ENTERED INTO THROUGH THE
FACILITIES OF ANY NATIONAL SECURITIES EXCHANGE ON WHICH THIS
SECURITY IS LISTED OR ADMITTED TO TRADING.
Section 4.9 Citizenship
Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any
federal, state or local law or regulation that the General
Partner determines would create a substantial risk of
cancellation or forfeiture of any property in which the Group
Member has an interest based on the nationality, citizenship or
other related status of a Limited Partner, the General Partner
may request any Limited Partner to furnish to the General
Partner, within 30 days after receipt of such request, an
executed Citizenship Certification or such other information
concerning his nationality, citizenship or other related status
(or, if the Limited Partner is a nominee holding for the account
of another Person, the nationality, citizenship or other related
status of such Person) as the General Partner may request. If a
Limited Partner fails to furnish to the General Partner within
the aforementioned
30-day
period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification
or other requested information the General Partner determines
that a Limited Partner is not an Eligible Citizen, the Limited
Partner Interests owned by such Limited Partner shall be subject
to redemption in accordance with the provisions of
Section 4.10. In addition, the General Partner may require
that the status of any such Limited Partner be changed to that
of a Non-citizen Assignee and, thereupon, the General Partner
shall be substituted for such Non-citizen Assignee as the
Limited Partner in respect of the Non-citizen Assignees
Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights
in respect of Limited Partner Interests held by it on behalf of
Non-citizen Assignees, distribute the votes in the same ratios
as the votes of Partners (including the General Partner) in
respect of Limited Partner Interests other than those of
Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen
Assignee shall have no right to receive a distribution in kind
pursuant to Section 12.4 but shall be entitled to the cash
equivalent thereof, and the Partnership shall provide cash in
exchange for an assignment of the Non-citizen Assignees
share of any distribution in kind. Such payment and assignment
shall be treated for Partnership purposes as a purchase by the
Partnership from the Non-citizen Assignee of his Limited Partner
Interest (representing his right to receive his share of such
distribution in kind).
(d) At any time after he can and does certify that he has
become an Eligible Citizen, a Non-citizen Assignee may, upon
application to the General Partner, request that with respect to
any Limited Partner Interests of such Non-citizen Assignee not
redeemed pursuant to Section 4.10, such Non-citizen
Assignee be admitted as a Limited Partner, and upon approval of
the General Partner, such Non-citizen Assignee shall be admitted
as a Limited Partner and shall no longer constitute a
Non-citizen Assignee and the General Partner shall cease to be
deemed to be the Limited Partner in respect of the Non-citizen
Assignees Limited Partner Interests.
Section 4.10 Redemption
of Partnership Interests of Non-citizen Assignees.
(a) If at any time a Limited Partner fails to furnish a
Citizenship Certification or other information requested within
the 30-day
period specified in Section 4.9(a), or if upon receipt of
such Citizenship Certification or other information the General
Partner determines, with the advice of counsel, that a Limited
Partner is not an Eligible Citizen, the Partnership may, unless
the Limited Partner establishes to the satisfaction of the
General Partner that such Limited Partner is an Eligible Citizen
or has transferred his Partnership Interests to a Person
who is an Eligible Citizen and who furnishes a Citizenship
24
Certification to the General Partner prior to the date fixed for
redemption as provided below, redeem the Limited Partner
Interest of such Limited Partner as follows:
(i) The General Partner shall, not later than the
30th day before the date fixed for redemption, give notice
of redemption to the Limited Partner, at his last address
designated on the records of the Partnership or the Transfer
Agent, by registered or certified mail, postage prepaid. The
notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed
for redemption, the place of payment, that payment of the
redemption price will be made upon surrender of the Certificate
evidencing the Redeemable Interests and that on and after the
date fixed for redemption no further allocations or
distributions to which the Limited Partner would otherwise be
entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable
Interests shall be an amount equal to the Current Market Price
(the date of determination of which shall be the date fixed for
redemption) of Limited Partner Interests of the class to be so
redeemed multiplied by the number of Limited Partner Interests
of each such class included among the Redeemable Interests. The
redemption price shall be paid, as determined by the General
Partner, in cash or by delivery of a promissory note of the
Partnership in the principal amount of the redemption price,
bearing interest at the rate of 5% annually and payable in
three equal annual installments of principal together with
accrued interest, commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited
Partner, at the place specified in the notice of redemption, of
the Certificate evidencing the Redeemable Interests, duly
endorsed in blank or accompanied by an assignment duly executed
in blank, the Limited Partner or his duly authorized
representative shall be entitled to receive the payment therefor.
(iv) After the redemption date, Redeemable Interests shall
no longer constitute issued and Outstanding Limited Partner
Interests.
(b) The provisions of this Section 4.10 shall also be
applicable to Limited Partner Interests held by a Limited
Partner as nominee of a Person determined to be other than an
Eligible Citizen.
(c) Nothing in this Section 4.10 shall prevent the
recipient of a notice of redemption from transferring his
Limited Partner Interest before the redemption date if such
transfer is otherwise permitted under this Agreement. Upon
receipt of notice of such a transfer, the General Partner shall
withdraw the notice of redemption, provided the
transferee of such Limited Partner Interest certifies to the
satisfaction of the General Partner that he is an Eligible
Citizen. If the transferee fails to make such certification,
such redemption shall be effected from the transferee on the
original redemption date.
ARTICLE V
CAPITAL
CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational
Contributions.
In connection with the formation of the Partnership under the
Delaware Act, the General Partner made an initial Capital
Contribution to the Partnership in the amount of $20.00, for a
2% General Partner Interest in the Partnership and has been
admitted as the General Partner of the Partnership, and each of
the Organizational Limited Partners made an initial Capital
Contribution to the Partnership in the amount of $490.00 for a
49% Limited Partner Interest in the Partnership and have been
admitted as Limited Partners of the Partnership. As of the
Closing Date, the interest of the Organizational Limited
Partners shall be redeemed as provided in the Contribution
Agreement; and the initial Capital Contribution of the
Organizational Limited Partners shall thereupon be refunded.
Ninety-eight percent of any interest or other profit that may
have resulted from the investment or other use of such initial
Capital Contributions shall be allocated and distributed to the
Organizational Limited Partners, and the balance thereof shall
be allocated and distributed to the General Partner.
25
Section 5.2 Contributions
by the General Partner and its Affiliates.
(a) On the Closing Date and pursuant to the Contribution
Agreement: (i) the General Partner shall contribute to the
Partnership, as a Capital Contribution, a 4% interest in Targa
North Texas GP LLC, a Delaware limited liability company
(North Texas GP), in exchange for
(A) 578,127 General Partner Units representing a
continuation of its 2% General Partner Interest, subject to
all of the rights, privileges and duties of the General Partner
under this Agreement and (B) the Incentive Distribution
Rights; (ii) Targa GP Inc. shall contribute to the
Partnership, as a Capital Contribution, a 96% interest in
North Texas GP, in exchange for 5,475,052 Subordinated
Units, and (iii) Targa LP Inc. shall contribute to the
Partnership, as a Capital Contribution, all of its interest in
Targa North Texas LP, a Delaware limited partnership, in
exchange for 6,053,179 Subordinated Units.
(b) Upon the issuance of additional Common Units pursuant
to the Over-Allotment Option, the Partnership will issue to the
General Partner that number of additional General Partner Units
equal to
2/98ths of
the number of Common Units so issued pursuant to the
Over-Allotment Option, and the General Partner shall not be
obligated to make any additional Capital Contribution to the
Partnership in exchange for such issuance.
(c) Upon the issuance of any additional Limited Partner
Interests by the Partnership (other than the Common Units issued
in the Initial Offering, the Common Units issued pursuant to the
Over-Allotment Option, the Subordinated Units issued pursuant to
Section 5.2(a), any Class B Units issued pursuant to
Section 5.11 and any Common Units issued upon conversion of
Class B Units), the General Partner may, in exchange for a
proportionate number of General Partner Units, make additional
Capital Contributions in an amount equal to the product obtained
by multiplying (i) the quotient determined by dividing
(A) the General Partners Percentage Interest by
(B) 100 less the General Partners Percentage Interest
times (ii) the amount contributed to the Partnership by the
Limited Partners in exchange for such additional Limited Partner
Interests. Except as set forth in Article XII, the General
Partner shall not be obligated to make any additional Capital
Contributions to the Partnership.
Section 5.3 Contributions
by Initial Limited Partners.
(a) On the Closing Date and pursuant to the Underwriting
Agreement, each Underwriter shall contribute to the Partnership
cash in an amount equal to the Issue Price per Initial Common
Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. In exchange for such Capital Contributions by
the Underwriters, the Partnership shall issue Common Units to
each Underwriter on whose behalf such Capital Contribution is
made in an amount equal to the quotient obtained by dividing
(i) the cash contribution to the Partnership by or on
behalf of such Underwriter by (ii) the Issue Price per
Initial Common Unit.
(b) Upon the exercise of the Over-Allotment Option, each
Underwriter shall contribute to the Partnership cash in an
amount equal to the Issue Price per Initial Common Unit,
multiplied by the number of Common Units to be purchased by such
Underwriter at the Option Closing Date. In exchange for such
Capital Contributions by the Underwriters, the Partnership shall
issue Common Units to each Underwriter on whose behalf such
Capital Contribution is made in an amount equal to the quotient
obtained by dividing (i) the cash contributions to the
Partnership by or on behalf of such Underwriter by (ii) the
Issue Price per Initial Common Unit.
(c) No Limited Partner Interests will be issued or issuable
as of or at the Closing Date other than (i) the Common
Units issuable pursuant to subparagraph (a) hereof in
aggregate number equal to 16,800,000, (ii) the Option
Units as such term is used in the Underwriting Agreement
in an aggregate number up to 2,520,000 issuable upon exercise of
the Over-Allotment Option pursuant to
subparagraph (b) hereof, (iii) the 11,528,231
Subordinated Units issuable to Targa GP Inc. and Targa LP Inc.
pursuant to Section 5.2 hereof and (iv) the Incentive
Distribution Rights.
26
Section 5.4 Interest
and Withdrawal.
No interest shall be paid by the Partnership on Capital
Contributions. No Partner or Assignee shall be entitled to the
withdrawal or return of its Capital Contribution, except to the
extent, if any, that distributions made pursuant to this
Agreement or upon termination of the Partnership may be
considered as such by law and then only to the extent provided
for in this Agreement. Except to the extent expressly provided
in this Agreement, no Partner shall have priority over any other
Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any
such return shall be a compromise to which all Partners agree
within the meaning of
Section 17-502(b)
of the Delaware Act.
Section 5.5 Capital
Accounts.
(a) The Partnership shall maintain for each Partner (or a
beneficial owner of Partnership Interests held by a nominee
in any case in which the nominee has furnished the identity of
such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable
to the General Partner) owning a Partnership Interest a
separate Capital Account with respect to such
Partnership Interest in accordance with the rules of
Treasury
Regulation Section 1.704-1(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount
of all Capital Contributions made to the Partnership with
respect to such Partnership Interest and (ii) all
items of Partnership income and gain (including income and gain
exempt from tax) computed in accordance with Section 5.5(b)
and allocated with respect to such Partnership Interest
pursuant to Section 6.1, and decreased by (x) the
amount of cash or Net Agreed Value of all actual and deemed
distributions of cash or property made with respect to such
Partnership Interest and (y) all items of Partnership
deduction and loss computed in accordance with
Section 5.5(b) and allocated with respect to such
Partnership Interest pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of
income, gain, loss or deduction which is to be allocated
pursuant to Article VI and is to be reflected in the
Partners Capital Accounts, the determination, recognition
and classification of any such item shall be the same as its
determination, recognition and classification for federal income
tax purposes (including any method of depreciation, cost
recovery or amortization used for that purpose),
provided, that:
(i) Solely for purposes of this Section 5.5, the
Partnership shall be treated as owning directly its
proportionate share (as determined by the General Partner based
upon the provisions of the applicable Group Member Agreement or
governing, organizational or similar documents) of all property
owned by any other Group Member that is classified as a
partnership for federal income tax purposes and (y) any
other partnership, limited liability company, unincorporated
business or other entity classified as a partnership for federal
income tax purposes of which a Group Member is, directly or
indirectly, a partner.
(ii) All fees and other expenses incurred by the
Partnership to promote the sale of (or to sell) a
Partnership Interest that can neither be deducted nor
amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item
of deduction at the time such fees and other expenses are
incurred and shall be allocated among the Partners pursuant to
Section 6.1.
(iii) Except as otherwise provided in Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
the computation of all items of income, gain, loss and deduction
shall be made without regard to any election under
Section 754 of the Code which may be made by the
Partnership and, as to those items described in
Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross
income or are neither currently deductible nor capitalized for
federal income tax purposes. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to
Section 734(b) or 743(b) of the Code is required, pursuant
to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment in the Capital Accounts shall be
treated as an item of gain or loss.
27
(iv) Any income, gain or loss attributable to the taxable
disposition of any Partnership property shall be determined as
if the adjusted basis of such property as of such date of
disposition were equal in amount to the Partnerships
Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of
Section 704(b) of the Code, any deductions for
depreciation, cost recovery or amortization attributable to any
Contributed Property shall be determined as if the adjusted
basis of such property on the date it was acquired by the
Partnership were equal to the Agreed Value of such property.
Upon an adjustment pursuant to Section 5.5(d) to the
Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further
deductions for such depreciation, cost recovery or amortization
attributable to such property shall be determined as if the
adjusted basis of such property were equal to the Carrying Value
of such property immediately following such adjustment.
(vi) If the Partnerships adjusted basis in a
depreciable or cost recovery property is reduced for federal
income tax purposes pursuant to Section 48(q)(1) or
48(q)(3) of the Code, the amount of such reduction shall, solely
for purposes hereof, be deemed to be an additional depreciation
or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to
Section 6.1. Any restoration of such basis pursuant to
Section 48(q)(2) of the Code shall, to the extent possible,
be allocated in the same manner to the Partners to whom such
deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest
shall succeed to a pro rata portion of the Capital Account of
the transferor relating to the Partnership Interest so
transferred.
(ii) Subject to Section 6.7(c), immediately prior to
the transfer of a Subordinated Unit or of a Subordinated Unit
that has converted into a Common Unit pursuant to
Section 5.7 by a holder thereof (other than a transfer to
an Affiliate unless the General Partner elects to have this
subparagraph 5.5(c)(ii) apply), the Capital Account
maintained for such Person with respect to its Subordinated
Units or converted Subordinated Units will (A) first, be
allocated to the Subordinated Units or converted Subordinated
Units to be transferred in an amount equal to the product of
(x) the number of such Subordinated Units or converted
Subordinated Units to be transferred and (y) the Per Unit
Capital Amount for a Common Unit, and (B) second, any
remaining balance in such Capital Account will be retained by
the transferor, regardless of whether it has retained any
Subordinated Units or converted Subordinated Units
(Retained Converted Subordinated
Units). Following any such allocation, the
transferors Capital Account, if any, maintained with
respect to the retained Subordinated Units or Retained Converted
Subordinated Units, if any, will have a balance equal to the
amount allocated under clause (B) hereinabove, and the
transferees Capital Account established with respect to
the transferred Subordinated Units or converted Subordinated
Units will have a balance equal to the amount allocated under
clause (A) hereinabove.
(d) (i) In accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f),
on an issuance of additional Partnership Interests for cash
or Contributed Property, the issuance of
Partnership Interests as consideration for the provision of
services or the conversion of the General Partners
Combined Interest to Common Units pursuant to
Section 11.3(b), the Capital Account of all Partners and
the Carrying Value of each Partnership property immediately
prior to such issuance shall be adjusted upward or downward to
reflect any Unrealized Gain or Unrealized Loss attributable to
such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized on an actual sale of each
such property immediately prior to such issuance and had been
allocated to the Partners at such time pursuant to
Section 6.1 in the same manner as any item of gain or loss
actually recognized during such period would have been
allocated. In determining such Unrealized Gain or Unrealized
Loss, the aggregate cash amount and fair market value of all
Partnership assets (including cash or cash equivalents)
immediately prior to the issuance of additional
Partnership Interests shall be determined by the General
Partner using such method of valuation as it may adopt;
provided, however, that the General Partner, in arriving
at such valuation, must take fully into account the fair market
value of the Partnership Interests of all Partners at such
time. The General Partner shall allocate such aggregate
28
value among the assets of the Partnership (in such manner as it
determines) to arrive at a fair market value for individual
properties.
(ii) In accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a
Partner of any Partnership property (other than a distribution
of cash that is not in redemption or retirement of a
Partnership Interest), the Capital Accounts of all Partners
and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as if
such Unrealized Gain or Unrealized Loss had been recognized in a
sale of such property immediately prior to such distribution for
an amount equal to its fair market value, and had been allocated
to the Partners, at such time, pursuant to Section 6.1 in
the same manner as any item of gain or loss actually recognized
during such period would have been allocated. In determining
such Unrealized Gain or Unrealized Loss the aggregate cash
amount and fair market value of all Partnership assets
(including cash or cash equivalents) immediately prior to a
distribution shall (A) in the case of an actual
distribution that is not made pursuant to Section 12.4 or
in the case of a deemed distribution, be determined and
allocated in the same manner as that provided in
Section 5.5(d)(i) or (B) in the case of a liquidating
distribution pursuant to Section 12.4, be determined and
allocated by the Liquidator using such method of valuation as it
may adopt.
Section 5.6 Issuances
of Additional Partnership Securities.
(a) The Partnership may issue additional Partnership
Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership
purpose at any time and from time to time to such Persons for
such consideration and on such terms and conditions as the
General Partner shall determine, all without the approval of any
Limited Partners.
(b) Each additional Partnership Security authorized to be
issued by the Partnership pursuant to Section 5.6(a) may be
issued in one or more classes, or one or more series of any such
classes, with such designations, preferences, rights, powers and
duties (which may be senior to existing classes and series of
Partnership Securities), as shall be fixed by the General
Partner, including (i) the right to share in Partnership
profits and losses or items thereof; (ii) the right to
share in Partnership distributions; (iii) the rights upon
dissolution and liquidation of the Partnership;
(iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security;
(v) whether such Partnership Security is issued with the
privilege of conversion or exchange and, if so, the terms and
conditions of such conversion or exchange; (vi) the terms
and conditions upon which each Partnership Security will be
issued, evidenced by certificates and assigned or transferred;
(vii) the method for determining the Percentage Interest as
to such Partnership Security; and (viii) the right, if any,
of each such Partnership Security to vote on Partnership
matters, including matters relating to the relative rights,
preferences and privileges of such Partnership Security.
(c) The General Partner shall take all actions that it
determines to be necessary or appropriate in connection with
(i) each issuance of Partnership Securities and options,
rights, warrants and appreciation rights relating to Partnership
Securities pursuant to this Section 5.6, (ii) the
conversion of the General Partner Interest (represented by
General Partner Units) or any Incentive Distribution Rights into
Units pursuant to the terms of this Agreement, (iii) the
issuance of Class B Units pursuant to Section 5.11 and
the conversion of Class B Units into Common Units pursuant
to the terms of this Agreement, (iv) reflecting admission
of such additional Limited Partners in the books and records of
the Partnership as the Record Holder of such Limited Partner
Interest and (v) all additional issuances of Partnership
Securities. The General Partner shall determine the relative
rights, powers and duties of the holders of the Units or other
Partnership Securities being so issued. The General Partner
shall do all things necessary to comply with the Delaware Act
and is authorized and directed to do all things that it
determines to be necessary or appropriate in connection with any
future issuance of Partnership Securities or in connection with
the conversion of the General Partner Interest or any Incentive
Distribution Rights into Units pursuant to the terms of this
Agreement, including compliance with any statute, rule,
regulation or guideline of any federal,
29
state or other governmental agency or any National Securities
Exchange on which the Units or other Partnership Securities are
listed or admitted to trading.
(d) No fractional Units shall be issued by the Partnership.
Section 5.7 Conversion
of Subordinated Units.
(a) All of the Subordinated Units shall convert into Common
Units on a
one-for-one
basis on the second Business Day following the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in
respect of the final Quarter of the Subordination Period.
(b) Notwithstanding Section 5.7(a) above, the
Subordination Period shall terminate and all Outstanding
Subordinated Units shall convert into Common Units on a
one-for-one
basis on the second Business Day following the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in
respect of any Quarter ending on or after March 31, 2008 in
respect of which:
(i) distributions of Available Cash from Operating Surplus
under Section 6.4 in respect of all Outstanding Common
Units. Subordinated Units and General Partner Units and any
other Outstanding Units that are senior or equal in right of
distribution to the Subordinated Units with respect to the
four-Quarter period immediately preceding such date equaled or
exceeded the sum of the Third Target Distribution on all of the
Outstanding Common Units, Subordinated Units and General Partner
Units and any other Outstanding Units that are senior or equal
in right of distribution to the Subordinated Units during such
period;
(ii) the Adjusted Operating Surplus generated during the
four-Quarter period immediately preceding such date equaled or
exceeded the sum of the Third Target Distribution on all of the
Common Units, Subordinated Units and General Partner Units and
any other Units that are senior or equal in right of
distribution to the Subordinated Units that were Outstanding
during such period on a Fully Diluted Basis; and
(iii) there are no Cumulative Common Unit Arrearages.
(c) Notwithstanding any other provision of this Agreement,
all the then Outstanding Subordinated Units will automatically
convert into Common Units on a
one-for-one
basis as set forth in, and pursuant to the terms of,
Section 11.4.
(d) A Subordinated Unit that has converted into a Common
Unit shall be subject to the provisions of Section 6.7(b)
and Section 6.7(c).
Section 5.8 Limited
Preemptive Right.
Except as provided in this Section 5.8 and in
Section 5.2, no Person shall have any preemptive,
preferential or other similar right with respect to the issuance
of any Partnership Security, whether unissued, held in the
treasury or hereafter created. The General Partner shall have
the right, which it may from time to time assign in whole or in
part to any of its Affiliates, to purchase Partnership
Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons
other than the General Partner and its Affiliates, to the extent
necessary to maintain the Percentage Interests of the General
Partner and its Affiliates equal to that which existed
immediately prior to the issuance of such Partnership Securities.
Section 5.9 Splits
and Combinations.
(a) Subject to Section 5.9(d), Section 6.6 and
Section 6.9 (dealing with adjustments of distribution
levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a
subdivision or combination of Partnership Securities so long as,
after any such event, each Partner shall have the same
Percentage Interest in the Partnership as before such event, and
any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit
30
Arrearage) or stated as a number of Units (including the number
of Subordinated Units that may convert prior to the end of the
Subordination Period) are proportionately adjusted.
(b) Whenever such a distribution, subdivision or
combination of Partnership Securities is declared, the General
Partner shall select a Record Date as of which the distribution,
subdivision or combination shall be effective and shall send
notice thereof at least 20 days prior to such Record Date
to each Record Holder as of a date not less than 10 days
prior to the date of such notice. The General Partner also may
cause a firm of independent public accountants selected by it to
calculate the number of Partnership Securities to be held by
each Record Holder after giving effect to such distribution,
subdivision or combination. The General Partner shall be
entitled to rely on any certificate provided by such firm as
conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision
or combination, the Partnership may issue Certificates to the
Record Holders of Partnership Securities as of the applicable
Record Date representing the new number of Partnership
Securities held by such Record Holders, or the General Partner
may adopt such other procedures that it determines to be
necessary or appropriate to reflect such changes. If any such
combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership shall require, as a
condition to the delivery to a Record Holder of such new
Certificate, the surrender of any Certificate held by such
Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon
any distribution, subdivision or combination of Units. If a
distribution, subdivision or combination of Units would result
in the issuance of fractional Units but for the provisions of
this Section 5.9(d), each fractional Unit shall be rounded
to the nearest whole Unit (and a 0.5 Unit shall be rounded
to the next higher Unit).
Section 5.10 Fully
Paid and Non-Assessable Nature of Limited Partner Interests.
All Limited Partner Interests issued pursuant to, and in
accordance with the requirements of, this Article V shall
be fully paid and non-assessable Limited Partner Interests in
the Partnership, except as such non-assessability may be
affected by
Section 17-607
of the Delaware Act.
Section 5.11 Issuance
of Class B Units in Connection with Reset of Incentive
Distribution Rights.
(a) Subject to the provisions of this Section 5.11,
the holder of the Incentive Distribution Rights (or, if there is
more than one holder of the Incentive Distribution Rights, the
holders of a majority in interest of the Incentive Distribution
Rights) shall have the right, at any time when there are no
Subordinated Units outstanding and the Partnership has made a
distribution pursuant to Section 6.4(b)(v) for each of the
four most recently completed Quarters and the amount of each
such distribution did not exceed Adjusted Operating Surplus for
such Quarter, to make an election (the IDR
Reset Election) to cause the Minimum Quarterly
Distribution and the Target Distributions to be reset in
accordance with the provisions of Section 5.11(e) and, in
connection therewith, the holder or holders of the Incentive
Distribution Rights will become entitled to receive their
respective proportionate share of a number of Class B Units
derived by dividing (i) the average amount of cash
distributions made by the Partnership for the two full Quarters
immediately preceding the giving of the Reset Notice (as defined
in Section 5.11(b)) in respect of the Incentive
Distribution Rights by (ii) the average of the cash
distributions made by the Partnership in respect of each Common
Unit for the two full Quarters immediately preceding the giving
of the Reset Notice (the number of Class B Units determined
by such quotient is referred to herein as the
Aggregate Quantity of Class B
Units). Upon the issuance of such Class B
Units, the Partnership will issue to the General Partner that
number of additional General Partner Units equal to the product
of (x) the quotient obtained by dividing (A) the
Percentage Interest of the General Partner immediately prior to
such issuance by (B) a percentage equal to 100% less such
Percentage Interest by (y) the number of such Class B
Units, and the General Partner shall not be obligated to make
any additional Capital Contribution to the Partnership in
exchange for such issuance. The making of the IDR Reset Election
in the manner specified in Section 5.11(b) shall cause the
Minimum Quarterly Distribution and the Target Distributions to
be reset in accordance with the provisions of
Section 5.11(e) and, in connection therewith, the holder or
holders of
31
the Incentive Distribution Rights will become entitled to
receive Class B Units and General Partner Units on the
basis specified above, without any further approval required by
the General Partner or the Unitholders, at the time specified in
Section 5.11(c) unless the IDR Reset Election is rescinded
pursuant to Section 5.11(d).
(b) To exercise the right specified in
Section 5.11(a), the holder of the Incentive Distribution
Rights (or, if there is more than one holder of the Incentive
Distribution Rights, the holders of a majority in interest of
the Incentive Distribution Rights) shall deliver a written
notice (the Reset Notice) to the
Partnership. Within 10 Business Days after the receipt by
the Partnership of such Reset Notice, as the case may be, the
Partnership shall deliver a written notice to the holder or
holders of the Incentive Distribution Rights of the
Partnerships determination of the aggregate number of
Class B Units that each holder of Incentive Distribution
Rights will be entitled to receive.
(c) The holder or holders of the Incentive Distribution
Rights will be entitled to receive the Aggregate Quantity of
Class B Units and related additional General Partner Units
on the fifteenth Business Day after receipt by the Partnership
of the Reset Notice, and the Partnership shall issue
Certificates for the Class B Units to the holder or holders
of the Incentive Distribution Rights; provided, however,
that the issuance of Class B Units to the holder or holders
of the Incentive Distribution Rights shall not occur prior to
the approval of the listing or admission for trading of the
Common Units into which the Class B Units are convertible
pursuant to Section 5.11(f) by the principal National
Securities Exchange upon which the Common Units are then listed
or admitted for trading if any such approval is required
pursuant to the rules and regulations of such National
Securities Exchange.
(d) If the principal National Securities Exchange upon
which the Common Units are then traded have not approved the
listing or admission for trading of the Common Units into which
the Class B Units are convertible pursuant to
Section 5.11(f) on or before the 30th calendar day
following the Partnerships receipt of the Reset Notice and
such approval is required by the rules and regulations of such
National Securities Exchange, then the holder of the Incentive
Distribution Rights (or, if there is more than one holder of the
Incentive Distribution Rights, the holders of a majority in
interest of the Incentive Distribution Rights) shall have the
right to either rescind the IDR Reset Election or elect to
receive other Partnership Securities having such terms as the
General Partner may approve, with the approval of the Conflicts
Committee, that will provide (i) the same economic value,
in the aggregate, as the Aggregate Quantity of Class B
Units would have had at the time of the Partnerships
receipt of the Reset Notice, as determined by the General
Partner, and (ii) for the subsequent conversion of such
Partnership Securities into Common Units within not more than
12 months following the Partnerships receipt of the
Reset Notice upon the satisfaction of one or more conditions
that are reasonably acceptable to the holder of the Incentive
Distribution Rights (or, if there is more than one holder of the
Incentive Distribution Rights, the holders of a majority in
interest of the Incentive Distribution Rights).
(e) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution shall be adjusted at the time of the issuance of
Common Units or other Partnership Securities pursuant to this
Section 5.11 such that (i) the Minimum Quarterly
Distribution shall be reset to equal to the average cash
distribution amount per Common Unit for the two Quarters
immediately prior to the Partnerships receipt of the Reset
Notice (the Reset MQD), (ii) the
First Target Distribution shall be reset to equal 115% of the
Reset MQD, (iii) the Second Target Distribution shall be
reset to equal to 125% of the Reset MQD and (iv) the Third
Target Distribution shall be reset to equal 150% of the Reset
MQD.
(f) Any holder of Class B Units shall have the right
to elect, by giving written notice to the General Partner, to
convert all or a portion of the Class B Units held by such
holder, at any time following the first anniversary of the
issuance of such Class B Units, into Common Units on a
one-for-one
basis, such conversion to be effective on the second Business
Day following the General Partners receipt of such written
notice.
32
ARTICLE VI
ALLOCATIONS
AND DISTRIBUTIONS
Section 6.1 Allocations
for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in
determining the rights of the Partners among themselves, the
Partnerships items of income, gain, loss and deduction
(computed in accordance with
Section 5.5(b))
shall be allocated among the Partners in each taxable year (or
portion thereof) as provided herein below.
(a) Net Income. After giving effect to
the special allocations set forth in
Section 6.1(d),
Net Income for each taxable year and all items of income, gain,
loss and deduction taken into account in computing Net Income
for such taxable year shall be allocated as follows:
(i) First, 100% to the General Partner, in an amount equal
to the aggregate Net Losses allocated to the General Partner
pursuant to
Section 6.1(b)(iii)
for all previous taxable years until the aggregate Net Income
allocated to the General Partner pursuant to this
Section 6.1(a)(i)
for the current taxable year and all previous taxable years is
equal to the aggregate Net Losses allocated to the General
Partner pursuant to
Section 6.1(b)(iii)
for all previous taxable years;
(ii) Second, 100% to the General Partner and the
Unitholders, in accordance with their respective Percentage
Interests, until the aggregate Net Income allocated to such
Partners pursuant to this
Section 6.1(a)(ii)
for the current taxable year and all previous taxable years is
equal to the aggregate Net Losses allocated to such Partners
pursuant to
Section 6.1(b)(ii)
for all previous taxable years; and
(iii) Third, the balance, if any, 100% to the General
Partner and the Unitholders, in accordance with their respective
Percentage Interests.
(b) Net Losses. After giving effect to
the special allocations set forth in
Section 6.1(d),
Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net
Losses for such taxable period shall be allocated as follows:
(i) First, 100% to the General Partner and the Unitholders,
in accordance with their respective Percentage Interests, until
the aggregate Net Losses allocated pursuant to this
Section 6.1(b)(i)
for the current taxable year and all previous taxable years is
equal to the aggregate Net Income allocated to such Partners
pursuant to
Section 6.1(a)(iii)
for all previous taxable years, provided that the Net
Losses shall not be allocated pursuant to this
Section 6.1(b)(i)
to the extent that such allocation would cause any Unitholder to
have a deficit balance in its Adjusted Capital Account at the
end of such taxable year (or increase any existing deficit
balance in its Adjusted Capital Account);
(ii) Second, 100% to the General Partner and the
Unitholders, in accordance with their respective Percentage
Interests; provided, that Net Losses shall not be
allocated pursuant to this
Section 6.1(b)(ii)
to the extent that such allocation would cause any Unitholder to
have a deficit balance in its Adjusted Capital Account at the
end of such taxable year (or increase any existing deficit
balance in its Adjusted Capital Account); and
(iii) Third, the balance, if any, 100% to the General
Partner.
(c) Net Termination Gains and
Losses. After giving effect to the special
allocations set forth in
Section 6.1(d),
all items of income, gain, loss and deduction taken into account
in computing Net Termination Gain or Net Termination Loss for
such taxable period shall be allocated in the same manner as
such Net Termination Gain or Net Termination Loss is allocated
hereunder. All allocations under this
Section 6.1(c)
shall be made after Capital Account balances have been adjusted
by all other allocations provided under this Section 6.1
and after all distributions of Available Cash provided under
Section 6.4 and Section 6.5 have been made;
provided, however, that solely for purposes of
this
Section 6.1(c),
Capital Accounts shall not be adjusted for distributions made
pursuant to Section 12.4.
33
(i) If a Net Termination Gain is recognized (or deemed
recognized pursuant to
Section 5.5(d)),
such Net Termination Gain shall be allocated among the Partners
in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each
of the following subclauses, in the order listed, before an
allocation is made pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its
Capital Account, in the proportion that such deficit balance
bears to the total deficit balances in the Capital Accounts of
all Partners, until each such Partner has been allocated Net
Termination Gain equal to any such deficit balance in its
Capital Account;
(B) Second, (x) to the General Partner in accordance
with its Percentage Interest and (y) to all Unitholders
holding Common Units, Pro Rata, a percentage equal to 100% less
the percentage applicable to subclause (x) of this
clause (B), until the Capital Account in respect of each
Common Unit then Outstanding is equal to the sum of (1) its
Unrecovered Initial Unit Price, (2) the Minimum Quarterly
Distribution for the Quarter during which the Liquidation Date
occurs, reduced by any distribution pursuant to
Section 6.4(a)(i)
or Section 6.4(b)(i) with respect to such Common Unit for
such Quarter (the amount determined pursuant to this
clause (2) is hereinafter defined as the Unpaid
MQD) and (3) any then existing Cumulative
Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or
is deemed to be recognized) prior to the conversion of the last
Outstanding Class B Unit, (x) to the General Partner
in accordance with its Percentage Interest and (y) to all
Unitholders holding Class B Units, Pro Rata, a percentage
equal to 100% less the percentage applicable to
subclause (x) of this clause (C), until the
Capital Account in respect of each Class B Unit then
Outstanding equals the sum of (1) its Unrecovered Initial
Unit Price, and (2) the Minimum Quarterly Distribution for
the Quarter during which the Liquidation Date occurs, reduced by
any distribution pursuant to
Section 6.4(b)(i)
with respect to such Class B Unit for such Quarter;
(D) Fourth, if such Net Termination Gain is recognized (or
is deemed to be recognized) prior to the conversion of the last
Outstanding Subordinated Unit, (x) to the General Partner
in accordance with its Percentage Interest and (y) to all
Unitholders holding Subordinated Units, Pro Rata, a percentage
equal to 100% less the percentage applicable to
subclause (x) of this clause (D), until the
Capital Account in respect of each Subordinated Unit then
Outstanding equals the sum of (1) its Unrecovered Initial
Unit Price, determined for the taxable year (or portion thereof)
to which this allocation of gain relates, and (2) the
Minimum Quarterly Distribution for the Quarter during which the
Liquidation Date occurs, reduced by any distribution pursuant to
Section 6.4(a)(iii)
with respect to such Subordinated Unit for such Quarter;
(E) Fifth, 100% to the General Partner and all Unitholders
in accordance with their respective Percentage Interests, until
the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) its Unrecovered
Initial Unit Price, (2) the Unpaid MQD, (3) any then
existing Cumulative Common Unit Arrearage, and (4) the
excess of (aa) the First Target Distribution less the
Minimum Quarterly Distribution for each Quarter of the
Partnerships existence over (bb) the cumulative per
Unit amount of any distributions of Available Cash that is
deemed to be Operating Surplus made pursuant to
Section 6.4(a)(iv)
and
Section 6.4(b)(ii)
(the sum of (1), (2), (3) and (4) is hereinafter
defined as the First Liquidation Target
Amount);
(F) Sixth, (x) to the General Partner in accordance
with its Percentage Interest, (y) 13% to the holders of the
Incentive Distribution Rights, Pro Rata, and (z) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclause (x) and
(y) of this clause (F), until the Capital Account in
respect of each Common Unit then Outstanding is equal to the sum
of (1) the First Liquidation Target Amount, and
(2) the excess of (aa) the Second Target Distribution
less the First Target Distribution for each Quarter of the
Partnerships existence over (bb) the cumulative per
Unit amount of any distributions of Available Cash that is
deemed to be Operating Surplus made pursuant to
Section 6.4(a)(v)
and
Section 6.4(b)(iii)
(the sum of (1) and (2) is hereinafter defined as the
Second Liquidation Target Amount);
34
(G) Seventh, (x) to the General Partner in accordance
with its Percentage Interest, (y) 23% to the holders of the
Incentive Distribution Rights, Pro Rata, and (z) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclause (x) and
(y) of this clause (G), until the Capital Account in
respect of each Common Unit then Outstanding is equal to the sum
of (1) the Second Liquidation Target Amount, and
(2) the excess of (aa) the Third Target Distribution
less the Second Target Distribution for each Quarter of the
Partnerships existence over (bb) the cumulative per
Unit amount of any distributions of Available Cash that is
deemed to be Operating Surplus made pursuant to
Section 6.4(a)(vi)
and
Section 6.4(b)(iv)
(the sum of (1) and (2) is hereinafter defined as the
Third Liquidation Target
Amount); and
(H) Finally, (x) to the General Partner in accordance
with its Percentage Interest, (y) 48% to the holders of the
Incentive Distribution Rights, Pro Rata, and (z) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclause (x) and
(y) of this clause (H).
(ii) If a Net Termination Loss is recognized (or deemed
recognized pursuant to
Section 5.5(d)),
such Net Termination Loss shall be allocated among the Partners
in the following manner:
(A) First, if such Net Termination Loss is recognized (or
is deemed to be recognized) prior to the conversion of the last
Outstanding Subordinated Unit, (x) to the General Partner
in accordance with its Percentage Interest and (y) to all
Unitholders holding Subordinated Units, Pro Rata, a percentage
equal to 100% less the percentage applicable to
subclause (x) of this clause (A), until the
Capital Account in respect of each Subordinated Unit then
Outstanding has been reduced to zero;
(B) Second, (x) to the General Partner in accordance
with its Percentage Interest and (y) to the Class B
Unitholders, Pro Rata, a percentage equal to 100% less the
percentage applicable to subclause (x) of this
clause (B) until the Capital Account in respect of
each Class B Unit then Outstanding has been reduced to zero;
(C) Third, (x) to the General Partner in accordance
with its Percentage Interest and (y) to all Unitholders,
Pro Rata, a percentage equal to 100% less the percentage
applicable to subclause (x) of this
clause (B) until the Capital Account in respect of
each Unit then Outstanding has been reduced to zero; and
(D) Fourth, the balance, if any, 100% to the General
Partner.
(d) Special Allocations. Notwithstanding
any other provision of this Section 6.1, the following
special allocations shall be made for such taxable period:
(i) Partnership Minimum Gain
Chargeback. Notwithstanding any other provision
of this Section 6.1, if there is a net decrease in
Partnership Minimum Gain during any Partnership taxable period,
each Partner shall be allocated items of Partnership income and
gain for such period (and, if necessary, subsequent periods) in
the manner and amounts provided in Treasury
Regulation Sections 1.704-2(f)(6),
1.704-2(g)(2)
and
1.704-2(j)(2)(i),
or any successor provision. For purposes of this
Section 6.1(d),
each Partners Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required
hereunder shall be effected, prior to the application of any
other allocations pursuant to this
Section 6.1(d)
with respect to such taxable period (other than an allocation
pursuant to
Section 6.1(d)(vi)
and Section 6.1(d)(vii)). This
Section 6.1(d)(i)
is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury
Regulation Section 1.704-2(f)
and shall be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of
this Section 6.1 (other than Section 6.1(d)(i)),
except as provided in Treasury
Regulation Section 1.704-2(i)(4),
if there is a net decrease in Partner Nonrecourse Debt Minimum
Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning
of such taxable period shall be allocated items of Partnership
income and gain for such period (and, if necessary, subsequent
periods) in the manner and amounts provided in Treasury
35
Regulation Sections 1.704-2(i)(4)
and
1.704-2(j)(2)(ii),
or any successor provisions. For purposes of this
Section 6.1(d),
each Partners Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required
hereunder shall be effected, prior to the application of any
other allocations pursuant to this
Section 6.1(d),
other than
Section 6.1(d)(i)
and other than an allocation pursuant to
Section 6.1(d)(vi)
and
Section 6.1(d)(vii),
with respect to such taxable period. This
Section 6.1(d)(ii)
is intended to comply with the chargeback of items of income and
gain requirement in Treasury
Regulation Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any
property distributed (except cash or property distributed
pursuant to Section 12.4) to any Unitholder with respect to
its Units for a taxable year is greater (on a per Unit basis)
than the amount of cash or the Net Agreed Value of property
distributed to the other Unitholders with respect to their Units
(on a per Unit basis), then (1) there shall be allocated
income and gain to each Unitholder receiving such greater cash
or property distribution until the aggregate amount of such
items allocated pursuant to this
Section 6.1(d)(iii)(A)
for the current taxable year and all previous taxable years is
equal to the product of (aa) the amount by which the
distribution (on a per Unit basis) to such Unitholder exceeds
the distribution (on a per Unit basis) to the Unitholders
receiving the smallest distribution and (bb) the number of Units
owned by the Unitholder receiving the greater distribution; and
(2) the General Partner shall be allocated income and gain
in an aggregate amount equal to the product obtained by
multiplying (aa) the quotient determined by dividing
(x) the General Partners Percentage Interest at the
time in which the greater cash or property distribution occurs
by (y) the sum of 100 less the General Partners
Percentage Interest at the time in which the greater cash or
property distribution occurs times (bb) the sum of the amounts
allocated in clause (1) above.
(B) After the application of
Section 6.1(d)(iii)(A),
all or any portion of the remaining items of Partnership income
or gain for the taxable period, if any, shall be allocated
(1) to the holders of Incentive Distribution Rights, Pro
Rata, until the aggregate amount of such items allocated to the
holders of Incentive Distribution Rights pursuant to this
Section 6.1(d)(iii)(B)
for the current taxable year and all previous taxable years is
equal to the cumulative amount of all Incentive Distributions
made to the holders of Incentive Distribution Rights from the
Closing Date to a date 45 days after the end of the current
taxable year; and (2) to the General Partner an amount
equal to the product of (aa) an amount equal to the quotient
determined by dividing (x) the General Partners
Percentage Interest by (y) the sum of 100 less the General
Partners Percentage Interest times (bb) the sum of the
amounts allocated in clause (1) above.
(iv) Qualified Income Offset. In the
event any Partner unexpectedly receives any adjustments,
allocations or distributions described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5),
or
1.704-1(b)(2)(ii)(d)(6),
items of Partnership income and gain shall be specially
allocated to such Partner in an amount and manner sufficient to
eliminate, to the extent required by the Treasury Regulations
promulgated under
Section 704(b)
of the Code, the deficit balance, if any, in its Adjusted
Capital Account created by such adjustments, allocations or
distributions as quickly as possible unless such deficit balance
is otherwise eliminated pursuant to
Section 6.1(d)(i)
or
Section 6.1(d)(ii).
(v) Gross Income Allocations. In the
event any Partner has a deficit balance in its Capital Account
at the end of any Partnership taxable period in excess of the
sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the
amount such Partner is deemed obligated to restore pursuant to
Treasury
Regulation Sections 1.704-2(g)
and
1.704-2(i)(5),
such Partner shall be specially allocated items of Partnership
income and gain in the amount of such excess as quickly as
possible; provided, that an allocation pursuant to this
Section 6.1(d)(v)
shall be made only if and to the extent that such Partner would
have a deficit balance in its Capital Account as adjusted after
all other allocations provided for in this Section 6.1 have
been tentatively made as if this
Section 6.1(d)(v)
were not in this Agreement.
36
(vi) Nonrecourse Deductions. Nonrecourse
Deductions for any taxable period shall be allocated to the
Partners in accordance with their respective Percentage
Interests. If the General Partner determines that the
Partnerships Nonrecourse Deductions should be allocated in
a different ratio to satisfy the safe harbor requirements of the
Treasury Regulations promulgated under Section 704(b) of
the Code, the General Partner is authorized, upon notice to the
other Partners, to revise the prescribed ratio to the
numerically closest ratio that does satisfy such requirements.
(vii) Partner Nonrecourse
Deductions. Partner Nonrecourse Deductions for
any taxable period shall be allocated 100% to the Partner that
bears the Economic Risk of Loss with respect to the Partner
Nonrecourse Debt to which such Partner Nonrecourse Deductions
are attributable in accordance with Treasury
Regulation Section 1.704-2(i).
If more than one Partner bears the Economic Risk of Loss with
respect to a Partner Nonrecourse Debt, such Partner Nonrecourse
Deductions attributable thereto shall be allocated between or
among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For
purposes of Treasury
Regulation Section 1.752-3(a)(3),
the Partners agree that Nonrecourse Liabilities of the
Partnership in excess of the sum of (A) the amount of
Partnership Minimum Gain and (B) the total amount of
Nonrecourse Built-in Gain shall be allocated among the Partners
in accordance with their respective Percentage Interests.
(ix) Code Section 754
Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to
Section 734(b)
or 743(b) of
the Code is required, pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such
basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner
in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity.
(A) At the election of the General Partner with respect to
any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership income or gain for such taxable period, after taking
into account allocations pursuant to
Section 6.1(d)(iii),
shall be allocated 100% to each Partner holding Subordinated
Units that are Outstanding as of the termination of the
Subordination Period (Final Subordinated
Units) in the proportion of the number of Final
Subordinated Units held by such Partner to the total number of
Final Subordinated Units then Outstanding, until each such
Partner has been allocated an amount of income or gain that
increases the Capital Account maintained with respect to such
Final Subordinated Units to an amount equal to the product of
(A) the number of Final Subordinated Units held by such
Partner and (B) the Per Unit Capital Amount for a Common
Unit. The purpose of this allocation is to establish uniformity
between the Capital Accounts underlying Final Subordinated Units
and the Capital Accounts underlying Common Units held by Persons
other than the General Partner and its Affiliates immediately
prior to the conversion of such Final Subordinated Units into
Common Units. This allocation method for establishing such
economic uniformity will be available to the General Partner
only if the method for allocating the Capital Account maintained
with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to
Section 5.5(c)(ii)
does not otherwise provide such economic uniformity to the Final
Subordinated Units.
(B) At the election of the General Partner with respect to
any taxable period ending upon, or after, the conversion of the
Class B Units pursuant to
Section 5.11(f),
all or a portion of the remaining items of Partnership income or
gain for such taxable period, after taking into account
allocations pursuant to
Section 6.1(d)(iii)
and
Section 6.1(d)(x)(A),
shall be allocated 100% to the holder or holders of the Common
Units resulting from the conversion pursuant to
Section 5.11(f) (Converted Common Units)
in the proportion of the number of the Converted Common
Units held by such holder or holders to the total number of
Converted Common Units then Outstanding, until each such
37
holder has been allocated an amount of income or gain that
increases the Capital Account maintained with respect to such
Converted Common Units to an amount equal to the product of
(A) the number of Converted Common Units held by such
holder and (B) the Per Unit Capital Amount for a Common
Unit. The purpose of this allocation is to establish uniformity
between the Capital Accounts underlying Converted Common Units
and the Capital Accounts underlying Common Units held by Persons
other than the General Partner and its Affiliates immediately
prior to the receipt of Common Units pursuant to
Section 5.11(f).
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this
Section 6.1, other than the Required Allocations, the
Required Allocations shall be taken into account in making the
Agreed Allocations so that, to the extent possible, the net
amount of items of income, gain, loss and deduction allocated to
each Partner pursuant to the Required Allocations and the Agreed
Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under
the Agreed Allocations had the Required Allocations and the
related Curative Allocation not otherwise been provided in this
Section 6.1. Notwithstanding the preceding sentence,
Required Allocations relating to (1) Nonrecourse Deductions
shall not be taken into account except to the extent that there
has been a decrease in Partnership Minimum Gain and
(2) Partner Nonrecourse Deductions shall not be taken into
account except to the extent that there has been a decrease in
Partner Nonrecourse Debt Minimum Gain. Allocations pursuant to
this
Section 6.1(d)(xi)(A)
shall only be made with respect to Required Allocations to the
extent the General Partner determines that such allocations will
otherwise be inconsistent with the economic agreement among the
Partners. Further, allocations pursuant to this
Section 6.1(d)(xi)(A)
shall be deferred with respect to allocations pursuant to
clauses (1) and (2) hereof to the extent the General
Partner determines that such allocations are likely to be offset
by subsequent Required Allocations.
(B) The General Partner shall, with respect to each taxable
period, (1) apply the provisions of
Section 6.1(d)(xi)(A)
in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required
Allocations, and (2) divide all allocations pursuant to
Section 6.1(d)(xi)(A)
among the Partners in a manner that is likely to minimize such
economic distortions.
(xii) Corrective Allocations. In the
event of any allocation of Additional Book Basis Derivative
Items or any Book-Down Event or any recognition of a Net
Termination Loss, the following rules shall apply:
(A) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof), the General
Partner shall allocate additional items of income and gain away
from the holders of Incentive Distribution Rights to the
Unitholders and the General Partner, or additional items of
deduction and loss away from the Unitholders and the General
Partner to the holders of Incentive Distribution Rights, to the
extent that the Additional Book Basis Derivative Items allocated
to the Unitholders or the General Partner exceed their Share of
Additional Book Basis Derivative Items. For this purpose, the
Unitholders and the General Partner shall be treated as being
allocated Additional Book Basis Derivative Items to the extent
that such Additional Book Basis Derivative Items have reduced
the amount of income that would otherwise have been allocated to
the Unitholders or the General Partner under the Partnership
Agreement (e.g., Additional Book Basis Derivative Items taken
into account in computing cost of goods sold would reduce the
amount of book income otherwise available for allocation among
the Partners). Any allocation made pursuant to this
Section 6.1(d)(xii)(A)
shall be made after all of the other Agreed Allocations have
been made as if this
Section 6.1(d)(xii)
were not in this Agreement and, to the extent necessary, shall
require the reallocation of items that have been allocated
pursuant to such other Agreed Allocations.
(B) In the case of any negative adjustments to the Capital
Accounts of the Partners resulting from a Book-Down Event or
from the recognition of a Net Termination Loss, such negative
adjustment
38
(1) shall first be allocated, to the extent of the
Aggregate Remaining Net Positive Adjustments, in such a manner,
as determined by the General Partner, that to the extent
possible the aggregate Capital Accounts of the Partners will
equal the amount that would have been the Capital Account
balance of the Partners if no prior
Book-Up
Events had occurred, and (2) any negative adjustment in
excess of the Aggregate Remaining Net Positive Adjustments shall
be allocated pursuant to
Section 6.1(c)
hereof.
(C) In making the allocations required under this
Section 6.1(d)(xii),
the General Partner may apply whatever conventions or other
methodology it determines will satisfy the purpose of this
Section 6.1(d)(xii).
Section 6.2 Allocations
for Tax Purposes.
(a) Except as otherwise provided herein, for federal income
tax purposes, each item of income, gain, loss and deduction
shall be allocated among the Partners in the same manner as its
correlative item of book income, gain, loss or
deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities
attributable to a Contributed Property or Adjusted Property,
items of income, gain, loss, depreciation, amortization and cost
recovery deductions shall be allocated for federal income tax
purposes among the Partners as follows:
(i)(A) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the Partners in
the manner provided under
Section 704(c)
of the Code that takes into account the variation between the
Agreed Value of such property and its adjusted basis at the time
of contribution; and (B) any item of Residual Gain or
Residual Loss attributable to a Contributed Property shall be
allocated among the Partners in the same manner as its
correlative item of book gain or loss is allocated
pursuant to Section 6.1.
(ii)(A) In the case of an Adjusted Property, such items
shall (1) first, be allocated among the Partners in a
manner consistent with the principles of
Section 704(c)
of the Code to take into account the Unrealized Gain or
Unrealized Loss attributable to such property and the
allocations thereof pursuant to
Section 5.5(d)(i)
or
Section 5.5(d)(ii),
and (2) second, in the event such property was originally a
Contributed Property, be allocated among the Partners in a
manner consistent with
Section 6.2(b)(i)(A);
and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among
the Partners in the same manner as its correlative item of
book gain or loss is allocated pursuant to
Section 6.1.
(iii) The General Partner shall apply the principles of
Treasury
Regulation Section 1.704-3(d)
to eliminate Book-Tax Disparities, except with respect to
goodwill contributed to the Partnership upon formation.
(c) For the proper administration of the Partnership and
for the preservation of uniformity of the Limited Partner
Interests (or any class or classes thereof), the General Partner
shall (i) adopt such conventions as it deems appropriate in
determining the amount of depreciation, amortization and cost
recovery deductions; (ii) make special allocations for
federal income tax purposes of income (including gross income)
or deductions; and (iii) amend the provisions of this
Agreement as appropriate (x) to reflect the proposal or
promulgation of Treasury Regulations under
Section 704(b)
or
Section 704(c)
of the Code or (y) otherwise to preserve or achieve
uniformity of the Limited Partner Interests (or any class or
classes thereof). The General Partner may adopt such
conventions, make such allocations and make such amendments to
this Agreement as provided in this
Section 6.2(c)
only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of
any class or classes of Limited Partner Interests issued and
Outstanding or the Partnership, and if such allocations are
consistent with the principles of Section 704 of the Code.
(d) The General Partner may determine to depreciate or
amortize the portion of an adjustment under
Section 743(b)
of the Code attributable to unrealized appreciation in any
Adjusted Property (to the extent of the unamortized Book-Tax
Disparity) using a predetermined rate derived from the
depreciation or
39
amortization method and useful life applied to the
Partnerships common basis of such property, despite any
inconsistency of such approach with Treasury
Regulation Section 1.167(c)-l(a)(6)
or any successor regulations thereto. If the General Partner
determines that such reporting position cannot reasonably be
taken, the General Partner may adopt depreciation and
amortization conventions under which all purchasers acquiring
Limited Partner Interests in the same month would receive
depreciation and amortization deductions, based upon the same
applicable rate as if they had purchased a direct interest in
the Partnerships property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may
use any other depreciation and amortization conventions to
preserve the uniformity of the intrinsic tax characteristics of
any Limited Partner Interests, so long as such conventions would
not have a material adverse effect on the Limited Partners or
the Record Holders of any class or classes of Limited Partner
Interests.
(e) In accordance with Treasury
Regulation Section 1.1245-1(e),
any gain allocated to the Partners upon the sale or other
taxable disposition of any Partnership asset shall, to the
extent possible, after taking into account other required
allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to
the same extent as such Partners (or their predecessors in
interest) have been allocated any deductions directly or
indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit
recognized by the Partnership for federal income tax purposes
and allocated to the Partners in accordance with the provisions
hereof shall be determined without regard to any election under
Section 754 of the Code that may be made by the
Partnership; provided, however, that such allocations,
once made, shall be adjusted (in the manner determined by the
General Partner) to take into account those adjustments
permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and
deduction, for federal income tax purposes, shall be determined
on an annual basis and prorated on a monthly basis and shall be
allocated to the Partners as of the opening of the National
Securities Exchange on which the Partnership Interests are
listed or admitted to trading on the first Business Day of each
month; provided, however, such items for the period
beginning on the Closing Date and ending on the last day of the
month in which the Option Closing Date or the expiration of the
Over-Allotment Option occurs shall be allocated to the Partners
as of the opening of the National Securities Exchange on which
the Partnership Interests are listed or admitted to trading
on the first Business Day of the next succeeding month; and
provided, further, that gain or loss on a sale or other
disposition of any assets of the Partnership or any other
extraordinary item of income or loss realized and recognized
other than in the ordinary course of business, as determined by
the General Partner, shall be allocated to the Partners as of
the opening of the National Securities Exchange on which the
Partnership Interests are listed or admitted to trading on
the first Business Day of the month in which such gain or loss
is recognized for federal income tax purposes. The General
Partner may revise, alter or otherwise modify such methods of
allocation to the extent permitted or required by
Section 706 of the Code and the regulations or rulings
promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited
Partner under the provisions of this Article VI shall
instead be made to the beneficial owner of Limited Partner
Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in
accordance with
Section 6031(c)
of the Code or any other method determined by the General
Partner.
Section 6.3 Requirement
and Characterization of Distributions; Distributions to Record
Holders.
(a) Within 45 days following the end of each Quarter
commencing with the Quarter ending on March 31, 2007, an
amount equal to 100% of Available Cash with respect to such
Quarter shall, subject to
Section 17-607
of the Delaware Act, be distributed in accordance with this
Article VI by the Partnership to the Partners as of the
Record Date selected by the General Partner. All amounts of
Available Cash distributed by the Partnership on any date from
any source shall be deemed to be Operating Surplus until the sum
of all amounts of Available Cash theretofore distributed by the
Partnership to the Partners
40
pursuant to Section 6.4 equals the Operating Surplus from
the Closing Date through the close of the immediately preceding
Quarter. Any remaining amounts of Available Cash distributed by
the Partnership on such date shall, except as otherwise provided
in Section 6.5, be deemed to be Capital
Surplus. All distributions required to be made under this
Agreement shall be made subject to
Section 17-607
of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of
the dissolution and liquidation of the Partnership, all receipts
received during or after the Quarter in which the Liquidation
Date occurs shall be applied and distributed solely in
accordance with, and subject to the terms and conditions of,
Section 12.4.
(c) The General Partner may treat taxes paid by the
Partnership on behalf of, or amounts withheld with respect to,
all or less than all of the Partners, as a distribution of
Available Cash to such Partners.
(d) Each distribution in respect of a
Partnership Interest shall be paid by the Partnership,
directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such
Partnership Interest as of the Record Date set for such
distribution. Such payment shall constitute full payment and
satisfaction of the Partnerships liability in respect of
such payment, regardless of any claim of any Person who may have
an interest in such payment by reason of an assignment or
otherwise.
Section 6.4 Distributions
of Available Cash from Operating Surplus.
(a) During Subordination
Period. Available Cash with respect to any
Quarter within the Subordination Period that is deemed to be
Operating Surplus pursuant to the provisions of Section 6.3
or 6.5 shall, subject to
Section 17-607
of the Delaware Act, be distributed as follows, except as
otherwise contemplated by Section 5.6 in respect of other
Partnership Securities issued pursuant thereto:
(i) First, to the General Partner and the Unitholders
holding Common Units, in accordance with their respective
Percentage Interests, until there has been distributed in
respect of each Common Unit then Outstanding an amount equal to
the Minimum Quarterly Distribution for such Quarter;
(ii) Second, to the General Partner and the Unitholders
holding Common Units, in accordance with their respective
Percentage Interests, until there has been distributed in
respect of each Common Unit then Outstanding an amount equal to
the Cumulative Common Unit Arrearage existing with respect to
such Quarter;
(iii) Third, to the General Partner and the Unitholders
holding Subordinated Units, in accordance with their respective
Percentage Interests, until there has been distributed in
respect of each Subordinated Unit then Outstanding an amount
equal to the Minimum Quarterly Distribution for such Quarter;
(iv) Fourth, to the General Partner and all Unitholders, in
accordance with their respective Percentage Interests, until
there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution for such
Quarter;
(v) Fifth, (A) to the General Partner in accordance
with its Percentage Interest; (B) 13% to the holders of the
Incentive Distribution Rights, Pro Rata; and (C) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (A) and
(B) of this clause (v) until there has been
distributed in respect of each Unit then Outstanding an amount
equal to the excess of the Second Target Distribution over the
First Target Distribution for such Quarter;
(vi) Sixth, (A) to the General Partner in accordance
with its Percentage Interest, (B) 23% to the holders of the
Incentive Distribution Rights, Pro Rata; and (C) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (A) and
(B) of this subclause (vi), until there has been
distributed in respect of each Unit then Outstanding an amount
equal to the excess of the Third Target Distribution over the
Second Target Distribution for such Quarter; and
41
(vii) Thereafter, (A) to the General Partner in
accordance with its Percentage Interest; (B) 48% to the
holders of the Incentive Distribution Rights, Pro Rata; and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (vii);
provided, however, if the Minimum Quarterly Distribution,
the First Target Distribution, the Second Target Distribution
and the Third Target Distribution have been reduced to zero
pursuant to the second sentence of
Section 6.6(a),
the distribution of Available Cash that is deemed to be
Operating Surplus with respect to any Quarter will be made
solely in accordance with
Section 6.4(a)(vii).
(b) After Subordination Period. Available
Cash with respect to any Quarter after the Subordination Period
that is deemed to be Operating Surplus pursuant to the
provisions of Section 6.3 or Section 6.5, subject to
Section 17-607
of the Delaware Act, shall be distributed as follows, except as
otherwise required by Section 5.6(b) in respect of
additional Partnership Securities issued pursuant thereto:
(i) First, 100% to the General Partner and the Unitholders
in accordance with their respective Percentage Interests, until
there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, 100% to the General Partner and the
Unitholders in accordance with their respective Percentage
Interests, until there has been distributed in respect of each
Unit then Outstanding an amount equal to the excess of the First
Target Distribution over the Minimum Quarterly Distribution for
such Quarter;
(iii) Third, (A) to the General Partner in accordance
with its Percentage Interest; (B) 13% to the holders of the
Incentive Distribution Rights, Pro Rata; and (C) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (A) and
(B) of this clause (iii), until there has been distributed
in respect of each Unit then Outstanding an amount equal to the
excess of the Second Target Distribution over the First Target
Distribution for such Quarter;
(iv) Fourth, (A) to the General Partner in accordance
with its Percentage Interest; (B) 23% to the holders of the
Incentive Distribution Rights, Pro Rata; and (C) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclause (A) and
(B) of this clause (iv), until there has been
distributed in respect of each Unit then Outstanding an amount
equal to the excess of the Third Target Distribution over the
Second Target Distribution for such Quarter; and
(v) Thereafter, (A) to the General Partner in
accordance with its Percentage Interest; (B) 48% to the
holders of the Incentive Distribution Rights, Pro Rata; and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (v);
provided, however, if the Minimum Quarterly Distribution,
the First Target Distribution, the Second Target Distribution
and the Third Target Distribution have been reduced to zero
pursuant to the second sentence of
Section 6.6(a),
the distribution of Available Cash that is deemed to be
Operating Surplus with respect to any Quarter will be made
solely in accordance with
Section 6.4(b)(v).
Section 6.5 Distributions
of Available Cash from Capital Surplus.
Available Cash that is deemed to be Capital Surplus pursuant to
the provisions of
Section 6.3(a)
shall, subject to
Section 17-607
of the Delaware Act, be distributed, unless the provisions of
Section 6.3 require otherwise, 100% to the General Partner
and the Unitholders in accordance with their respective
Percentage Interests, until a hypothetical holder of a Common
Unit acquired on the Closing Date has received with respect to
such Common Unit, during the period since the Closing Date
through such date, distributions of Available Cash that are
deemed to be Capital Surplus in an aggregate amount equal to the
Initial Unit Price. Available Cash that is deemed to be Capital
Surplus shall then be distributed to the General Partner and all
Unitholders holding Common Units, in accordance with their
respective Percentage Interests, until
42
there has been distributed in respect of each Common Unit then
Outstanding an amount equal to the Cumulative Common Unit
Arrearage. Thereafter, all Available Cash shall be distributed
as if it were Operating Surplus and shall be distributed in
accordance with Section 6.4.
Section 6.6 Adjustment
of Minimum Quarterly Distribution and Target Distribution
Levels.
(a) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution, Third Target
Distribution, Common Unit Arrearages and Cumulative Common Unit
Arrearages shall be proportionately adjusted in the event of any
distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other
Partnership Securities in accordance with Section 5.9. In
the event of a distribution of Available Cash that is deemed to
be from Capital Surplus, the then applicable Minimum Quarterly
Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, shall be adjusted
proportionately downward to equal the product obtained by
multiplying the otherwise applicable Minimum Quarterly
Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be,
by a fraction of which the numerator is the Unrecovered Initial
Unit Price of the Common Units immediately after giving effect
to such distribution and of which the denominator is the
Unrecovered Initial Unit Price of the Common Units immediately
prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution, shall also be subject to adjustment pursuant to
Section 5.11 and Section 6.9.
Section 6.7 Special
Provisions Relating to the Holders of Subordinated Units and
Class B Units.
(a) Except with respect to the right to vote on or approve
matters requiring the vote or approval of a percentage of the
holders of Outstanding Common Units and the right to participate
in allocations of income, gain, loss and deduction and
distributions made with respect to Common Units, the holder of a
Subordinated Unit shall have all of the rights and obligations
of a Unitholder holding Common Units hereunder; provided,
however, that immediately upon the conversion of
Subordinated Units into Common Units pursuant to
Section 5.7, the Unitholder holding a Subordinated Unit
shall possess all of the rights and obligations of a Unitholder
holding Common Units hereunder, including the right to vote as a
Common Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with
respect to Common Units; provided, however, that such
converted Subordinated Units shall remain subject to the
provisions of
Sections 5.5(c)(ii),
6.1(d)(x)(A),
6.7(b) and
6.7(c).
(b) A Unitholder shall not be permitted to transfer a
Subordinated Unit or a Subordinated Unit that has converted into
a Common Unit pursuant to Section 5.7 (other than a
transfer to an Affiliate) if the remaining balance in the
transferring Unitholders Capital Account with respect to
the retained Subordinated Units or Retained Converted
Subordinated Units would be negative after giving effect to the
allocation under
Section 5.5(c)(ii)(B).
(c) The Unitholder holding a Common Unit that has resulted
from the conversion of a Subordinated Unit pursuant to
Section 5.7 shall not be issued a Common Unit Certificate
pursuant to Section 4.1, and shall not be permitted to
transfer such Common Units to a Person that is not an Affiliate
of the holder until such time as the General Partner determines,
based on advice of counsel, that each such Common Unit should
have, as a substantive matter, like intrinsic economic and
federal income tax characteristics, in all material respects, to
the intrinsic economic and federal income tax characteristics of
an Initial Common Unit. In connection with the condition imposed
by this
Section 6.7(c),
the General Partner may take whatever steps are required to
provide economic uniformity to such Common Units in preparation
for a transfer of such Common Units, including the application
of
Sections 5.5(c)(ii),
6.1(d)(x)
and 6.7(b);
provided, however, that no such steps may be taken that
would have a material adverse effect on the Unitholders holding
Common Units represented by Common Unit Certificates.
(d) Except with respect to the right to vote on or approve
matters requiring the vote or approval of a percentage of the
holders of Outstanding Common Units and the right to participate
in allocations of income, gain, loss and deduction and
distributions made with respect to Common Units, the holders of
43
Class B Units shall have all the rights and obligations of
a Unitholder holding Common Units; provided, however,
that immediately upon the conversion of Class B Units into
Common Units pursuant to Section 5.11, the Unitholders
holding a Class B Unit shall possess all the rights and
obligations of a Unitholder holding Common Units hereunder,
including the right to vote as a Common Unitholder and the right
to participate in allocations of income, gain, loss and
deduction and distributions made with respect to Common Units;
provided, however, that such converted Class B Units
shall remain subject to the provisions of
Sections 6.1(d)(x)(B)
and 6.7(e).
(e) The holder or holders of Common Units resulting from
the conversion pursuant to
Section 5.11(f)
of any Class B Units pursuant to Section 5.11 shall
not be issued a Common Unit Certificate pursuant to
Section 4.1, and shall not be permitted to transfer such
Common Units until such time as the General Partner determines,
based on advice of counsel, that each such Common Unit should
have, as a substantive matter, like intrinsic economic and
federal income tax characteristics, in all material respects, to
the intrinsic economic and federal income tax characteristics of
an Initial Common Unit. In connection with the condition imposed
by this
Section 6.7(d),
the General Partner may take whatever steps are required to
provide economic uniformity to such Common Units, including the
application of
Section 6.1(d)(x)(B);
provided, however, that no such steps may be taken
that would have a material adverse effect on the Unitholders
holding Common Units represented by Common Unit Certificates.
Section 6.8 Special
Provisions Relating to the Holders of Incentive Distribution
Rights.
Notwithstanding anything to the contrary set forth in this
Agreement, the holders of the Incentive Distribution Rights
(a) shall (i) possess the rights and obligations
provided in this Agreement with respect to a Limited Partner
pursuant to Article III and Article VII and
(ii) have a Capital Account as a Partner pursuant to
Section 5.5 and all other provisions related thereto and
(b) shall not (i) be entitled to vote on any matters
requiring the approval or vote of the holders of Outstanding
Units, except as provided by law, (ii) be entitled to any
distributions other than as provided in Sections 6.4(a)(v),
(vi) and (vii),
Section 6.4(b)(iii),
(iv) and (v), and Section 12.4 or (iii) be
allocated items of income, gain, loss or deduction other than as
specified in this Article VI.
Section 6.9 Entity-Level Taxation.
If legislation is enacted or the interpretation of existing
language is modified by a governmental taxing authority so that
a Group Member is treated as an association taxable as a
corporation or is otherwise subject to an entity-level tax for
federal, state or local income tax purposes, then the General
Partner may reduce the Minimum Quarterly Distribution, the First
Target Distribution, the Second Target Distribution and the
Third Target Distribution by the amount of income taxes that are
payable by reason of any such new legislation or interpretation
(the Incremental Income Taxes), or any portion
thereof selected by the General Partner, in the manner provided
in this Section 6.9. If the General Partner elects to reduce the
Minimum Quarterly Distribution, the First Target Distribution,
the Second Target Distribution and the Third Target Distribution
for any Quarter with respect to all or a portion of any
Incremental Income Taxes, the General Partner shall estimate for
such Quarter the Partnership Groups aggregate liability
(the Estimated Incremental Quarterly Tax
Amount) for all (or the relevant portion of) such
Incremental Income Taxes; provided that any difference
between such estimate and the actual tax liability for
Incremental Income Taxes (or the relevant portion thereof) for
such Quarter may, to the extent determined by the General
Partner be taken into account in determining the Estimated
Incremental Quarterly Tax Amount with respect to each Quarter in
which any such difference can be determined. For each such
Quarter, the Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution, shall be the product obtained by multiplying
(a) the amounts therefor that are set out herein prior to
the application of this Section 6.9 times (b) the
quotient obtained by dividing (i) Available Cash with
respect to such Quarter by (ii) the sum of Available Cash
with respect to such Quarter and the Estimated Incremental
Quarterly Tax Amount for such Quarter, as determined by the
General Partner. For purposes of the foregoing, Available Cash
with respect to a Quarter will be deemed reduced by the
Estimated Incremental Quarterly Tax Amount for that Quarter.
44
ARTICLE VII
MANAGEMENT
AND OPERATION OF BUSINESS
Section 7.1 Management.
(a) The General Partner shall conduct, direct and manage
all activities of the Partnership. Except as otherwise expressly
provided in this Agreement, all management powers over the
business and affairs of the Partnership shall be exclusively
vested in the General Partner, and no Limited Partner shall have
any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted
a general partner of a limited partnership under applicable law
or that are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to
Section 7.3, shall have full power and authority to do all
things and on such terms as it determines to be necessary or
appropriate to conduct the business of the Partnership, to
exercise all powers set forth in Section 2.5 and to
effectuate the purposes set forth in Section 2.4, including
the following:
(i) the making of any expenditures, the lending or
borrowing of money, the assumption or guarantee of, or other
contracting for, indebtedness and other liabilities, the
issuance of evidences of indebtedness, including indebtedness
that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental or other
agencies having jurisdiction over the business or assets of the
Partnership;
(iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any or all of the
assets of the Partnership or the merger or other combination of
the Partnership with or into another Person (the matters
described in this clause (iii) being subject, however, to
any prior approval that may be required by Section 7.3 and
Article XIV);
(iv) the use of the assets of the Partnership (including
cash on hand) for any purpose consistent with the terms of this
Agreement, including the financing of the conduct of the
operations of the Partnership Group; subject to
Section 7.6(a), the lending of funds to other Persons
(including other Group Members); the repayment or guarantee of
obligations of any Group Member; and the making of capital
contributions to any Group Member;
(v) the negotiation, execution and performance of any
contracts, conveyances or other instruments (including
instruments that limit the liability of the Partnership under
contractual arrangements to all or particular assets of the
Partnership, with the other party to the contract to have no
recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the
terms of the transaction being less favorable to the Partnership
than would otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including
employees having titles such as president,
vice president, secretary and
treasurer) and agents, outside attorneys,
accountants, consultants and contractors and the determination
of their compensation and other terms of employment or hiring;
(viii) the maintenance of insurance for the benefit of the
Partnership Group, the Partners and Indemnitees;
(ix) the formation of, or acquisition of an interest in,
and the contribution of property and the making of loans to, any
further limited or general partnerships, joint ventures,
corporations, limited liability companies or other relationships
(including the acquisition of interests in, and the
contributions of property to, any Group Member from time to
time) subject to the restrictions set forth in Section 2.4;
45
(x) the control of any matters affecting the rights and
obligations of the Partnership, including the bringing and
defending of actions at law or in equity and otherwise engaging
in the conduct of litigation, arbitration or mediation and the
incurring of legal expense and the settlement of claims and
litigation;
(xi) the indemnification of any Person against liabilities
and contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any
National Securities Exchange and the delisting of some or all of
the Limited Partner Interests from, or requesting that trading
be suspended on, any such exchange (subject to any prior
approval that may be required under Section 4.8);
(xiii) the purchase, sale or other acquisition or
disposition of Partnership Securities, or the issuance of
options, rights, warrants, appreciation rights and tracking and
phantom interests relating to Partnership Securities;
(xiv) the undertaking of any action in connection with the
Partnerships participation in any Group Member; and
(xv) the entering into of agreements with any of its
Affiliates to render services to a Group Member or to itself in
the discharge of its duties as General Partner of the
Partnership.
(b) Notwithstanding any other provision of this Agreement,
any Group Member Agreement, the Delaware Act or any applicable
law, rule or regulation, each of the Partners and the Assignees
and each other Person who may acquire an interest in Partnership
Securities hereby (i) approves, ratifies and confirms the
execution, delivery and performance by the parties thereto of
this Agreement and the Group Member Agreement of each other
Group Member, the Underwriting Agreement, the Omnibus Agreement,
the Contribution Agreement, the Natural Gas Purchase Agreement,
the NGL and Products Purchase Agreement, any Group Member
Agreement and the other agreements described in or filed as
exhibits to the Registration Statement that are related to the
transactions contemplated by the Registration Statement;
(ii) agrees that the General Partner (on its own or through
any officer of the Partnership) is authorized to execute,
deliver and perform the agreements referred to in
clause (i) of this sentence and the other agreements, acts,
transactions and matters described in or contemplated by the
Registration Statement on behalf of the Partnership without any
further act, approval or vote of the Partners or the Assignees
or the other Persons who may acquire an interest in Partnership
Securities; and (iii) agrees that the execution, delivery
or performance by the General Partner, any Group Member or any
Affiliate of any of them of this Agreement or any agreement
authorized or permitted under this Agreement (including the
exercise by the General Partner or any Affiliate of the General
Partner of the rights accorded pursuant to
Article XV) shall not constitute a breach by the
General Partner of any duty that the General Partner may owe the
Partnership or the Limited Partners or any other Persons under
this Agreement (or any other agreements) or of any duty stated
or implied by law or equity.
Section 7.2 Certificate
of Limited Partnership.
The General Partner has caused the Certificate of Limited
Partnership to be filed with the Secretary of State of the State
of Delaware as required by the Delaware Act. The General Partner
shall use all reasonable efforts to cause to be filed such other
certificates or documents that the General Partner determines to
be necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a
partnership in which the limited partners have limited
liability) in the State of Delaware or any other state in which
the Partnership may elect to do business or own property. To the
extent the General Partner determines such action to be
necessary or appropriate, the General Partner shall file
amendments to and restatements of the Certificate of Limited
Partnership and do all things to maintain the Partnership as a
limited partnership (or a partnership or other entity in which
the limited partners have limited liability) under the laws of
the State of Delaware or of any other state in which the
Partnership may elect to do business or own property. Subject to
the terms of Section 3.4(a), the General Partner shall
46
not be required, before or after filing, to deliver or mail a
copy of the Certificate of Limited Partnership, any
qualification document or any amendment thereto to any Limited
Partner.
Section 7.3 Restrictions
on the General Partners Authority.
Except as provided in Article XII and Article XIV, the
General Partner may not sell, exchange or otherwise dispose of
all or substantially all of the assets of the Partnership Group,
taken as a whole, in a single transaction or a series of related
transactions (including by way of merger, consolidation, other
combination or sale of ownership interests of the
Partnerships Subsidiaries) without the approval of holders
of a Unit Majority; provided, however, that this
provision shall not preclude or limit the General Partners
ability to mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of the assets of the
Partnership Group and shall not apply to any forced sale of any
or all of the assets of the Partnership Group pursuant to the
foreclosure of, or other realization upon, any such encumbrance.
Without the approval of holders of a Unit Majority, the General
Partner shall not, on behalf of the Partnership, except as
permitted under Section 4.6, 11.1 and Section 11.2,
elect or cause the Partnership to elect a successor general
partner of the Partnership.
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Section 7.4
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Reimbursement
of the General Partner.
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(a) Except as provided in this Section 7.4 and
elsewhere in this Agreement, the General Partner shall not be
compensated for its services as a general partner or managing
member of any Group Member.
(b) Subject to the limitations contained in the Omnibus
Agreement, the General Partner shall be reimbursed on a monthly
basis, or such other basis as the General Partner may determine,
for (i) all direct and indirect expenses it incurs or
payments it makes on behalf of the Partnership Group (including
salary, bonus, incentive compensation and other amounts paid to
any Person, including Affiliates of the General Partner to
perform services for the Partnership Group or for the General
Partner in the discharge of its duties to the Partnership
Group), and (ii) all other expenses allocable to the
Partnership Group or otherwise incurred by the General Partner
in connection with operating the Partnership Groups
business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the
expenses that are allocable to the Partnership Group.
Reimbursements pursuant to this Section 7.4 shall be in
addition to any reimbursement to the General Partner as a result
of indemnification pursuant to Section 7.7.
(c) The General Partner, without the approval of the
Limited Partners (who shall have no right to vote in respect
thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices
(including plans, programs and practices involving the issuance
of Partnership Securities or options to purchase or rights,
warrants or appreciation rights or phantom or tracking interests
relating to Partnership Securities), or cause the Partnership to
issue Partnership Securities in connection with, or pursuant to,
any employee benefit plan, employee program or employee practice
maintained or sponsored by the General Partner, Group Member or
any Affiliates in each case for the benefit of employees and
directors of the General Partner or any of its Affiliates, in
respect of services performed, directly or indirectly, for the
benefit of the Partnership Group. The Partnership agrees to
issue and sell to the General Partner or any of its Affiliates
any Partnership Securities that the General Partner or such
Affiliates are obligated to provide to any employees and
directors pursuant to any such employee benefit plans, employee
programs or employee practices. Expenses incurred by the General
Partner in connection with any such plans, programs and
practices (including the net cost to the General Partner or such
Affiliates of Partnership Securities purchased by the General
Partner or such Affiliates from the Partnership to fulfill
options or awards under such plans, programs and practices)
shall be reimbursed in accordance with Section 7.4(b). Any
and all obligations of the General Partner under any employee
benefit plans, employee programs or employee practices adopted
by the General Partner as permitted by this Section 7.4(c)
shall constitute obligations of the General Partner hereunder
and shall be assumed by any successor General Partner approved
pursuant to Section 11.1 or Section 11.2 or the
transferee of or successor to all of the General Partners
General Partner Interest (represented by General Partner Units)
pursuant to Section 4.6.
47
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Section 7.5
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Outside
Activities.
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(a) After the Closing Date, the General Partner, for so
long as it is the General Partner of the Partnership
(i) agrees that its sole business will be to act as a
general partner or managing member, as the case may be, of the
Partnership and any other partnership or limited liability
company of which the Partnership is, directly or indirectly, a
partner or member and to undertake activities that are ancillary
or related thereto (including being a limited partner in the
Partnership) and (ii) shall not engage in any business or
activity or incur any debts or liabilities except in connection
with or incidental to (A) its performance as general
partner or managing member, if any, of one or more Group Members
or as described in or contemplated by the Registration Statement
(B) the acquiring, owning or disposing of debt or equity
securities in any Group Member or (C) the guarantee of, and
mortgage, pledge, or encumbrance of any or all of its assets in
connection with, any indebtedness of Targa Resources, Inc., any
of its successors or permitted assigns or any other Affiliate of
the General Partner.
(b) Each Indemnitee (other than the General Partner) shall
have the right to engage in businesses of every type and
description and other activities for profit and to engage in and
possess an interest in other business ventures of any and every
type or description, whether in businesses engaged in or
anticipated to be engaged in by any Group Member, independently
or with others, including business interests and activities in
direct competition with the business and activities of any Group
Member, and none of the same shall constitute a breach of this
Agreement or any duty expressed or implied by law to any Group
Member or any Partner or Assignee. None of any Group Member, any
Limited Partner or any other Person shall have any rights by
virtue of this Agreement, any Group Member Agreement, or the
partnership relationship established hereby in any business
ventures of any Indemnitee. Notwithstanding anything to the
contrary in this Agreement, (i) the engaging in competitive
activities by any Indemnitees (other than the General Partner)
in accordance with the provisions of this Section 7.5 is
hereby approved by the Partnership and all Partners,
(ii) it shall be deemed not to be a breach of any fiduciary
duty or any other obligation of any type whatsoever of any
Indemnitee for the Indemnitees (other than the General Partner)
to engage in such business interests and activities in
preference to or to the exclusion of the Partnership and
(iii) the Indemnitees shall have no obligation hereunder or
as a result of any duty expressed or implied by law to present
business opportunities to the Partnership. Notwithstanding
anything to the contrary in this Agreement, the doctrine of
corporate opportunity, or any analogous doctrine, shall not
apply to any Indemnitee (including the General Partner). No
Indemnitee (including the General Partner) who acquires
knowledge of a potential transaction, agreement, arrangement or
other matter that may be an opportunity for the Partnership,
shall have any duty to communicate or offer such opportunity to
the Partnership, and such Indemnitee (including the General
Partner) shall not be liable to the Partnership, to any Limited
Partner or any other Person for breach of any fiduciary or other
duty by reason of the fact that such Indemnitee (including the
General Partner) pursues or acquires for itself, directs such
opportunity to another Person or does not communicate such
opportunity or information to the Partnership; provided such
Indemnitee does not engage in such business or activity as a
result of or using confidential or proprietary information
provided by or on behalf of the Partnership to such Indemnitee.
(c) The General Partner and each of its Affiliates may
acquire Units or other Partnership Securities in addition to
those acquired on the Closing Date and, except as otherwise
provided in this Agreement, shall be entitled to exercise, at
their option, all rights relating to all Units or other
Partnership Securities acquired by them. The term
Affiliates when used in this Section 7.5(d)
with respect to the General Partner shall not include any Group
Member.
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Section 7.6
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Loans
from the General Partner; Loans or Contributions from the
Partnership or Group Members.
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(a) The General Partner or any of its Affiliates may lend
to any Group Member, and any Group Member may borrow from the
General Partner or any of its Affiliates, funds needed or
desired by the Group Member for such periods of time and in such
amounts as the General Partner may determine; provided,
however, that in any such case the lending party may not
charge the borrowing party interest at a rate greater than the
rate that would be charged the borrowing party or impose terms
less favorable to the
48
borrowing party than would be charged or imposed on the
borrowing party by unrelated lenders on comparable loans made on
an arms-length basis (without reference to the lending
partys financial abilities or guarantees), all as
determined by the General Partner. The borrowing party shall
reimburse the lending party for any costs (other than any
additional interest costs) incurred by the lending party in
connection with the borrowing of such funds. For purposes of
this Section 7.6(a) and Section 7.6(b), the term
Group Member shall include any Affiliate of a Group
Member that is controlled by the Group Member.
(b) The Partnership may lend or contribute to any Group
Member, and any Group Member may borrow from the Partnership,
funds on terms and conditions determined by the General Partner.
No Group Member may lend funds to the General Partner or any of
its Affiliates (other than another Group Member).
(c) No borrowing by any Group Member or the approval
thereof by the General Partner shall be deemed to constitute a
breach of any duty, expressed or implied, of the General Partner
or its Affiliates to the Partnership or the Limited Partners by
reason of the fact that the purpose or effect of such borrowing
is directly or indirectly to (i) enable distributions to
the General Partner or its Affiliates (including in their
capacities as Limited Partners) to exceed the General
Partners Percentage Interest of the total amount
distributed to all partners or (ii) hasten the expiration
of the Subordination Period or the conversion of any
Subordinated Units into Common Units.
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Section 7.7
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Indemnification.
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(a) To the fullest extent permitted by law but subject to
the limitations expressly provided in this Agreement, all
Indemnitees shall be indemnified and held harmless by the
Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including
legal fees and expenses), judgments, fines, penalties, interest,
settlements or other amounts arising from any and all claims,
demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee;
provided, that the Indemnitee shall not be indemnified
and held harmless if there has been a final and non-appealable
judgment entered by a court of competent jurisdiction
determining that, in respect of the matter for which the
Indemnitee is seeking indemnification pursuant to this
Section 7.7, the Indemnitee acted in bad faith or engaged
in fraud, willful misconduct or, in the case of a criminal
matter, acted with knowledge that the Indemnitees conduct
was unlawful; provided, further, no indemnification
pursuant to this Section 7.7 shall be available to the
General Partner or its Affiliates (other than a Group Member)
with respect to its or their obligations incurred pursuant to
the Underwriting Agreement, the Omnibus Agreement or the
Contribution Agreement (other than obligations incurred by the
General Partner on behalf of the Partnership). Any
indemnification pursuant to this Section 7.7 shall be made
only out of the assets of the Partnership, it being agreed that
the General Partner shall not be personally liable for such
indemnification and shall have no obligation to contribute or
loan any monies or property to the Partnership to enable it to
effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses
(including legal fees and expenses) incurred by an Indemnitee
who is indemnified pursuant to Section 7.7(a) in defending
any claim, demand, action, suit or proceeding shall, from time
to time, be advanced by the Partnership prior to a determination
that the Indemnitee is not entitled to be indemnified upon
receipt by the Partnership of any undertaking by or on behalf of
the Indemnitee to repay such amount if it shall be determined
that the Indemnitee is not entitled to be indemnified as
authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7
shall be in addition to any other rights to which an Indemnitee
may be entitled under any agreement, pursuant to any vote of the
holders of Outstanding Limited Partner Interests, as a matter of
law or otherwise, both as to actions in the Indemnitees
capacity as an Indemnitee and as to actions in any other
capacity (including any capacity under the Underwriting
Agreement), and shall continue as to an Indemnitee who has
ceased to serve in such capacity and shall inure to the benefit
of the heirs, successors, assigns and administrators of the
Indemnitee.
49
(d) The Partnership may purchase and maintain (or reimburse
the General Partner or its Affiliates for the cost of)
insurance, on behalf of the General Partner, its Affiliates and
such other Persons as the General Partner shall determine,
against any liability that may be asserted against, or expense
that may be incurred by, such Person in connection with the
Partnerships activities or such Persons activities
on behalf of the Partnership, regardless of whether the
Partnership would have the power to indemnify such Person
against such liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the Partnership
shall be deemed to have requested an Indemnitee to serve as
fiduciary of an employee benefit plan whenever the performance
by it of its duties to the Partnership also imposes duties on,
or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed
on an Indemnitee with respect to an employee benefit plan
pursuant to applicable law shall constitute fines
within the meaning of Section 7.7(a); and action taken or
omitted by it with respect to any employee benefit plan in the
performance of its duties for a purpose reasonably believed by
it to be in the best interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose
that is in the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification
provisions set forth in this Agreement.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to
which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the
benefit of the Indemnitees, their heirs, successors, assigns and
administrators and shall not be deemed to create any rights for
the benefit of any other Persons.
(i) No amendment, modification or repeal of this
Section 7.7 or any provision hereof shall in any manner
terminate, reduce or impair the right of any past, present or
future Indemnitee to be indemnified by the Partnership, nor the
obligations of the Partnership to indemnify any such Indemnitee
under and in accordance with the provisions of this
Section 7.7 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
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Section 7.8
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Liability
of Indemnitees.
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(a) Notwithstanding anything to the contrary set forth in
this Agreement, no Indemnitee shall be liable for monetary
damages to the Partnership, the Limited Partners, or any other
Persons who have acquired interests in the Partnership
Securities, for losses sustained or liabilities incurred as a
result of any act or omission of an Indemnitee unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that, in respect of the
matter in question, the Indemnitee acted in bad faith or engaged
in fraud, willful misconduct or, in the case of a criminal
matter, acted with knowledge that the Indemnitees conduct
was criminal.
(b) Subject to its obligations and duties as General
Partner set forth in Section 7.1(a), the General Partner
may exercise any of the powers granted to it by this Agreement
and perform any of the duties imposed upon it hereunder either
directly or by or through its agents, and the General Partner
shall not be responsible for any misconduct or negligence on the
part of any such agent appointed by the General Partner in good
faith.
(c) To the extent that, at law or in equity, an Indemnitee
has duties (including fiduciary duties) and liabilities relating
thereto to the Partnership or to the Partners, the General
Partner and any other Indemnitee acting in connection with the
Partnerships business or affairs shall not be liable to
the Partnership or to any Partner for its good faith reliance on
the provisions of this Agreement.
(d) Any amendment, modification or repeal of this
Section 7.8 or any provision hereof shall be prospective
only and shall not in any way affect the limitations on the
liability of the Indemnitees under this
50
Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
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Section 7.9
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Resolution
of Conflicts of Interest; Standards of Conduct and Modification
of Duties.
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(a) Unless otherwise expressly provided in this Agreement
or any Group Member Agreement, whenever a potential conflict of
interest exists or arises between the General Partner or any of
its Affiliates, on the one hand, and the Partnership, any Group
Member or any Partner, on the other, any resolution or course of
action by the General Partner or its Affiliates in respect of
such conflict of interest shall be permitted and deemed approved
by all Partners, and shall not constitute a breach of this
Agreement, of any Group Member Agreement, of any agreement
contemplated herein or therein, or of any duty stated or implied
by law or equity, if the resolution or course of action in
respect of such conflict of interest is (i) approved by
Special Approval, (ii) approved by the vote of a majority
of the Common Units (excluding Common Units owned by the General
Partner and its Affiliates), (iii) on terms no less
favorable to the Partnership than those generally being provided
to or available from unrelated third parties or (iv) fair
and reasonable to the Partnership, taking into account the
totality of the relationships between the parties involved
(including other transactions that may be particularly favorable
or advantageous to the Partnership). The General Partner shall
be authorized but not required in connection with its resolution
of such conflict of interest to seek Special Approval of such
resolution, and the General Partner may also adopt a resolution
or course of action that has not received Special Approval. If
Special Approval is sought, then it shall be presumed that, in
making its decision, the Conflicts Committee acted in good
faith, and if Special Approval is not sought and the Board of
Directors determines that the resolution or course of action
taken with respect to a conflict of interest satisfies either of
the standards set forth in clauses (iii) or
(iv) above, then it shall be presumed that, in making its
decision, the Board of Directors acted in good faith, and in
either case, in any proceeding brought by any Limited Partner or
by or on behalf of such Limited Partner or any other Limited
Partner or the Partnership challenging such approval, the Person
bringing or prosecuting such proceeding shall have the burden of
overcoming such presumption. Notwithstanding anything to the
contrary in this Agreement or any duty otherwise existing at law
or equity, the existence of the conflicts of interest described
in the Registration Statement are hereby approved by all
Partners and shall not constitute a breach of this Agreement.
(b) Whenever the General Partner makes a determination or
takes or declines to take any other action, or any of its
Affiliates causes it to do so, in its capacity as the general
partner of the Partnership as opposed to in its individual
capacity, whether under this Agreement, any Group Member
Agreement or any other agreement contemplated hereby or
otherwise, then, unless another express standard is provided for
in this Agreement, the General Partner, or such Affiliates
causing it to do so, shall make such determination or take or
decline to take such other action in good faith and shall not be
subject to any other or different standards imposed by this
Agreement, any Group Member Agreement, any other agreement
contemplated hereby or under the Delaware Act or any other law,
rule or regulation or at equity. In order for a determination or
other action to be in good faith for purposes of
this Agreement, the Person or Persons making such determination
or taking or declining to take such other action must believe
that the determination or other action is in the best interests
of the Partnership.
(c) Whenever the General Partner makes a determination or
takes or declines to take any other action, or any of its
Affiliates causes it to do so, in its individual capacity as
opposed to in its capacity as the general partner of the
Partnership, whether under this Agreement, any Group Member
Agreement or any other agreement contemplated hereby or
otherwise, then the General Partner, or such Affiliates causing
it to do so, are entitled to make such determination or to take
or decline to take such other action free of any fiduciary duty
or obligation whatsoever to the Partnership, any Limited
Partner, and the General Partner, or such Affiliates causing it
to do so, shall not be required to act in good faith or pursuant
to any other standard imposed by this Agreement, any Group
Member Agreement, any other agreement contemplated hereby or
under the Delaware Act or any other law, rule or regulation or
at equity. By way of illustration and not of limitation,
whenever the phrase, at the option of the General
Partner, or some
51
variation of that phrase, is used in this Agreement, it
indicates that the General Partner is acting in its individual
capacity. For the avoidance of doubt, whenever the General
Partner votes or transfers its Partnership Interests, or
refrains from voting or transferring its
Partnership Interests, it shall be acting in its individual
capacity. The General Partners organizational documents
may provide that determinations to take or decline to take any
action in its individual, rather than representative, capacity
may or shall be determined by its members, if the General
Partner is a limited liability company, stockholders, if the
General Partner is a corporation, or the members or stockholders
of the General Partners general partner, if the General
Partner is a partnership.
(d) Notwithstanding anything to the contrary in this
Agreement, the General Partner and its Affiliates shall have no
duty or obligation, express or implied, to (i) sell or
otherwise dispose of any asset of the Partnership Group other
than in the ordinary course of business or (ii) permit any
Group Member to use any facilities or assets of the General
Partner and its Affiliates, except as may be provided in
contracts entered into from time to time specifically dealing
with such use. Any determination by the General Partner or any
of its Affiliates to enter into such contracts shall be at its
option.
(e) Except as expressly set forth in this Agreement,
neither the General Partner nor any other Indemnitee shall have
any duties or liabilities, including fiduciary duties, to the
Partnership or any Limited Partner and the provisions of this
Agreement, to the extent that they restrict, eliminate or
otherwise modify the duties and liabilities, including fiduciary
duties, of the General Partner or any other Indemnitee otherwise
existing at law or in equity, are agreed by the Partners to
replace such other duties and liabilities of the General Partner
or such other Indemnitee.
(f) The Unitholders hereby authorize the General Partner,
on behalf of the Partnership as a partner or member of a Group
Member, to approve of actions by the general partner or managing
member of such Group Member similar to those actions permitted
to be taken by the General Partner pursuant to this
Section 7.9.
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Section 7.10
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Other
Matters Concerning the General Partner.
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(a) The General Partner may rely and shall be protected in
acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, debenture or other paper or
document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
(b) The General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment
bankers and other consultants and advisers selected by it, and
any act taken or omitted to be taken in reliance upon the
opinion (including an Opinion of Counsel) of such Persons as to
matters that the General Partner reasonably believes to be
within such Persons professional or expert competence
shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of
any of its powers or obligations hereunder, to act through any
of its duly authorized officers, a duly appointed attorney or
attorneys-in-fact
or the duly authorized officers of the Partnership or any Group
Member.
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Section 7.11
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Purchase
or Sale of Partnership Securities.
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The General Partner may cause the Partnership to purchase or
otherwise acquire Partnership Securities; provided that,
except as permitted pursuant to Section 4.10, the General
Partner may not cause any Group Member to purchase Subordinated
Units during the Subordination Period. Such Partnership
Securities shall be held by the Partnership as treasury
securities unless they are expressly cancelled by action of an
appropriate officer of the General Partner. As long as
Partnership Securities are held by any Group Member, such
Partnership Securities shall not be considered Outstanding for
any purpose, except as otherwise provided herein. The General
Partner or any Affiliate of the General Partner may also
purchase
52
or otherwise acquire and sell or otherwise dispose of
Partnership Securities for its own account, subject to the
provisions of Articles IV and X.
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Section 7.12
|
Registration
Rights of the General Partner and its Affiliates.
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(a) If (i) the General Partner or any Affiliate of the
General Partner (including for purposes of this
Section 7.12, any Person that is an Affiliate of the
General Partner at the date hereof notwithstanding that it may
later cease to be an Affiliate of the General Partner) holds
Partnership Securities that it desires to sell and
(ii) Rule 144 of the Securities Act (or any successor
rule or regulation to Rule 144) or another exemption
from registration is not available to enable such holder of
Partnership Securities (the Holder) to
dispose of the number of Partnership Securities it desires to
sell at the time it desires to do so without registration under
the Securities Act, then at the option and upon the request of
the Holder, the Partnership shall file with the Commission as
promptly as practicable after receiving such request, and use
commercially reasonable efforts to cause to become effective and
remain effective for a period of not less than six months
following its effective date or such shorter period as shall
terminate when all Partnership Securities covered by such
registration statement have been sold, a registration statement
under the Securities Act registering the offering and sale of
the number of Partnership Securities specified by the Holder;
provided, however, that the Partnership shall not be
required to effect more than three registrations pursuant to
this Section 7.12(a) and Section 7.12(b); and
provided further, however, that if the Conflicts
Committee determines in good faith that the requested
registration would be materially detrimental to the Partnership
and its Partners because such registration would
(x) materially interfere with a significant acquisition,
reorganization or other similar transaction involving the
Partnership, (y) require premature disclosure of material
information that the Partnership has a bona fide business
purpose for preserving as confidential or (z) render the
Partnership unable to comply with requirements under applicable
securities laws, then the Partnership shall have the right to
postpone such requested registration for a period of not more
than six months after receipt of the Holders
request, such right pursuant to this Section 7.12(a) or
Section 7.12(b) not to be utilized more than once in any
twelve-month period. In connection with any registration
pursuant to the first sentence of this Section 7.12(a), the
Partnership shall (i) promptly prepare and file
(A) such documents as may be necessary to register or
qualify the securities subject to such registration under the
securities laws of such states as the Holder shall reasonably
request; provided, however, that no such qualification
shall be required in any jurisdiction where, as a result
thereof, the Partnership would become subject to general service
of process or to taxation or qualification to do business as a
foreign corporation or partnership doing business in such
jurisdiction solely as a result of such registration, and
(B) such documents as may be necessary to apply for listing
or to list the Partnership Securities subject to such
registration on such National Securities Exchange as the Holder
shall reasonably request, and (ii) do any and all other
acts and things that may be necessary or appropriate to enable
the Holder to consummate a public sale of such Partnership
Securities in such states. Except as set forth in
Section 7.12(d), all costs and expenses of any such
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(b) If any Holder holds Partnership Securities that it
desires to sell and Rule 144 of the Securities Act (or any
successor rule or regulation to Rule 144) or another
exemption from registration is not available to enable such
Holder to dispose of the number of Partnership Securities it
desires to sell at the time it desires to do so without
registration under the Securities Act, then at the option and
upon the request of the Holder, the Partnership shall file with
the Commission as promptly as practicable after receiving such
request, and use commercially reasonable efforts to cause to
become effective and remain effective for a period of not less
than six months following its effective date or such shorter
period as shall terminate when all Partnership Securities
covered by such shelf registration statement have been sold, a
shelf registration statement covering the
Partnership Securities specified by the Holder on an appropriate
form under Rule 415 under the Securities Act, or any
similar rule that may be adopted by the Commission; provided,
however, that the Partnership shall not be required to
effect more than three registrations pursuant to
Section 7.12(a) and this Section 7.12(b); and
provided further, however, that if the Conflicts
Committee determines in good faith that any offering under, or
the use of any prospectus forming a part of, the shelf
registration statement would be materially detrimental to the
Partnership and its Partners because such
53
offering or use would (x) materially interfere with a
significant acquisition, reorganization or other similar
transaction involving the Partnership, (y) require
premature disclosure of material information that the
Partnership has a bona fide business purpose for preserving as
confidential or (z) render the Partnership unable to comply
with requirements under applicable securities laws, then the
Partnership shall have the right to suspend such offering or use
for a period of not more than six months after receipt of the
Holders request, such right pursuant to
Section 7.12(a) or this Section 7.12(b) not to be
utilized more than once in any twelve-month period. In
connection with any shelf registration pursuant to this
Section 7.12(b), the Partnership shall (i) promptly
prepare and file (A) such documents as may be necessary to
register or qualify the securities subject to such shelf
registration under the securities laws of such states as the
Holder shall reasonably request; provided, however, that
no such qualification shall be required in any jurisdiction
where, as a result thereof, the Partnership would become subject
to general service of process or to taxation or qualification to
do business as a foreign corporation or partnership doing
business in such jurisdiction solely as a result of such shelf
registration, and (B) such documents as may be necessary to
apply for listing or to list the Partnership Securities subject
to such shelf registration on such National Securities Exchange
as the Holder shall reasonably request, and (ii) do any and
all other acts and things that may be necessary or appropriate
to enable the Holder to consummate a public sale of such
Partnership Securities in such states. Except as set forth in
Section 7.12(d), all costs and expenses of any such shelf
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(c) If the Partnership shall at any time propose to file a
registration statement under the Securities Act for an offering
of equity securities of the Partnership for cash (other than an
offering relating solely to an employee benefit plan), the
Partnership shall notify all Holders of such proposal and use
all reasonable efforts to include such number or amount of
securities held by the Holder in such registration statement as
the Holder shall request; provided, that the Partnership
is not required to make any effort or take any action to so
include the securities of the Holder once the registration
statement is declared effective by the Commission or otherwise
becomes effective, including any registration statement
providing for the offering from time to time of securities
pursuant to Rule 415 of the Securities Act. If the proposed
offering pursuant to this Section 7.12(c) shall be an
underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the
Partnership and the Holder in writing that in their opinion the
inclusion of all or some of the Holders Partnership
Securities would adversely and materially affect the success of
the offering, the Partnership shall include in such offering
only that number or amount, if any, of securities held by the
Holder that, in the opinion of the managing underwriter or
managing underwriters, will not so adversely and materially
affect the offering. Except as set forth in
Section 7.12(d), all costs and expenses of any such
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(d) If underwriters are engaged in connection with any
registration referred to in this Section 7.12, the
Partnership shall provide indemnification, representations,
covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters.
Further, in addition to and not in limitation of the
Partnerships obligation under Section 7.7, the
Partnership shall, to the fullest extent permitted by law,
indemnify and hold harmless the Holder, its officers, directors
and each Person who controls the Holder (within the meaning of
the Securities Act) and any agent thereof (collectively,
Indemnified Persons) from and against
any and all losses, claims, damages, liabilities, joint or
several, expenses (including legal fees and expenses),
judgments, fines, penalties, interest, settlements or other
amounts arising from any and all claims, demands, actions, suits
or proceedings, whether civil, criminal, administrative or
investigative, in which any Indemnified Person may be involved,
or is threatened to be involved, as a party or otherwise, under
the Securities Act or otherwise (hereinafter referred to in this
Section 7.12(d) as a claim and in
the plural as claims) based upon,
arising out of or resulting from any untrue statement or alleged
untrue statement of any material fact contained in any
registration statement under which any Partnership Securities
were registered under the Securities Act or any state securities
or Blue Sky laws, in any preliminary prospectus (if used prior
to the effective date of such registration statement), or in any
summary or final prospectus or any free writing prospectus or in
any amendment or supplement thereto (if used during the period
the Partnership is required to keep the
54
registration statement current), or arising out of, based upon
or resulting from the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading;
provided, however, that the Partnership shall not be
liable to any Indemnified Person to the extent that any such
claim arises out of, is based upon or results from an untrue
statement or alleged untrue statement or omission or alleged
omission made in such registration statement, such preliminary,
summary or final prospectus or any free writing prospectus or
such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Partnership by or on
behalf of such Indemnified Person specifically for use in the
preparation thereof.
(e) The provisions of Section 7.12(a),
Section 7.12(b) and Section 7.12(c) shall continue to
be applicable with respect to the General Partner (and any of
the General Partners Affiliates) after it ceases to be a
general partner of the Partnership, during a period of two years
subsequent to the effective date of such cessation and for so
long thereafter as is required for the Holder to sell all of the
Partnership Securities with respect to which it has requested
during such two-year period inclusion in a registration
statement otherwise filed or that a registration statement be
filed; provided, however, that the Partnership shall not
be required to file successive registration statements covering
the same Partnership Securities for which registration was
demanded during such two-year period. The provisions of
Section 7.12(d) shall continue in effect thereafter.
(f) The rights to cause the Partnership to register
Partnership Securities pursuant to this Section 7.12 may be
assigned (but only with all related obligations) by a Holder to
a transferee or assignee of such Partnership Securities,
provided (i) the Partnership is, within a reasonable time
after such transfer, furnished with written notice of the name
and address of such transferee or assignee and the Partnership
Securities with respect to which such registration rights are
being assigned; and (ii) such transferee or assignee agrees
in writing to be bound by and subject to the terms set forth in
this Section 7.12.
(g) Any request to register Partnership Securities pursuant
to this Section 7.12 shall (i) specify the Partnership
Securities intended to be offered and sold by the Person making
the request, (ii) express such Persons present intent
to offer such Partnership Securities for distribution,
(iii) describe the nature or method of the proposed offer
and sale of Partnership Securities, and (iv) contain the
undertaking of such Person to provide all such information and
materials and take all action as may be required in order to
permit the Partnership to comply with all applicable
requirements in connection with the registration of such
Partnership Securities.
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Section 7.13
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Reliance
by Third Parties.
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Notwithstanding anything to the contrary in this Agreement, any
Person dealing with the Partnership shall be entitled to assume
that the General Partner and any officer of the General Partner
authorized by the General Partner to act on behalf of and in the
name of the Partnership has full power and authority to
encumber, sell or otherwise use in any manner any and all assets
of the Partnership and to enter into any authorized contracts on
behalf of the Partnership, and such Person shall be entitled to
deal with the General Partner or any such officer as if it were
the Partnerships sole party in interest, both legally and
beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such
Person to contest, negate or disaffirm any action of the General
Partner or any such officer in connection with any such dealing.
In no event shall any Person dealing with the General Partner or
any such officer or its representatives be obligated to
ascertain that the terms of this Agreement have been complied
with or to inquire into the necessity or expedience of any act
or action of the General Partner or any such officer or its
representatives. Each and every certificate, document or other
instrument executed on behalf of the Partnership by the General
Partner or its representatives shall be conclusive evidence in
favor of any and every Person relying thereon or claiming
thereunder that (a) at the time of the execution and
delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person
executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on
behalf of the Partnership and (c) such certificate,
document or instrument was duly executed and delivered in
accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
55
ARTICLE VIII
BOOKS,
RECORDS, ACCOUNTING AND REPORTS
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Section 8.1
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Records
and Accounting.
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The General Partner shall keep or cause to be kept at the
principal office of the Partnership appropriate books and
records with respect to the Partnerships business,
including all books and records necessary to provide to the
Limited Partners any information required to be provided
pursuant to Section 3.4(a). Any books and records
maintained by or on behalf of the Partnership in the regular
course of its business, including the record of the Record
Holders of Units or other Partnership Securities, books of
account and records of Partnership proceedings, may be kept on,
or be in the form of, computer disks, hard drives, punch cards,
magnetic tape, photographs, micrographics or any other
information storage device; provided, that the books and
records so maintained are convertible into clearly legible
written form within a reasonable period of time. The books of
the Partnership shall be maintained, for financial reporting
purposes, on an accrual basis in accordance with U.S. GAAP.
The fiscal year of the Partnership shall be a fiscal year ending
December 31.
(a) As soon as practicable, but in no event later than
120 days after the close of each fiscal year of the
Partnership, the General Partner shall cause to be mailed or
made available, by any reasonable means (including posting on or
accessible through the Partnerships or the SECs
website) to each Record Holder of a Unit as of a date selected
by the General Partner, an annual report containing financial
statements of the Partnership for such fiscal year of the
Partnership, presented in accordance with U.S. GAAP,
including a balance sheet and statements of operations,
Partnership equity and cash flows, such statements to be audited
by a firm of independent public accountants selected by the
General Partner.
(b) As soon as practicable, but in no event later than
90 days after the close of each Quarter except the last
Quarter of each fiscal year, the General Partner shall cause to
be mailed or made available, by any reasonable means (including
posting on or accessible through the Partnerships or the
SECs website) to each Record Holder of a Unit, as of a
date selected by the General Partner, a report containing
unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or
rule of any National Securities Exchange on which the Units are
listed or admitted to trading, or as the General Partner
determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
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Section 9.1
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Tax
Returns and Information.
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The Partnership shall timely file all returns of the Partnership
that are required for federal, state and local income tax
purposes on the basis of the accrual method and the taxable year
or years that it is required by law to adopt, from time to time,
as determined by the General Partner. In the event the
Partnership is required to use a taxable year other than a year
ending on December 31, the General Partner shall use
reasonable efforts to change the taxable year of the Partnership
to a year ending on December 31. The tax information
reasonably required by Record Holders for federal and state
income tax reporting purposes with respect to a taxable year
shall be furnished to them within 90 days of the close of
the calendar year in which the Partnerships taxable year
ends. The classification, realization and recognition of income,
gain, losses and deductions and other items shall be on the
accrual method of accounting for federal income tax purposes.
56
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Section 9.2
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Tax
Elections.
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(a) The Partnership shall make the election under
Section 754 of the Code in accordance with applicable
regulations thereunder, subject to the reservation of the right
to seek to revoke any such election upon the General
Partners determination that such revocation is in the best
interests of the Limited Partners. Notwithstanding any other
provision herein contained, for the purposes of computing the
adjustments under Section 743(b) of the Code, the General
Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of a Limited
Partner Interest will be deemed to be the lowest quoted closing
price of the Limited Partner Interests on any National
Securities Exchange on which such Limited Partner Interests are
listed or admitted to trading during the calendar month in which
such transfer is deemed to occur pursuant to Section 6.2(g)
without regard to the actual price paid by such transferee.
(b) Except as otherwise provided herein, the General
Partner shall determine whether the Partnership should make any
other elections permitted by the Code.
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Section 9.3
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Tax
Controversies.
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Subject to the provisions hereof, the General Partner is
designated as the Tax Matters Partner (as defined in the Code)
and is authorized and required to represent the Partnership (at
the Partnerships expense) in connection with all
examinations of the Partnerships affairs by tax
authorities, including resulting administrative and judicial
proceedings, and to expend Partnership funds for professional
services and costs associated therewith. Each Partner agrees to
cooperate with the General Partner and to do or refrain from
doing any or all things reasonably required by the General
Partner to conduct such proceedings.
Notwithstanding any other provision of this Agreement, the
General Partner is authorized to take any action that may be
required to cause the Partnership and other Group Members to
comply with any withholding requirements established under the
Code or any other federal, state or local law including pursuant
to Sections 1441, 1442, 1445 and 1446 of the Code. To the
extent that the Partnership is required or elects to withhold
and pay over to any taxing authority any amount resulting from
the allocation or distribution of income to any Partner or
Assignee (including by reason of Section 1446 of the Code),
the General Partner may treat the amount withheld as a
distribution of cash pursuant to Section 6.3 in the amount
of such withholding from such Partner.
ARTICLE X
ADMISSION OF
PARTNERS
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Section 10.1
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Admission
of Limited Partners.
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(a) Upon the issuance by the Partnership of Common Units,
Subordinated Units and Incentive Distribution Rights to the
General Partner, Targa GP Inc., Targa LP Inc. and the
Underwriters as described in Article V in connection with
the Initial Offering, the General Partner shall admit such
parties to the Partnership as Initial Limited Partners in
respect of the Common Units, Subordinated Units or Incentive
Distribution Rights issued to them.
(b) By acceptance of the transfer of any Limited Partner
Interests in accordance with Article IV or the acceptance
of any Limited Partner Interests issued pursuant to
Article V or pursuant to a merger or consolidation pursuant
to Article XIV, and except as provided in Section 4.9,
each transferee of, or other such Person acquiring, a Limited
Partner Interest (including any nominee holder or an agent or
representative acquiring such Limited Partner Interests for the
account of another Person) (i) shall be admitted to the
Partnership as a Limited Partner with respect to the Limited
Partner Interests so transferred or issued to such Person when
any such transfer, issuance or admission is reflected in the
books and records of the
57
Partnership and such Limited Partner becomes the Record Holder
of the Limited Partner Interests so transferred, (ii) shall
become bound by the terms of this Agreement,
(iii) represents that the transferee has the capacity,
power and authority to enter into this Agreement,
(iv) grants the powers of attorney set forth in this
Agreement and (v) makes the consents and waivers contained
in this Agreement, all with or without execution of this
Agreement by such Person. The transfer of any Limited Partner
Interests and the admission of any new Limited Partner shall not
constitute an amendment to this Agreement. A Person may become a
Limited Partner or Record Holder of a Limited Partner Interest
without the consent or approval of any of the Partners. A Person
may not become a Limited Partner without acquiring a Limited
Partner Interest and until such Person is reflected in the books
and records of the Partnership as the Record Holder of such
Limited Partner Interest. The rights and obligations of a Person
who is a Non-citizen Assignee shall be determined in accordance
with Section 4.9 hereof.
(c) The name and mailing address of each Limited Partner
shall be listed on the books and records of the Partnership
maintained for such purpose by the Partnership or the Transfer
Agent. The General Partner shall update the books and records of
the Partnership from time to time as necessary to reflect
accurately the information therein (or shall cause the Transfer
Agent to do so, as applicable). A Limited Partner Interest may
be represented by a Certificate, as provided in Section 4.1
hereof.
(d) Any transfer of a Limited Partner Interest shall not
entitle the transferee to share in the profits and losses, to
receive distributions, to receive allocations of income, gain,
loss, deduction or credit or any similar item or to any other
rights to which the transferor was entitled until the transferee
becomes a Limited Partner pursuant to Section 10.2(a).
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Section 10.2
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Admission
of Successor General Partner.
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A successor General Partner approved pursuant to
Section 11.1 or Section 11.2 or the transferee of or
successor to all of the General Partner Interest (represented by
General Partner Units) pursuant to Section 4.6 who is
proposed to be admitted as a successor General Partner shall be
admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the
predecessor or transferring General Partner, pursuant to
Section 11.1 or 11.2 or the transfer of the General Partner
Interest (represented by General Partner Units) pursuant to
Section 4.6, provided, however, that no such
successor shall be admitted to the Partnership until compliance
with the terms of Section 4.6 has occurred and such
successor has executed and delivered such other documents or
instruments as may be required to effect such admission. Any
such successor shall, subject to the terms hereof, carry on the
business of the members of the Partnership Group without
dissolution.
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Section 10.3
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Amendment
of Agreement and Certificate of Limited Partnership.
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To effect the admission to the Partnership of any Partner, the
General Partner shall take all steps necessary or appropriate
under the Delaware Act to amend the records of the Partnership
to reflect such admission and, if necessary, to prepare as soon
as practicable an amendment to this Agreement and, if required
by law, the General Partner shall prepare and file an amendment
to the Certificate of Limited Partnership, and the General
Partner may for this purpose, among others, exercise the power
of attorney granted pursuant to Section 2.6.
ARTICLE XI
WITHDRAWAL
OR REMOVAL OF PARTNERS
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Section 11.1
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Withdrawal
of the General Partner.
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(a) The General Partner shall be deemed to have withdrawn
from the Partnership upon the occurrence of any one of the
following events (each such event herein referred to as an
Event of Withdrawal);
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(i) The General Partner voluntarily withdraws from the
Partnership by giving written notice to the other Partners;
(ii) The General Partner transfers all of its rights as
General Partner pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to
Section 11.2;
(iv) The General Partner (A) makes a general
assignment for the benefit of creditors; (B) files a
voluntary bankruptcy petition for relief under Chapter 7 of
the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar
relief (but not a reorganization) under any law; (D) files
an answer or other pleading admitting or failing to contest the
material allegations of a petition filed against the General
Partner in a proceeding of the type described in
clauses (A)-(C) of this Section 11.1(a)(iv); or (E)
seeks, consents to or acquiesces in the appointment of a trustee
(but not a
debtor-in-possession),
receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(v) A final and non-appealable order of relief under
Chapter 7 of the United States Bankruptcy Code is entered
by a court with appropriate jurisdiction pursuant to a voluntary
or involuntary petition by or against the General
Partner; or
(vi) (A) in the event the General Partner is a
corporation, a certificate of dissolution or its equivalent is
filed for the General Partner, or 90 days expire after the
date of notice to the General Partner of revocation of its
charter without a reinstatement of its charter, under the laws
of its state of incorporation; (B) in the event the General
Partner is a partnership or a limited liability company, the
dissolution and commencement of winding up of the General
Partner; (C) in the event the General Partner is acting in
such capacity by virtue of being a trustee of a trust, the
termination of the trust; (D) in the event the General
Partner is a natural person, his death or adjudication of
incompetency; and (E) otherwise in the event of the
termination of the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv),
(v) or (vi)(A), (B), (C) or (E) occurs, the withdrawing General
Partner shall give notice to the Limited Partners within
30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this
Section 11.1 shall result in the withdrawal of the General
Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership
upon the occurrence of an Event of Withdrawal shall not
constitute a breach of this Agreement under the following
circumstances: (i) at any time during the period beginning
on the Closing Date and ending at 12:00 midnight, Central Time,
on December 31, 2016, the General Partner voluntarily
withdraws by giving at least 90 days advance notice
of its intention to withdraw to the Limited Partners;
provided, that prior to the effective date of such
withdrawal, the withdrawal is approved by Unitholders holding at
least a majority of the Outstanding Common Units (excluding
Common Units held by the General Partner and its Affiliates) and
the General Partner delivers to the Partnership an Opinion of
Counsel (Withdrawal Opinion of
Counsel) that such withdrawal (following the
selection of the successor General Partner) would not result in
the loss of the limited liability of any Limited Partner or any
Group Member or cause any Group Member to be treated as an
association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not
already so treated or taxed); (ii) at any time after
12:00 midnight, Central Time, on December 31, 2016,
the General Partner voluntarily withdraws by giving at least
90 days advance notice to the Unitholders, such
withdrawal to take effect on the date specified in such notice;
(iii) at any time that the General Partner ceases to be the
General Partner pursuant to Section 11.1(a)(ii) or is
removed pursuant to Section 11.2; or
(iv) notwithstanding clause (i) of this sentence, at
any time that the General Partner voluntarily withdraws by
giving at least 90 days advance notice of its
intention to withdraw to the Limited Partners, such withdrawal
to take effect on the date specified in the notice, if at the
time such notice is given one Person and its Affiliates (other
than the General Partner and its Affiliates) own beneficially or
of record or control at least 50% of the Outstanding Units. The
withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall also constitute the
withdrawal of the General Partner as general partner or managing
member, if any, to the extent applicable,
59
of the other Group Members. If the General Partner gives a
notice of withdrawal pursuant to Section 11.1(a)(i), the
holders of a Unit Majority, may, prior to the effective date of
such withdrawal, elect a successor General Partner. The Person
so elected as successor General Partner shall automatically
become the successor general partner or managing member, to the
extent applicable, of the other Group Members of which the
General Partner is a general partner or a managing member. If,
prior to the effective date of the General Partners
withdrawal, a successor is not selected by the Unitholders as
provided herein or the Partnership does not receive a Withdrawal
Opinion of Counsel, the Partnership shall be dissolved in
accordance with Section 12.1. Any successor General Partner
elected in accordance with the terms of this Section 11.1
shall be subject to the provisions of Section 10.3.
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Section 11.2
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Removal
of the General Partner.
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The General Partner may be removed if such removal is approved
by the Unitholders holding at least 662/3% of the Outstanding
Units (including Units held by the General Partner and its
Affiliates) voting as a single class. Any such action by such
holders for removal of the General Partner must also provide for
the election of a successor General Partner by the Unitholders
holding a majority of the outstanding Common Units and
Class B Units, if any, voting as a single class and a
majority of the outstanding Subordinated Units (if any
Subordinated Units are then Outstanding) voting as a class
(including, in each case, Units held by the General Partner and
its Affiliates). Such removal shall be effective immediately
following the admission of a successor General Partner pursuant
to Section 10.3. The removal of the General Partner shall
also automatically constitute the removal of the General Partner
as general partner or managing member, to the extent applicable,
of the other Group Members of which the General Partner is a
general partner or a managing member. If a Person is elected as
a successor General Partner in accordance with the terms of this
Section 11.2, such Person shall, upon admission pursuant to
Section 10.3, automatically become a successor general
partner or managing member, to the extent applicable, of the
other Group Members of which the General Partner is a general
partner or a managing member. The right of the holders of
Outstanding Units to remove the General Partner shall not exist
or be exercised unless the Partnership has received an opinion
opining as to the matters covered by a Withdrawal Opinion of
Counsel. Any successor General Partner elected in accordance
with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.3.
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Section 11.3
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Interest
of Departing General Partner and Successor General
Partner.
|
(a) In the event of (i) withdrawal of the General
Partner under circumstances where such withdrawal does not
violate this Agreement or (ii) removal of the General
Partner by the holders of Outstanding Units under circumstances
where Cause does not exist, if the successor General Partner is
elected in accordance with the terms of Section 11.1 or
Section 11.2, the Departing General Partner shall have the
option, exercisable prior to the effective date of the departure
of such Departing General Partner, to require its successor to
purchase its General Partner Interest (represented by General
Partner Units) and its general partner interest (or equivalent
interest), if any, in the other Group Members and all of its
Incentive Distribution Rights (collectively, the
Combined Interest) in exchange for an
amount in cash equal to the fair market value of such Combined
Interest, such amount to be determined and payable as of the
effective date of its departure. If the General Partner is
removed by the Unitholders under circumstances where Cause
exists or if the General Partner withdraws under circumstances
where such withdrawal violates this Agreement, and if a
successor General Partner is elected in accordance with the
terms of Section 11.1 or Section 11.2 (or if the
business of the Partnership is continued pursuant to
Section 12.2 and the successor General Partner is not the
former General Partner), such successor shall have the option,
exercisable prior to the effective date of the departure of such
Departing General Partner (or, in the event the business of the
Partnership is continued, prior to the date the business of the
Partnership is continued), to purchase the Combined Interest for
such fair market value of such Combined Interest of the
Departing General Partner. In either event, the Departing
General Partner shall be entitled to receive all reimbursements
due such Departing General Partner pursuant to Section 7.4,
including any employee-related liabilities (including severance
liabilities), incurred in connection with the termination of any
employees employed by the
60
Departing General Partner or its Affiliates (other than any
Group Member) for the benefit of the Partnership or the other
Group Members.
For purposes of this Section 11.3(a), the fair market value
of the Departing General Partners Combined Interest shall
be determined by agreement between the Departing General Partner
and its successor or, failing agreement within 30 days
after the effective date of such Departing General
Partners departure, by an independent investment banking
firm or other independent expert selected by the Departing
General Partner and its successor, which, in turn, may rely on
other experts, and the determination of which shall be
conclusive as to such matter. If such parties cannot agree upon
one independent investment banking firm or other independent
expert within 45 days after the effective date of such
departure, then the Departing General Partner shall designate an
independent investment banking firm or other independent expert,
the Departing General Partners successor shall designate
an independent investment banking firm or other independent
expert, and such firms or experts shall mutually select a third
independent investment banking firm or independent expert, which
third independent investment banking firm or other independent
expert shall determine the fair market value of the Combined
Interest of the Departing General Partner. In making its
determination, such third independent investment banking firm or
other independent expert may consider the then current trading
price of Units on any National Securities Exchange on which
Units are then listed or admitted to trading, the value of the
Partnerships assets, the rights and obligations of the
Departing General Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner
set forth in Section 11.3(a), the Departing General Partner
(or its transferee) shall become a Limited Partner and its
Combined Interest shall be converted into Common Units pursuant
to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 11.3(a),
without reduction in such Partnership Interest (but subject
to proportionate dilution by reason of the admission of its
successor). Any successor General Partner shall indemnify the
Departing General Partner (or its transferee) as to all debts
and liabilities of the Partnership arising on or after the date
on which the Departing General Partner (or its transferee)
becomes a Limited Partner. For purposes of this Agreement,
conversion of the Combined Interest of the Departing General
Partner to Common Units will be characterized as if the
Departing General Partner (or its transferee) contributed its
Combined Interest to the Partnership in exchange for the newly
issued Common Units.
(c) If a successor General Partner is elected in accordance
with the terms of Section 11.1 or Section 11.2 (or if
the business of the Partnership is continued pursuant to
Section 12.2 and the successor General Partner is not the
former General Partner) and the option described in
Section 11.3(a) is not exercised by the party entitled to
do so, the successor General Partner shall, at the effective
date of its admission to the Partnership, contribute to the
Partnership cash in the amount equal to the product of the (x)
quotient obtained by dividing (A) the Percentage Interest
of the General Partner Interest of the Departing General Partner
by (B) a percentage equal to 100% less the Percentage
Interest of the General Partner Interest of the Departing
General Partner and (y) the Net Agreed Value of the
Partnerships assets on such date. In such event, such
successor General Partner shall, subject to the following
sentence, be entitled to its Percentage Interest of all
Partnership allocations and distributions to which the Departing
General Partner was entitled. In addition, the successor General
Partner shall cause this Agreement to be amended to reflect
that, from and after the date of such successor General
Partners admission, the successor General Partners
interest in all Partnership distributions and allocations shall
be its Percentage Interest.
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Section 11.4
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Termination
of Subordination Period, Conversion of Subordinated Units and
Extinguishment of Cumulative Common Unit Arrearages.
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Notwithstanding any provision of this Agreement, if the General
Partner is removed as general partner of the Partnership under
circumstances where Cause does not exist and Units held by the
General Partner and its Affiliates are not voted in favor of
such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and
automatically convert into Common Units on a
one-for-one
basis, (ii) all Cumulative Common Unit Arrearages on the
Common Units will be extinguished
61
and (iii) the General Partner will have the right to
convert its General Partner Interest (represented by General
Partner Units) and its Incentive Distribution Rights into Common
Units or to receive cash in exchange therefor in accordance with
Section 11.3.
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Section 11.5
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Withdrawal
of Limited Partners.
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No Limited Partner shall have any right to withdraw from the
Partnership; provided, however, that when a transferee of
a Limited Partners Limited Partner Interest becomes a
Record Holder of the Limited Partner Interest so transferred,
such transferring Limited Partner shall cease to be a Limited
Partner with respect to the Limited Partner Interest so
transferred.
ARTICLE XII
DISSOLUTION
AND LIQUIDATION
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Section 12.1
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Dissolution.
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The Partnership shall not be dissolved by the admission of
additional Limited Partners or by the admission of a successor
General Partner in accordance with the terms of this Agreement.
Upon the removal or withdrawal of the General Partner, if a
successor General Partner is elected pursuant to
Section 11.1 or Section 11.2, the Partnership shall
not be dissolved and such successor General Partner shall
continue the business of the Partnership. The Partnership shall
dissolve, and (subject to Section 12.2) its affairs shall
be wound up, upon:
(a) an Event of Withdrawal of the General Partner as
provided in Section 11.1(a) (other than
Section 11.1(a)(ii)), unless a successor is elected and an
Opinion of Counsel is received as provided in
Section 11.1(b) or 11.2 and such successor is admitted to
the Partnership pursuant to Section 10.3;
(b) an election to dissolve the Partnership by the General
Partner that is approved by the holders of a Unit Majority;
(c) the entry of a decree of judicial dissolution of the
Partnership pursuant to the provisions of the Delaware
Act; or
(d) at any time there are no Limited Partners, unless the
Partnership is continued without dissolution in accordance with
the Delaware Act.
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Section 12.2
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Continuation
of the Business of the Partnership After Dissolution.
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Upon (a) dissolution of the Partnership following an Event
of Withdrawal caused by the withdrawal or removal of the General
Partner as provided in Section 11.1(a)(i) or (iii) and the
failure of the Partners to select a successor to such Departing
General Partner pursuant to Section 11.1 or
Section 11.2, then within 90 days thereafter, or
(b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in
Section 11.1(a)(iv), (v) or (vi), then, to the maximum
extent permitted by law, within 180 days thereafter, the
holders of a Unit Majority may elect to continue the business of
the Partnership on the same terms and conditions set forth in
this Agreement by appointing as a successor General Partner a
Person approved by the holders of a Unit Majority. Unless such
an election is made within the applicable time period as set
forth above, the Partnership shall conduct only activities
necessary to wind up its affairs. If such an election is so
made, then:
(i) the Partnership shall continue without dissolution
unless earlier dissolved in accordance with this
Article XII;
(ii) if the successor General Partner is not the former
General Partner, then the interest of the former General Partner
shall be treated in the manner provided in
Section 11.3; and
(iii) the successor General Partner shall be admitted to
the Partnership as General Partner, effective as of the Event of
Withdrawal, by agreeing in writing to be bound by this
Agreement;
62
provided, that the right of the holders of a Unit
Majority to approve a successor General Partner and to continue
the business of the Partnership shall not exist and may not be
exercised unless the Partnership has received an Opinion of
Counsel that (x) the exercise of the right would not result
in the loss of limited liability of any Limited Partner and
(y) neither the Partnership nor any Group Member would be
treated as an association taxable as a corporation or otherwise
be taxable as an entity for federal income tax purposes upon the
exercise of such right to continue (to the extent not already so
treated or taxed).
Section 12.3 Liquidator.
Upon dissolution of the Partnership, unless the business of the
Partnership is continued pursuant to Section 12.2, the
General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner)
shall be entitled to receive such compensation for its services
as may be approved by holders of at least a majority of the
Outstanding Common Units and Subordinated Units voting as a
single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days
prior notice and may be removed at any time, with or without
cause, by notice of removal approved by holders of at least a
majority of the Outstanding Common Units, Class B Units (if
any), and Subordinated Units voting as a single class. Upon
dissolution, removal or resignation of the Liquidator, a
successor and substitute Liquidator (who shall have and succeed
to all rights, powers and duties of the original Liquidator)
shall within 30 days thereafter be approved by holders of
at least a majority of the Outstanding Common Units,
Class B Units (if any), and Subordinated Units voting as a
single class. The right to approve a successor or substitute
Liquidator in the manner provided herein shall be deemed to
refer also to any such successor or substitute Liquidator
approved in the manner herein provided. Except as expressly
provided in this Article XII, the Liquidator approved in
the manner provided herein shall have and may exercise, without
further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner under the
terms of this Agreement (but subject to all of the applicable
limitations, contractual and otherwise, upon the exercise of
such powers, other than the limitation on sale set forth in
Section 7.3) necessary or appropriate to carry out the
duties and functions of the Liquidator hereunder for and during
the period of time required to complete the winding up and
liquidation of the Partnership as provided for herein.
Section 12.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the
Partnership, discharge its liabilities, and otherwise wind up
its affairs in such manner and over such period as determined by
the Liquidator, subject to
Section 17-804
of the Delaware Act and the following:
(a) The assets may be disposed of by public or private sale
or by distribution in kind to one or more Partners on such terms
as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the
property shall be deemed for purposes of Section 12.4(c) to
have received cash equal to its fair market value; and
contemporaneously therewith, appropriate cash distributions must
be made to the other Partners. The Liquidator may defer
liquidation or distribution of the Partnerships assets for
a reasonable time if it determines that an immediate sale or
distribution of all or some of the Partnerships assets
would be impractical or would cause undue loss to the Partners.
The Liquidator may distribute the Partnerships assets, in
whole or in part, in kind if it determines that a sale would be
impractical or would cause undue loss to the Partners.
(b) Liabilities of the Partnership include amounts owed to
the Liquidator as compensation for serving in such capacity
(subject to the terms of Section 12.3) and amounts to
Partners otherwise than in respect of their distribution rights
under Article VI. With respect to any liability that is
contingent, conditional or unmatured or is otherwise not yet due
and payable, the Liquidator shall either settle such claim for
such amount as it thinks appropriate or establish a reserve of
cash or other assets to provide for its payment. When paid, any
unused portion of the reserve shall be distributed as additional
liquidation proceeds.
63
(c) All property and all cash in excess of that required to
discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the
extent of, the positive balances in their respective Capital
Accounts, as determined after taking into account all Capital
Account adjustments (other than those made by reason of
distributions pursuant to this Section 12.4(c)) for the
taxable year of the Partnership during which the liquidation of
the Partnership occurs (with such date of occurrence being
determined pursuant to Treasury
Regulation Section 1.704-1(b)(2)(ii)(g)),
and such distribution shall be made by the end of such taxable
year (or, if later, within 90 days after said date of such
occurrence).
Section 12.5 Cancellation
of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and
property as provided in Section 12.4 in connection with the
liquidation of the Partnership, the Certificate of Limited
Partnership and all qualifications of the Partnership as a
foreign limited partnership in jurisdictions other than the
State of Delaware shall be canceled and such other actions as
may be necessary to terminate the Partnership shall be taken.
Section 12.6 Return
of Contributions.
The General Partner shall not be personally liable for, and
shall have no obligation to contribute or loan any monies or
property to the Partnership to enable it to effectuate, the
return of the Capital Contributions of the Limited Partners or
Unitholders, or any portion thereof, it being expressly
understood that any such return shall be made solely from
Partnership assets.
Section 12.7 Waiver
of Partition.
To the maximum extent permitted by law, each Partner hereby
waives any right to partition of the Partnership property.
Section 12.8 Capital
Account Restoration.
No Limited Partner shall have any obligation to restore any
negative balance in its Capital Account upon liquidation of the
Partnership. The General Partner shall be obligated to restore
any negative balance in its Capital Account upon liquidation of
its interest in the Partnership by the end of the taxable year
of the Partnership during which such liquidation occurs, or, if
later, within 90 days after the date of such liquidation.
ARTICLE XIII
AMENDMENT OF
PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendments
to be Adopted Solely by the General Partner.
Each Partner agrees that the General Partner, without the
approval of any Partner, may amend any provision of this
Agreement and execute, swear to, acknowledge, deliver, file and
record whatever documents may be required in connection
therewith, to reflect:
(a) a change in the name of the Partnership, the location
of the principal place of business of the Partnership, the
registered agent of the Partnership or the registered office of
the Partnership;
(b) admission, substitution, withdrawal or removal of
Partners in accordance with this Agreement;
(c) a change that the General Partner determines to be
necessary or appropriate to qualify or continue the
qualification of the Partnership as a limited partnership or a
partnership in which the Limited Partners have limited liability
under the laws of any state or to ensure that the Group Members
will not be treated as associations taxable as corporations or
otherwise taxed as entities for federal income tax purposes;
64
(d) a change that the General Partner determines,
(i) does not adversely affect the Limited Partners
(including any particular class of Partnership Interests as
compared to other classes of Partnership Interests) in any
material respect, (ii) to be necessary or appropriate to
(A) satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or
contained in any federal or state statute (including the
Delaware Act) or (B) facilitate the trading of the Units
(including the division of any class or classes of Outstanding
Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any
rule, regulation, guideline or requirement of any National
Securities Exchange on which the Units are or will be listed or
admitted to trading, (iii) to be necessary or appropriate
in connection with action taken by the General Partner pursuant
to Section 5.9 or (iv) is required to effect the
intent expressed in the Registration Statement or the intent of
the provisions of this Agreement or is otherwise contemplated by
this Agreement;
(e) a change in the fiscal year or taxable year of the
Partnership and any other changes that the General Partner
determines to be necessary or appropriate as a result of a
change in the fiscal year or taxable year of the Partnership
including, if the General Partner shall so determine, a change
in the definition of Quarter and the dates on which
distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of
Counsel, to prevent the Partnership, or the General Partner or
its directors, officers, trustees or agents from in any manner
being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisers Act of 1940, as
amended, or plan asset regulations adopted under the
Employee Retirement Income Security Act of 1974, as amended,
regardless of whether such are substantially similar to plan
asset regulations currently applied or proposed by the United
States Department of Labor;
(g) an amendment that the General Partner determines to be
necessary or appropriate in connection with the authorization of
issuance of any class or series of Partnership Securities
pursuant to Section 5.6, including any amendment that the
General Partner determines is necessary or appropriate in
connection with (i) the adjustments of the Minimum
Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution pursuant to the
provisions of Section 5.11, (ii) the implementation of
the provisions of Section 5.11 or (iii) any
modifications to the Incentive Distribution Rights made in
connection with the issuance of Partnership Securities pursuant
to Section 5.6, provided that, with respect to this
clause (iii), the modifications to the Incentive
Distribution Rights and the related issuance of Partnership
Securities have received Special Approval;
(h) any amendment expressly permitted in this Agreement to
be made by the General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by
a Merger Agreement approved in accordance with Section 14.3;
(j) an amendment that the General Partner determines to be
necessary or appropriate to reflect and account for the
formation by the Partnership of, or investment by the
Partnership in, any corporation, partnership, joint venture,
limited liability company or other entity, in connection with
the conduct by the Partnership of activities permitted by the
terms of Section 2.4;
(k) a merger, conveyance or conversion pursuant to
Section 14.3(d); or
(l) any other amendments substantially similar to the
foregoing.
Section 13.2 Amendment
Procedures.
Except as provided in Section 13.1 and Section 13.3,
all amendments to this Agreement shall be made in accordance
with the requirements contained in this Section 13.2.
Amendments to this Agreement may be proposed only by the General
Partner; provided, however, that the General Partner
shall have no duty or obligation to propose any amendment to
this Agreement and may decline to do so free of any fiduciary
duty or obligation whatsoever to the Partnership or any Limited
Partner and, in declining to propose an
65
amendment, to the fullest extent permitted by law shall not be
required to act in good faith or pursuant to any other standard
imposed by this Agreement, any Group Member Agreement, any other
agreement contemplated hereby or under the Delaware Act or any
other law, rule or regulation or at equity. A proposed amendment
shall be effective upon its approval by the General Partner and
the holders of a Unit Majority, unless a greater or different
percentage is required under this Agreement or by Delaware law.
Each proposed amendment that requires the approval of the
holders of a specified percentage of Outstanding Units shall be
set forth in a writing that contains the text of the proposed
amendment. If such an amendment is proposed, the General Partner
shall seek the written approval of the requisite percentage of
Outstanding Units or call a meeting of the Unitholders to
consider and vote on such proposed amendment. The General
Partner shall notify all Record Holders upon final adoption of
any such proposed amendments.
Section 13.3 Amendment
Requirements.
(a) Notwithstanding the provisions of Section 13.1 and
Section 13.2, no provision of this Agreement that
establishes a percentage of Outstanding Units (including Units
deemed owned by the General Partner) required to take any action
shall be amended, altered, changed, repealed or rescinded in any
respect that would have the effect of reducing such voting
percentage unless such amendment is approved by the written
consent or the affirmative vote of holders of Outstanding Units
whose aggregate Outstanding Units constitute not less than the
voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Section 13.1 and
Section 13.2, no amendment to this Agreement may
(i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a
result of an amendment approved pursuant to
Section 13.3(c), or (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any
way the amounts distributable, reimbursable or otherwise payable
to, the General Partner or any of its Affiliates without its
consent, which consent may be given or withheld at its option.
(c) Except as provided in Section 14.3, and without
limitation of the General Partners authority to adopt
amendments to this Agreement without the approval of any
Partners or Assignees as contemplated in Section 13.1, any
amendment that would have a material adverse effect on the
rights or preferences of any class of Partnership Interests
in relation to other classes of Partnership Interests must
be approved by the holders of not less than a majority of the
Outstanding Partnership Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement,
except for amendments pursuant to Section 13.1 and except
as otherwise provided by Section 14.3(b), no amendments
shall become effective without the approval of the holders of at
least 90% of the Outstanding Units voting as a single class
unless the Partnership obtains an Opinion of Counsel to the
effect that such amendment will not affect the limited liability
of any Limited Partner under applicable partnership law of the
state under whose laws the Partnership is organized.
(e) Except as provided in Section 13.1, this
Section 13.3 shall only be amended with the approval of the
holders of at least 90% of the Outstanding Units.
Section 13.4 Special
Meetings.
All acts of Limited Partners to be taken pursuant to this
Agreement shall be taken in the manner provided in this
Article XIII. Special meetings of the Limited Partners may
be called by the General Partner or by Limited Partners owning
20% or more of the Outstanding Units of the class or classes for
which a meeting is proposed. Limited Partners shall call a
special meeting by delivering to the General Partner one or more
requests in writing stating that the signing Limited Partners
wish to call a special meeting and indicating the general or
specific purposes for which the special meeting is to be called.
Within 60 days after receipt of such a call from Limited
Partners or within such greater time as may be reasonably
necessary for the Partnership to comply with any statutes,
rules, regulations, listing agreements or similar requirements
governing the holding of a meeting or the solicitation of
proxies for use at such a meeting, the General Partner shall
send a notice of the meeting to the Limited Partners either
directly or indirectly through the Transfer Agent. A meeting
shall be held at a time and place determined by the General
66
Partner on a date not less than 10 days nor more than
60 days after the time notice of the meeting is given as
provided in Section 16.1. Limited Partners shall not vote
on matters that would cause the Limited Partners to be deemed to
be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Limited
Partners limited liability under the Delaware Act or the
law of any other state in which the Partnership is qualified to
do business.
Section 13.5 Notice
of a Meeting.
Notice of a meeting called pursuant to Section 13.4 shall
be given to the Record Holders of the class or classes of Units
for which a meeting is proposed in writing by mail or other
means of written communication in accordance with
Section 16.1. The notice shall be deemed to have been given
at the time when deposited in the mail or sent by other means of
written communication.
Section 13.6 Record
Date.
For purposes of determining the Limited Partners entitled to
notice of or to vote at a meeting of the Limited Partners or to
give approvals without a meeting as provided in
Section 13.11 the General Partner may set a Record Date,
which shall not be less than 10 nor more than 60 days
before (a) the date of the meeting (unless such requirement
conflicts with any rule, regulation, guideline or requirement of
any National Securities Exchange on which the Units are listed
or admitted to trading, in which case the rule, regulation,
guideline or requirement of such National Securities Exchange
shall govern) or (b) in the event that approvals are sought
without a meeting, the date by which Limited Partners are
requested in writing by the General Partner to give such
approvals. If the General Partner does not set a Record Date,
then (a) the Record Date for determining the Limited
Partners entitled to notice of or to vote at a meeting of the
Limited Partners shall be the close of business on the day next
preceding the day on which notice is given, and (b) the
Record Date for determining the Limited Partners entitled to
give approvals without a meeting shall be the date the first
written approval is deposited with the Partnership in care of
the General Partner in accordance with Section 13.11.
Section 13.7 Adjournment.
When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting and a new Record Date
need not be fixed, if the time and place thereof are announced
at the meeting at which the adjournment is taken, unless such
adjournment shall be for more than 45 days. At the
adjourned meeting, the Partnership may transact any business
which might have been transacted at the original meeting. If the
adjournment is for more than 45 days or if a new Record
Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this
Article XIII.
Section 13.8 Waiver
of Notice; Approval of Meeting.
The transactions of any meeting of Limited Partners, however
called and noticed, and whenever held, shall be as valid as if
it had occurred at a meeting duly held after regular call and
notice, if a quorum is present either in person or by proxy.
Attendance of a Limited Partner at a meeting shall constitute a
waiver of notice of the meeting, except when the Limited Partner
attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened; and
except that attendance at a meeting is not a waiver of any right
to disapprove the consideration of matters required to be
included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
Section 13.9 Quorum
and Voting.
The holders of a majority of the Outstanding Units of the class
or classes for which a meeting has been called (including
Outstanding Units deemed owned by the General Partner)
represented in person or by proxy shall constitute a quorum at a
meeting of Limited Partners of such class or classes unless any
such action by the Limited Partners requires approval by holders
of a greater percentage of such Units, in which
67
case the quorum shall be such greater percentage. At any meeting
of the Limited Partners duly called and held in accordance with
this Agreement at which a quorum is present, the act of Limited
Partners holding Outstanding Units that in the aggregate
represent a majority of the Outstanding Units entitled to vote
and be present in person or by proxy at such meeting shall be
deemed to constitute the act of all Limited Partners, unless a
greater or different percentage is required with respect to such
action under the provisions of this Agreement, in which case the
act of the Limited Partners holding Outstanding Units that in
the aggregate represent at least such greater or different
percentage shall be required. The Limited Partners present at a
duly called or held meeting at which a quorum is present may
continue to transact business until adjournment, notwithstanding
the withdrawal of enough Limited Partners to leave less than a
quorum, if any action taken (other than adjournment) is approved
by the required percentage of Outstanding Units specified in
this Agreement (including Outstanding Units deemed owned by the
General Partner). In the absence of a quorum any meeting of
Limited Partners may be adjourned from time to time by the
affirmative vote of holders of at least a majority of the
Outstanding Units entitled to vote at such meeting (including
Outstanding Units deemed owned by the General Partner)
represented either in person or by proxy, but no other business
may be transacted, except as provided in Section 13.7.
Section 13.10 Conduct
of a Meeting.
The General Partner shall have full power and authority
concerning the manner of conducting any meeting of the Limited
Partners or solicitation of approvals in writing, including the
determination of Persons entitled to vote, the existence of a
quorum, the satisfaction of the requirements of
Section 13.4, the conduct of voting, the validity and
effect of any proxies and the determination of any
controversies, votes or challenges arising in connection with or
during the meeting or voting. The General Partner shall
designate a Person to serve as chairman of any meeting and shall
further designate a Person to take the minutes of any meeting.
All minutes shall be kept with the records of the Partnership
maintained by the General Partner. The General Partner may make
such other regulations consistent with applicable law and this
Agreement as it may deem advisable concerning the conduct of any
meeting of the Limited Partners or solicitation of approvals in
writing, including regulations in regard to the appointment of
proxies, the appointment and duties of inspectors of votes and
approvals, the submission and examination of proxies and other
evidence of the right to vote, and the revocation of approvals
in writing.
Section 13.11 Action
Without a Meeting.
If authorized by the General Partner, any action that may be
taken at a meeting of the Limited Partners may be taken without
a meeting if an approval in writing setting forth the action so
taken is signed by Limited Partners owning not less than the
minimum percentage of the Outstanding Units (including Units
deemed owned by the General Partner) that would be necessary to
authorize or take such action at a meeting at which all the
Limited Partners were present and voted (unless such provision
conflicts with any rule, regulation, guideline or requirement of
any National Securities Exchange on which the Units are listed
or admitted to trading, in which case the rule, regulation,
guideline or requirement of such National Securities Exchange
shall govern). Prompt notice of the taking of action without a
meeting shall be given to the Limited Partners who have not
approved in writing. The General Partner may specify that any
written ballot submitted to Limited Partners for the purpose of
taking any action without a meeting shall be returned to the
Partnership within the time period, which shall be not less than
20 days, specified by the General Partner. If a ballot
returned to the Partnership does not vote all of the Units held
by the Limited Partners, the Partnership shall be deemed to have
failed to receive a ballot for the Units that were not voted. If
approval of the taking of any action by the Limited Partners is
solicited by any Person other than by or on behalf of the
General Partner, the written approvals shall have no force and
effect unless and until (a) they are deposited with the
Partnership in care of the General Partner, (b) approvals
sufficient to take the action proposed are dated as of a date
not more than 90 days prior to the date sufficient
approvals are deposited with the Partnership and (c) an
Opinion of Counsel is delivered to the General Partner to the
effect that the exercise of such right and the action proposed
to be taken with respect to any particular matter (i) will
not cause the Limited Partners to be deemed to be taking part in
the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners
limited
68
liability, and (ii) is otherwise permissible under the
state statutes then governing the rights, duties and liabilities
of the Partnership and the Partners.
Section 13.12 Right
to Vote and Related Matters.
(a) Only those Record Holders of the Units on the Record
Date set pursuant to Section 13.6 (and also subject to the
limitations contained in the definition of
Outstanding) shall be entitled to notice of, and to
vote at, a meeting of Limited Partners or to act with respect to
matters as to which the holders of the Outstanding Units have
the right to vote or to act. All references in this Agreement to
votes of, or other acts that may be taken by, the Outstanding
Units shall be deemed to be references to the votes or acts of
the Record Holders of such Outstanding Units.
(b) With respect to Units that are held for a Persons
account by another Person (such as a broker, dealer, bank, trust
company or clearing corporation, or an agent of any of the
foregoing), in whose name such Units are registered, such other
Person shall, in exercising the voting rights in respect of such
Units on any matter, and unless the arrangement between such
Persons provides otherwise, vote such Units in favor of, and at
the direction of, the Person who is the beneficial owner, and
the Partnership shall be entitled to assume it is so acting
without further inquiry. The provisions of this
Section 13.12(b) (as well as all other provisions of this
Agreement) are subject to the provisions of Section 4.3.
ARTICLE XIV
MERGER,
CONSOLIDATION OR CONVERSION
Section 14.1 Authority.
The Partnership may merge or consolidate with or into one or
more corporations, limited liability companies, statutory trusts
or associations, real estate investment trusts, common law
trusts or unincorporated businesses, including a partnership
(whether general or limited (including a limited liability
partnership)) or convert into any such entity, whether such
entity is formed under the laws of the State of Delaware or any
other state of the United States of America, pursuant to a
written plan of merger or consolidation (Merger
Agreement) or a written plan of conversion
(Plan of Conversion), as the case may
be, in accordance with this Article XIV.
Section 14.2 Procedure
for Merger, Consolidation or Conversion.
(a) Merger, consolidation or conversion of the Partnership
pursuant to this Article XIV requires the prior consent of
the General Partner, provided, however, that, to the
fullest extent permitted by law, the General Partner shall have
no duty or obligation to consent to any merger, consolidation or
conversion of the Partnership and may decline to do so free of
any fiduciary duty or obligation whatsoever to the Partnership,
any Limited Partner and, in declining to consent to a merger,
consolidation or conversion, shall not be required to act in
good faith or pursuant to any other standard imposed by this
Agreement, any other agreement contemplated hereby or under the
Act or any other law, rule or regulation or at equity.
(b) If the General Partner shall determine to consent to
the merger or consolidation, the General partner shall approve
the Merger Agreement, which shall set forth:
(i) name and state of domicile of each of the business
entities proposing to merge or consolidate;
(ii) the name and state of domicile of the business entity
that is to survive the proposed merger or consolidation (the
Surviving Business Entity);
(iii) the terms and conditions of the proposed merger or
consolidation;
(iv) the manner and basis of exchanging or converting the
equity securities of each constituent business entity for, or
into, cash, property or interests, rights, securities or
obligations of the Surviving Business Entity; and (i) if
any general or limited partner interests, securities or rights
of any constituent business entity are not to be exchanged or
converted solely for, or into, cash, property or
69
general or limited partner interests, rights, securities or
obligations of the Surviving Business Entity, the cash, property
or interests, rights, securities or obligations of any general
or limited partnership, corporation, trust, limited liability
company, unincorporated business or other entity (other than the
Surviving Business Entity) which the holders of such general or
limited partner interests, securities or rights are to receive
in exchange for, or upon conversion of their interests,
securities or rights, and (ii) in the case of securities
represented by certificates, upon the surrender of such
certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving
Business Entity or any general or limited partnership,
corporation, trust, limited liability company, unincorporated
business or other entity (other than the Surviving Business
Entity), or evidences thereof, are to be delivered;
(v) a statement of any changes in the constituent documents
or the adoption of new constituent documents (the articles or
certificate of incorporation, articles of trust, declaration of
trust, certificate or agreement of limited partnership,
operating agreement or other similar charter or governing
document) of the Surviving Business Entity to be effected by
such merger or consolidation;
(vi) the effective time of the merger, which may be the
date of the filing of the certificate of merger pursuant to
Section 14.4 or a later date specified in or determinable
in accordance with the Merger Agreement (provided, that
if the effective time of the merger is to be later than the date
of the filing of such certificate of merger, the effective time
shall be fixed at a date or time certain at or prior to the time
of the filing of such certificate of merger and stated
therein); and
(vii) such other provisions with respect to the proposed
merger or consolidation that the General Partner determines to
be necessary or appropriate.
(c) If the General Partner shall determine to consent to
the conversion, the General Partner shall approve the Plan of
Conversion, which shall set forth:
(i) the name of the converting entity and the converted
entity;
(ii) a statement that the Partnership is continuing its
existence in the organizational form of the converted entity;
(iii) a statement as to the type of entity that the
converted entity is to be and the state or country under the
laws of which the converted entity is to be incorporated, formed
or organized;
(iv) the manner and basis of exchanging or converting the
equity securities of each constituent business entity for, or
into, cash, property or interests, rights, securities or
obligations of the converted entity;
(v) in an attachment or exhibit, the certificate of limited
partnership of the Partnership; and
(vi) in an attachment or exhibit, the certificate of
limited partnership, articles of incorporation, or other
organizational documents of the converted entity;
(vii) the effective time of the conversion, which may be
the date of the filing of the articles of conversion or a later
date specified in or determinable in accordance with the Plan of
Conversion (provided, that if the effective time of the
conversion is to be later than the date of the filing of such
articles of conversion, the effective time shall be fixed at a
date or time certain at or prior to the time of the filing of
such articles of conversion and stated therein); and
(viii) such other provisions with respect to the proposed
conversion that the General Partner determines to be necessary
or appropriate.
Section 14.3 Approval
by Limited Partners.
(a) Except as provided in Section 14.3(d), the General
Partner, upon its approval of the Merger Agreement or the Plan
of Conversion, as the case may be, shall direct that the Merger
Agreement or the Plan of Conversion, as applicable, be submitted
to a vote of Limited Partners, whether at a special meeting
70
or by written consent, in either case in accordance with the
requirements of Article XIII. A copy or a summary of the
Merger Agreement or the Plan of Conversion, as the case may be,
shall be included in or enclosed with the notice of a special
meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger
Agreement or Plan of Conversion, as the case may be, shall be
approved upon receiving the affirmative vote or consent of the
holders of a Unit Majority.
(c) Except as provided in Section 14.3(d), after such
approval by vote or consent of the Limited Partners, and at any
time prior to the filing of the certificate of merger or
articles of conversion pursuant to Section 14.4, the
merger, consolidation or conversion may be abandoned pursuant to
provisions therefor, if any, set forth in the Merger Agreement
or Plan of Conversion, as the case may be.
(d) Notwithstanding anything else contained in this
Article XIV or in this Agreement, the General Partner is
permitted, without Limited Partner approval, to convert the
Partnership or any Group Member into a new limited liability
entity, to merge the Partnership or any Group Member into, or
convey all of the Partnerships assets to, another limited
liability entity that shall be newly formed and shall have no
assets, liabilities or operations at the time of such
conversion, merger or conveyance other than those it receives
from the Partnership or other Group Member if (i) the
General Partner has received an Opinion of Counsel that the
conversion, merger or conveyance, as the case may be, would not
result in the loss of the limited liability of any Limited
Partner or cause the Partnership to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not previously
treated as such), (ii) the sole purpose of such conversion,
merger, or conveyance is to effect a mere change in the legal
form of the Partnership into another limited liability entity
and (iii) the governing instruments of the new entity
provide the Limited Partners and the General Partner with the
same rights and obligations as are herein contained.
(e) Additionally, notwithstanding anything else contained
in this Article XIV or in this Agreement, the General
Partner is permitted, without Limited Partner approval, to merge
or consolidate the Partnership with or into another entity if
(A) the General Partner has received an Opinion of Counsel
that the merger or consolidation, as the case may be, would not
result in the loss of the limited liability of any Limited
Partner or cause the 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), (B) the merger or consolidation would not
result in an amendment to the Partnership Agreement, other than
any amendments that could be adopted pursuant to
Section 13.1, (C) the Partnership is the Surviving
Business Entity in such merger or consolidation, (D) each
Unit outstanding immediately prior to the effective date of the
merger or consolidation is to be an identical Unit of the
Partnership after the effective date of the merger or
consolidation, and (E) the number of Partnership Securities
to be issued by the Partnership in such merger or consolidation
do not exceed 20% of the Partnership Securities Outstanding
immediately prior to the effective date of such merger or
consolidation.
(f) Pursuant to
Section 17-211(g)
of the Delaware Act, an agreement of merger or consolidation
approved in accordance with this Article XIV may
(a) effect any amendment to this Agreement or
(b) effect the adoption of a new partnership agreement for
the Partnership if it is the Surviving Business Entity. Any such
amendment or adoption made pursuant to this Section 14.3
shall be effective at the effective time or date of the merger
or consolidation.
Section 14.4 Certificate
of Merger.
Upon the required approval by the General Partner and the
Unitholders of a Merger Agreement or the Plan of Conversion, as
the case may be, a certificate of merger or articles of
conversion, as applicable, shall be executed and filed with the
Secretary of State of the State of Delaware in conformity with
the requirements of the Delaware Act.
71
Section 14.5 Effect
of Merger, Consolidation or Conversion.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the
business entities that has merged or consolidated, and all
property, real, personal and mixed, and all debts due to any of
those business entities and all other things and causes of
action belonging to each of those business entities, shall be
vested in the Surviving Business Entity and after the merger or
consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business
entity;
(ii) the title to any real property vested by deed or
otherwise in any of those constituent business entities shall
not revert and is not in any way impaired because of the merger
or consolidation;
(iii) all rights of creditors and all liens on or security
interests in property of any of those constituent business
entities shall be preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent
business entities shall attach to the Surviving Business Entity
and may be enforced against it to the same extent as if the
debts, liabilities and duties had been incurred or contracted by
it.
(b) At the effective time of the articles of conversion:
(i) the Partnership shall continue to exist, without
interruption, but in the organizational form of the converted
entity rather than in its prior organizational form;
(ii) all rights, title, and interests to all real estate
and other property owned by the Partnership shall continue to be
owned by the converted entity in its new organizational form
without reversion or impairment, without further act or deed,
and without any transfer or assignment having occurred, but
subject to any existing liens or other encumbrances thereon;
(iii) all liabilities and obligations of the Partnership
shall continue to be liabilities and obligations of the
converted entity in its new organizational form without
impairment or diminution by reason of the conversion;
(iv) all rights of creditors or other parties with respect
to or against the prior interest holders or other owners of the
Partnership in their capacities as such in existence as of the
effective time of the conversion will continue in existence as
to those liabilities and obligations and may be pursued by such
creditors and obligees as if the conversion did not occur;
(v) a proceeding pending by or against the Partnership or
by or against any of Partners in their capacities as such may be
continued by or against the converted entity in its new
organizational form and by or against the prior partners without
any need for substitution of parties; and
(vi) the Partnership Units that are to be converted into
partnership interests, shares, evidences of ownership, or other
securities in the converted entity as provided in the plan of
conversion shall be so converted, and Partners shall be entitled
only to the rights provided in the Plan of Conversion.
ARTICLE XV
RIGHT TO
ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 Right
to Acquire Limited Partner Interests.
(a) Notwithstanding any other provision of this Agreement,
if at any time the General Partner and its Affiliates hold more
than 80% of the total Limited Partner Interests of any class
then Outstanding, the General Partner shall then have the right,
which right it may assign and transfer in whole or in part to
the Partnership or any Affiliate of the General Partner,
exercisable at its option, to purchase all, but not less than
all, of such Limited Partner Interests of such class then
Outstanding held by Persons other than the General Partner and
its Affiliates, at the greater of (x) the Current Market
Price as of the date three days prior to the date that the
notice described in Section 15.1(b) is mailed and
(y) the highest price paid by
72
the General Partner or any of its Affiliates for any such
Limited Partner Interest of such class purchased during the
90-day
period preceding the date that the notice described in
Section 15.1(b) is mailed. As used in this Agreement,
(i) Current Market Price as of any date of any
class of Limited Partner Interests means the average of the
daily Closing Prices (as hereinafter defined) per Limited
Partner Interest of such class for the 20 consecutive Trading
Days (as hereinafter defined) immediately prior to such date;
(ii) Closing Price for any day means the last
sale price on such day, regular way, or in case no such sale
takes place on such day, the average of the closing bid and
asked prices on such day, regular way, as reported in the
principal consolidated transaction reporting system with respect
to securities listed on the principal National Securities
Exchange (other than the Nasdaq Stock Market) on which such
Limited Partner Interests are listed or admitted to trading or,
if such Limited Partner Interests of such class are not listed
or admitted to trading on any National Securities Exchange
(other than the Nasdaq Stock Market), the last quoted price on
such day or, if not so quoted, the average of the high bid and
low asked prices on such day in the
over-the-counter
market, as reported by the Nasdaq Stock Market or such other
system then in use, or, if on any such day such Limited Partner
Interests of such class are not quoted by any such organization,
the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in such
Limited Partner Interests of such class selected by the General
Partner, or if on any such day no market maker is making a
market in such Limited Partner Interests of such class, the fair
value of such Limited Partner Interests on such day as
determined by the General Partner; and (iii) Trading
Day means a day on which the principal National Securities
Exchange on which such Limited Partner Interests of any class
are listed or admitted for trading is open for the transaction
of business or, if Limited Partner Interests of a class are not
listed or admitted for trading on any National Securities
Exchange, a day on which banking institutions in New York City
generally are open.
(b) If the General Partner, any Affiliate of the General
Partner or the Partnership elects to exercise the right to
purchase Limited Partner Interests granted pursuant to
Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the
Notice of Election to Purchase) and
shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner
Interests of such class (as of a Record Date selected by the
General Partner) at least 10, but not more than 60, days
prior to the Purchase Date. Such Notice of Election to Purchase
shall also be published for a period of at least three
consecutive days in at least two daily newspapers of general
circulation printed in the English language and published in the
Borough of Manhattan, New York. The Notice of Election to
Purchase shall specify the Purchase Date and the price
(determined in accordance with Section 15.1(a)) at which
Limited Partner Interests will be purchased and state that the
General Partner, its Affiliate or the Partnership, as the case
may be, elects to purchase such Limited Partner Interests, upon
surrender of Certificates representing such Limited Partner
Interests in exchange for payment, at such office or offices of
the Transfer Agent as the Transfer Agent may specify, or as may
be required by any National Securities Exchange on which such
Limited Partner Interests are listed. Any such Notice of
Election to Purchase mailed to a Record Holder of Limited
Partner Interests at his address as reflected in the records of
the Transfer Agent shall be conclusively presumed to have been
given regardless of whether the owner receives such notice. On
or prior to the Purchase Date, the General Partner, its
Affiliate or the Partnership, as the case may be, shall deposit
with the Transfer Agent cash in an amount sufficient to pay the
aggregate purchase price of all of such Limited Partner
Interests to be purchased in accordance with this
Section 15.1. If the Notice of Election to Purchase shall
have been duly given as aforesaid at least 10 days prior to
the Purchase Date, and if on or prior to the Purchase Date the
deposit described in the preceding sentence has been made for
the benefit of the holders of Limited Partner Interests subject
to purchase as provided herein, then from and after the Purchase
Date, notwithstanding that any Certificate shall not have been
surrendered for purchase, all rights of the holders of such
Limited Partner Interests (including any rights pursuant to
Article IV, Article V, Article VI, and
Article XII) shall thereupon cease, except the right
to receive the purchase price (determined in accordance with
Section 15.1(a)) for Limited Partner Interests therefor,
without interest, upon surrender to the Transfer Agent of the
Certificates representing such Limited Partner Interests, and
such Limited Partner Interests shall thereupon be deemed to be
transferred to the General Partner, its Affiliate or the
Partnership, as the case
73
may be, on the record books of the Transfer Agent and the
Partnership, and the General Partner or any Affiliate of the
General Partner, or the Partnership, as the case may be, shall
be deemed to be the owner of all such Limited Partner Interests
from and after the Purchase Date and shall have all rights as
the owner of such Limited Partner Interests (including all
rights as owner of such Limited Partner Interests pursuant to
Article IV, Article V, Article VI and
Article XII).
(c) At any time from and after the Purchase Date, a holder
of an Outstanding Limited Partner Interest subject to purchase
as provided in this Section 15.1 may surrender his
Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described
in Section 15.1(a), therefor, without interest thereon.
ARTICLE XVI
GENERAL
PROVISIONS
Section 16.1 Addresses
and Notices; Written Communications.
(a) Any notice, demand, request, report or proxy materials
required or permitted to be given or made to a Partner under
this Agreement shall be in writing and shall be deemed given or
made when delivered in person or when sent by first
class United States mail or by other means of written
communication to the Partner at the address described below. Any
notice, payment or report to be given or made to a Partner
hereunder shall be deemed conclusively to have been given or
made, and the obligation to give such notice or report or to
make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report
to the Record Holder of such Partnership Securities at his
address as shown on the records of the Transfer Agent or as
otherwise shown on the records of the Partnership, regardless of
any claim of any Person who may have an interest in such
Partnership Securities by reason of any assignment or otherwise.
An affidavit or certificate of making of any notice, payment or
report in accordance with the provisions of this
Section 16.1 executed by the General Partner, the Transfer
Agent or the mailing organization shall be prima facie evidence
of the giving or making of such notice, payment or report. If
any notice, payment or report addressed to a Record Holder at
the address of such Record Holder appearing on the books and
records of the Transfer Agent or the Partnership is returned by
the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver it, such
notice, payment or report and any subsequent notices, payments
and reports shall be deemed to have been duly given or made
without further mailing (until such time as such Record Holder
or another Person notifies the Transfer Agent or the Partnership
of a change in his address) if they are available for the
Partner at the principal office of the Partnership for a period
of one year from the date of the giving or making of such
notice, payment or report to the other Partners. Any notice to
the Partnership shall be deemed given if received by the General
Partner at the principal office of the Partnership designated
pursuant to Section 2.3. The General Partner may rely and
shall be protected in relying on any notice or other document
from a Partner or other Person if believed by it to be genuine.
(b) The terms in writing, written
communications, written notice and words of
similar import shall be deemed satisfied under this Agreement by
use of
e-mail and
other forms of electronic communication.
Section 16.2 Further
Action.
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this
Agreement.
Section 16.3 Binding
Effect.
This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their heirs, executors, administrators,
successors, legal representatives and permitted assigns.
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Section 16.4 Integration.
This Agreement constitutes the entire agreement among the
parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining
thereto.
Section 16.5 Creditors.
None of the provisions of this Agreement shall be for the
benefit of, or shall be enforceable by, any creditor of the
Partnership.
Section 16.6 Waiver.
No failure by any party to insist upon the strict performance of
any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof
shall constitute waiver of any such breach of any other
covenant, duty, agreement or condition.
Section 16.7 Third-Party
Beneficiaries.
Each Partner agrees that any Indemnitee shall be entitled to
assert rights and remedies hereunder as a third-party
beneficiary hereto with respect to those provisions of this
Agreement affording a right, benefit or privilege to such
Indemnitee.
Section 16.8 Counterparts.
This Agreement may be executed in counterparts, all of which
together shall constitute an agreement binding on all the
parties hereto, notwithstanding that all such parties are not
signatories to the original or the same counterpart. Each party
shall become bound by this Agreement immediately upon affixing
its signature hereto or, in the case of a Person acquiring a
Limited Partner Interest, pursuant to Section 10.1(a)
without execution hereto.
Section 16.9 Applicable
Law.
This Agreement shall be construed in accordance with and
governed by the laws of the State of Delaware, without regard to
the principles of conflicts of law.
Section 16.10 Invalidity
of Provisions.
If any provision of this Agreement is or becomes invalid,
illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein
shall not be affected thereby.
Section 16.11 Consent
of Partners.
Each Partner hereby expressly consents and agrees that, whenever
in this Agreement it is specified that an action may be taken
upon the affirmative vote or consent of less than all of the
Partners, such action may be so taken upon the concurrence of
less than all of the Partners and each Partner shall be bound by
the results of such action.
Section 16.12 Facsimile
Signatures.
The use of facsimile signatures affixed in the name and on
behalf of the transfer agent and registrar of the Partnership on
certificates representing Common Units is expressly permitted by
this Agreement.
[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
GENERAL PARTNER:
TARGA RESOURCES GP LLC
Name:
Title:
ORGANIZATIONAL LIMITED PARTNERS:
TARGA GP INC.
Name:
Title:
TARGA LP INC.
Name:
Title:
Signature
Page First Amended and Restated Agreement
of Limited Partnership of Targa Resources Partners, LP
76
LIMITED PARTNERS:
All Limited Partners now and hereafter admitted as Limited
Partners of the Partnership, pursuant to powers of attorney now
and hereafter executed in favor of, and granted and delivered to
the General Partner or without execution hereof pursuant to
Section 10.2(a) hereof.
[ ]
Name:
Title:
Signature
Page First Amended and Restated Agreement
of Limited Partnership of Targa Resources Partners, LP
77
EXHIBIT A
to the First Amended and Restated
Agreement of Limited Partnership of
Targa Resources Partners LP
Certificate Evidencing Common Units
Representing Limited Partner Interests in
Targa Resources Partners LP
In accordance with Section 4.1 of the First Amended and
Restated Agreement of Limited Partnership of Targa Resources
Partners LP, as amended, supplemented or restated from time to
time (the Partnership Agreement),
Targa Resources Partners LP, a Delaware limited partnership (the
Partnership), hereby certifies that
(the Holder) is the registered owner
of Common Units representing limited partner interests in the
Partnership (the Common Units)
transferable on the books of the Partnership, in person or by
duly authorized attorney, upon surrender of this Certificate
properly endorsed. The rights, preferences and limitations of
the Common Units are set forth in, and this Certificate and the
Common Units represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the
Partnership Agreement. Copies of the Partnership Agreement are
on file at, and will be furnished without charge on delivery of
written request to the Partnership at, the principal office of
the Partnership located at 1000 Louisiana, Suite 4300,
Houston, Texas 77002. Capitalized terms used herein but not
defined shall have the meanings given them in the Partnership
Agreement.
THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF
TARGA RESOURCES PARTNERS LP THAT THIS SECURITY MAY NOT BE SOLD,
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH
TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR
STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION
OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR
QUALIFICATION OF TARGA RESOURCES PARTNERS LP UNDER THE LAWS OF
THE STATE OF DELAWARE, OR (C) CAUSE TARGA RESOURCES
PARTNERS LP TO BE TREATED AS AN ASSOCIATION TAXABLE AS A
CORPORATION OR OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL
INCOME TAX PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR
TAXED). TARGA RESOURCES GP LLC, THE GENERAL PARTNER OF TARGA
RESOURCES PARTNERS LP, MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE
TRANSFER OF THIS SECURITY IF IT RECEIVES AN OPINION OF COUNSEL
THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID A SIGNIFICANT RISK
OF TARGA RESOURCES PARTNERS LP BECOMING TAXABLE AS A CORPORATION
OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR FEDERAL INCOME
TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE SHALL NOT
PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS
SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL
SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED
TO TRADING.
The Holder, by accepting this Certificate, is deemed to have
(i) requested admission as, and agreed to become, a Limited
Partner and to have agreed to comply with and be bound by and to
have executed the Partnership Agreement, (ii) represented
and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney
provided for in the Partnership Agreement and (iv) made the
waivers and given the consents and approvals contained in the
Partnership Agreement.
Exhibit A-1
This Certificate shall not be valid for any purpose unless it
has been countersigned and registered by the Transfer Agent and
Registrar.
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Dated: _
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Targa Resources Partners LP
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By: Targa Resources GP
LLC
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Countersigned and Registered by:
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[ ]
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By:
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as Transfer Agent and Registrar
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Name:
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By: _
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By:
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Authorized Signature
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Secretary
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[Reverse of Certificate]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the
face of this Certificate, shall be construed as follows
according to applicable laws or regulations:
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TEN COM -
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as tenants in common
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UNIF GIFT/TRANSFERS MIN ACT
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TEN ENT -
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as tenants by the entireties
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Custodian
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(Cust)
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(Minor)
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JT TEN -
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as joint tenants with right of
survivorship
and not as tenants in common
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under Uniform Gifts/Transfers to
CD Minors Act (State)
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Additional abbreviations, though not in the above list, may also
be used.
Exhibit A-2
ASSIGNMENT
OF COMMON UNITS OF
TARGA RESOURCES PARTNERS LP
FOR VALUE RECEIVED,
hereby assigns, conveys, sells and transfers unto
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(Please print or typewrite name
and address of assignee)
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(Please insert Social Security or
other identifying number of assignee)
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Common Units representing limited partner interests evidenced by
this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and appoint
as its
attorney-in-fact
with full power of substitution to transfer the same on the
books of Targa Resources Partners LP.
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Date: _
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NOTE:
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The signature to any endorsement
hereon must correspond with the name as written upon the face of
this Certificate in every particular, without alteration,
enlargement or change
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THE SIGNATURE(S) MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17d-15
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(Signature)
(Signature)
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No transfer of the Common Units evidenced hereby will be
registered on the books of the Partnership, unless the
Certificate evidencing the Common Units to be transferred is
surrendered for registration or transfer.
Exhibit A-3
APPENDIX B
GLOSSARY
OF SELECTED TERMS
The following are abbreviations and definitions of terms
commonly used in the oil and natural gas industry and this
prospectus.
Adjusted operating surplus. For any
period, operating surplus generated during that period is
adjusted to:
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(a)
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increase operating surplus by any net decreases made in
subsequent periods in cash reserves for operating expenditures
initially established with respect to such period to the extent
such decrease results in a reduction in adjusted operating
surplus in subsequent periods pursuant to clause (b) below;
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(b)
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decrease operating surplus by any net decrease in cash reserves
for operating expenditures during that period not relating to an
operating expenditure made during that period; and
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(c)
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increase operating surplus by 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.
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Adjusted operating surplus does not include the portion of
operating surplus described in subpart (a)(2) of the definition
of operating surplus in this Appendix B.
Available cash. For any quarter ending
prior to liquidation:
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(a)
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all cash and cash equivalents of Targa Resources Partners LP and
its subsidiaries on hand on the date of determination of
available cash for that quarter;
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(b)
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less the amount of cash reserves established by our general
partner to:
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(1)
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provide for the proper conduct of the business of Targa
Resources Partners LP its subsidiaries (including reserves for
future capital expenditures and for future credit needs of Targa
Resource Partners LP and its subsidiaries) after that quarter;
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(2)
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comply with applicable law or any debt instrument or other
agreement or obligation to which Targa Resources Partners LP or
any of its subsidiaries is a party or its assets are subject; and
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(3)
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provide funds for minimum quarterly distributions and cumulative
common unit arrearages for any one or more of the next four
quarters;
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provided, however, that our general partner may not
establish cash reserves pursuant to clause (b)(3) immediately
above unless our general partner has determined that the
establishment of reserves will not prevent us from distributing
the minimum quarterly distribution on all common units and any
cumulative common unit arrearages thereon for that quarter; and
provided, further, that disbursements made by us or any
of our subsidiaries or cash reserves established, increased or
reduced after the end of that quarter but on or before the date
of determination of available cash for that quarter shall be
deemed to have been made, established, increased or reduced, for
purposes of determining available cash, within that quarter if
our general partner so determines.
Bbl or barrel. One stock tank barrel,
or 42 U.S. gallons liquid volume, used in reference to oil
as NGLs or other liquid hydrocarbons.
BBtu. One billion Btus.
Bcf. One billion cubic feet of natural
gas.
Btu. British thermal unit, which is the
heat required to raise the temperature of a one-pound mass of
water from 58.5 to 59.5 degrees Fahrenheit.
Capital account. The capital account
maintained for a partner under the partnership agreement. The
capital account of a partner for a common unit, a Class B
unit, a subordinated unit, an incentive distribution
B-1
right or any other partnership interest will be the amount which
that capital account would be if that common unit, a
Class B unit, subordinated unit, incentive distribution
right or other partnership interest were the only interest in
Targa Resources Partners LP held by a partner.
Capital surplus. All available cash
distributed by us on any date from any source will be treated as
distributed from operating surplus until the sum of all
available cash distributed since the closing of the initial
public offering equals the operating surplus from the closing of
the initial public offering through the end of the quarter
immediately preceding that distribution. Any excess available
cash distributed by us on that date will be deemed to be capital
surplus.
Closing price. The last sale price on a
day, regular way, or in case no sale takes place on that day,
the average of the closing bid and asked prices on that day,
regular way, in either case, as reported in the principal
consolidated transaction reporting system for securities listed
or admitted to trading on the principal national securities
exchange on which the units of that class are listed or admitted
to trading. If the units of that class are not listed or
admitted to trading on any national securities exchange, the
last quoted price on that day. If no quoted price exists, the
average of the high bid and low asked prices on that day in the
over-the-counter
market, as reported by the New York Stock Exchange or any other
system then in use. If on any day the units of that class are
not quoted by any organization of that type, the average of the
closing bid and asked prices on that day as furnished by a
professional market maker making a market in the units of the
class selected by the our board of directors. If on that day no
market maker is making a market in the units of that class, the
fair value of the units on that day as determined reasonably and
in good faith by our board of directors.
Condensate. A natural gas liquid with a
low vapor pressure, mainly composed of propane, butane, pentane
and heavier hydrocarbon fractions.
Cumulative common unit arrearage. The
amount by which the minimum quarterly distribution for a quarter
during the subordination period exceeds the distribution of
available cash from operating surplus actually made for that
quarter on a common unit, cumulative for that quarter and all
prior quarters during the subordination period.
Current market price. For any class of
units listed or admitted to trading on any national securities
exchange as of any date, the average of the daily closing prices
for the 20 consecutive trading days immediately prior to that
date.
Interim capital transactions. The
following transactions if they occur prior to liquidation:
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(a)
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borrowings, refinancings or refundings of indebtedness and sales
of debt securities (other than for items purchased on open
account in the ordinary course of business) by Targa Resources
Partners LP or any of its subsidiaries;
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(b)
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sales of equity interests by Targa Resources Partners LP or any
of its subsidiaries;
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(c)
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sales or other voluntary or involuntary dispositions of any
assets of Targa Resources Partners LP or any of its subsidiaries
(other than sales or other dispositions of inventory, accounts
receivable and other assets in the ordinary course of business,
and sales or other dispositions of assets as a part of normal
retirements or replacements);
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(d)
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capital contributions received; and
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(e)
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corporate reorganizations or restructurings.
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Dehydration. The process of removing
liquids and moisture content from gas or other matter.
DOT. Department of Transportation.
EIA. Energy Information Administration.
EPA. Environmental Protection Agency.
B-2
Equity volumes. The portion of natural
gas and/or
NGLs we receive as payment for services in our gathering and
processing business under percent-of-proceeds, percent-of-value
or percent-of-liquids arrangements.
FERC. Federal Energy Regulatory
Commission.
Field. The general area encompassed by
one or more oil or gas reservoirs or pools that are located on a
single geologic feature, that are otherwise closely related to
the same geologic feature (either structural or stratigraphic).
Formation. A subsurface rock formation
containing one or more individual and separate natural
accumulations of moveable petroleum that is confined by
impermeable rock and is characterized by a single-pressure
system.
Fractionation. The process by which a
mixed stream of natural gas liquids is separated into its
constituent products.
Henry Hub. A pipeline interchange near
Erath, Louisiana, where a number of interstate and intrastate
pipelines interconnect through a header system operated by
Sabine Pipe Line. It is the standard delivery point for the
NYMEX natural gas futures contract in the U.S.
Hydrocarbon. An organic compound
containing only carbon and hydrogen.
Liquefied Natural Gas (LNG). Natural
gas that has been cooled to −259 degrees Fahrenheit
(−161 degrees Celsius) and at which point it is
condensed into a liquid which is colorless, odorless,
non-corrosive and non-toxic.
MBbl. One thousand stock tank barrels.
Mcf. One thousand cubic feet of natural
gas.
MMBbl. One million stock tank barrels.
MMBtu. One million Btu.
MMcf. One million cubic feet of natural
gas.
MMS. U.S. Minerals Management
Service.
Natural gas. Hydrocarbon gas found in
the earth, composed of methane, ethane, butane, propane and
other gases.
NGA. Natural Gas Act of 1938.
NGLs. Natural gas liquids. The
combination of ethane, propane, butane and natural gasolines
that when removed from natural gas become liquid under various
levels of higher pressure and lower temperature.
NGPA. Natural Gas Policy Act of 1978.
NGPSA. Natural Gas Transmission
Pipeline Siting Act.
NYMEX. New York Mercantile Exchange.
OCS. Outer Continental Shelf.
Operating expenditures. All of our
expenditures and expenditures of our subsidiaries, including,
but not limited to, taxes, reimbursements of our general
partner, non-pro rata repurchase of units (other than those made
with the proceeds of an Interim Capital Transaction), interest
payments and maintenance capital expenditures, subject to the
following:
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(a)
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Payments (including prepayments) of principal of and premium on
indebtedness will not constitute operating expenditures.
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B-3
(b) Operating expenditures will not include:
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(1)
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expansion capital expenditures;
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(2)
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payment of transaction expenses (including taxes) relating to
interim capital transactions; or
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(3)
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distributions to unitholders.
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Where capital expenditures consist of both maintenance capital
expenditures and expansion capital expenditures, the general
partner, with the concurrence of the conflicts committee, shall
determine the allocation between the amounts paid for each.
Operating surplus. For any period prior
to liquidation, on a cumulative basis and without duplication:
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(1)
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all cash receipts of Targa Resource Partners LP and our
subsidiaries for the period beginning on the closing date of our
initial public offering and ending with the last day of that
period, other than cash receipts from interim capital
transactions (provided that cash receipts from the termination
of a commodity hedge or interest rate swap prior to its
specified termination date shall be included in operating
surplus in equal quarterly installments over the scheduled life
of such commodity hedge or interest rate swap); and
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(2)
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an amount equal to four times the amount needed for any one
quarter for us to pay a distribution on all units (including
general partner units) and incentive distribution rights at the
same per-unit amount as was distributed in the immediately
preceding quarter; less
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(1)
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operating expenditures for the period beginning on the closing
date of our initial public offering and ending with the last day
of that period; and
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(2)
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the amount of cash reserves that is established by our general
partner to provide funds for future operating expenditures;
provided however, that disbursements made (including
contributions to Targa Resource Partners LP or our subsidiaries
or disbursements on behalf of Targa Resource Partners LP or our
subsidiaries) or cash reserves established, increased or reduced
after the end of that period but on or before the date of
determination of available cash for that period shall be deemed
to have been made, established, increased or reduced for
purposes of determining operating surplus, within that period if
our general partner so determines.
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Petrochemicals. Chemicals derived from
petroleum; feedstocks for the manufacture of plastics and
synthetic rubber. Petrochemicals include benzene, toluene,
xylene, styrene, and methanol.
Raw NGL mix. Mixed stream of NGLs,
including ethane, propane, butane and natural gasolines, prior
to separation in a fractionator.
Residue gas. The pipeline quality
natural gas remaining after natural gas is processed.
Subordination period. The subordination
period will extend from the closing of the initial public
offering until the first to occur of:
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(a)
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the first day of any quarter beginning after March 31, 2010
for which:
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(1)
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distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled
or exceeded the sum of the minimum quarterly distributions on
all of the outstanding common units and subordinated units for
each of the three consecutive, non-overlapping four-quarter
periods immediately preceding that date, provided, however,
subordinated units may additionally convert into common units as
described in Provisions of Our Partnership Agreement
Relating to Cash Distributions Subordination
Period Early Conversion of Subordinated Units.
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B-4
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(2)
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the adjusted operating surplus generated during each of the
three consecutive, non-overlapping four quarter periods,
immediately preceding that date equaled or exceeded the sum of
the minimum quarterly distributions on all of the common units
and subordinated units that were outstanding during those
periods on a fully diluted basis; and
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(3)
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there are no outstanding cumulative common units arrearages.
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(b)
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the date on which the general partner is removed as our general
partner upon the requisite vote by the limited partners under
circumstances where cause does not exist and units held by our
general partner and its affiliates are not voted in favor of the
removal.
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Tcf. One trillion cubic feet of natural
gas.
Throughput. The volume of product
transported or passing through a pipeline, plant, terminal or
other facility.
Wellhead. The equipment at the surface
of a well used to control the pressure; the point at which the
hydrocarbons and water exit the ground.
Workover. Operations on a completed
production well to clean, repair and maintain the well for the
purposes of increasing or restoring production.
B-5
16,800,000
Common Units
Representing Limited Partner
Interests
Targa Resources Partners
LP
PROSPECTUS
February 8, 2007
Citigroup
Goldman, Sachs & Co.
UBS Investment Bank
Merrill Lynch & Co.
A.G. Edwards
Credit Suisse
Lehman Brothers
Wachovia Securities
Raymond James
RBC Capital Markets
Sanders Morris Harris