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 read carefully these and other risks described under
"Risk Factors."
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.
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.
The assumptions underlying the forecast of cash available for distributions
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.
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Because of the natural decline in production from existing wells, our
success depends on our ability to obtain new sources of supplies of natural
gas and natural gas liquids, which are dependent 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.
Natural gas, NGLs and other commodity prices are volatile, and a reduction
in these prices could adversely affect our cash flow and our ability to make
distributions to you.
Our hedging activities may have a material adverse effect on our earnings,
profitability, cash flows and financial condition.
We typically do not obtain independent evaluations of natural gas reserves
dedicated to our gathering and pipeline systems; therefore, volumes of
natural gas on our systems in the future could be less than we anticipate.
We depend on certain natural gas producer customers for a significant
portion of our supply of natural gas. The loss of any of these customers
could result in a decline in our volumes, revenues and cash available for
distribution.
We may not successfully balance our purchases and sales of natural gas,
which would increase our exposure to commodity price risks.
If third-party pipelines and other facilities interconnected to our systems
become unavailable to transport or produce natural gas and NGLs, our
revenues and cash available for distribution could be adversely affected.
Our industry is highly competitive, and increased competitive pressure could
adversely affect our business and operating results.
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.
We are subject to compliance with stringent environmental laws and
regulations that may expose us to significant costs and liabilities.
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.
If we do not make acquisitions on economically acceptable terms, our future
growth will be limited.
We do not own all of the land on which our pipelines and facilities are
located, which could disrupt our operations.
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 debt levels may limit our flexibility in obtaining additional financing
and in pursuing other business opportunities.
Restrictions in our amended and restated credit facility may limit our
ability to make distributions to you and may limit our ability to capitalize
on acquisitions and other business opportunities.
Increases in interest rates, which have recently experienced record lows,
could adversely impact our unit price and our ability to issue additional
equity, to incur debt to make acquisitions or for other purposes or to make
cash distributions at our intended levels.
Due to our lack of industry and geographic diversification, adverse
developments in our midstream operations or operating areas would reduce our
ability to make distributions to our unitholders.
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We are exposed to the credit risks of our key producer customers, and any
material nonpayment or nonperformance by our key producer customers could
reduce our ability to make distributions to our unitholders.
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.
If we fail to develop or maintain an effective system of internal controls,
we may not be able to report our financial results accurately or prevent
fraud.
Risks Inherent in an Investment in Us
Eagle Rock Holdings, L.P. will own a 57.5% limited partner interest in us
and will control our general partner, which has sole responsibility for
conducting our business and managing our operations. Our general partner has
conflicts of interest, which may permit it to favor its own interests to
your detriment.
The NGP Investors and their affiliates and certain private investors are not
limited in their 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.
Cost reimbursements due to 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.
Our partnership agreement requires that we distribute all of our available
cash, which could limit our ability to grow and make acquisitions.
Our partnership agreement limits our general partner's fiduciary duties to
holders of our common units and subordinated units.
Our partnership agreement restricts the remedies available to holders of our
common units and subordinated units for actions taken by our general partner
that might otherwise constitute breaches of fiduciary duty.
Holders of our common units have limited voting rights and are not entitled
to elect our general partner or its directors.
Even if holders of our common units are dissatisfied, they cannot initially
remove our general partner without its consent.
Our partnership agreement restricts the voting rights of unitholders owning
20% or more of our common units.
Control of our general partner may be transferred to a third party without
unitholder consent.
You will experience immediate and substantial dilution of $16.38 in tangible
net book value per common unit.
We may issue additional units without your approval, which would dilute your
existing ownership interests.
Affiliates of our general partner, the NGP Investors and their affiliates,
and the Private Investors may sell common units in the public markets, which
sales could have an adverse impact on the trading price of the common units.
Our general partner has a limited call right that may require you to sell
your units at an undesirable time or price.
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Your liability may not be limited if a court finds that unitholder action
constitutes control of our business.
Unitholders may have liability to repay distributions that were wrongfully
distributed to them.
There is no existing market for our common units, and a trading market that
will provide you with adequate liquidity may not develop. The price of our
common units may fluctuate significantly, and you could lose all or part of
your investment.
We will incur increased costs as a result of being a publicly traded
partnership.
Tax Risks to Common Unitholders
The tax efficiency of our partnership structure 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 (the "IRS") were to treat us as a
corporation or if we become subject to a material amount of entity-level
taxation for state tax purposes, it would reduce the amount of cash
available for distribution to you.
If the IRS contests the federal income tax positions we take, the market for
our common units may be adversely impacted, and the cost of any IRS contest
will reduce our cash available for distribution to you.
You may be required to pay taxes on your share of our income even if you do
not receive any cash distributions from us.
Tax gain or loss on disposition of our common units could be more or less
than expected.
Tax-exempt entities and foreign persons face unique tax issues from owning
common units that may result in adverse tax consequences to them.
We will treat each purchaser of 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.
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.
You will likely 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.
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Formation Transactions and Partnership Structure
General
We are a Delaware limited partnership formed in May 2006 to own and operate
the assets that have historically been owned and operated by Eagle Rock
Holdings, L.P. and its subsidiaries. In 2002, certain members of our management
team formed Eagle Rock Energy, Inc. to provide midstream services to natural gas
producers. In connection with the acquisition of the Dry Trail plant in 2003,
members of our management team and Natural Gas Partners formed Eagle Rock
Holdings, L.P., the successor to Eagle Rock Energy, Inc., to own, operate,
acquire and develop complementary midstream energy assets.
In March 2006, certain private investors, which we refer to as the March
2006 Private Investors, contributed $98.3 million to Eagle Rock Pipeline, L.P.,
which will become our operating partnership and which we refer to as Eagle Rock
Pipeline, in exchange for 5,455,050 common units in Eagle Rock Pipeline.
In June 2006, we purchased all of the partnership interests in Midstream Gas
Services, L.P., which we refer to as MGS, for approximately $4.7 million in cash
and 1,125,416 common units in Eagle Rock Pipeline from a group of private
investors, including Natural Gas Partners VII, L.P. We will issue up to 812,540
of our common units, which we refer to as the Deferred Common Units, to Natural
Gas Partners VII, L.P., the primary equity owner of MGS, as a contingent
earn-out payment if MGS achieves certain financial objectives for the year
ending December 31, 2007. Prior to the acquisition, Natural Gas Partners VII,
L.P. owned a 95% limited partnership interest in MGS and a 95% interest in its
general partner, which owned a 1% general partner interest in MGS. We refer to
the private investors who received common units in Eagle Rock Pipeline as
partial consideration for the MGS acquisition as the June 2006 Private
Investors. The March 2006 Private Investors and the June 2006 Private Investors
are collectively referred to in this prospectus as the "Private Investors." Each
of the Private Investors' common units in Eagle Rock Pipeline will be converted
into common units in us upon consummation of this offering on approximately a
1-for-0.732 common unit basis. Because of the contingent nature of the earn-out
provision, the information in this prospectus assumes that the Deferred Common
Units are not issued.
Prior to the consummation of this offering, we anticipate entering into an
amended and restated credit facility that we expect will provide for an
aggregate of $500 million in borrowing capacity. At the closing of this
offering:
we will issue 12,500,000 common units to the public in this offering,
representing a 29.2% limited partner interest in us;
Eagle Rock Holdings, L.P. will own 3,634,224 common units and 20,951,772
subordinated units, totaling an aggregate 57.5% limited partner interest in
us and all of the equity interests in our general partner, Eagle Rock Energy
GP, L.P.;
the Private Investors will own 4,817,548 common units, representing an 11.3%
limited partner interest in us;
Eagle Rock Energy GP, L.P. will own 855,174 general partner units
representing an initial 2% general partner interest in us as well as the
incentive distribution rights;
we will own all of the ownership interests in Eagle Rock Pipeline, our
operating partnership, and its operating subsidiaries, which will own and
operate our assets;
we will enter into a registration rights agreement with Eagle Rock Holdings,
L.P.;
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we will enter into an Omnibus Agreement with Eagle Rock Energy G&P, LLC,
Eagle Rock Holdings, L.P. and our general partner that will address our
reimbursement to Eagle Rock Energy G&P, LLC and Eagle Rock Holdings, L.P.
for the payment of certain operating expenses and insurance coverage
expenses incurred on our behalf and certain indemnification obligations of
Eagle Rock Holdings, L.P. to us; and
Eagle Rock Holdings, L.P. will pay $6.0 million to Natural Gas Partners as
consideration for the termination of an advisory services, reimbursement and
indemnification agreement between Natural Gas Partners and Eagle Rock
Holdings, L.P.
The diagram on the following page depicts our organization and ownership
after giving effect to the offering and the related formation transactions.
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Ownership of Eagle Rock Energy Partners, L.P.
Public Common Units 29.2 %
Private Investors Common Units 11.3 %
Eagle Rock Holdings, L.P. Common and Subordinated Units 57.5 %
General Partner Interest 2.0 %
Total 100.0 %
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Management of Eagle Rock Energy Partners
Eagle Rock Energy GP, L.P., our general partner, has sole responsibility for
conducting our business and for managing our operations. Because our general
partner is a limited partnership, its general partner, Eagle Rock Energy G&P,
LLC, will conduct our business and operations, and the board of directors and
executive officers of Eagle Rock Energy G&P, LLC will make decisions on our
behalf. The senior executives who currently manage our business will continue to
do so following the completion of this offering. Neither our general partner,
nor any of its affiliates, will receive any management fee or other compensation
in connection with the management of our business, but they will be entitled to
reimbursement for all direct and indirect expenses they incur on our behalf.
Neither our general partner nor the board of directors of Eagle Rock Energy
G&P, LLC will be elected by our unitholders. Unlike shareholders in a publicly
traded corporation, our unitholders will not be entitled to elect the directors
of Eagle Rock Energy G&P, LLC. Because of its ownership of a majority interest
in Eagle Rock Holdings, L.P., Natural Gas Partners will have the right to elect
all of the members of the board of directors of Eagle Rock Energy G&P, LLC at
the closing of this offering. References herein to the officers or directors of
our general partner refer to the officers and directors of Eagle Rock Energy
G&P, LLC. In addition, certain references to our general partner refer to Eagle
Rock Energy GP, L.P. and Eagle Rock Energy G&P, LLC, collectively.
As is common with publicly traded limited partnerships and in order to
maximize operational flexibility, we will conduct our operations through
subsidiaries. We will initially have one direct subsidiary, Eagle Rock Pipeline,
L.P., a limited partnership that will conduct business through itself and its
subsidiaries.
Natural Gas Partners, which will control our general partner, is
headquartered in Irving, Texas. Founded in 1988, Natural Gas Partners is among
the oldest of the private equity firms that specialize in the energy industry.
Through its family of eight institutionally-backed investment funds, Natural Gas
Partners has sponsored over 100 portfolio companies and has controlled invested
capital and additional commitments totaling $2.9 billion.
Principal Executive Offices and Internet Address
Our principal executive offices are located at 14950 Heathrow Forest
Parkway, Suite 111, Houston, Texas 77032 and our telephone number is
(832) 327-8000. Our website is located at www.eaglerockenergy.com. We expect to
make our periodic reports and other information filed with or furnished to the
Securities and Exchange Commission, which we refer to as 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.
Our General Partner's Rights to Receive Distributions
2% General Partner Interest. Our general partner initially will be entitled
to receive 2% of our quarterly cash distributions. The general partner's initial
2% interest in these distributions will be reduced if we issue additional units
in the future and our general partner does not elect to contribute a
proportionate amount of capital to us to maintain its initial 2% general partner
interest. All references in this prospectus to the general partner's 2% general
partner interest assumes that the general partner will elect to make these
additional capital contributions in order to maintain its right to receive 2% of
these cash distributions.
Incentive Distributions. In addition to its 2% general partner interest, our
general partner holds the incentive distribution rights, which are non-voting
limited partner interests that represent the right to receive an increasing
percentage of quarterly distributions of available cash as higher target
distribution levels of cash have been distributed to the unitholders. The
following table shows how our available cash
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from operating surplus is allocated among our unitholders and the general
partner as higher target distribution levels are met:
Marginal Percentage
Interest in
Distributions*
Total Quarterly Distribution
Per Unit General
Partner
Target Distribution Level Unitholders Interest
Minimum Quarterly Distribution $0.3625 98% 2%
First Target Distribution up to $0.4169 98% 2%
Second Target Distribution above $0.4169 up to $0.4531 85% 15%
Third Target Distribution above $0.4531 up to $0.5438 75% 25%
Thereafter above $0.5438 50% 50%
* Assuming there are no arrearages on common units and that our general partner
maintains its 2% general partner interest and continues to own the incentive
distribution rights.
For a more detailed description of the incentive distribution rights, please
read "Provisions of Our Partnership Agreement Relating to Cash Distributions -
General Partner Interest and Incentive Distribution Rights."
Summary of Conflicts of Interest and Fiduciary Duties
General. Eagle Rock Energy GP, L.P., 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." The officers and
directors of Eagle Rock Energy G&P, LLC also have fiduciary duties to manage
Eagle Rock Energy G&P, LLC and our general partner in a manner beneficial to
their owners. 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.
For example, our general partner will be entitled to make determinations that
affect our ability to make cash distributions, including determinations related
to:
the manner in which our business is operated;
the level and amount of our borrowings;
the amount, nature and timing of our capital expenditures;
asset purchases and sales and other acquisitions and dispositions; and
the amount of cash reserves necessary or appropriate to satisfy general,
administrative and other expenses and debt service requirements, and
otherwise provide for the proper conduct of our business.
These determinations will have an effect on the amount of cash distributions
we make to the holders of common units, which in turn has an effect on whether
our general partner receives incentive cash distributions as discussed above.
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Partnership Agreement Modifications to Fiduciary Duties. Our partnership
agreement limits the liability and reduces the fiduciary duties of our general
partner to holders of our common units and subordinated units. Our partnership
agreement also restricts the remedies available to holders of our common units
and subordinated units for actions that might otherwise constitute a breach of
our general partner's fiduciary duties owed to holders of our common units and
subordinated units. By purchasing a common unit, the purchaser agrees to be
bound by the terms of our partnership agreement and, pursuant to the terms of
our partnership agreement, each holder of common units consents to various
actions contemplated in the partnership agreement and conflicts of interest that
might otherwise be considered a breach of fiduciary or other duties under
applicable state law.
Our general partner's affiliates may engage in competition with us. Our
partnership agreement provides that our general partner will be restricted from
engaging in any business activities other than those incidental to its ownership
of interests in us. Except as provided in our partnership agreement, Eagle Rock
Holdings, L.P. and the NGP Investors are not prohibited from engaging in, and
are not required to offer us the opportunity to engage in, other businesses or
activities, including those that might be in direct competition with us.
For a more detailed description of the conflicts of interest and fiduciary
duties of our general partner, please read "Conflicts of Interest and Fiduciary
Duties."
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