ENTERPRISE PRODUCTS PARTNERS L.P.
Enterprise Products GP, LLC, its general partner
2727 North Loop West
Houston, TX 77008
February 10, 2003
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0690
Re: File No. S7-02-03; Proposed Exchange Act Rule 10A-3, Standards Relating to Listed Company Audit Committees Dated January 8, 2002 (Release No. 33-8173) ("Proposed Rule")
Dear Mr. Secretary:
Enterprise Products Partners L.P. ("Enterprise") submits these comments on the Proposed Rule. Enterprise is the second-largest publicly traded midstream energy partnership (NYSE: EPD), with an enterprise value of approximately $6 billion. Enterprise is a leading North American provider of midstream energy services to producers and consumers of natural gas and natural gas liquids ("NGLs"). Our services include natural gas transportation, processing and storage and NGL fractionation (or separation), transportation, storage and import/export terminalling.
Enterprise was formed as a so-called master limited partnership ("MLP") in April 1998 to acquire, own and operate all of the NGL processing and distribution assets of Enterprise Products Company ("EPCO"). Enterprise conducts all of its business through its 99% owned subsidiary, Enterprise Products Operating L.P. and its subsidiaries and joint ventures. Enterprise's general partner, Enterprise Products GP, LLC, ("EPGP") owns a 1.0% interest in Enterprise and a 1.0101% interest in the operating partnership. All of the business and operations of Enterprise are managed by EPGP which is governed by a board of directors that functions under the Commission's rules as the board of the public partnership issuer of EPD common units and other listed securities.
EPCO and its affiliates own approximately 56% of the outstanding EPD common units and have the right to designate seven of the ten members of the EPGP board of directors and the three members of the EPGP Audit Committee. Three members of the board of directors are designated by Shell US Gas & Power, which holds a 30% membership interest in EPGP and approximately 20% of the outstanding EPD common units. Employees of EPCO conduct all of the business of Enterprise under a management agreement, and EPCO has other business dealings with Enterprise.
Under the Proposed Rule, each member of an issuer's audit committee will be required to be independent. Enterprise endorses the principle of the Proposed Rule; independence is a critical criterion for effective and productive audit committee membership. EPGP's audit committee members have been entirely independent since the committee was constituted, and they have served with distinction and dedication, much to the benefit of our partnership and its unitholders. Two have served on the committee since 1998, and one has served since 2000. However, under the proposed independence requirements, a person designated by the controlling shareholder or controlling group of shareholders ("Controlling Shareholder") of a publicly traded entity will be deemed not to be independent and, therefore, ineligible to serve on the audit committee of that entity. We do not believe the mere act of designation should prevent a designee of a Controlling Shareholder from being eligible to serve on the audit committee of an issuer when such person is in fact independent from the Controlling Shareholder.
Because we have a unique type of Controlling Shareholder (our sponsor, EPCO), Enterprise is particularly concerned about the impact the proposed independence requirements will have on our sound and orderly governance. We believe EPCO and its affiliates would likely be considered Enterprise's Controlling Shareholder under the Proposed Rule, so our current audit committee members would be disqualified from further service. Moreover, we would be put in the Catch-22 situation of being unable to designate their successors, even if otherwise independent from EPCO, because the only way we could act to do so would be through EPGP which is controlled by EPCO. Such a result was surely not intended when the Commission issued the Proposed Rule.
Proposed independence requirements
Under the Proposed Rule each member of an issuer's audit committee will be required to be independent. In order to be independent, a member may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee:
(a) accept directly or indirectly any consulting, advisory, or other compensatory fees from the issuer; or
(b) be an affiliated person of the issuer or any subsidiary thereof.
The Section (e)(1)(i) definition of "affiliate" largely turns on control of the issuer and includes beneficial owners owning, directly or indirectly, more than 10% of any class of equity securities. MLP sponsors, such as EPCO, and other Controlling Shareholders clearly fall within the definition of "affiliate". The definition of "affiliate", however, goes on in Section (e)(1)(ii) to deem "a director, executive officer, partner, member, principal or designee of an affiliate" also to be an affiliate of the issuer. Thus, any person designated by a Controlling Shareholder will be deemed to be an affiliate of the issuer. As such, that designee cannot be considered independent under the proposed independence requirements and will be ineligible to serve on the audit committee of that issuer.
The inclusion of "designee" in the definition of "affiliate" is very troubling to Enterprise, given the unique structure of our MLP and most other MLPs, where the sponsor plays a well-disclosed, central and ongoing role in the management and operation of the MLP it established. Enterprise's situation vis-à-vis EPCO is not unusual among public partnerships; in fact, it is typical, certainly among our peers in the energy and pipeline segments, such as Kinder Morgan Energy Partners, El Paso Energy Partners, Enbridge, TEPPCO, Plains Resources and others.
We are concerned that the word "designee" would likely be construed by the Commission to include anyone nominated by, and elected, by the vote of the Controlling Shareholder, without regard to whether the person elected is, in fact, subject to the control and direction of the Controlling Shareholder. We believe control and direction of the designee by the Controlling Shareholder, not mere designation, should be the relevant factor for denying a person eligibility to serve on the audit committee of an issuer. This concept, we believe, has been incorporated clearly in the proposed "affiliate" definition and would pick up - and exclude -- any person acting under the control or direction of the Controlling Shareholder.1 Unfortunately, including the word "designee" in the "affiliate" definition would only operate to foreclose service by otherwise fully independent potential audit committee members who would be entitled to serve but for their designation by the Controlling Shareholder.
The exemption proposed by the Commission for audit committee members of a listed parent entity does not solve the problem, because many Controlling Shareholders, such as EPCO, are not public entities. Furthermore, if the Controlling Shareholder has any business dealings with the controlled entity, the listing requirements of the applicable exchange or the NASDAQ may very well prohibit the audit committee member of the Controlling Shareholder serving on the board of the controlled entity. To forestall the unwarranted exclusion of qualified individuals from audit committee service, we believe the concept introduced in the Proposed Rule's discussion of the exemption for listed parent entities "if an audit committee member .... is otherwise independent"2 should be extended to the "affiliate" definition and apply to persons designated by, but otherwise independent of, a Controlling Shareholder, whether that shareholder is listed or not. This result can be achieved very simply and without doing violence to the goal of audit committee independence or weakening or defeating any other provisions of the Proposed Rule.
Suggested amendment to proposed independence requirements
In our view, the act of designation by a Controlling Shareholder should not alone render a person ineligible to serve on the audit committee of an issuer. To address this problem in the Proposed Rule, we believe the word "designee" should be deleted from the "affiliate" definition. This change will not dilute the proposed independence requirement, because those persons who are controlled or directed by a Controlling Shareholder will still be denied eligibility by virtue of the "control" aspect of the "affiliate" definition. Moreover, it will further the sound policy of allowing those persons who are not so controlled or directed, and are otherwise independent of the issuer, to serve on audit committees.
We believe a rule that presumes a lack of independence in persons merely designated by a Controlling Shareholder is too broad and will be detrimental to MLPs such as Entnerprise and their investors, because it will prevent otherwise qualified, experienced, effective, and appropriate persons from serving on audit committees. Such an outcome would be work against, not promote, the sound governance of MLPs and other entities and deprive the investing public of the benefit of service by many conscientious and qualified persons in audit committee positions. Deleting "designee" from the "affiliate" definition will allow those persons appropriately to serve without weakening in any way the beneficial effects of the Proposed Rule.
Enterprise appreciates having the opportunity to submit theses comments. If they raise any questions or you wish to have additional information, please contact me or Richard H. Bachmann, Chief Legal Officer, at 713/880-6500.
/S/ O. S. Andras
President and Chief Executive Officer
|1 || "The term affiliate, or a person affiliated with, a specified person, means a person that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such issuer." (Definition of "affiliate" from the Proposed Rule)
|2 || Ninth paragraph of "A. Audit Committee Independence" from the discussion of the Proposed Rule.