Filed pursuant to Rule 424(b)(2)
Registration No. 333-100494
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 25, 2002)
3,425,000 UNITS
[TEPPCO PARTNERS, L.P. LOGO]
TEPPCO PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
$30.35 PER UNIT
------------------
We are selling 3,425,000 units representing limited partner interests with
this prospectus supplement and the accompanying base prospectus. We have granted
the underwriters an option to purchase up to 513,750 additional units to cover
over-allotments. The underwriters can exercise this right at any time within
thirty days after the offering.
Our units are listed for trading on the New York Stock Exchange under the
symbol "TPP." The last reported sale price of the units on the New York Stock
Exchange on April 2, 2003 was $30.35 per unit.
We have agreed with Duke Energy Transport and Trading Company, LLC, an
affiliate of Duke Energy Corporation, to use the net proceeds from this offering
to repurchase 3,425,000 of our Class B units which is equal to the number of
units we are selling in this offering. We will use any net proceeds from the
sale of additional units upon any exercise of the underwriters' over-allotment
option to repurchase an equal number of additional Class B units from Duke
Energy Transport and Trading Company, LLC. The total number of Class B units
outstanding is 3,916,547.
------------------
INVESTING IN OUR UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-5 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 1 OF THE ACCOMPANYING BASE
PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying base prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
------------------
PER UNIT TOTAL
-------- ------------
Public Offering Price....................................... $30.35 $103,948,750
Underwriting Discount....................................... $ 1.29 $ 4,418,250
Proceeds to TEPPCO Partners, L.P. (before expenses)......... $29.06 $ 99,530,500
The underwriters are offering the units subject to various conditions. The
underwriters expect to deliver the units to purchasers on or about April 8,
2003.
------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
UBS WARBURG
GOLDMAN, SACHS & CO.
April 2, 2003
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING BASE PROSPECTUS AND THE DOCUMENTS WE HAVE
INCORPORATED BY REFERENCE. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THE UNITS IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED BY THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING BASE
PROSPECTUS, AS WELL AS THE INFORMATION WE HAVE PREVIOUSLY FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION THAT IS INCORPORATED BY REFERENCE HEREIN, IS
ACCURATE AS OF ANY DATE OTHER THAN ITS DATE. FOR PURPOSES OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING BASE PROSPECTUS, UNLESS THE CONTEXT OTHERWISE
INDICATES, WHEN WE REFER TO "US," "WE," "OUR," "OURS," "TEPPCO PARTNERS" OR THE
"PARTNERSHIP," WE ARE DESCRIBING OURSELVES, TEPPCO PARTNERS, L.P., TOGETHER WITH
OUR SUBSIDIARIES.
------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-1
Risk Factors................................................ S-5
Where You Can Find More Information......................... S-6
Use of Proceeds............................................. S-7
Capitalization.............................................. S-8
Price Range of Units and Cash Distributions................. S-9
Historical and Pro Forma Summary Selected Financial and
Operating Information..................................... S-10
Underwriting................................................ S-13
Legal Matters............................................... S-15
Experts..................................................... S-15
BASE PROSPECTUS
About This Prospectus....................................... ii
About TEPPCO Partners....................................... ii
The Subsidiary Guarantors................................... ii
Risk Factors................................................ 1
Where You Can Find More Information......................... 10
Forward-looking Statements and Associated Risks............. 11
TEPPCO Partners............................................. 12
Use of Proceeds............................................. 13
Ratio of Earnings to Fixed Charges.......................... 13
Description of Debt Securities.............................. 13
Book Entry, Delivery and Form............................... 22
Cash Distributions.......................................... 23
Tax Considerations.......................................... 29
Investment in Limited Partnership Units by Employee Benefit
Plans..................................................... 45
Plan of Distribution........................................ 47
Legal....................................................... 48
Experts..................................................... 48
ii
PROSPECTUS SUPPLEMENT SUMMARY
This document is in two parts. The first part is this prospectus
supplement, which describes our business and the specific terms of this
offering. The second part is the accompanying base prospectus, which gives more
general information, some of which may not apply to this offering. If
information varies between this prospectus supplement and the accompanying base
prospectus, you should rely on the information in this prospectus supplement.
You should carefully read the entire prospectus supplement, the accompanying
base prospectus and the documents incorporated herein by reference, to
understand fully the terms of our units, as well as the tax and other
considerations that are important to you in making your investment decision.
TEPPCO PARTNERS, L.P.
WHO WE ARE
We are one of the largest publicly traded pipeline limited partnerships.
Our general partner is wholly-owned by Duke Energy Field Services, or DEFS,
which is owned by Duke Energy Corporation and ConocoPhillips. We engage in three
principal businesses:
- Transporting Refined Petroleum Products, Liquefied Petroleum Gases and
Petrochemicals (Our Downstream Segment). We own and operate an
approximately 4,500-mile refined petroleum products pipeline system,
which includes 29 storage facilities, extending from southeast Texas
through the central and midwest states to the northeast United States. We
deliver to customers at 53 locations through facilities owned by us or
third parties. Our system includes a products pipeline system to the
Midwest and is the only pipeline system that transports liquefied
petroleum gas to the northeast United States from the Texas Gulf Coast.
Our Mont Belvieu, Texas, storage complex is located at one of the largest
liquefied petroleum gas storage complexes in the United States. We also
own two marine receiving terminals, one near Beaumont, Texas, and the
other at Providence, Rhode Island. Our Downstream Segment also includes
three petrochemical pipelines between Mont Belvieu and Port Arthur,
Texas. We own a one-half interest in Centennial Pipeline LLC, or
Centennial. Centennial owns and operates an interstate refined petroleum
products pipeline extending from the upper Texas Gulf Coast to Illinois.
- Gathering, Transporting and Marketing Crude Oil (Our Upstream
Segment). We own and operate approximately 2,600 miles of crude oil
trunk line and gathering pipelines, primarily in Texas and Oklahoma. We
also own an interest in Seaway Crude Pipeline Company, or Seaway, which
owns an approximately 500-mile, large diameter crude oil pipeline that
transports primarily imported crude oil from the Texas Gulf Coast to the
mid-continent and midwest refining sectors. In addition, we own crude oil
storage tanks at Cushing, Oklahoma, and Midland, Texas, and an interest
in a crude oil pipeline operating in New Mexico, Oklahoma and Texas.
- Gathering Natural Gas, Transporting Natural Gas Liquids and Fractionating
Natural Gas Liquids (Our Midstream Segment). With our acquisition of
Jonah Gas Gathering Company in September 2001, we gather natural gas in
the Green River Basin in southwestern Wyoming, one of the most prolific
and active natural gas producing basins in the United States. Our Jonah
natural gas gathering system consists of approximately 400 miles of
pipelines. Natural gas gathered on the Jonah system is delivered to
several interstate pipeline systems that provide access to a number of
West Coast, Rocky Mountain and midwest markets. On March 1, 2002, we
expanded our natural gas liquids, or NGLs, operations with the
acquisition of the Chaparral and Quanah pipelines, which consist of a
combined 970 miles of gathering and trunk pipelines extending from
southeastern New Mexico and West Texas to Mont Belvieu, Texas. On June
30, 2002, we acquired the Val Verde coal bed methane gathering system
from a subsidiary of Burlington Resources Inc. The Val Verde gathering
system consists of 360 miles of pipeline, 14 compressor stations and a
large amine treating facility for the removal of carbon dioxide. The Val
Verde gathering system gathers coal bed methane from the Fruitland Coal
Formation of the San Juan Basin in Colorado and New Mexico
S-1
and has a pipeline capacity of approximately one billion cubic feet of
gas per day. The system is one of the largest coal bed methane gathering
and treating facilities in the United States, gathering coal bed methane
from more than 540 separate wells throughout New Mexico. In addition to
these acquisitions, we own and operate approximately 650 miles of NGLs
pipelines located along the Texas Gulf Coast and own two fractionators in
Colorado. Certain of the assets of our Midstream Segment are operated and
commercially managed by DEFS under agreements with us.
OUR STRATEGY
Our goals are to increase cash flow and distributions to our unitholders.
Our business strategy to accomplish these goals is to:
- Target acquisitions of fee-based businesses that are related to our
existing businesses and that generate stable cash flows without commodity
price exposure;
- Increase throughput on our pipeline systems that have additional
capacity;
- Expand our existing pipeline and gathering systems to facilitate customer
generated growth;
- Continue to utilize our relationship with DEFS to gain access to
additional midstream acquisition opportunities and to provide management
of the assets in that segment;
- Maintain and enhance the safety and integrity of our pipeline and
gathering systems; and
- Continue our focus on customer service so as to remain the incremental
provider of choice in the markets we serve.
OUR GENERAL PARTNER
Our general partner is Texas Eastern Products Pipeline Company, LLC, an
indirect wholly-owned subsidiary of DEFS. DEFS is among the nation's leaders in
the gathering and processing of natural gas and the production, transportation
and marketing of NGLs. DEFS was formed in March 2000 when Duke Energy and
ConocoPhillips combined their natural gas gathering and processing businesses.
Duke Energy owns approximately 70% of DEFS and ConocoPhillips owns approximately
30%.
Duke Energy is an integrated provider of energy and energy services,
offering physical delivery and management of both electricity and natural gas
throughout the U.S. and abroad. ConocoPhillips is a diversified energy company
engaged in exploration and production of oil and gas; gas gathering, processing
and marketing; refining, marketing and transportation; and chemicals.
Please refer to page 12 of the accompanying base prospectus for our
organizational chart.
RECENT DEVELOPMENTS
Senior Notes Offering. On January 30, 2003, we completed the sale of $200
million in aggregate principal amount of 6.125% Senior Notes due 2013. The
$197.0 million in net proceeds from this issuance, after deducting offering
expenses, were used to reduce amounts outstanding under our three-year bank
revolving credit facility and for general corporate purposes.
Cash Distribution Increase. On March 27, 2003, we announced an increase in
our annual distribution of 10 cents per unit, effective with the distribution
payable on May 9, 2003 to unitholders of record on April 30, 2003. This increase
raises our annual distribution rate to $2.50 per unit, or $0.625 per unit on a
quarterly basis.
S-2
THE OFFERING
Units offered...................... 3,425,000 units (3,938,750 units if the
underwriters' over-allotment option is
exercised in full)
UNITS CLASS B UNITS TOTAL UNITS
---------- ------------- -----------
Units outstanding before this offering and the
repurchase of our Class B units(1)............... 53,812,697 3,916,547 57,729,244
Units to be outstanding after this offering and the
repurchase of our Class B units (assuming no
exercise of the underwriters' over-allotment
option).......................................... 57,237,697 491,547 57,729,244
Units to be outstanding after this offering and the
repurchase of our Class B units (assuming the
underwriters' over-allotment option is exercised
in full)......................................... 57,751,447 -- 57,751,447
New York Stock Exchange symbol..... TPP
Use of proceeds.................... We will use the net proceeds from this
offering to repurchase from Duke Energy
Transport and Trading Company, LLC, or
DETTCO, 3,425,000 of our Class B units
which is equal to the number of units we
are selling in this offering. We will use
any net proceeds from the sale of
additional units upon any exercise of the
underwriters' over-allotment option to
repurchase an equal number of additional
Class B units from DETTCO. If the
underwriters exercise their
over-allotment option with respect to
more units than the number of Class B
units held by DETTCO, we will use any
excess net proceeds for general
partnership purposes. Please read "Use of
Proceeds" on page S-7.
Timing of next quarterly
distribution....................... Cash distributions for the first quarter
2003 will be paid on May 9, 2003. On
March 27, 2003, as a result of our
continued expectation of improvement in
results from our business segments, we
announced an increase in our quarterly
distribution to $0.625 per unit, or $2.50
per unit on an annualized basis,
commencing with the distribution payable
in May 2003.
Risk Factors....................... An investment in our units involves
risks. See "Risk Factors" beginning on
page S-5 of this prospectus supplement
and on page 1 of the accompanying base
prospectus.
Except as the context otherwise indicates, the information in this
prospectus supplement assumes no exercise of the underwriters' over-allotment
option.
- ---------------
(1) The Class B Units are economically identical to our units but are not
publicly traded. The Class B units may be redeemed by us for cash if certain
conditions are met. Additionally, the Class B units may be converted, at the
option of the holder, into an equal number of units if specified conditions
are met. An affiliate of Duke Energy also owns 2,500,000 of our units.
S-3
TAX CONSIDERATIONS
The tax consequences to you of an investment in units will depend in part
on your own tax circumstances. For a discussion of the principal federal income
tax considerations associated with our operations and the purchase, ownership
and disposition of units, please read "Tax Considerations" beginning on page 29
of the accompanying base prospectus. You are urged to consult your own tax
advisor about the federal, state, foreign and local tax consequences peculiar to
your circumstances.
We estimate that if you purchase a unit in this offering and hold the unit
through the record date for the distribution with respect to the final calendar
quarter of 2005, you will be allocated an amount of U.S. federal taxable income
for 2003, 2004 and 2005 that averages less than 10% of the amount of cash
distributed to you with respect to each such period (assuming quarterly
distributions on the units with respect to each such period of $0.625 per unit).
However, the taxable income allocable to a unitholder after 2005 may constitute
an increasing percentage of distributed cash.
These estimates are based on numerous assumptions regarding our business
and operations, including assumptions as to tariffs and gathering rates,
transportation and gathering volumes, capital expenditures, growth, financings,
cash flows and anticipated cash distributions. In particular, these estimates
take into account our past acquisitions but assume that we will not make any
other acquisitions in the future. These estimates and assumptions are subject
to, among other things, numerous business, economic, regulatory and competitive
uncertainties beyond our control and to tax reporting positions (including
estimates of the relative fair market values of our assets and the validity of
curative allocations) that we have adopted or intend to adopt and with which the
Internal Revenue Service, or the IRS, might disagree. Accordingly, the estimates
may not turn out to be correct. The actual percentage of distributions that will
effectively constitute taxable income could be higher or lower, and any
differences could be material.
Ownership of units by tax-exempt entities, regulated investment companies
and foreign investors raises issues unique to such persons. Please read "Tax
Considerations -- Tax-Exempt Entities, Regulated Investment Companies and
Foreign Investors" in the accompanying base prospectus.
Section 7704 of the Internal Revenue Code of 1986, as amended, 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 whose gross
income for every taxable year consists of at least 90% "qualifying income."
Qualifying income includes income and gains derived from the exploration,
development, mining or production, processing, refining, transportation and
marketing of any mineral or natural resource. Other types of qualifying income
include interest other than from a financial business, dividends, gains from the
sale of real property and gains from the sale or other disposition of assets
held for the production of income that otherwise constitutes qualifying income.
After review of our year end 2002 results, we believe that at least 94% of our
gross income for the year 2002 constitutes qualifying income. We further
estimate that this percentage will increase for the year 2003 due to the impact
of the addition in March 2002 of the NGL transportation business of the
Chaparral and Quanah pipelines and the acquisition in June 2002 of the Val Verde
gathering system, all of which generate qualifying income.
S-4
RISK FACTORS
You should read carefully the discussion of material risks to our business
under the caption "Risk Factors" beginning on page 1 of the accompanying base
prospectus. These risks include:
- Potential future acquisitions and expansions, if any, may affect our
business by substantially increasing the level of our indebtedness and
contingent liabilities and increasing our risks of being unable to
effectively integrate these new operations.
- Expanding our natural gas gathering business by constructing new
pipelines and compression facilities subjects us to construction risks
and risks that natural gas supplies will not be available upon completion
of the new pipelines.
- Our interstate tariff rates are subject to review and possible adjustment
by federal regulators.
- Our partnership status may be a disadvantage to us in calculating cost of
service for rate-making purposes.
- Competition could adversely affect our operating results.
- Our business requires extensive credit risk management which may not be
adequate to protect against customer nonpayment.
- Our crude oil marketing business involves risks relating to product
prices.
- Reduced demand could affect shipments on the pipelines.
- Our gathering system profits and cash flow depend on the volumes of
natural gas produced from the fields served by our gathering systems and
are subject to factors beyond our control.
- Our operations are subject to governmental laws and regulations relating
to the protection of the environment which may expose us to significant
costs and liabilities.
- Terrorist attacks aimed at our facilities could adversely affect our
business.
- Our business involves many hazards and operational risks, some of which
may not be covered by insurance.
- We could be adversely affected if third parties are successful in
asserting rights to acquire the Jonah natural gas gathering system from
us.
- We are a holding company and depend entirely on our operating
subsidiaries' distributions to service our debt obligations.
- We may issue additional limited partnership interests, diluting existing
interests of unitholders.
- Our general partner and its affiliates may have conflicts with our
partnership.
- Unitholders have limited voting rights and control of management.
- Our partnership agreement limits the liability of our general partner.
- The IRS could treat us as a corporation for tax purposes, which would
substantially reduce the cash available for distribution to you.
- A successful IRS contest of the federal income tax positions we take may
adversely impact the market for limited partnership units.
- You may be required to pay taxes even if you do not receive any cash
distributions.
- Tax gain or loss on disposition of limited partnership units could be
different than expected.
- If you are a tax-exempt entity, regulated investment company or mutual
fund or you are not an individual residing in the United States, you may
have adverse tax consequences from owning limited partnership units.
S-5
- We have registered as a tax shelter. This may increase the risk of an IRS
audit of us or a unitholder.
- We will treat each purchaser of units after the initial sale of any units
pursuant to this prospectus as having the same tax benefits without
regard to the units purchased. The IRS may challenge this treatment,
which could adversely affect the value of the units.
- You will likely be subject to state and local taxes in states where you
do not live as a result of an investment in the units.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports and other information with the
SEC. You may read and copy any document we file at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-732-0330 for further information on their public reference room. Our SEC
filings are available at the SEC's web site at www.sec.gov and at our web site
at www.teppco.com. You can also obtain information about us at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" the information we file
with the SEC. This means that we can disclose important information to you
without actually including the specific information in this prospectus by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus. Information that we file later with the
SEC will automatically update and may replace information in this prospectus and
information previously filed with the SEC. The documents listed below and any
future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 (excluding any information furnished
pursuant to Item 9 or Item 12 on any Current Report on Form 8-K) are
incorporated by reference in this prospectus until the termination of this
offering:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
2002 filed March 21, 2003;
- our Current Reports on Form 8-K filed on January 21, 2003 and January 30,
2003; and
- the description of our limited partnership units contained in the
Registration Statement on Form 8-A (Registration No. 1-10403), initially
filed December 6, 1989, and any subsequent amendment thereto filed for
the purpose of updating such description.
You may request a copy of any document incorporated by reference in this
prospectus, at no cost, by writing or calling us at the following address:
Investor Relations Department
TEPPCO Partners, L.P.
2929 Allen Parkway
P.O. Box 2521
Houston, Texas 77252-2521
(713) 759-3636
S-6
USE OF PROCEEDS
We will use the net proceeds from the sale of the 3,425,000 units in this
offering of approximately $99.5 million (after deducting underwriting discounts
and commissions) to repurchase 3,425,000 of our Class B units from DETTCO. We
will use the net proceeds from any exercise of the underwriters' over-allotment
option to repurchase additional Class B Units from DETTCO. Upon any exercise of
the underwriters' over-allotment option, we will repurchase from DETTCO a number
of Class B units equal to the number of units covered by the exercise of the
underwriters' over-allotment option. If the underwriters exercise their
over-allotment option with respect to more units than the number of Class B
units held by DETTCO, we will use any excess net proceeds for general
partnership purposes. We will use the proceeds from our general partner's
capital contribution related to this offering for general partnership purposes.
Duke Energy has agreed to reimburse us for the expenses of this offering on a
pro rata basis based upon the percentage of net proceeds DETTCO receives from
this offering.
S-7
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 2002:
- on a historical basis;
- on a pro forma basis to reflect:
- the borrowing of $20.0 million under our three-year bank revolving
credit facility to fund our additional ownership interest in Centennial;
and
- the sale in January 2003 of $200.0 million in aggregate principal of our
6.125% Senior Notes due 2013 and the application of the $197.0 million
in net proceeds to repay $182.0 million outstanding under our three-year
bank revolving credit facility and to retain $15.0 million as cash for
general corporate purposes,
as if these transactions occurred on December 31, 2002; and
- on a pro forma as adjusted basis to reflect the adjustments detailed
above and this offering and the application of the net proceeds herefrom
and from our general partner's related capital contribution as described
under "Use of Proceeds" above, as if these transactions occurred on
December 31, 2002.
This table should be read in conjunction with our consolidated financial
statements and the notes thereto that are incorporated by reference in this
prospectus supplement and the accompanying prospectus.
AS OF DECEMBER 31, 2002
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
Current Assets:
Cash and cash equivalents...................... $ 30,968 $ 45,968 $ 47,999
========== ========== ==========
Long-term debt:
6.450% Senior Notes due 2008 of TE
Products(1)................................. $ 179,845 $ 179,845 $ 179,845
7.510% Senior Notes due 2028 of TE Products.... 210,000 210,000 210,000
7.625% Senior Notes due 2012 of TEPPCO
Partners(1)................................. 497,995 497,995 497,995
6.125% Senior Notes due 2013 of TEPPCO
Partners.................................... -- 198,570 198,570
Three-year bank revolving credit facility(2)... 432,000 270,000 270,000
Fair value adjustments and deferred gains
related to interest rate swaps(3)........... 57,852 57,852 57,852
---------- ---------- ----------
Total long-term debt........................ 1,377,692 1,414,262 1,414,262
Redeemable Class B units held by related
party(4)....................................... 103,363 103,363 12,972
Partners' capital(5)............................. 891,842 891,842 984,264
---------- ---------- ----------
Total capitalization........................ $2,372,897 $2,409,467 $2,411,498
========== ========== ==========
- ---------------
(1) At December 31, 2002, the 6.450% Senior Notes due 2008 of TE Products and
our 7.625% Senior Notes due 2012 include $2.2 million of unamortized debt
discounts.
(2) As of April 2, 2003, $265 million was outstanding under our three-year bank
revolving credit facility.
(3) Our TE Products subsidiary entered into an interest rate swap agreement to
hedge its exposure to changes in the fair value of the 7.51% Senior Notes
due 2028. At December 31, 2002, the 7.51% Senior Notes include an adjustment
to increase the fair value of the debt by $13.6 million related to this
interest rate swap agreement. We also entered into interest rate swap
agreements to hedge our exposure to changes in the fair value of our 7.625%
Senior Notes due 2012. At December 31, 2002, the 7.625% Senior Notes include
a deferred gain, net of amortization, from previous interest rate swap
terminations of $44.3 million. These hedges are accounted for under the
S-8
provisions of Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities.
(4) The pro forma as adjusted amount reflects the book value of the remaining
491,547 Class B units outstanding, assuming 3,425,000 Class B units are
retired upon consummation of this offering. This amount was determined based
on the book value of $26.39 per Class B unit at December 31, 2002.
(5) The pro forma as adjusted amount reflects an increase in partners' capital
in the amount of $90.4 million representing the book value of the 3,425,000
Class B units retired with the proceeds of this offering plus the general
partner contribution of $2.0 million related to this offering.
PRICE RANGE OF UNITS AND CASH DISTRIBUTIONS
As of April 2, 2003, there were 53,812,697 units outstanding, held by
approximately 51,300 holders, including units held in street name. The units are
traded on the New York Stock Exchange under the symbol "TPP." The following
table sets forth, for the periods indicated, the high and low sales prices for
the units, as reported on the NYSE Composite Transactions Tape, and quarterly
cash distributions paid to our unitholders. The last reported sale price of
units on The New York Stock Exchange on April 2, 2003, was $30.35 per unit.
PRICE RANGE
--------------- CASH
HIGH LOW DISTRIBUTIONS(1)
------ ------ ----------------
2003
Second quarter (through April 2, 2003)............... $31.20 $30.35 N/A(2)
First quarter........................................ 31.64 28.05 $0.625(3)
2002
Fourth quarter....................................... $29.98 $26.00 $0.600
Third quarter........................................ 32.19 23.90 0.600
Second quarter....................................... 33.20 29.35 0.600
First quarter........................................ 33.25 27.30 0.575
2001
Fourth quarter....................................... $36.50 $28.50 $0.575
Third quarter........................................ 32.90 26.00 0.575
Second quarter....................................... 30.10 25.76 0.525
First quarter........................................ 27.44 24.38 0.525
- ---------------
(1) Represents cash distributions attributable to the quarter and declared and
paid within 50 days after the quarter. We paid an identical cash
distribution to the holders of our outstanding Class B units for each period
shown in this table.
(2) We expect the cash distribution with respect to the second quarter of 2003
will be declared in July 2003 and paid in August 2003.
(3) The cash distribution with respect to the first quarter of 2003 was declared
on March 27, 2003 and is payable May 9, 2003 to unitholders of record on
April 30, 2003.
S-9
HISTORICAL AND PRO FORMA SUMMARY SELECTED FINANCIAL AND
OPERATING INFORMATION
Presented below is our consolidated historical data as of and for each of
the periods indicated. The annual consolidated financial data set forth below
for each of the three fiscal years in the period ended December 31, 2002, was
derived from our audited consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2002, which is
incorporated in this prospectus supplement by reference.
The pro forma statement of income data for the year ended December 31,
2002, was derived from the historical internal financial reports of the Val
Verde Gathering and Processing System and from our condensed combined statements
of income included in our Annual Report on Form 10-K for the year ended December
31, 2002. The pro forma income statement data presents our pro forma results as
if the acquisition of the Val Verde gathering system was consummated on January
1, 2002. The pro forma data is presented for illustrative purposes only and is
not necessarily indicative of the results of operations which would have
occurred had the purchase been consummated on January 1, 2002, nor is it
necessarily indicative of future results of operations.
The summary data set forth below includes "Adjusted EBITDA," which may be
viewed as a "non-GAAP financial measure" under the rules of the SEC. We define
Adjusted EBITDA as net income plus interest expense-net and depreciation and
amortization plus a pro rata portion, based on our equity ownership, of the
interest expense and depreciation and amortization of each of our joint
ventures. We have historically included the pro rata portion of these joint
venture items in our EBITDA-related disclosures. We have included Adjusted
EBITDA as a supplemental disclosure because our management believes Adjusted
EBITDA is used by our investors as a supplemental financial measurement in the
evaluation of our business. Our management believes Adjusted EBITDA provides
useful information regarding the performance of our assets without regard to
financing methods, capital structures or historical cost basis. As a result,
Adjusted EBITDA provides investors a helpful measure for comparing our operating
performance with the performance of other companies that have different
financing and capital structures. Adjusted EBITDA multiples are also used by our
investors in assisting in the valuation of our limited partners' equity.
Adjusted EBITDA should not be considered as an alternative to net income as an
indicator of our operating performance or as a measure of liquidity, including
as an alternative to cash flows from operating activities or other cash flow
data calculated in accordance with generally accepted accounting principles. Our
Adjusted EBITDA may not be comparable to EBITDA of other entities because other
entities may not calculate EBITDA in the same manner as we do.
Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which discontinues the amortization of goodwill and
indefinite life intangibles and requires an annual test of impairment based on a
comparison of fair value to carrying values. The following table includes our
annual results on a comparable basis, as if we had not recorded amortization
expense of goodwill or amortization expense of our excess investment for the
periods presented.
S-10
YEAR ENDED DECEMBER 31,
-------------------------------------------------
HISTORICAL
------------------------------------ PRO FORMA
2000 2001 2002 2002
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
INCOME STATEMENT DATA:
Operating revenues................... $3,087,941 $3,556,413 $3,242,163 $3,279,948
Purchases of crude oil and petroleum
products........................... 2,793,643 3,172,805 2,772,328 2,772,328
Depreciation and amortization........ 35,163 45,899 86,032 101,224
Operating expenses................... 150,149 185,918 213,556 224,679
---------- ---------- ---------- ----------
Total costs and expenses........... 2,978,955 3,404,622 3,071,916 3,098,231
---------- ---------- ---------- ----------
Operating income................... 108,986 151,791 170,247 181,717
Interest expense -- net.............. (44,423) (62,057) (66,192) (65,189)
Equity earnings...................... 12,214 17,398 11,980 11,980
Other income -- net.................. 599 1,999 1,827 1,827
---------- ---------- ---------- ----------
Net income (as reported)........... 77,376 109,131 117,862 130,335
Amortization of goodwill and excess
investment......................... 767 2,396 -- --
---------- ---------- ---------- ----------
Adjusted net income................ $ 78,143 $ 111,527 $ 117,862 $ 130,335
========== ========== ========== ==========
Basic and diluted net income per
Limited Partner and Class B Unit:
As reported........................ $ 1.89 $ 2.18 $ 1.79 $ 1.70
Amortization of goodwill and excess
investment......................... 0.02 0.05 -- --
---------- ---------- ---------- ----------
Adjusted net income per Unit....... $ 1.91 $ 2.23 $ 1.79 $ 1.70
========== ========== ========== ==========
Weighted Average Limited Partner and
Class B Units Outstanding.......... 33,594 39,258 49,202 57,265
DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Property, plant and equipment -- net............. $ 949,705 $1,180,461 $1,587,824
Total assets..................................... 1,622,810 2,065,348 2,770,642
Long-term debt (net of current maturities)....... 835,784 715,842 1,377,692
Redeemable Class B Units......................... 105,411 105,630 103,363
Partners' capital................................ 315,057 543,181 891,842
S-11
YEAR ENDED DECEMBER 31,
---------------------------------------------
HISTORICAL
--------------------------------- PRO FORMA
2000 2001 2002 2002
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT AS NOTED)
OTHER FINANCIAL DATA:
Adjusted EBITDA(1)............................. $ 160,121 $ 225,429 $ 281,789 $ 308,451
Net cash flow provided by (used in):
Operating activities......................... 108,045 169,148 234,917
Investing activities
Capital expenditures...................... (68,481) (107,614) (133,372)
Acquisitions and equity investments....... (427,188) (455,787) (594,723)
Other..................................... 1,475 5,536 3,380
--------- --------- ---------
Total investing activities.............. $(494,194) $(557,865) $(724,715)
Financing activities......................... $ 380,652 $ 387,100 $ 495,287
OPERATING DATA:
Downstream (MBbls):
Refined products............................. 128,151 122,947 138,164
LPGs......................................... 39,633 39,957 40,490
Mont Belvieu................................. 27,159 23,122 28,948
Upstream:
Crude oil transportation (MBbls)............. 46,225 78,714 82,813
Crude oil marketing (MBbls).................. 107,607 156,477 139,182
Crude oil terminaling (MBbls)................ 56,473 121,932 127,376
Lubricants and chemicals (thousands
gallons).................................. 7,974 8,769 9,648
Midstream:
NGL transportation (MBbls)................... 5,201 21,538 53,980
Gathering -- natural gas (MMcf).............. -- 45,496 340,697
Fractionation -- natural gas (MBbls)......... 4,078 4,078 4,072
- ---------------
(1) The following table reconciles Adjusted EBITDA with our net income:
YEAR ENDED DECEMBER 31,
------------------------------------------
HISTORICAL
------------------------------ PRO FORMA
2000 2001 2002 2002
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT AS NOTED)
Net income......................... $ 77,376 $109,131 $117,862 $130,335
Interest expense -- net............ 44,423 62,057 66,192 65,189
Depreciation and amortization
(D&A)............................ 35,163 45,899 86,032 101,224
TEPPCO's pro-rata percentage of
joint venture interest expense
and D&A.......................... 3,159 8,342 11,703 11,703
-------- -------- -------- --------
Adjusted EBITDA............... $160,121 $225,429 $281,789 $308,451
======== ======== ======== ========
S-12
UNDERWRITING
Salomon Smith Barney Inc. is acting as representative of the underwriters
named below. Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus supplement, each underwriter named
below has agreed to purchase, and we have agreed to sell to that underwriter,
the number of units set forth opposite the underwriter's name.
NUMBER OF
UNDERWRITER UNITS
- ----------- ---------
Salomon Smith Barney Inc. .................................. 993,250
A.G. Edwards & Sons, Inc. .................................. 633,625
Lehman Brothers Inc. ....................................... 633,625
UBS Warburg LLC............................................. 633,625
Goldman, Sachs & Co......................................... 530,875
---------
Total............................................. 3,425,000
=========
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 the
over-allotment option 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 this prospectus
supplement and some of the units to dealers at the public offering price less a
concession not to exceed $0.774 per unit. The underwriters may allow, and
dealers may reallow, a concession not to exceed $0.10 per unit on sales to other
dealers. 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.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to 513,750 additional
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 such underwriter's initial purchase commitment.
We, the executive officers and directors of our general partner, and Duke
Energy, on behalf of itself and its subsidiaries, have agreed that, with limited
exceptions, for a period of 90 days from the date of this prospectus supplement,
we will not, without the prior written consent of Salomon Smith Barney, dispose
of or hedge any units or any securities convertible into or exercisable or
exchangeable for units. Salomon Smith Barney, in its sole discretion, may
release any of the securities subject to these lock-up agreements at any time
without notice.
The units are listed on the New York Stock Exchange under the symbol "TPP."
Because the National Association of Securities Dealers, Inc. views the
units offered hereby as interests in a direct participation program, this
offering is being made in compliance with Rule 2810 of the NASD's Conduct Rules.
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 units.
NO EXERCISE FULL EXERCISE
----------- -------------
Per Unit.................................................... $ 1.29 $ 1.29
Total....................................................... $4,418,250 $5,080,988
S-13
In connection with the offering, Salomon Smith Barney, on behalf of the
underwriters, may purchase and sell units in the open market. These transactions
may include short sales, syndicate covering transactions and stabilizing
transactions. Short sales involve syndicate sales of 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'
over-allotment option. 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 the over-allotment option.
Transactions to close out the covered syndicate short involve either purchases
of units in the open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also make "naked"
short sales of units in excess of the over-allotment option. The underwriters
must close out any naked short position by purchasing 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
Salomon Smith Barney repurchases units originally sold by that syndicate member
in order to cover syndicate short positions or make stabilizing purchases.
Any of these activities 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 otherwise would exist in the open market
in the absence of these transactions. The underwriters may conduct these
transactions on the New York Stock Exchange or in the over-the-counter market,
or otherwise. If the underwriters commence any of these transactions, they may
be discontinued at any time.
We estimate that the total expenses of this offering will be approximately
$200,000. Duke Energy has agreed to reimburse us for the expenses of this
offering on a pro rata basis based upon the net proceeds DETTCO receives from
this offering.
The underwriters have performed investment banking and advisory services
for us from time to time for which they have received customary fees and
expenses. The underwriters may, from time to time, engage in transactions with
and perform services for us in the ordinary course of their business.
A.G. Edwards & Sons, Inc. acted as financial advisor to us by providing an
opinion as to the fairness, from a financial point of view, to our unitholders,
other than Texas Eastern Products Pipeline Company, LLC and Duke Energy, of the
consideration paid by us for the purchase of the Val Verde gathering system from
Burlington Resources Gathering Inc. pursuant to the terms of the Purchase and
Sale agreement dated May 24, 2002. In addition, Goldman, Sachs & Co. and its
affiliates beneficially own 3,784,517 of our units as of December 31, 2002.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. We may agree to allocate a number
of shares to underwriters for sale to their online brokerage account holders. We
will allocate shares to underwriters that may make Internet distributions on the
same basis as other allocations. In addition, shares may be sold by the
underwriters to securities dealers who resell shares to online brokerage account
holders.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
S-14
LEGAL MATTERS
The validity of the units being offered and certain federal income tax
matters relating to the units will be passed upon for us by Vinson & Elkins
L.L.P., Houston, Texas. Andrews & Kurth L.L.P., Houston, Texas will pass on
certain legal matters on behalf of the underwriters.
EXPERTS
The consolidated financial statements of TEPPCO Partners as of December 31,
2002 and 2001 and for each of the years in the three-year period ended December
31, 2002 (included in TEPPCO Partners' Annual Report on Form 10-K for the year
ended December 31, 2002) and the consolidated financial statements of TE
Products Pipeline Company, Limited Partnership as of December 31, 2002 and 2001
and for each of the years in the three-year period ended December 31, 2002
(included in TE Products Pipeline Company, Limited Partnership's Annual Report
on Form 10-K for the year ended December 31, 2002) have been incorporated by
reference herein in reliance upon the reports of KPMG LLP, independent
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The audit report covering the December 31, 2002 consolidated financial
statements of TEPPCO Partners refers to a change in the method of accounting for
derivative instruments and hedging activities as of January 1, 2001, and,
effective January 1, 2002, adoption of the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
S-15
PROSPECTUS
TEPPCO PARTNERS, L.P.
LIMITED PARTNERSHIP UNITS
DEBT SECURITIES
---------------------
GUARANTEES OF DEBT SECURITIES OF TEPPCO PARTNERS, L.P. BY:
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
TCTM, L.P.
TEPPCO MIDSTREAM COMPANIES, L.P.
JONAH GAS GATHERING COMPANY
VAL VERDE GAS GATHERING COMPANY, L.P.
---------------------
We, TEPPCO Partners, L.P., may from time to time offer and sell limited
partnership units and debt securities that may be fully and unconditionally
guaranteed by our subsidiaries, TE Products Pipeline Company, Limited
Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P., Jonah Gas Gathering
Company and Val Verde Gas Gathering Company, L.P. This prospectus describes the
general terms of these securities and the general manner in which we will offer
the securities. The specific terms of any securities we offer will be included
in a supplement to this prospectus. The prospectus supplement will also describe
the specific manner in which we will offer the securities.
The New York Stock Exchange has listed our limited partnership units under
the symbol "TPP."
Our address is 2929 Allen Parkway, P.O. Box 2521, Houston, Texas
77252-2521, and our telephone number is (713) 759-3636.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 1 OF THIS
PROSPECTUS BEFORE YOU MAKE AN INVESTMENT IN OUR SECURITIES.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is October 25, 2002
TABLE OF CONTENTS
About this Prospectus....................................... ii
About TEPPCO Partners....................................... ii
The Subsidiary Guarantors................................... ii
Risk Factors................................................ 1
Risks Relating to our Business............................ 1
Risks Relating to our Partnership Structure............... 5
Tax Risks to Unitholders.................................. 7
Where You Can Find More Information......................... 10
Forward-looking Statements and Associated Risks............. 11
TEPPCO Partners............................................. 12
Use of Proceeds............................................. 13
Ratio of Earnings to Fixed Charges.......................... 13
Description of Debt Securities.............................. 13
General................................................... 13
Covenants................................................. 15
Events of Default, Remedies and Notice.................... 16
Amendments and Waivers.................................... 18
Defeasance................................................ 19
No Personal Liability of General Partner.................. 20
Subordination............................................. 20
The Trustee............................................... 22
Governing Law............................................. 22
Book Entry, Delivery and Form............................... 22
Cash Distributions.......................................... 23
General................................................... 23
Quarterly Distributions of Available Cash................. 25
Adjustment of the Target Distributions.................... 25
Distributions of Cash Upon Liquidation.................... 26
Defined Terms............................................. 27
Tax Considerations.......................................... 29
Partnership Status........................................ 30
Partner Status............................................ 32
Tax Consequences of Limited Partnership Unit Ownership.... 32
Treatment of Operations................................... 38
Disposition of Limited Partnership Units.................. 39
Uniformity of Limited Partnership Units................... 41
Tax-exempt Entities, Regulated Investment Companies and
Foreign Investors...................................... 41
Administrative Matters.................................... 42
State, Local and Other Tax Considerations................. 45
Investment in Limited Partnership Units by Employee Benefit
Plans..................................................... 45
Plan of Distribution........................................ 47
Legal....................................................... 48
Experts..................................................... 48
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS, ANY
PROSPECTUS SUPPLEMENT AND THE DOCUMENTS WE HAVE INCORPORATED BY REFERENCE. WE
HAVE NOT AUTHORIZED ANYONE ELSE TO GIVE YOU DIFFERENT INFORMATION. WE ARE NOT
OFFERING THESE SECURITIES IN ANY STATE WHERE THEY DO NOT PERMIT THE OFFER. WE
WILL DISCLOSE ANY MATERIAL CHANGES IN OUR AFFAIRS IN AN AMENDMENT TO THIS
PROSPECTUS, A PROSPECTUS SUPPLEMENT OR A FUTURE FILING WITH THE SECURITIES AND
EXCHANGE COMMISSION INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under this shelf registration process, we may sell up to $774,397,350 in
principal amount of the limited partnership units or debt securities, or a
combination of both described in this prospectus in one or more offerings. This
prospectus generally describes us and the limited partnership units and debt
securities. Each time we sell limited partnership units or debt securities with
this prospectus, we will provide a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus supplement
may also add to, update or change information in this prospectus. The
information in this prospectus is accurate as of October 11, 2002. You should
carefully read both this prospectus and any prospectus supplement and the
additional information described under the heading "Where You Can Find More
Information."
ABOUT TEPPCO PARTNERS
We are one of the largest publicly traded limited partnerships engaged in
the transportation of refined products, liquefied petroleum gases and
petrochemicals, the transportation and marketing of crude oil and natural gas
liquids and the gathering of natural gas. Texas Eastern Products Pipeline
Company, LLC (formerly Texas Eastern Products Pipeline Company and referred to
in this prospectus as TEPPCO LLC) serves as our general partner and is an
indirect wholly owned subsidiary of Duke Energy Field Services, LLC, which is
owned 70% by Duke Energy Corporation and 30% by Phillips Petroleum Company.
Please see the organization chart on page 12 for a more detailed description of
our organizational structure.
As used in this prospectus, "we," "us," "our" and "TEPPCO Partners" mean
TEPPCO Partners, L.P. and, where the context requires, include our subsidiary
operating partnerships.
THE SUBSIDIARY GUARANTORS
TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO
Midstream Companies, L.P., Jonah Gas Gathering Company and Val Verde Gas
Gathering Company, L.P. are our only "significant subsidiaries" as defined by
the rules and regulations of the SEC, as of the date of this prospectus. The
general partner of TE Products, TCTM and TEPPCO Midstream is TEPPCO GP, Inc.,
which is wholly owned by us. TEPPCO GP owns a 0.001% general partner interest in
each of TE Products, TCTM and TEPPCO Midstream. We own a 99.999% limited partner
interest in each of TE Products, TCTM and TEPPCO Midstream. Jonah is a Wyoming
general partnership. TEPPCO Midstream owns a 99.999% general partner interest in
Jonah and TEPPCO GP owns a 0.001% general partner interest and serves as its
managing general partner. TEPPCO NGL Pipelines, LLC owns a 0.001% general
partner interest in Val Verde, and TEPPCO Midstream owns a 99.999% limited
partner interest in Val Verde. We sometimes refer to TE Products, TCTM, TEPPCO
Midstream, Jonah and Val Verde in this prospectus as the "Subsidiary
Guarantors." The Subsidiary Guarantors may jointly and severally and
unconditionally guarantee our payment obligations under any series of debt
securities offered by this prospectus, as set forth in a related prospectus
supplement.
ii
RISK FACTORS
Before you invest in our securities, you should be aware that there are
risks associated with such an investment. You should consider carefully these
risk factors together with all of the other information included in this
prospectus, any prospectus supplement and the documents we have incorporated by
reference into this document before purchasing our securities.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
that event, we may be unable to make distributions to our unitholders or pay
interest on, or the principal of, any debt securities, the trading price of our
limited partnership units could decline or you may lose all of your investment.
RISKS RELATING TO OUR BUSINESS
POTENTIAL FUTURE ACQUISITIONS AND EXPANSIONS, IF ANY, MAY AFFECT OUR BUSINESS BY
SUBSTANTIALLY INCREASING THE LEVEL OF OUR INDEBTEDNESS AND CONTINGENT
LIABILITIES AND INCREASING OUR RISKS OF BEING UNABLE TO EFFECTIVELY INTEGRATE
THESE NEW OPERATIONS.
From time to time, we evaluate and acquire assets and businesses that we
believe complement our existing assets and businesses. Acquisitions may require
substantial capital or the incurrence of substantial indebtedness. If we
consummate any future acquisitions, our capitalization and results of operations
may change significantly, and you will not have the opportunity to evaluate the
economic, financial and other relevant information that we will consider in
determining the application of these funds and other resources.
Acquisitions and business expansions involve numerous risks, including
difficulties in the assimilation of the assets and operations of the acquired
businesses, inefficiencies and difficulties that arise because of unfamiliarity
with new assets and the businesses associated with them and new geographic areas
and the diversion of management's attention from other business concerns.
Further, unexpected costs and challenges may arise whenever businesses with
different operations or management are combined, and we may experience
unanticipated delays in realizing the benefits of an acquisition. Following an
acquisition, we may discover previously unknown liabilities associated with the
acquired business for which we have no recourse under applicable indemnification
provisions.
OUR AMENDED REVOLVING CREDIT FACILITY CONTAINS RESTRICTIVE FINANCIAL COVENANTS
WHICH, IF BREACHED, COULD RESULT IN A DEFAULT UNDER OUR OTHER INDEBTEDNESS,
INCLUDING OUR 7.625% SENIOR NOTES AND OUR GUARANTEE OF A PORTION OF THE
INDEBTEDNESS OF CENTENNIAL PIPELINE, LLC.
In connection with our acquisition of the Val Verde gathering system, we
amended our revolving credit facility to increase the maximum permitted
debt-to-EBITDA (earnings before interest expense, income tax expense and
depreciation and amortization expense) ratio. For the 12-month period ending
September 30, 2002, the maximum permitted ratio is 5.0-to-1 on a pro forma
basis. At December 31, 2002, the maximum permitted debt-to-EBITDA ratio under
our revolving credit facility returns to its pre-amendment level of 4.5-to-1.
This ratio is determined for each fiscal quarter based on the preceding 12
months on a pro forma basis. Although we expect to satisfy this restrictive
financial covenant by reducing debt through sales of additional limited
partnership units or other possible alternatives or combinations thereof, we can
not assure you that we will be successful in these efforts. If we fail to meet
these restrictive financial covenants, we expect to seek a waiver of these
restrictions. If we cannot obtain a waiver of these restrictions, we could be in
default of our revolving credit facilities, which could result in the
acceleration of the amount outstanding thereunder at the time. A default under
our revolving credit facilities could result in a default under our 7.625%
senior notes and our guarantee of a portion of the indebtedness of Centennial
Pipeline, LLC.
1
EXPANDING OUR NATURAL GAS GATHERING BUSINESS BY CONSTRUCTING NEW PIPELINES AND
COMPRESSION FACILITIES SUBJECTS US TO CONSTRUCTION RISKS AND RISKS THAT NATURAL
GAS SUPPLIES WILL NOT BE AVAILABLE UPON COMPLETION OF THE NEW PIPELINES.
We may expand the capacity of our existing natural gas gathering system
through the construction of additional facilities. The construction of gathering
facilities requires the expenditure of significant amounts of capital, which may
exceed our estimates. Generally, we may have only limited natural gas supplies
committed to these facilities prior to their construction. Moreover, we may
construct facilities to capture anticipated future growth in production in a
region in which anticipated production growth does not materialize. As a result,
there is the risk that new facilities may not be able to attract enough natural
gas to achieve our expected investment return, which could adversely affect our
financial position or results of operations.
OUR INTERSTATE TARIFF RATES ARE SUBJECT TO REVIEW AND POSSIBLE ADJUSTMENT BY
FEDERAL REGULATORS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Federal Energy Regulatory Commission, or the FERC, pursuant to the
Interstate Commerce Act, regulates the tariff rates for our interstate common
carrier pipeline operations. To be lawful under that Act, interstate tariff
rates must be just and reasonable and not unduly discriminatory. Shippers may
protest, and the FERC may investigate, the lawfulness of new or changed tariff
rates. The FERC can suspend those tariff rates for up to seven months. It can
also require refunds of amounts collected under rates ultimately found unlawful.
The FERC may also challenge tariff rates that have become final and effective.
Because of the complexity of rate making, the lawfulness of any rate is never
assured.
The FERC uses prescribed rate methodologies for approving regulated tariff
rates for transporting crude oil and refined products. These methodologies may
limit our ability to set rates based on our actual costs or may delay the use of
rates reflecting increased costs. Changes in the FERC's approved methodology for
approving rates could adversely affect us. Adverse decisions by the FERC in
approving our regulated rates could adversely affect our cash flow. Additional
challenges to our tariff rates could be filed with the FERC.
While the FERC does not directly regulate our natural gas gathering
operations, federal regulation, directly or indirectly, influences the parties
that gather natural gas on our Jonah gas gathering system. As an intrastate
natural gas gathering system and not an interstate transmission pipeline, the
Jonah system generally is exempt from FERC regulation under the Natural Gas Act
of 1938. Nonetheless, FERC regulation still significantly affects our natural
gas gathering business. In recent years, FERC has pursued pro-competition
policies in its regulation of interstate natural gas pipelines. However, if the
FERC does not continue this approach as it considers proposals by natural gas
pipelines to allow negotiated rates that are not limited by rate ceilings,
pipeline rate case proposals and revisions to rules and policies that may affect
our shippers' rights of access to interstate natural gas transportation
capacity, it could have an adverse effect on the rates we are able to charge in
the future.
OUR PARTNERSHIP STATUS MAY BE A DISADVANTAGE TO US IN CALCULATING OUR COST OF
SERVICE FOR RATE-MAKING PURPOSES.
In a 1995 decision involving an unrelated oil pipeline limited partnership,
the FERC partially disallowed the inclusion of income taxes in that
partnership's cost of service. In another FERC proceeding involving a different
oil pipeline limited partnership, the FERC held that the oil pipeline limited
partnership may not claim an income tax allowance for income attributable to
non-corporate limited partners, both individuals and other entities. Because
corporations are taxpaying entities, income taxes are generally allowed to be
included as a corporate cost-of-service. While we currently do not use the
cost-of-service methodology to support our rates, these decisions might
adversely affect us should we elect in the future to use the cost-of-service
methodology or should we be required to use that methodology to defend our rates
if challenged by our customers. This could put us at a competitive disadvantage.
2
COMPETITION COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Our refined products and liquefied petroleum gases, or LPGs, transportation
business competes with other pipelines in the areas where we deliver products.
We also compete with trucks, barges and railroads in some of the areas we serve.
Competitive pressures may adversely affect our tariff rates or volumes shipped.
The crude oil gathering and marketing business is characterized by thin margins
and intense competition for supplies of crude oil at the wellhead. A decline in
domestic crude oil production has intensified competition among gatherers and
marketers. Our crude oil transportation business competes with common carriers
and proprietary pipelines owned and operated by major oil companies, large
independent pipeline companies and other companies in the areas where our
pipeline systems deliver crude oil and natural gas liquids.
New supplies of natural gas are necessary to offset natural declines in
production from wells connected to our gathering system and to increase
throughput volume, and we encounter competition in obtaining contracts to gather
natural gas supplies. Competition in natural gas gathering is based in large
part on reputation, efficiency, reliability, gathering system capacity and price
arrangements. Our key competitors in the gas gathering segment include
independent gas gatherers and major integrated energy companies. Alternate
gathering facilities are available to producers we serve, and those producers
may also elect to construct proprietary gas gathering systems. If the production
delivered to our gathering system declines, our revenues from such operations
will decline.
OUR BUSINESS REQUIRES EXTENSIVE CREDIT RISK MANAGEMENT THAT MAY NOT BE ADEQUATE
TO PROTECT AGAINST CUSTOMER NONPAYMENT.
Risks of nonpayment and nonperformance by customers are a major
consideration in our businesses. Our credit procedures and policies may not be
adequate to fully eliminate customer credit risk.
OUR CRUDE OIL MARKETING BUSINESS INVOLVES RISKS RELATING TO PRODUCT PRICES.
Our crude oil operations subject us to pricing risks as we buy and sell
crude oil for delivery on our crude oil pipelines or enter into future delivery
obligations with respect to futures contracts on the New York Mercantile
Exchange. These pricing and basis risks cannot be completely hedged or
eliminated. These are the risks that price relationships between delivery
points, classes of products or delivery periods will change from time to time.
REDUCED DEMAND COULD AFFECT SHIPMENTS ON THE PIPELINES.
Our products pipeline business depends in large part on the demand for
refined petroleum products in the markets served by our pipelines. Reductions in
that demand adversely affect our pipeline business. Market demand varies based
upon the different end uses of the refined products we ship. Demand for
gasoline, which has in recent years accounted for approximately one-half of our
refined products transportation revenues, depends upon price, prevailing
economic conditions and demographic changes in the markets we serve. Weather
conditions, government policy and crop prices affect the demand for refined
products used in agricultural operations. Demand for jet fuel, which has in
recent years accounted for almost one-quarter of our refined products revenues,
depends on prevailing economic conditions and military usage. Propane deliveries
are generally sensitive to the weather and meaningful year-to-year variances
have occurred and will likely continue to occur.
3
OUR GATHERING SYSTEM PROFITS AND CASH FLOW DEPEND ON THE VOLUMES OF NATURAL GAS
PRODUCED FROM THE FIELDS SERVED BY OUR GATHERING SYSTEMS AND ARE SUBJECT TO
FACTORS BEYOND OUR CONTROL.
Regional production levels drive the volume of natural gas gathered on our
system. We cannot influence or control the operation or development of the gas
fields we serve. Production levels may be affected by:
- the absolute price of, volatility in the price of, and market demand for
natural gas;
- changes in laws and regulations, particularly with regard to taxes,
denial of reduced well density spacing, safety and protection of the
environment;
- the depletion rates of existing wells;
- adverse weather and other natural phenomena;
- the availability of drilling and service rigs; and
- industry changes, including the effect of consolidations or divestitures.
Any declines in the volumes of natural gas delivered for gathering on our
system will adversely affect our revenues and could, if sustained or pronounced,
materially adversely affect our financial position or results of operation.
OUR OPERATIONS ARE SUBJECT TO GOVERNMENTAL LAWS AND REGULATIONS RELATING TO THE
PROTECTION OF THE ENVIRONMENT WHICH MAY EXPOSE US TO SIGNIFICANT COSTS AND
LIABILITIES.
The risk of substantial environmental costs and liabilities is inherent in
pipeline and terminaling operations and we may incur substantial environmental
costs and liabilities. Our operations are subject to federal, state and local
laws and regulations relating to protection of the environment. We currently own
or lease, and have owned or leased, many properties that have been used for many
years to terminal or store crude oil, petroleum products or other chemicals.
Owners, tenants or users of these properties have disposed of or released
hydrocarbons or solid wastes on or under them. Additionally, some sites we
operate are located near current or former refining and terminaling operations.
There is a risk that contamination has migrated from those sites to ours.
Increasingly strict environmental laws, regulations and enforcement policies and
claims for damages and other similar developments could result in substantial
costs and liabilities.
Many of our operations and activities are subject to significant federal
and state environmental laws and regulations. These include, for example, the
Federal Clean Air Act and analogous state laws, which impose obligations related
to air emissions and the Federal Water Pollution Control Act, commonly referred
to as the Clean Water Act, and analogous state laws, which regulate discharge of
wastewaters from our facilities to state and federal waters. In addition, our
operations are also subject to the federal Comprehensive Environmental Response,
Compensation, and Liability Act, also known as CERCLA or the Superfund law, the
Resource Conservation and Recovery Act, also known as RCRA, and analogous state
laws in connection with 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 wastes for disposal. Various governmental
authorities including the U.S. Environmental Protection Agency have the power to
enforce compliance with these regulations and the permits issued under them, and
violators are subject to administrative, civil and criminal penalties, including
civil fines, injunctions or both. Liability may be incurred without regard to
fault under CERCLA, RCRA, and analogous state laws for the remediation of
contaminated areas. Private parties, including the owners of properties through
which our pipeline systems pass, may also have the right to pursue legal actions
to enforce compliance as well as to seek damages for non-compliance with
environmental laws and regulations or for personal injury or property damage.
There is inherent risk of the incurrence of environmental costs and liabilities
in our business due to our handling of the products we gather or transport, air
emissions related to our operations, historical industry operations, waste
disposal practices and the prior use of flow meters containing mercury,
4
some of which may be material. In addition, the possibility exists that stricter
laws, regulations or enforcement policies could significantly increase our
compliance costs and the cost of any remediation that may become necessary, some
of which may be material. Our insurance may not cover all environmental risks
and costs or may not provide sufficient coverage in the event an environmental
claim is made against us. Our business may be adversely affected by increased
costs due to stricter pollution control requirements or liabilities resulting
from non-compliance with required operating or other regulatory permits. New
environmental regulations might adversely affect our products and activities,
including processing, storage and transportation, as well as waste management
and air emissions. Federal and state agencies also could impose additional
safety requirements, any of which could affect our profitability.
TERRORIST ATTACKS AIMED AT OUR FACILITIES COULD ADVERSELY AFFECT OUR BUSINESS.
On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scale. Since the September 11 attacks, the United
States government has issued warnings that energy assets, specifically our
nation's pipeline infrastructure, may be the future target of terrorist
organizations. These developments have subjected our operations to increased
risks. Any future terrorist attack on our facilities, those of our customers
and, in some cases, those of other pipelines, could have a material adverse
effect on our business.
OUR BUSINESS INVOLVES MANY HAZARDS AND OPERATIONAL RISKS, SOME OF WHICH MAY NOT
BE COVERED BY INSURANCE.
Our operations are subject to the many hazards inherent in the
transportation of refined petroleum products, liquefied petroleum gases and
petrochemicals, the transportation of crude oil and the gathering, compressing,
treating and processing of natural gas and natural gas liquids and in the
storage of residue gas, including ruptures, leaks and fires. These risks could
result in substantial losses due to personal injury 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. We are not fully insured against all risks incident to our business.
Most significantly, we are not insured against the loss of revenues caused by
interruption of business in the event of a loss of, or damage to, our
facilities. If a significant accident or event occurs that is not fully insured,
it could adversely affect our financial position or results of operations.
WE COULD BE ADVERSELY AFFECTED IF THIRD PARTIES ARE SUCCESSFUL IN ASSERTING
RIGHTS TO ACQUIRE THE JONAH GAS GATHERING SYSTEM FROM US.
A producer on the Jonah gas gathering system has notified Alberta Energy
Company, Ltd. that it has a right to acquire all or a portion of the assets
comprising the Jonah gas gathering system. The producer asserts that it is
entitled to match any offers to acquire the assets comprising all or a portion
of the Jonah gas gathering system and that it is entitled to full details of the
sale of the system to us. It is not clear whether this asserted right covers all
or some portion of the Jonah system. On September 30, 2001, our subsidiaries
paid subsidiaries of Alberta Energy approximately $360 million for the
outstanding partnership interests in Jonah Gas Gathering Company, which owns and
operates the Jonah gas gathering system. Through September 30, 2002, we have
spent an additional $45 million for expansion of the Jonah system. If the
producer is successful in asserting this alleged right, we could be adversely
affected by the divestiture of the Jonah gas gathering system and resultant loss
of expected incremental cash flow from our investment or as a result of making
payments in excess of any indemnity payments from Alberta Energy to the producer
in settlement of these claims.
RISKS RELATING TO OUR PARTNERSHIP STRUCTURE
WE ARE A HOLDING COMPANY AND DEPEND ENTIRELY ON OUR OPERATING SUBSIDIARIES'
DISTRIBUTIONS TO SERVICE OUR DEBT OBLIGATIONS.
We are a holding company with no material operations. If we cannot receive
cash distributions from our operating subsidiaries, we will not be able to meet
our debt service obligations. Our operating
5
subsidiaries may from time to time incur additional indebtedness under
agreements that contain restrictions which could further limit each operating
subsidiary's ability to make distributions to us.
The debt securities issued by us and the guarantees issued by our
subsidiary guarantors will be structurally subordinated to the claims of the
creditors of our operating subsidiaries who are not guarantors of the debt
securities. Holders of the debt securities will not be creditors of our
operating partnerships that have not guaranteed the debt securities. The claims
to the assets of non-guarantor operating subsidiaries derive from our own
partnership interests in those operating subsidiaries. Claims of our
non-guarantor operating subsidiaries' creditors will generally have priority as
to the assets of those operating subsidiaries over our own partnership interest
claims and will therefore have priority over the holders of our debt, including
the debt securities. Our non-guarantor operating subsidiaries' creditors may
include:
- general creditors,
- trade creditors,
- secured creditors,
- taxing authorities, and
- creditors holding guarantees.
While our non-guarantor operating subsidiaries currently have no
indebtedness for borrowed money, such subsidiaries are not restricted from
incurring indebtedness and may do so in the future. Any debt securities offered
pursuant to this prospectus and the applicable prospectus supplement will be
structurally subordinated to any such indebtedness.
WE MAY ISSUE ADDITIONAL LIMITED PARTNERSHIP INTERESTS, DILUTING EXISTING
INTERESTS OF UNITHOLDERS.
Our partnership agreement allows us to issue additional limited partnership
units and other equity securities without unitholder approval. These additional
securities may be issued to raise cash or acquire additional assets or for other
partnership purposes. There is no limit on the total number of limited
partnership units and other equity securities we may issue. When we issue
additional limited partnership units or other equity securities, the
proportionate partnership interest of our existing unitholders will decrease.
The issuance could negatively affect the amount of cash distributed to
unitholders and the market price of limited partnership units. Issuance of
additional limited partnership units will also diminish the relative voting
strength of the previously outstanding limited partnership units.
OUR GENERAL PARTNER AND ITS AFFILIATES MAY HAVE CONFLICTS WITH OUR PARTNERSHIP.
The directors and officers of our general partner and its affiliates have
duties to manage the general partner in a manner that is beneficial to its
member. At the same time, the general partner has duties to manage us in a
manner that is beneficial to us. Therefore, the general partner's duties to us
may conflict with the duties of its officers and directors to its member.
Such conflicts may include, among others, the following:
- decisions of our general partner regarding the amount and timing of cash
expenditures, borrowings and issuances of additional limited partnership
units or other securities can affect the amount of incentive compensation
payments we make to our general partner;
- under our partnership agreement we reimburse the general partner for the
costs of managing and operating us; and
- under our partnership agreement, it is not a breach of our general
partner's fiduciary duties for affiliates of our general partner to
engage in activities that compete with us.
We may acquire additional businesses or properties directly or indirectly
for the issuance of additional limited partnership units. At our current level
of cash distributions, our general partner receives as incentive distributions
approximately 50% of any incremental increase in our distributions. As a result,
6
acquisitions funded though the issuance of limited partnership units have in the
past and may in the future benefit our general partner more than our
unitholders.
UNITHOLDERS HAVE LIMITED VOTING RIGHTS AND CONTROL OF MANAGEMENT.
Our general partner manages and controls our activities and the activities
of our operating partnerships. Unitholders have no right to elect the general
partner or the directors of the general partner on an annual or other ongoing
basis. However, if the general partner resigns or is removed, its successor may
be elected by holders of a majority of the limited partnership units.
Unitholders may remove the general partner only by a vote of the holders of at
least 66 2/3% of the limited partnership units and only after receiving state
regulatory approvals required for the transfer of control of a public utility.
As a result, unitholders will have limited influence on matters affecting our
operations, and third parties may find it difficult to gain control of us or
influence our actions.
OUR PARTNERSHIP AGREEMENT LIMITS THE LIABILITY OF OUR GENERAL PARTNER.
Our general partner owes duties of loyalty and care to the unitholders.
Provisions of our partnership agreement and the partnership agreements for each
of the operating partnerships, however, contain language limiting the liability
of the general partner to the unitholders for actions or omissions taken in good
faith. In addition, the partnership agreements grant broad rights of
indemnification to the general partner and its directors, officers, employees
and affiliates for acts taken in good faith in a manner believed to be in or not
opposed to our best interests.
TAX RISKS TO UNITHOLDERS
You should read "Tax Considerations," beginning on page 29, for a more
complete discussion of the following federal income tax risks related to owning
and disposing of limited partnership units.
THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO YOU.
The anticipated benefit of an investment in our limited partnership units
depends largely on our being treated as a partnership for U.S. federal income
tax purposes.
If we were classified as a corporation for U.S. federal income tax
purposes, we would pay federal income tax on our income at the corporate tax
rate, which is currently a maximum of 35%, and would pay state income taxes at
varying rates. Distributions to you would generally be taxed again to you as
corporate distributions, and no income, gains, losses or deductions would flow
through to you. Because a tax would be imposed upon us as a corporation, the
cash available for distribution to you would be substantially reduced. Treatment
of us as a corporation would result in a material reduction in the after-tax
return to the unitholders, likely causing a substantial reduction in the value
of the limited partnership units. Current law may change so as to cause us to be
taxed as a corporation for federal income tax purposes or otherwise subject us
to entity-level taxation. Our partnership agreement provides that, if a law is
enacted or existing law is modified or interpreted in a manner that subjects us
to taxation as a corporation or otherwise subjects us to entity-level taxation
for federal, state or local income tax purposes, then the minimum quarterly
distribution and the target distribution levels will be decreased to reflect
that impact on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY IMPACT THE MARKET FOR LIMITED PARTNERSHIP UNITS.
We have not requested a ruling from the Internal Revenue Service, or IRS,
with respect to any 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 our counsel's conclusions or the positions we take. A
court may not concur with our counsel's conclusions or the positions we take.
Any contest with the IRS may materially and adversely
7
impact the market for limited partnership units and the price at which they
trade. In addition, the costs of any contest with the IRS, principally legal,
accounting and related fees, will be borne by us and directly or indirectly by
the unitholders and the general partner.
YOU MAY BE REQUIRED TO PAY TAXES EVEN IF YOU DO NOT RECEIVE ANY CASH
DISTRIBUTIONS.
You will be required to pay federal income taxes and, in some cases, state
and local income taxes on your share of our taxable income even if you do not
receive any 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 your share of our taxable income.
TAX GAIN OR LOSS ON DISPOSITION OF LIMITED PARTNERSHIP UNITS COULD BE DIFFERENT
THAN EXPECTED.
If you sell your limited partnership units, you will recognize gain or loss
equal to the difference between the amount realized and your tax basis in those
limited partnership units. Prior distributions in excess of the total net
taxable income you were allocated for a limited partnership unit, which
decreased your tax basis in that limited partnership unit, will, in effect,
become taxable income to you if the limited partnership unit is sold at a price
greater than your tax basis in that limited partnership unit, even if the price
you receive is less than your original cost. A substantial portion of the amount
realized, whether or not representing gain, may be ordinary income to you.
Should the IRS successfully contest some positions we take, you could recognize
more gain on the sale of limited partnership units than would be the case under
those positions, without the benefit of decreased income in prior years. Also,
if you sell your limited partnership units, you may incur a tax liability in
excess of the amount of cash you receive from the sale.
IF YOU ARE A TAX-EXEMPT ENTITY, REGULATED INVESTMENT COMPANY OR MUTUAL FUND OR
YOU ARE NOT AN INDIVIDUAL RESIDING IN THE UNITED STATES, YOU MAY HAVE ADVERSE
TAX CONSEQUENCES FROM OWNING LIMITED PARTNERSHIP UNITS.
Investment in limited partnership units by tax-exempt entities, regulated
investment companies (or mutual funds) and foreign persons raises issues unique
to them. For example, virtually all of our income allocated to organizations
exempt from federal income tax, including individual retirement accounts and
other retirement plans, will be unrelated business taxable income and will be
taxable to them. Very little of our income will be qualifying income to a
regulated investment company or mutual fund. Distributions to foreign persons
will be reduced by withholding taxes at the highest effective rate applicable to
individuals and foreign persons will be required to file federal income tax
returns and pay tax on their share of our taxable income.
WE HAVE REGISTERED AS A TAX SHELTER. THIS MAY INCREASE THE RISK OF AN IRS AUDIT
OF US OR A UNITHOLDER.
We have registered with the IRS as a "tax shelter." The IRS requires that
some types of entities, including some partnerships, register as "tax shelters"
in response to the perception that they claim tax benefits that the IRS may
believe to be unwarranted. As a result, we may be audited by the IRS and tax
adjustments could be made. Any unitholder owning less than a 1% profits interest
in us has very limited rights to participate in the income tax audit process.
Further, any adjustments in our tax returns will lead to adjustments in our
unitholders' tax returns and may lead to audits of unitholders' tax returns and
adjustments of items unrelated to us. You will bear the cost of any expense
incurred in connection with an examination of your personal tax return.
WE WILL TREAT EACH PURCHASER OF LIMITED PARTNERSHIP UNITS AFTER THE INITIAL SALE
OF ANY LIMITED PARTNERSHIP UNITS PURSUANT TO THIS PROSPECTUS AS HAVING THE SAME
TAX BENEFITS WITHOUT REGARD TO THE LIMITED PARTNERSHIP UNITS PURCHASED. THE IRS
MAY CHALLENGE THIS TREATMENT, WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR
LIMITED PARTNERSHIP UNITS.
Because we cannot match transferors and transferees of limited partnership
units, we will adopt depreciation and amortization positions that do not conform
with all aspects of final Treasury Regulations.
8
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 your sale of limited partnership units and
could have a negative impact on the value of the limited partnership units or
result in audit adjustments to your tax returns. Please read "Tax
Considerations -- Uniformity of Limited Partnership Units" for a further
discussion of the effect of the depreciation and amortization positions we
adopt.
YOU WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES IN STATES WHERE YOU DO NOT
LIVE AS A RESULT OF AN INVESTMENT IN OUR LIMITED PARTNERSHIP UNITS.
In addition to federal income taxes, you will likely be subject to other
taxes, including 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 and in which you do not
reside. You may be required to file state and local income tax returns and pay
state and local income taxes in many or all of the jurisdictions in which we do
business. Please read "Tax Considerations -- State, Local and Other Tax
Considerations" for a discussion of the jurisdictions in which we do business or
own property and the jurisdictions in which you will likely be required to file
tax returns. Further, you may be subject to penalties for failure to comply with
those requirements. It is your responsibility to file all United States federal,
state and local tax returns. Our counsel has not rendered an opinion on the
state or local tax consequences of an investment in the limited partnership
units.
9
WHERE YOU CAN FIND MORE INFORMATION
TEPPCO Partners, L.P. and TE Products Pipeline Company, Limited Partnership
file annual, quarterly and other reports and other information with the SEC. You
may read and copy any document we file at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-732-0330 for further information on their public reference room. Our SEC
filings are also available at the SEC's web site at http://www.sec.gov. You can
also obtain information about us at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005.
The SEC allows TEPPCO Partners and TE Products to "incorporate by
reference" the information they have filed with the SEC. This means that TEPPCO
Partners and TE Products can disclose important information to you without
actually including the specific information in this prospectus by referring you
to those documents. The information incorporated by reference is an important
part of this prospectus. Information that TEPPCO Partners and TE Products file
later with the SEC will automatically update and may replace information in this
prospectus and information previously filed with the SEC. The documents listed
below and any future filings made with the SEC under Sections 13(a), 13(c), 14,
or 15(d) of the Securities Exchange Act of 1934 are incorporated by reference in
this prospectus until the termination of this offering.
TEPPCO PARTNERS, L.P. (FILE NO. 1-10403)
- Annual Report on Form 10-K for the fiscal year ended December 31, 2001
filed March 14, 2002, as amended by the Annual Report on Form 10-K/A
filed June 3, 2002.
- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002
filed May 14, 2002.
- Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002
filed August 14, 2002.
- Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
2002 filed November 1, 2002.
- Current Report on Form 8-K filed January 14, 2002 (other than any
information furnished pursuant to Item 9 thereof).
- Current Report on Form 8-K filed January 28, 2002 (other than any
information furnished pursuant to Item 9 thereof).
- Current Report on Form 8-K filed February 8, 2002 (other than any
information furnished pursuant to Item 9 thereof).
- Current Report on Form 8-K filed February 20, 2002.
- Current Report on Form 8-K filed March 12, 2002.
- Current Report on Form 8-K filed March 20, 2002.
- Current Report on Form 8-K filed April 16, 2002.
- Current Report on Form 8-K filed April 24, 2002.
- Current Report on Form 8-K filed June 4, 2002.
- Current Report on Form 8-K filed July 2, 2002, as amended by the Current
Reports on Form 8-K/A filed August 12, 2002 and October 8, 2002.
- Current Report on Form 8-K filed July 15, 2002.
- Current Report on Form 8-K filed September 3, 2002.
- Current Report on Form 8-K filed September 6, 2002.
- Current Report on Form 8-K filed October 9, 2002.
10
- Current Report on Form 8-K filed October 21, 2002.
- The description of the limited partnership units contained in the
Registration Statement on Form 8-A (Registration No. 001 10403),
initially filed December 6, 1989, and any subsequent amendment thereto
filed for the purpose of updating such description.
TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP (FILE NO. 1-13603)
- Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
filed March 26, 2002.
- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2002, filed May 14, 2002.
- Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002,
filed August 14, 2002.
- Current Report on Form 8-K filed February 20, 2002.
- Current Report on Form 8-K filed April 16, 2002.
- Current Report on Form 8-K filed October 9, 2002.
You may request a copy of any document incorporated by reference in this
prospectus, at no cost, by writing or calling us at the following address:
Investor Relations Department
TEPPCO Partners, L.P.
TE Products Pipeline Company, Limited Partnership
2929 Allen Parkway
P.O. Box 2521
Houston, Texas 77252-2521
(713) 759-3636
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus, any accompanying prospectus supplement and the documents
we have incorporated by reference contain forward-looking statements. The words
"believe," "expect," "estimate" and "anticipate" and similar expressions
identify forward-looking statements. Forward-looking statements include those
that address activities, events or developments that we expect or anticipate
will or may occur in the future. These include the following:
- the amount and nature of future capital expenditures,
- business strategy and measures to carry out strategy,
- competitive strengths,
- goals and plans,
- expansion and growth of our business and operations,
- references to intentions as to future matters and
- other similar matters.
A forward-looking statement may include a statement of the assumptions or
bases underlying the forward-looking statement. We believe we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the risk factors set forth under the caption
"Risk Factors" and other cautionary statements in this prospectus, any
prospectus supplement and the documents we have incorporated by reference. We
will not update these statements unless the securities laws require us to do so.
11
TEPPCO PARTNERS
We are a publicly traded Delaware limited partnership engaged in the
transportation of refined products, liquefied petroleum gases and
petrochemicals, the transportation and marketing of crude oil and natural gas
liquids and the gathering of natural gas. The following chart shows our
organization and ownership structure as of the date of this prospectus before
giving effect to this offering. Except in the following chart, the ownership
percentages referred to in this prospectus reflect the approximate effective
ownership interest in us and our subsidiary companies on a combined basis.
Please read "The Subsidiary Guarantors" on page ii for a more detailed
description of our ownership of the Subsidiary Guarantors.
(GRAPH)
12
USE OF PROCEEDS
Except as otherwise provided in the applicable prospectus supplement, we
will use the net proceeds we receive from the sale of the securities to pay all
or a portion of indebtedness outstanding at the time and to acquire properties
as suitable opportunities arise.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the periods indicated is
as follows:
SIX MONTHS
ENDED
TWELVE MONTHS ENDED DECEMBER 31, JUNE 30,
------------------------------------- -------------
1997 1998 1999 2000 2001 2001 2002
----- ----- ----- ----- ----- ----- -----
Ratio of Earnings to Fixed Charges..... 2.70x 2.72x 3.06x 2.10x 2.79x 3.29x 2.59x
For purposes of calculating the ratio of earnings to fixed charges:
- "fixed charges" represent interest expense (including amounts
capitalized), amortization of debt costs and the portion of rental
expense representing the interest factor; and
- "earnings" represent the aggregate of income from continuing operations
(before adjustment for minority interest, extraordinary loss and equity
earnings), fixed charges and distributions from equity investment, less
capitalized interest.
DESCRIPTION OF DEBT SECURITIES
We will issue our debt securities under an Indenture dated February 20,
2002, as supplemented, among us, as issuer, First Union National Bank, as
trustee, and the Subsidiary Guarantors. The debt securities will be governed by
the provisions of the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended. We, the trustee and
the Subsidiary Guarantors may enter into additional supplements to the Indenture
from time to time. If we decide to issue subordinated debt securities, we will
issue them under a separate Indenture containing subordination provisions.
This description is a summary of the material provisions of the debt
securities and the Indentures. We urge you to read the Indenture and the form of
Subordinated Indenture filed as exhibits to the registration statement of which
this prospectus is a part because those Indentures, and not this description,
govern your rights as a holder of debt securities. References in this prospectus
to an "Indenture" refer to the particular Indenture under which we issue a
series of debt securities.
GENERAL
THE DEBT SECURITIES
Any series of debt securities that we issue:
- will be our general obligations;
- will be general obligations of the Subsidiary Guarantors if they are
guaranteed by the Subsidiary Guarantors; and
- may be subordinated to our senior indebtedness and that of the Subsidiary
Guarantors.
The Indenture does not limit the total amount of debt securities that we
may issue. We may issue debt securities under the Indenture from time to time in
separate series, up to the aggregate amount authorized for each such series.
13
We will prepare a prospectus supplement and either an indenture supplement
or a resolution of our Board of Directors and accompanying officers' certificate
relating to any series of debt securities that we offer, which will include
specific terms relating to some or all of the following:
- the form and title of the debt securities;
- the total principal amount of the debt securities;
- the date or dates on which the debt securities may be issued;
- the portion of the principal amount which will be payable if the maturity
of the debt securities is accelerated;
- any right we may have to defer payments of interest by extending the
dates payments are due and whether interest on those deferred amounts
will be payable;
- the dates on which the principal and premium, if any, of the debt
securities will be payable;
- the interest rate which the debt securities will bear and the interest
payment dates for the debt securities;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
- whether the debt securities are entitled to the benefits of any
guarantees by the Subsidiary Guarantors;
- whether the debt securities may be issued in amounts other than $1,000
each or multiples thereof;
- any changes to or additional Events of Default or covenants;
- the subordination, if any, of the debt securities and any changes to the
subordination provisions of the Indenture; and
- any other terms of the debt securities.
THIS DESCRIPTION OF DEBT SECURITIES WILL BE DEEMED MODIFIED, AMENDED OR
SUPPLEMENTED BY ANY DESCRIPTION OF ANY SERIES OF DEBT SECURITIES SET FORTH IN A
PROSPECTUS SUPPLEMENT RELATED TO THAT SERIES.
The prospectus supplement will also describe any material United States
federal income tax consequences or other special considerations regarding the
applicable series of debt securities, including those relating to:
- debt securities with respect to which payments of principal, premium or
interest are determined with reference to an index or formula, including
changes in prices of particular securities, currencies or commodities;
- debt securities with respect to which principal, premium or interest is
payable in a foreign or composite currency;
- debt securities that are issued at a discount below their stated
principal amount, bearing no interest or interest at a rate that at the
time of issuance is below market rates; and
- variable rate debt securities that are exchangeable for fixed rate debt
securities.
At our option, we may make interest payments by check mailed to the
registered holders of debt securities or, if so stated in the applicable
prospectus supplement, at the option of a holder by wire transfer to an account
designated by the holder.
Unless otherwise provided in the applicable prospectus supplement, fully
registered securities may be transferred or exchanged at the office of the
trustee at which its corporate trust business is principally
14
administered in the United States, subject to the limitations provided in the
Indenture, without the payment of any service charge, other than any applicable
tax or governmental charge.
Any funds we pay to a paying agent for the payment of amounts due on any
debt securities that remain unclaimed for two years will be returned to us, and
the holders of the debt securities must look only to us for payment after that
time.
THE SUBSIDIARY GUARANTEES
Our payment obligations under any series of debt securities may be jointly
and severally, fully and unconditionally guaranteed by the Subsidiary
Guarantors. If a series of debt securities are so guaranteed, the Subsidiary
Guarantors will execute a notation of guarantee as further evidence of their
guarantee. The applicable prospectus supplement will describe the terms of any
guarantee by the Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under its guarantee will be
limited to the maximum amount that will not result in the obligations of the
Subsidiary Guarantor under the guarantee constituting a fraudulent conveyance or
fraudulent transfer under federal or state law, after giving effect to:
- all other contingent and fixed liabilities of the Subsidiary Guarantor;
and
- any collections from or payments made by or on behalf of any other
Subsidiary Guarantors in respect of the obligations of the Subsidiary
Guarantor under its guarantee.
The guarantee of any Subsidiary Guarantor may be released under certain
circumstances. If no default has occurred and is continuing under the Indenture,
and to the extent not otherwise prohibited by the Indenture, a Subsidiary
Guarantor will be unconditionally released and discharged from the guarantee:
- automatically upon any sale, exchange or transfer, to any person that is
not our affiliate, of all of our direct or indirect limited partnership
or other equity interests in the Subsidiary Guarantor;
- automatically upon the merger of the Subsidiary Guarantor into us or any
other Subsidiary Guarantor or the liquidation and dissolution of the
Subsidiary Guarantor; or
- following delivery of a written notice by us to the trustee, upon the
release of all guarantees by the Subsidiary Guarantor of any debt of ours
for borrowed money (or a guarantee of such debt), except for any series
of debt securities.
If a series of debt securities is guaranteed by the Subsidiary Guarantors
and is designated as subordinate to our Senior Indebtedness, then the guarantees
by the Subsidiary Guarantors will be subordinated to the Senior Indebtedness of
the Subsidiary Guarantors to substantially the same extent as the series is
subordinated to our Senior Indebtedness. See "-- Subordination."
COVENANTS
REPORTS
The Indenture contains the following covenant for the benefit of the
holders of all series of debt securities:
So long as any debt securities are outstanding, we will:
- for as long as we are required to file information with the SEC pursuant
to the Exchange Act, file with the trustee, within 15 days after we are
required to file with the SEC, copies of the annual report and of the
information, documents and other reports which we are required to file
with the SEC pursuant to the Exchange Act;
- if we are not required to file information with the SEC pursuant to the
Exchange Act, file with the trustee, within 15 days after we would have
been required to file with the SEC, financial statements and a
Management's Discussion and Analysis of Financial Condition and Results
of Operations,
15
both comparable to what we would have been required to file with the SEC
had we been subject to the reporting requirements of the Exchange Act;
and
- if we are required to furnish annual or quarterly reports to our
unitholders pursuant to the Exchange Act, file with the trustee any
annual report or other reports sent to our unitholders generally.
A series of debt securities may contain additional financial and other
covenants applicable to us and our subsidiaries. The applicable prospectus
supplement will contain a description of any such covenants that are added to
the Indenture specifically for the benefit of holders of a particular series.
EVENTS OF DEFAULT, REMEDIES AND NOTICE
EVENTS OF DEFAULT
Each of the following events will be an "Event of Default" under the
Indenture with respect to a series of debt securities:
- default in any payment of interest on any debt securities of that series
when due that continues for 30 days;
- default in the payment of principal of or premium, if any, on any debt
securities of that series when due at its stated maturity, upon
redemption, upon required repurchase or otherwise;
- default in the payment of any sinking fund payment on any debt securities
of that series when due;
- failure by us or, if the series of debt securities is guaranteed by the
Subsidiary Guarantors, by a Subsidiary Guarantor, to comply for 60 days
after notice with the other agreements contained in the Indenture, any
supplement to the Indenture or any board resolution authorizing the
issuance of that series;
- certain events of bankruptcy, insolvency or reorganization of us or, if
the series of debt securities is guaranteed by the Subsidiary Guarantors,
of the Subsidiary Guarantors; or
- if the series of debt securities is guaranteed by the Subsidiary
Guarantors:
- any of the guarantees by the Subsidiary Guarantors ceases to be in full
force and effect, except as otherwise provided in the Indenture;
- any of the guarantees by the Subsidiary Guarantors is declared null and
void in a judicial proceeding; or
- any Subsidiary Guarantor denies or disaffirms its obligations under the
Indenture or its guarantee.
EXERCISE OF REMEDIES
If an Event of Default, other than an Event of Default described in the
fifth bullet point above, occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the outstanding debt securities of that
series may declare the entire principal of, premium, if any, and accrued and
unpaid interest, if any, on all the debt securities of that series to be due and
payable immediately.
A default under the fourth bullet point above will not constitute an Event
of Default until the trustee or the holders of 25% in principal amount of the
outstanding debt securities of that series notify us and, if the series of debt
securities is guaranteed by the Subsidiary Guarantors, the Subsidiary
Guarantors, of the default and such default is not cured within 60 days after
receipt of notice.
If an Event of Default described in the fifth bullet point above occurs and
is continuing, the principal of, premium, if any, and accrued and unpaid
interest on all outstanding debt securities of all series will become
immediately due and payable without any declaration of acceleration or other act
on the part of the trustee or any holders.
16
The holders of a majority in principal amount of the outstanding debt
securities of a series may:
- waive all past defaults, except with respect to nonpayment of principal,
premium or interest; and
- rescind any declaration of acceleration by the trustee or the holders
with respect to the debt securities of that series,
but only if:
- rescinding the declaration of acceleration would not conflict with any
judgment or decree of a court of competent jurisdiction; and
- all existing Events of Default have been cured or waived, other than the
nonpayment of principal, premium or interest on the debt securities of
that series that have become due solely by the declaration of
acceleration.
If an Event of Default occurs and is continuing, the trustee will be under
no obligation, except as otherwise provided in the Indenture, to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the holders unless such holders have offered to the trustee reasonable indemnity
or security against any costs, liability or expense. No holder may pursue any
remedy with respect to the Indenture or the debt securities of any series,
except to enforce the right to receive payment of principal, premium or interest
when due, unless:
- such holder has previously given the trustee notice that an Event of
Default with respect to that series is continuing;
- holders of at least 25% in principal amount of the outstanding debt
securities of that series have requested that the trustee pursue the
remedy;
- such holders have offered the trustee reasonable indemnity or security
against any cost, liability or expense;
- the trustee has not complied with such request within 60 days after the
receipt of the request and the offer of indemnity or security; and
- the holders of a majority in principal amount of the outstanding debt
securities of that series have not given the trustee a direction that, in
the opinion of the trustee, is inconsistent with such request within such
60-day period.
The holders of a majority in principal amount of the outstanding debt
securities of a series have the right, subject to certain restrictions, to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or of exercising any right or power conferred on the
trustee with respect to that series of debt securities. The trustee, however,
may refuse to follow any direction that:
- conflicts with law;
- is inconsistent with any provision of the Indenture;
- the trustee determines is unduly prejudicial to the rights of any other
holder; or
- would involve the trustee in personal liability.
NOTICE OF EVENT OF DEFAULT
Within 30 days after the occurrence of an Event of Default, we are required
to give written notice to the trustee and indicate the status of the default and
what action we are taking or propose to take to cure the default. In addition,
we are required to deliver to the trustee, within 120 days after the end of each
fiscal year, a compliance certificate indicating that we have complied with all
covenants contained in the Indenture or whether any default or Event of Default
has occurred during the previous year.
If an Event of Default occurs and is continuing and is known to the
trustee, the trustee must mail to each holder a notice of the Event of Default
by the later of 90 days after the Event of Default occurs or
17
30 days after the trustee knows of the Event of Default. Except in the case of a
default in the payment of principal, premium or interest with respect to any
debt securities, the trustee may withhold such notice, but only if and so long
as the board of directors, the executive committee or a committee of directors
or responsible officers of the trustee in good faith determines that withholding
such notice is in the interests of the holders.
AMENDMENTS AND WAIVERS
We may amend the Indenture without the consent of any holder of debt
securities to:
- cure any ambiguity, omission, defect or inconsistency;
- convey, transfer, assign, mortgage or pledge any property to or with the
trustee;
- provide for the assumption by a successor of our obligations under the
Indenture;
- add Subsidiary Guarantors with respect to the debt securities;
- change or eliminate any restriction on the payment of principal of, or
premium, if any, on, any debt securities;
- secure the debt securities;
- add covenants for the benefit of the holders or surrender any right or
power conferred upon us or any Subsidiary Guarantor;
- make any change that does not adversely affect the rights of any holder;
- add or appoint a successor or separate trustee; or
- comply with any requirement of the Securities and Exchange Commission in
connection with the qualification of the Indenture under the Trust
Indenture Act.
In addition, we may amend the Indenture if the holders of a majority in
principal amount of all debt securities of each series that would be affected
then outstanding under the Indenture consent to it. We may not, however, without
the consent of each holder of outstanding debt securities of each series that
would be affected, amend the Indenture to:
- reduce the percentage in principal amount of debt securities of any
series whose holders must consent to an amendment;
- reduce the rate of or extend the time for payment of interest on any debt
securities;
- reduce the principal of or extend the stated maturity of any debt
securities;
- reduce the premium payable upon the redemption of any debt securities or
change the time at which any debt securities may or shall be redeemed;
- make any debt securities payable in other than U.S. dollars;
- impair the right of any holder to receive payment of premium, principal
or interest with respect to such holder's debt securities on or after the
applicable due date;
- impair the right of any holder to institute suit for the enforcement of
any payment with respect to such holder's debt securities;
- release any security that has been granted in respect of the debt
securities;
- make any change in the amendment provisions which require each holder's
consent;
- make any change in the waiver provisions; or
- release a Subsidiary Guarantor or modify such Subsidiary Guarantor's
guarantee in any manner adverse to the holders.
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The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, we are required to mail to all holders a notice
briefly describing the amendment. The failure to give, or any defect in, such
notice, however, will not impair or affect the validity of the amendment.
The holders of a majority in aggregate principal amount of the outstanding
debt securities of each affected series, on behalf of all such holders, and
subject to certain rights of the trustee, may waive:
- compliance by us or a Subsidiary Guarantor with certain restrictive
provisions of the Indenture; and
- any past default under the Indenture, subject to certain rights of the
trustee under the Indenture;
except that such majority of holders may not waive a default:
- in the payment of principal, premium or interest; or
- in respect of a provision that under the Indenture cannot be amended
without the consent of all holders of the series of debt securities that
is affected.
DEFEASANCE
At any time, we may terminate, with respect to debt securities of a
particular series all our obligations under such series of debt securities and
the Indenture, which we call a "legal defeasance." If we decide to make a legal
defeasance, however, we may not terminate our obligations:
- relating to the defeasance trust;
- to register the transfer or exchange of the debt securities;
- to replace mutilated, destroyed, lost or stolen debt securities; or
- to maintain a registrar and paying agent in respect of the debt
securities.
IF WE EXERCISE OUR LEGAL DEFEASANCE OPTION, ANY SUBSIDIARY GUARANTEE WILL
TERMINATE WITH RESPECT TO THAT SERIES OF DEBT SECURITIES.
At any time we may also effect a "covenant defeasance," which means we have
elected to terminate our obligations under:
- covenants applicable to a series of debt securities and described in the
prospectus supplement applicable to such series, other than as described
in such prospectus supplement;
- the bankruptcy provisions with respect to the Subsidiary Guarantors, if
any; and
- the guarantee provision described under "Events of Default" above with
respect to a series of debt securities.
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the affected series of debt securities may not be accelerated
because of an Event of Default with respect to that series. If we exercise our
covenant defeasance option, payment of the affected series of debt securities
may not be accelerated because of an Event of Default specified in the fourth,
fifth (with respect only to a Subsidiary Guarantor (if any)) or sixth bullet
points under "-- Events of Default" above or an Event of Default that is added
specifically for such series and described in a prospectus supplement.
In order to exercise either defeasance option, we must:
- irrevocably deposit in trust with the trustee money or certain U.S.
government obligations for the payment of principal, premium, if any, and
interest on the series of debt securities to redemption or maturity, as
the case may be;
19
- comply with certain other conditions, including that no default has
occurred and is continuing after the deposit in trust; and
- deliver to the trustee of an opinion of counsel to the effect that
holders of the series of debt securities will not recognize income, gain
or loss for federal income tax purposes as a result of such defeasance
and will be subject to federal income tax on the same amount and in the
same manner and at the same times as would have been the case if such
deposit and defeasance had not; occurred. In the case of legal defeasance
only, such opinion of counsel must be based on a ruling of the Internal
Revenue Service or other change in applicable federal income tax law.
NO PERSONAL LIABILITY OF GENERAL PARTNER
Texas Eastern Products Pipeline Company, LLC, our general partner, and its
directors, officers, employees, incorporators and stockholders, as such, will
not be liable for:
- any of our obligations or the obligations of the Subsidiary Guarantors
under the debt securities, the Indentures or the guarantees; or
- any claim based on, in respect of, or by reason of, such obligations or
their creation.
By accepting a debt security, each holder will be deemed to have waived and
released all such liability. This waiver and release are part of the
consideration for our issuance of the debt securities. This waiver may not be
effective, however, to waive liabilities under the federal securities laws and
it is the view of the Securities and Exchange Commission that such a waiver is
against public policy.
SUBORDINATION
Debt securities of a series may be subordinated to our "Senior
Indebtedness," which we define generally to include all notes or other evidences
of indebtedness for money, including guarantees, borrowed by us or, if
applicable to any series of outstanding debt securities, the Subsidiary
Guarantors, that are not expressly subordinate or junior in right of payment to
any of our or any Subsidiary Guarantor's other indebtedness. Subordinated debt
securities will be subordinate in right of payment, to the extent and in the
manner set forth in the Indenture and the prospectus supplement relating to such
series, to the prior payment of all of our indebtedness and that of any
Subsidiary Guarantor that is designated as "Senior Indebtedness" with respect to
the series.
The holders of Senior Indebtedness of ours or, if applicable, a Subsidiary
Guarantor, will receive payment in full of the Senior Indebtedness before
holders of subordinated debt securities will receive any payment of principal,
premium or interest with respect to the subordinated debt securities:
- upon any payment or distribution of our assets or, if applicable to any
series of outstanding debt securities, the Subsidiary Guarantors' assets,
to creditors;
- upon a total or partial liquidation or dissolution of us or, if
applicable to any series of outstanding debt securities, the Subsidiary
Guarantors; or
- in a bankruptcy, receivership or similar proceeding relating to us or, if
applicable to any series of outstanding debt securities, to the
Subsidiary Guarantors.
Until the Senior Indebtedness is paid in full, any distribution to which
holders of subordinated debt securities would otherwise be entitled will be made
to the holders of Senior Indebtedness, except that such holders may receive
limited partnership units and any debt securities that are subordinated to
Senior Indebtedness to at least the same extent as the subordinated debt
securities.
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If we do not pay any principal, premium or interest with respect to Senior
Indebtedness within any applicable grace period (including at maturity), or any
other default on Senior Indebtedness occurs and the maturity of the Senior
Indebtedness is accelerated in accordance with its terms, we may not:
- make any payments of principal, premium, if any, or interest with respect
to subordinated debt securities;
- make any deposit for the purpose of defeasance of the subordinated debt
securities; or
- repurchase, redeem or otherwise retire any subordinated debt securities,
except that in the case of subordinated debt securities that provide for
a mandatory sinking fund, we may deliver subordinated debt securities to
the trustee in satisfaction of our sinking fund obligation,
unless, in either case,
- the default has been cured or waived and the declaration of acceleration
has been rescinded;
- the Senior Indebtedness has been paid in full in cash; or
- we and the trustee receive written notice approving the payment from the
representatives of each issue of "Designated Senior Indebtedness."
Generally, "Designated Senior Indebtedness" will include:
- indebtedness for borrowed money under a bank credit agreement, called
"Bank Indebtedness";
- any specified issue of Senior Indebtedness of at least $100 million; and
- any other indebtedness for borrowed money that we may designate.
During the continuance of any default, other than a default described in
the immediately preceding paragraph, that may cause the maturity of any Senior
Indebtedness to be accelerated immediately without further notice, other than
any notice required to effect such acceleration, or the expiration of any
applicable grace periods, we may not pay the subordinated debt securities for a
period called the "Payment Blockage Period." A Payment Blockage Period will
commence on the receipt by us and the trustee of written notice of the default,
called a "Blockage Notice," from the representative of any Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period.
The Payment Blockage Period may be terminated before its expiration:
- by written notice from the person or persons who gave the Blockage
Notice;
- by repayment in full in cash of the Senior Indebtedness with respect to
which the Blockage Notice was given; or
- if the default giving rise to the Payment Blockage Period is no longer
continuing.
UNLESS THE HOLDERS OF SENIOR INDEBTEDNESS SHALL HAVE ACCELERATED THE MATURITY OF
THE SENIOR INDEBTEDNESS, WE MAY RESUME PAYMENTS ON THE SUBORDINATED DEBT
SECURITIES AFTER THE EXPIRATION OF THE PAYMENT BLOCKAGE PERIOD.
Generally, not more than one Blockage Notice may be given in any period of
360 consecutive days unless the first Blockage Notice within the 360-day period
is given by holders of Designated Senior Indebtedness, other than Bank
Indebtedness, in which case the representative of the Bank Indebtedness may give
another Blockage Notice within the period. The total number of days during which
any one or more Payment Blockage Periods are in effect, however, may not exceed
an aggregate of 179 days during any period of 360 consecutive days.
After all Senior Indebtedness is paid in full and until the subordinated
debt securities are paid in full, holders of the subordinated debt securities
shall be subrogated to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness.
21
As a result of the subordination provisions described above, in the event
of insolvency, the holders of Senior Indebtedness, as well as certain of our
general creditors, may recover more, ratably, than the holders of the
subordinated debt securities.
THE TRUSTEE
We may appoint a separate trustee for any series of debt securities. We use
the term "trustee" to refer to the trustee appointed with respect to any such
series of debt securities. We may maintain banking and other commercial
relationships with the trustee and its affiliates in the ordinary course of
business, and the trustee may own debt securities.
GOVERNING LAW
The Indenture and the debt securities will be governed by, and construed in
accordance with, the laws of the State of New York.
BOOK ENTRY, DELIVERY AND FORM
We may issue debt securities of a series in the form of one or more global
certificates deposited with a depositary. We expect that The Depository Trust
Company, New York, New York, or "DTC," will act as depositary. If we issue debt
securities of a series in book-entry form, we will issue one or more global
certificates that will be deposited with DTC and will not issue physical
certificates to each holder. A global security may not be transferred unless it
is exchanged in whole or in part for a certificated security, except that DTC,
its nominees and their successors may transfer a global security as a whole to
one another.
DTC will keep a computerized record of its participants, such as a broker,
whose clients have purchased the debt securities. The participants will then
keep records of their clients who purchased the debt securities. Beneficial
interests in global securities will be shown on, and transfers of beneficial
interests in global securities will be made only through, records maintained by
DTC and its participants.
DTC advises us that it is:
- a limited-purpose trust company organized under the New York Banking Law;
- a "banking organization" within the meaning of the New York Banking Law;
- a member of the United States Federal Reserve System;
- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
- a "clearing agency" registered under the provisions of Section 17A of the
Securities Exchange Act of 1934.
DTC IS OWNED BY A NUMBER OF ITS PARTICIPANTS AND BY THE NEW YORK STOCK EXCHANGE,
INC., THE AMERICAN STOCK EXCHANGE, INC. AND THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC. THE RULES THAT APPLY TO DTC AND ITS PARTICIPANTS ARE ON
FILE WITH THE SECURITIES AND EXCHANGE COMMISSION.
DTC holds securities that its participants deposit with DTC. DTC also
records the settlement among participants of securities transactions, such as
transfers and pledges, in deposited securities through computerized records for
participants' accounts. This eliminates the need to exchange certificates.
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations.
We will wire principal, premium, if any, and interest payments due on the
global securities to DTC's nominee. We, the trustee and any paying agent will
treat DTC's nominee as the owner of the global securities for all purposes.
Accordingly, we, the trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global securities to
owners of beneficial interests in the global securities.
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It is DTC's current practice, upon receipt of any payment of principal,
premium, if any, or interest, to credit participants' accounts on the payment
date according to their respective holdings of beneficial interests in the
global securities as shown on DTC's records. In addition, it is DTC's current
practice to assign any consenting or voting rights to participants, whose
accounts are credited with debt securities on a record date, by using an omnibus
proxy.
Payments by participants to owners of beneficial interests in the global
securities, as well as voting by participants, will be governed by the customary
practices between the participants and the owners of beneficial interests, as is
the case with debt securities held for the account of customers registered in
"street name." Payments to holders of beneficial interests are the
responsibility of the participants and not of DTC, the trustee or us.
Beneficial interests in global securities will be exchangeable for
certificated securities with the same terms in authorized denominations only if:
- DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
- we determine not to require all of the debt securities of a series to be
represented by a global security and notify the trustee of our decision.
CASH DISTRIBUTIONS
GENERAL
We hold all of our assets and conduct all of our operations through our
subsidiaries. Our subsidiaries will generate all of our Cash from Operations.
The distribution of that cash from our subsidiaries to us is expected to be our
principal source of Available Cash, as described below, from which we will make
distributions. Available Cash means generally, with respect to any calendar
quarter, the sum of all of our cash receipts plus net reductions to cash
reserves less the sum of all of our cash disbursements and net additions to cash
reserves. Cash from Operations, which is determined on a cumulative basis,
generally means all cash generated by our operations, after deducting related
cash expenditures, reserves and other items specified in our partnership
agreement. It also includes the $20 million cash balance we had on the date of
our initial public offering in 1990. The full definitions of Available Cash and
Cash from Operations are set forth in "-- Defined Terms."
Our subsidiary partnerships must, under their partnership agreements,
distribute 100% of their available cash. Available cash is defined in the
subsidiary partnership agreements in substantially the same manner as it is in
our partnership agreement. Our limited liability company subsidiaries have
adopted a dividend policy under which all available cash is to be distributed.
Accordingly, the following paragraphs describing distributions to unitholders
and the general partner, and the percentage interests in our distributions, are
stated on the basis of cash available for distribution by us and our
subsidiaries on a combined basis.
We will make distributions to unitholders and the general partner with
respect to each calendar quarter in an amount equal to 100% of our Available
Cash for the quarter, except in connection with our dissolution and liquidation.
Distributions of our Available Cash will be made 98% to unitholders and 2% to
the general partner, subject to the payment of incentive distributions to the
general partner, if specified target levels of cash distributions to the
unitholders are achieved. The general partner's incentive distributions are
described below under "-- Quarterly Distributions of Available
Cash -- Distributions of Cash from Operations."
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The following table sets forth the amount of distributions of Available
Cash constituting Cash from Operations effected with respect to our limited
partnership units for the quarters in the periods shown.
AMOUNT
RECORD DATE PAYMENT DATE PER UNIT
- ----------- ---------------- --------
January 29, 1999......................................... February 5, 1999 0.450
April 30, 1999........................................... May 7, 1999 0.450
July 30, 1999............................................ August 6, 1999 0.475
October 29, 1999......................................... November 5, 1999 0.475
January 31, 2000......................................... February 4, 2000 0.475
April 28, 2000........................................... May 5, 2000 0.500
July 31, 2000............................................ August 4, 2000 0.500
October 31, 2000......................................... November 3, 2000 0.525
January 31, 2001......................................... February 2, 2001 0.525
April 30, 2001........................................... May 4, 2001 0.525
July 31, 2001............................................ August 6, 2001 0.525
October 31, 2001......................................... November 5, 2001 0.575
January 31, 2002......................................... February 8, 2002 0.575
April 30, 2002........................................... May 8, 2002 0.575
July 31, 2002............................................ August 8, 2002 0.600
Cash distributions are characterized as either distributions of Cash from
Operations or Cash from Interim Capital Transactions. This distinction is
important because it affects the amount of cash that is distributed to the
unitholders relative to the general partner. See "-- Quarterly Distributions of
Available Cash -- Distributions of Cash from Operations" and "-- Quarterly
Distributions of Available Cash -- Distributions of Cash from Interim Capital
Transactions" below. We will ordinarily generate Cash from Interim Capital
Transactions from:
- borrowings and sales of debt securities other than for working capital
purposes;
- sales of equity interests; and
- sales or other dispositions of our assets.
All Available Cash that we distribute on any date from any source will be
treated as if it were a distribution of Cash from Operations until the sum of
all Available Cash distributed as Cash from Operations to the unitholders and to
the general partner equals the aggregate amount of all Cash from Operations that
we generated since we commenced operations through the end of the prior calendar
quarter.
Any remaining Available Cash distributed on that date will be treated as if
it were a distribution of Cash from Interim Capital Transactions, except as
otherwise set forth below under the caption "-- Quarterly Distributions of
Available Cash -- Distributions of Cash from Interim Capital Transactions."
A more complete description of how we will distribute cash before we
commence to dissolve or liquidate is set forth below under "-- Quarterly
Distributions of Available Cash." Distributions of cash in connection with our
dissolution and liquidation will be made as described below under
"-- Distributions of Cash Upon Liquidation."
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QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
DISTRIBUTIONS OF CASH FROM OPERATIONS
Our distributions of Available Cash that constitutes Cash from Operations
in respect of any calendar quarter will be made in the following priorities:
- first, 98% to all unitholders pro rata and 2% to the general partner
until all unitholders have received distributions of $0.275 per limited
partnership unit for such calendar quarter (the "First Target
Distribution");
- second, 85% to all unitholders pro rata and 15% to the general partner
until all unitholders have received distributions of $0.325 per limited
partnership unit for such calendar quarter (the "Second Target
Distribution");
- third, 75% to all unitholders pro rata and 25% to the general partner
until all unitholders have received distributions of $0.450 per limited
partnership unit for such calendar quarter (the "Third Target
Distribution" and, together with the First Target Distribution and Second
Target Distribution, the "Target Distributions"); and
- thereafter, 50% to all unitholders pro rata and 50% to the general
partner.
The following table illustrates the percentage allocation of distributions
of Available Cash that constitute Cash from Operations among the unitholders and
the general partner up to the various target distribution levels.
MARGINAL PERCENTAGE
INTEREST IN
DISTRIBUTIONS
---------------------
GENERAL
QUARTERLY AMOUNT: UNITHOLDERS PARTNER
- ----------------- ----------- -------
up to $0.275................................................ 98% 2%
$0.276 to $0.325............................................ 85% 15%
$0.326 to $0.450............................................ 75% 25%
Thereafter.................................................. 50% 50%
The Target Distributions are each subject to adjustment as described below
under "-- Adjustment of the Target Distributions."
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions of Available Cash that constitute Cash from Interim Capital
Transactions will be distributed 99% to all unitholders pro rata and 1% to the
general partner until a hypothetical holder of a limited partnership unit
acquired in our initial public offering has received, with respect to that
limited partnership unit, distributions of Available Cash constituting Cash from
Interim Capital Transactions in an amount per limited partnership unit equal to
$20.00. Thereafter, all Available Cash will be distributed as if it were Cash
from Operations. We have not distributed any Available Cash that constitutes
Cash from Interim Capital Transactions.
ADJUSTMENT OF THE TARGET DISTRIBUTIONS
The Target Distributions will be proportionately adjusted in the event of
any combination or subdivision of limited partnership units. In addition, if a
distribution is made of Available Cash constituting Cash from Interim Capital
Transactions, the Target Distributions will also be adjusted proportionately
downward to equal the product resulting from multiplying each of them by a
fraction, of which the numerator shall be the Unrecovered Capital immediately
after giving effect to such distribution and the denominator shall be the
Unrecovered Capital immediately before such distribution. For these purposes,
"Unrecovered Capital" means, at any time, an amount equal to the excess of (1)
$10.00 over
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(2) the sum of all distributions theretofore made in respect of a hypothetical
limited partnership unit offered in our initial public offering out of Available
Cash constituting Cash from Interim Capital Transactions and all distributions
in connection with our liquidation.
The Target Distributions also may be adjusted if legislation is enacted
that causes us to be taxable as a corporation or to be treated as an association
taxable as a corporation for federal income tax purposes. In that event, the
Target Distributions for each quarter thereafter would be reduced to an amount
equal to the product of each of the Target Distributions multiplied by 1 minus
the sum of:
- the maximum marginal federal corporate income tax rate, plus
- any increase that results from such legislation in the effective overall
state and local income tax rate applicable to us for the taxable year in
which such quarter occurs after taking into account the benefit of any
deduction allowable for federal income tax purposes with respect to the
payment of state and local income taxes.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
We will dissolve on December 31, 2084, unless we are dissolved at an
earlier date pursuant to the terms of our partnership agreement. The proceeds of
our liquidation shall be applied first in accordance with the provisions of our
partnership agreement and applicable law to pay our creditors in the order of
priority provided by law. Thereafter, any remaining proceeds will be distributed
to unitholders and the general partner as set forth below. Upon our liquidation,
unitholders are entitled to share with the general partner in the remainder of
our assets. Their sharing will be in proportion to their capital account
balances, after giving effect to the following allocations of any gain or loss
realized from sales or other dispositions of assets following commencement of
our liquidation. Gain or loss will include any unrealized gain or loss
attributable to assets distributed in kind. Any such gain will be allocated as
follows:
- first, to each partner having a deficit balance in his capital account in
the proportion that the deficit balance bears to the total deficit
balances in the capital accounts of all partners until each partner has
been allocated gain equal to that deficit balance;
- second, 100% to the partners in accordance with their percentage
interests until the capital account in respect of each limited
partnership unit then outstanding is equal to the Unrecovered Capital
attributable to that limited partnership unit;
- third, 100% to the partners in accordance with their percentage interests
until the per-unit capital account in respect of each limited partnership
unit is equal to the sum of
- the Unrecovered Capital attributable to that limited partnership unit,
plus
- any cumulative arrearages in the payment of the Minimum Quarterly
Distribution in respect of that limited partnership unit for any quarter
after December 31, 1994;
- fourth, 85% to all unitholders pro rata and 15% to the general partner
until the capital account of each outstanding limited partnership unit is
equal to the sum of
- the Unrecovered Capital with respect to that limited partnership unit,
plus
- any cumulative arrearages in the payment of the Minimum Quarterly
Distribution in respect of that limited partnership unit for any quarter
after December 31, 1994, plus
- the excess of:
(a) the First Target Distribution over the Minimum Quarterly
Distribution for each quarter of our existence, less
(b) the amount of any distributions of Cash from Operations in excess
of the Minimum Quarterly Distribution which were distributed 85% to the
unitholders pro rata and 15% to the general partner for each quarter of our
existence ((a) less (b) being the "Target Amount");
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- fifth, 75% to all unitholders pro rata and 25% to the general partner,
until the capital account of each outstanding limited partnership unit is
equal to the sum of:
- the Unrecovered Capital with respect to that limited partnership unit,
plus
- the Target Amount, plus
- the excess of:
(a) the Second Target Distribution over the First Target Distribution
for each quarter of our existence, less
(b) the amount of any distributions of Cash from Operations in excess
of the First Target Distribution which were distributed 75% to the
unitholders pro rata and 25% to the general partner for each quarter of our
existence ((a) less (b) being the "Second Target Amount");
- thereafter, any then-remaining gain would be allocated 50% to all
unitholders pro rata and 50% to the general partner.
For these purposes, "Unrecovered Capital" means, at any time with respect
to any limited partnership units,
- $10, less
- the sum of:
- any distributions of Available Cash constituting Cash from Interim
Capital Transactions, and
- any distributions of cash and the fair value of any assets distributed
in kind in connection with our dissolution and liquidation theretofore
made in respect of a limited partnership unit that was sold in the
initial offering of the limited partnership units.
Any loss realized from sales or other dispositions of assets following
commencement of our dissolution and liquidation, including any unrealized gain
or loss attributable to assets distributed in kind, will be allocated to the
general partner and the unitholders: first, in proportion to the positive
balances in the partners' capital accounts until all balances are reduced to
zero; and second, to the general partner.
DEFINED TERMS
"Available Cash" means, with respect to any calendar quarter, the sum of:
- all our cash receipts during that quarter from all sources, including
distributions of cash received from subsidiaries, plus
- any reduction in reserves established in prior quarters,
- less the sum of:
- all our cash disbursements during that quarter, including, disbursements
for taxes on us as an entity, debt service and capital expenditures,
- any reserves established in that quarter in such amounts as the general
partner shall determine to be necessary or appropriate in its reasonable
discretion
(a) to provide for the proper conduct of our business, including
reserves for future rate refunds or capital expenditures, or
(b) to provide funds for distributions with respect to any of the next
four calendar quarters, and
- any other reserves established in that quarter in such amounts as the
general partner determines in its reasonable discretion to be necessary
because the distribution of such amounts would be prohibited by
applicable law or by any loan agreement, security agreement, mortgage,
debt
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instrument or other agreement or obligation to which we are a party or
by which we are bound or our assets are subject.
Taxes that we pay on behalf of, or amounts withheld with respect to, less
than all of the unitholders shall not be considered cash disbursements by us
that reduce "Available Cash" but will be deemed a distribution of Available Cash
to those unitholders. Alternatively, in the discretion of our general partner,
those taxes that pertain to all unitholders may be considered to be cash
disbursements which reduce Available Cash and which will not be deemed to be a
distribution of Available Cash to the unitholders. Notwithstanding the
foregoing, "Available Cash" will not include any cash receipts or reductions in
reserves or take into account any disbursements made or reserves established
after commencement of our dissolution and liquidation.
"Cash from Interim Capital Transactions" means all cash distributed other
than Cash from Operations.
"Cash from Operations" means, at any date but before the commencement of
our dissolution and liquidation, on a cumulative basis:
- $20 million, plus
- all our cash receipts during the period since the commencement of our
operations through that date, excluding any cash proceeds from any
Interim Capital Transactions or Termination Capital Transactions, less
the sum of:
(a) all our cash operating expenditures during that period including,
without limitation, taxes imposed on us,
(b) all our cash debt service payments during that period other than:
- payments or prepayments of principal and premium required by reason of
loan agreements or by lenders in connection with sales or other
dispositions of assets all cash distributed other than Cash from
Operations, and
- payments or prepayments of principal and premium made in connection
with refinancings or refundings of indebtedness, provided that any
payment or prepayment or principal, whether or not then due, shall be
determined at the election and in the discretion of the general
partner, to be refunded or refinanced by any indebtedness incurred or
to be incurred by us simultaneously with or within 180 days before or
after that payment or prepayment to the extent of the principal amount
of such indebtedness so incurred,
(c) all our cash capital expenditures during that period other than:
- cash capital expenditures made to increase the throughput or
deliverable capacity or terminaling capacity of our assets, taken as a
whole, from the throughput or deliverable capacity or terminaling
capacity existing immediately before those capital expenditures, and
- cash expenditures made in payment of transaction expenses relating to
Interim Capital Transactions,
(d) an amount equal to the incremental revenues collected pursuant to
a rate increase that are subject to possible refund,
(e) any reserves outstanding as of that date that the general partner
determines in its reasonable discretion to be necessary or appropriate to
provide for the future cash payment of items of the type referred to in (a)
through (c) above, and
(f) any reserves that the general partner determines to be necessary
or appropriate in its reasonable discretion to provide funds for
distributions with respect to any one or more of the next four calendar
quarters, all as determined on a consolidated basis and after elimination
of intercompany items and the general partner's interest in our
subsidiaries.
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"Interim Capital Transactions" means our:
- borrowings and sales of debt securities other than for working capital
purposes and other than for items purchased on open account in the
ordinary course of business,
- sales of partnership interests, and
- sales or other voluntary or involuntary dispositions of any assets other
than:
- sales or other dispositions of inventory in the ordinary course of
business,
- sales or other dispositions of other current assets including
receivables and accounts or
- sales or other dispositions of assets as a part of normal retirements or
replacements,
in each case before the commencement of our dissolution and liquidation.
TAX CONSIDERATIONS
This section was prepared by Fulbright & Jaworski L.L.P., our tax counsel,
and addresses all material United States federal income tax consequences to
prospective unitholders who are individual citizens or residents of the United
States, and unless otherwise noted, this section is our tax counsel's opinion
with respect to the matters set forth except for statements of fact and the
representations and estimates of the results of future operations included in
this discussion which are the expression of our general partner and as to which
no opinion is expressed. Our tax counsel bases its opinions on its
interpretation of the Internal Revenue Code of 1986, as amended (the "Code"),
and existing and proposed Treasury Regulations issued thereunder, judicial
decisions, administrative rulings, the facts set forth in this prospectus and
factual representations made by our general partner. Our tax counsel's opinions
are subject to both the accuracy of such facts and the continued applicability
of such legislative, administrative and judicial authorities, all of which
authorities are subject to changes and interpretations that may or may not be
retroactively applied.
It is impractical to comment on all aspects of federal, state, local and
foreign laws that may affect the tax consequences of the transactions
contemplated by the sale of limited partnership units made by this prospectus
and of an investment in such limited partnership units. Moreover, this
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to taxpayers such as
corporations, estates, nonresident aliens or other unitholders subject to
specialized tax treatment, such as tax-exempt entities, foreign persons,
regulated investment companies and insurance companies. Accordingly, we
encourage each prospective unitholder to consult, and rely on, his own tax
advisor in analyzing the federal, state, local and foreign tax consequences
peculiar to him with respect to the ownership and disposition of limited
partnership units.
We have not requested a ruling from the Internal Revenue Service (the
"IRS") with respect to our classification as a partnership for federal income
tax purposes or any other matter affecting us. An opinion of counsel represents
only that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the IRS may adopt positions that differ from our tax counsel's
conclusions expressed herein. We may need to resort to administrative or court
proceedings to sustain some or all of our tax counsel's conclusions, and some or
all of these conclusions ultimately may not be sustained. Any contest of this
sort with the IRS may materially and adversely impact the market for the limited
partnership units and the prices at which limited partnership units trade. In
addition the costs of any contest with the IRS will be borne directly or
indirectly by the unitholders and the general partner. Furthermore, neither we
nor our tax counsel can assure you that the tax consequences of investing in
limited partnership units will not be significantly modified by future
legislation, administrative changes or court decisions, which may or may not be
retroactively applied.
29
For the reasons described below, our tax counsel has not rendered an
opinion with respect to the following specific federal income tax issues:
- the treatment of a unitholder whose limited partnership units are loaned
to a short seller to cover a short sale of limited partnership units
(please read "-- Tax Consequences of Limited Partnership Unit
Ownership -- Treatment of Short Sales and Constructive Sales of
Appreciated Financial Positions");
- whether our monthly convention for allocating taxable income and losses
is permitted by existing Treasury Regulations (please read
"-- Disposition of Limited Partnership Units -- Allocations Between
Transferors and Transferees");
- whether our method for depreciating Code Section 743 adjustments is
sustainable (please read "-- Tax Consequences of Limited Partnership Unit
Ownership -- Section 754 Election"); and
- whether assignees of limited partnership units who are entitled to
execute and deliver transfer applications, but who fail to execute and
deliver transfer applications, are our partners (please read "-- Partner
Status").
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 in computing his federal income tax liability his allocable share of the
partnership's items of income, gain, loss and deduction, regardless of whether
cash distributions are made to him by the partnership. Distributions by a
partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
Our tax counsel is of the opinion that under present law, and subject to
the conditions and qualifications set forth below, both we and each of our
subsidiary partnerships are and will continue to be classified as a partnership
for federal income tax purposes. Our tax counsel's opinion as to our
classification as a partnership and that of each of our subsidiary partnerships
is based principally on our tax counsel's interpretation of the factors set
forth in Treasury Regulations under Sections 7701 and 7704 of the Code, its
interpretation of Section 7704 of the Code and upon representations made by our
general partner.
The Treasury Regulations under Section 7701 pertaining to the
classification of entities such as us as partnerships or associations taxable as
corporations for federal income tax purposes were significantly revised
effective January 1, 1997. Pursuant to these revised Treasury Regulations, known
as the "check-the-box" regulations, entities organized as limited partnerships
under domestic partnership statutes are treated as partnerships for federal
income tax purposes unless they elect to be treated as associations taxable as
corporations. For taxable years beginning after January 1, 1997, domestic
limited partnerships that were in existence prior to January 1, 1997 are deemed
to have elected to continue their classification under the Treasury Regulations
in force prior to January 1, 1997, unless they formally elect another
classification. Neither we nor our subsidiary partnerships have filed an
election to be treated as an association taxable as a corporation under the
"check-the-box" regulations, and our tax counsel has rendered its opinion that
we and our subsidiary partnerships were classified as partnerships on December
31, 1996 under the prior Treasury Regulations.
Notwithstanding the "check-the-box" regulations under Section 7701 of the
Code, Section 7704 of the Code provides that publicly traded partnerships shall,
as a general rule, be taxed as corporations despite the fact that they are not
classified as corporations under Section 7701 of the Code. Section 7704 of the
Code provides an exception to this general rule for a publicly traded
partnership if 90% or more of its gross income for every taxable year consists
of "qualifying income" (the "Qualifying Income Exception"). For purposes of this
exception, "qualifying income" includes income and gains derived from the
exploration, development, mining or production, processing, refining,
transportation (including pipelines) or marketing of any mineral or natural
resource. Other types of "qualifying income" include interest, dividends, real
property rents, gains from the sale of real property, including real property
held by
30
one considered to be a "dealer" in such property, and gains from the sale or
other disposition of capital assets held for the production of income that
otherwise constitutes "qualifying income". We have represented that 90% or more
of our gross income, as determined for purposes of the Qualifying Income
Exception, has been and will be derived from fees and charges for transporting
natural gas, refined petroleum products, natural gas liquids, carbon dioxide and
other hydrocarbons through our pipelines, dividends, and interest. We estimate
that less than 10% of our income is not qualifying income; however, this
estimate could change from time to time.
In rendering its opinion as to periods before 1997 that we and our
subsidiary partnerships were each classified as a partnership for federal income
tax purposes, our tax counsel has relied on the following factual
representations that the general partner made about us and our subsidiary
partnerships:
- As to us and each of our subsidiary partnerships, the general partner at
all times while acting as general partner had a net worth of at least
$5.0 million computed by excluding any net worth attributable to its
interest in, and accounts and notes receivable from, or payable to, us or
any limited partnership in which it is a general partner.
- Each such partnership operated and will continue to operate in accordance
with applicable state partnership statutes, the partnership agreements
and the statements and representations made in this prospectus.
- Except as otherwise required by Section 704(c) of the Code, the general
partner of each partnership had at least a 1% interest in each material
item of income, gain, loss, deduction and credit of its respective
partnership.
- For each taxable year, 90% or more of our gross income was from sources
that, in our counsel's opinion, generated "qualified income" within the
meaning of Section 7704 of the Code.
- Our general partner and the general partner of each of our subsidiary
partnerships acted independently of the limited partners of such
partnerships.
Our tax counsel has rendered its opinion as to taxable years beginning
after 1996 relying on the accuracy of the second and fourth representations
listed above together with the further representation by the general partner of
each partnership that such partnership neither has nor will elect to be treated
as an association taxable as a corporation pursuant to the "check-the-box"
regulations.
Our tax counsel's opinion as to the classification of us and our subsidiary
partnerships as partnerships for federal income tax purposes is also based on
the assumption that if the general partner of each partnership ceases to be the
general partner, any successor general partner will make and satisfy such
representations. In this regard, if the general partner were to withdraw as a
general partner at a time when there is no successor general partner, or if the
successor general partner could not satisfy the above representations, then the
IRS might attempt to classify us or a subsidiary partnership as an association
taxable as a corporation.
If we fail to meet the Qualifying Income Exception to the general rule of
Section 7704 of the Code, other than a failure which is determined by the IRS to
be inadvertent and which is cured within a reasonable time after discovery, we
will be treated as if we had transferred all of our assets, subject to
liabilities, to a newly formed corporation on the first day of the year in which
we fail to meet the Qualifying Income Exception in return for stock in such
corporation, and then distributed such stock to the unitholders in liquidation
of their limited partnership units. This contribution and liquidation should be
tax-free to the 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
classified as an association taxable as a corporation for federal income tax
purposes.
If we were taxable as a corporation in any year, our items of income, gain,
loss, deduction, and credit would be reflected only on our tax return rather
than being passed through to our unitholders, and our net
31
income would be taxed at corporate rates. In addition, any distribution made to
a unitholder would be treated as either:
- dividend income to the extent of our current or accumulated earnings and
profits;
- in the absence of earnings and profits, as a nontaxable return of capital
to the extent of the unitholder's tax basis in his limited partnership
units; or
- taxable capital gain, after the unitholder's tax basis in his limited
partnership units is reduced to zero.
Accordingly, our classification as an association taxable as a corporation
would result in a material reduction in a unitholder's cash flow and after-tax
return, and thus, would likely result in a substantial reduction in the value of
a unitholder's limited partnership units.
PARTNER STATUS
Unitholders who have become our limited partners pursuant to the provisions
of our partnership agreement will be treated as our partners for federal income
tax purposes. Moreover, the IRS has ruled that assignees of limited partnership
interests who have not been admitted to a partnership as limited partners, but
who have the capacity to exercise substantial dominion and control over the
assigned partnership interests, will be treated as partners for federal income
tax purposes. On the basis of this ruling, except as otherwise described herein,
(1) assignees who have executed and delivered transfer applications, and are
awaiting admission as limited partners, and (2) unitholders whose limited
partnership units are held in street name or by another nominee will be treated
as our partners for federal income tax purposes. As there is no direct authority
addressing assignees of limited partnership units who are entitled to execute
and deliver transfer applications, but who fail to execute and deliver transfer
applications, the tax status of such unitholders is unclear and our tax counsel
expresses no opinion with respect to the status of such assignees. Such
unitholders should consult their own tax advisors with respect to their status
as partners for federal income tax purposes. A purchaser or other transferee of
limited partnership units who does not execute and deliver a transfer
application may not receive federal income tax information or reports furnished
to record holders of limited partnership units unless the limited partnership
units are held in a nominee or street name account and the nominee or broker
executes and delivers a transfer application with respect to such limited
partnership units.
A beneficial owner of limited partnership units whose limited partnership
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 such limited partnership
units for federal income tax purposes. These holders should consult with their
own tax advisors with respect to their status as our partners for federal income
tax purposes. Please read "-- Tax Consequences of Limited Partnership Unit
Ownership -- Treatment of Short Sales and Constructive Sales of Appreciated
Financial Positions".
Our items of income, gain, deduction, loss, and credit would not appear to
be reportable by a unitholder who is not a partner for federal income tax
purposes, and any cash distributions received by a unitholder who is not a
partner for federal income tax purposes would therefore be fully taxable as
ordinary income. These unitholders should consult their own tax advisors with
respect to their status as our partner.
TAX CONSEQUENCES OF LIMITED PARTNERSHIP UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
We will not pay any federal income tax. Our items of income, gain, loss,
deduction and credit will consist of our allocable share of the income, gains,
losses, deductions and credits of our subsidiary partnerships and dividends from
our corporate subsidiaries. Each unitholder will be required to take into
account his allocable share of our items of income, gain, loss, deduction, and
credit for our taxable year ending within his taxable year without regard to
whether we make any cash distributions to him.
32
Consequently, a unitholder may be allocated income from us although he has not
received a cash distribution from us.
TREATMENT OF DISTRIBUTIONS
Our distributions generally will not be taxable to a unitholder for federal
income tax purposes to the extent of his tax basis in his limited partnership
units immediately before the distribution. Cash distributions in excess of such
tax basis generally will be considered to be gain from the sale or exchange of
the limited partnership units, taxable in accordance with the rules described
under "-- Disposition of Limited Partnership Units". Any reduction in a
unitholder's share of our nonrecourse liabilities included in his tax basis in
his limited partnership units will be treated as a distribution of cash to such
unitholder. Please read "-- Tax Consequences of Limited Partnership Unit
Ownership -- Tax Basis of Limited Partnership Units". If a unitholder's
percentage interest decreases because we offer additional limited partnership
units, then such unitholder's share of nonrecourse liabilities will decrease,
and this will result in a corresponding deemed distribution of cash. To the
extent our distributions cause a unitholder's "at risk" amount to be less than
zero at the end of any taxable year, he must recapture any losses deducted in
previous years. Please read "-- Tax Consequences of Limited Partnership Unit
Ownership -- Limitations on Deductibility of Losses".
A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his limited partnership
units, if such distribution reduces the unitholder's share of our "unrealized
receivables," including depreciation recapture, and/or "inventory items" (as
both are defined in Section 751 of the Code) (collectively, "Section 751
Assets"). To that extent, the unitholder will be treated as having received his
proportionate share of the Section 751 Assets and having exchanged such assets
with us in return for the non-pro rata portion of the actual distribution made
to him. This latter deemed exchange will generally result in the unitholder's
realization of ordinary income under Section 751(b) of the Code. Such income
will equal the excess of (1) the non-pro rata portion of such distribution over
(2) the unitholder's tax basis for the share of such Section 751 Assets deemed
relinquished in the exchange.
TAX BASIS OF LIMITED PARTNERSHIP UNITS
A unitholder's tax basis in his limited partnership units initially will be
equal to the amount paid for the limited partnership units plus his share of our
liabilities that are without recourse to any partner ("nonrecourse
liabilities"), if any. A unitholder's share of our nonrecourse liabilities will
generally be based on his share of our profits. Please read "-- Disposition of
Limited Partnership Units -- Gain or Loss in General". A unitholder's basis will
be increased by the unitholder's share of our income and by any increase in the
unitholder's share of our nonrecourse liabilities. A unitholder's basis in his
limited partnership units will be decreased, but not below zero, by his share of
our distributions, his share of decreases in our nonrecourse liabilities, his
share of our losses and his share of our nondeductible expenditures that are not
required to be capitalized.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES
A unitholder may not deduct from taxable income his share of our losses, if
any, to the extent that such losses exceed the lesser of (1) the adjusted tax
basis of his limited partnership units at the end of our taxable year in which
the loss occurs and (2) in the case of an individual unitholder, a shareholder
of a corporate unitholder that is an "S" corporation and a corporate unitholder
if 50% or more of the value of the corporation's stock is owned directly or
indirectly by five or fewer individuals, the amount for which the unitholder is
considered "at risk" at the end of that year. In general, a unitholder will
initially be "at risk" to the extent of the purchase price of his limited
partnership units. A unitholder's "at risk" amount increases or decreases as his
tax basis in his limited partnership units increases or decreases, except that
our nonrecourse liabilities, or increases or decreases in such liabilities, are
not included in a unitholder's "at risk" amount. 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
33
disallowed to a unitholder or recaptured as a result of these limitations can be
carried forward and will be allowable to the unitholder to the extent that his
tax basis or "at risk" amount, whichever was the limiting factor, is increased
in a subsequent year. Upon a taxable disposition of a limited partnership 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 limitation is no longer utilizable.
In addition to the foregoing limitations, the passive loss limitations
generally provide that individuals, estates, trusts and closely held
corporations and personal service corporations can deduct losses from passive
activities, which are generally activities in which the taxpayer does not
materially participate, only to the extent of the taxpayer's income from those
passive activities. The passive loss limitations are applied separately with
respect to each publicly traded partnership. Consequently, any passive losses
that we generate will only be available to offset future income that we generate
and will not be available to offset income from other passive activities or
investments, including other publicly traded partnerships, or salary or active
business income. The passive activity loss rules are applied after other
applicable limitations on deductions, such as the "at risk" and basis limitation
rules discussed above. Suspended passive losses that are not used to offset a
unitholder's allocable share of our income may be deducted in full when the
unitholder disposes of his entire investment in us to an unrelated party in a
fully taxable transaction.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income". The IRS has announced that Treasury Regulations will be issued that
characterize "net passive income" from a publicly traded partnership as
"investment income" for purposes of the limitations on the deductibility of
"investment interest expense," and until such Treasury Regulations are issued,
"net passive income" from publicly traded partnerships shall be treated as
"investment income". In addition, a unitholder's share of our portfolio income
will be treated as "investment income". "Investment interest expense" includes:
- interest on indebtedness properly allocable to property held for
investment;
- a partnership's interest expense attributed to portfolio income; and
- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's "investment interest expense" will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a limited partnership unit. "Net investment income" includes
gross income from property held for investment and amounts treated as portfolio
income pursuant to the passive loss rules less deductible expense, 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.
ALLOCATION OF INCOME, GAIN, LOSS AND DEDUCTION
In general, if we have a net profit, items of income, gain, loss and
deduction will be allocated among the general partner and the unitholders in
accordance with their respective percentage interests in us. If we have a net
loss, items of income, gain, loss and deduction will generally be allocated (1)
first, to the general partner and the unitholders in accordance with their
respective percentage interests in us to the extent of their positive capital
accounts, and (2) second, to the general partner.
Notwithstanding the above, as required by Section 704(c) of the Code,
specified items of 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 ("Contributed
Property") and our property that has been revalued and reflected in the
partners' capital accounts upon the issuance of limited partnership units prior
to this offering ("Adjusted Property"). In addition, items of recapture income
will be allocated to the extent possible to the partner allocated the deduction
giving rise
34
to the treatment of such gain as recapture income. Although we expect that these
allocations of recapture income will be respected under Treasury Regulations, if
they are not respected, the amount of the income or gain allocated to a
unitholder will not change, but instead a change in the character of the income
allocated to a unitholder would result. Finally, although we do not expect that
our operations will result in the creation of negative capital accounts, if
negative capital accounts nevertheless result, items of our income and gain will
be allocated in an amount and manner sufficient to eliminate the negative
balance as quickly as possible.
An allocation of our items of income, gain, loss and deduction, other than
an allocation required by the Code to eliminate the difference between a
unitholder's "book" capital account, credited with the fair market value of
Contributed Property, and "tax" capital account, credited with the tax basis of
Contributed Property, referred to in this discussion as the "Book-Tax
Disparity," will generally be given effect for federal income tax purposes in
determining a unitholder's distributive share of an item of income, gain, loss
or deduction only if the allocation has "substantial economic effect" under the
Treasury Regulations. In any other case, a unitholder's distributive share of an
item will be determined on the basis of the unitholder's interest in us, which
will be determined by taking into account all the facts and circumstances,
including the unitholder's relative contributions to us, the interests of all
the unitholders in profits and losses, the interest of all the unitholders in
cash flow and other nonliquidating distributions and rights of all the
unitholders to distributions of capital upon liquidation.
Under the Code, partners in a partnership cannot be allocated more
depreciation, gain or loss than the total amount of any such item recognized by
that partnership in a particular taxable period (the "ceiling limitation"). This
"ceiling limitation" is not expected to have significant application to
allocations with respect to Contributed Property, and thus, is not expected to
prevent our unitholders from receiving allocations of depreciation, gain or loss
from such properties equal to that which they would have received had such
properties actually had a basis equal to fair market value at the outset.
However, to the extent the ceiling limitation is or becomes applicable, our
partnership agreement requires that certain items of income and deduction be
allocated in a way designed to effectively "cure" this problem and eliminate the
impact of the ceiling limitation. Such allocations will not have substantial
economic effect because they will not be reflected in the capital accounts of
our unitholders.
The legislative history of Section 704(c) of the Code states that Congress
anticipated that Treasury Regulations would permit partners to agree to a more
rapid elimination of Book-Tax Disparities than required provided there is no tax
avoidance potential. Further, under Final Treasury Regulations under Section
704(c) of the Code, allocations similar to our curative allocations would be
allowed. However, since the Final Treasury Regulations are not applicable to us,
our tax counsel is unable to opine on the validity of our curative allocations.
SECTION 754 ELECTION
We and our subsidiary partnerships have each made the election permitted by
Section 754 of the Code, which is irrevocable without the consent of the IRS.
Such election will generally permit us to adjust a limited partnership unit
purchaser's tax basis in our properties ("inside basis") pursuant to Section
743(b) of the Code. The Section 754 election only applies to a person who
purchases limited partnership units from a unitholder, and the Section 743(b)
adjustment belongs solely to such purchaser. Thus, for purposes of determining
income, gains, losses and deductions, the purchaser will have a special basis
for those of our properties that are adjusted under Section 743(b) of the Code.
Generally, the amount of the Section 743(b) adjustment is the difference
between a partner's tax basis in his partnership interest and the partner's
proportionate share of the common basis of the partnership's properties
attributable to such partnership interest. Therefore, the calculations and
adjustments in connection with determining the amount of the Section 743(b)
adjustment depend on, among other things, the date on which a transfer occurs
and the price at which the transfer occurs. To help reduce the complexity of
those calculations and the resulting administrative cost to us, we will apply
the following method to determine the Section 743(b) adjustment for transfers of
limited partnership units
35
made after this offering: the price paid by a transferee for his limited
partnership units will be deemed to be the lowest quoted trading price for the
limited partnership units during the calendar month in which the transfer was
deemed to occur, without regard to the actual price paid. The application of
such convention yields a less favorable tax result, as compared to adjustments
based on actual price, to a transferee who paid more than the "convention price"
for his limited partnership units.
It is possible that the IRS could successfully assert that our method for
determining the Section 743(b) adjustment amount does not meet the requirements
of the Code or the applicable Treasury Regulations and require us to use a
different method. Should the IRS require us to use a different method and
should, in our opinion, the expense of compliance exceed the benefit of the
Section 754 election, we may seek permission from the IRS to revoke our Section
754 election. Such a revocation may increase the ratio of a unitholder's
allocable share of taxable income to cash distributions and, therefore, could
adversely affect the value of a unitholder's limited partnership units.
The allocation of the Section 743(b) adjustment among our assets is complex
and will be made on the basis of assumptions as to the value of our assets and
other matters. We cannot assure you that the allocations we make will not be
successfully challenged by the IRS and that the deductions resulting from such
allocations will not be reduced or disallowed altogether. For example, the IRS
could seek to reallocate some or all of any Section 743(b) adjustment allocated
by us to our tangible assets to intangible assets instead, such as goodwill,
which, as an intangible asset, is generally amortizable over a longer period of
time and under a less accelerated method than our tangible assets. Should the
IRS require a different allocation of the Section 743(b) adjustment 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 limited
partnership units may be allocated more income than he would have been allocated
had the election not been revoked, and therefore, such revocation could
adversely affect the value of a unitholder's limited partnership units.
Treasury Regulations under Sections 743 and 197 of the Code generally
require, unless the remedial allocation method is adopted, that the Section
743(b) adjustment attributable to recovery property to be depreciated as if the
total amount of such adjustment were attributable to newly-purchased recovery
property placed in service when the limited partnership unit transfer occurs.
The remedial allocation method can be adopted only with respect to property
contributed to a partnership on or after December 21, 1993, and a significant
part of our assets were acquired by contribution to us before that date. 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 Code
rather than cost-recovery deductions under Section 168 generally is required to
be depreciated using either the straight-line method or the 150 percent
declining-balance method. We utilize the 150 percent declining-balance method on
such property. 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 common basis in such
properties. This difference could adversely affect the continued uniformity of
the intrinsic tax characteristics of our limited partnership units. To avoid
such a lack of uniformity, we have adopted an accounting convention under
Section 743(b) to preserve the uniformity of limited partnership units despite
its inconsistency with these Treasury Regulations. Please read "-- Uniformity of
Limited Partnership Units".
Although our tax counsel is unable to opine as to the validity of such an
approach because there is no clear authority on this issue, we 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 such property, despite its inconsistency with the Treasury Regulations
described above. To the extent a 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. If we determine that this
position cannot reasonably be taken, we may take a depreciation or amortization
position under which all purchasers acquiring limited partnership units in the
same month would receive depreciation or amortization, whether attributable to
common basis or a
36
Section 743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our assets. This kind of aggregate approach may
result in lower annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read "-- Uniformity of
Limited Partnership Units".
A Section 754 election is advantageous if the transferee's tax basis in his
limited partnership units is higher than the limited partnership units' share of
the aggregate tax basis of our assets immediately prior to the transfer. In that
case, as a result of the election, the transferee would have, among other items,
a greater amount of depreciation and depletion deductions and his share of any
gain or loss on a sale of our assets would be less. Conversely, a Section 754
election is disadvantageous if the transferee's tax basis in his limited
partnership units is lower than those limited partnership units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the limited partnership units may be affected either
favorably or unfavorably by the election.
TREATMENT OF SHORT SALES AND CONSTRUCTIVE SALES OF APPRECIATED FINANCIAL
POSITIONS
Taxpayers are required to recognize gain but not loss on constructive sales
of appreciated financial positions, which would include a constructive sale of
limited partnership units. Constructive sales include short sales of the same or
substantially identical property, entering into a notional principal contract on
the same or substantially identical property, and entering into a futures or
forward contract to deliver the same or substantially identical property. Thus,
gain would be triggered if a unitholder entered into a contract to sell his or
her limited partnership units for a fixed price on a future date. If a
constructive sale occurs, the taxpayer must recognize gain as if the appreciated
financial position were sold, assigned or otherwise terminated at its fair
market value on the date of the constructive sale. Adjustments for the gain
recognized on the constructive sale are made in the amount of any gain or loss
later realized by the taxpayer with respect to the position.
It would appear that a unitholder whose limited partnership units are
loaned to a "short seller" to cover a short sale of limited partnership units
would be considered as having transferred beneficial ownership of such limited
partnership units and would no longer be a partner with respect to such limited
partnership units during the period of such loan. As a result, during such
period, any of our items of income, gain, loss and deductions with respect to
such limited partnership units would appear not to be reportable by such
unitholder, any cash distributions the unitholder receives with respect to such
limited partnership units would be fully taxable and all of such distributions
would appear to be treated as ordinary income. The IRS also may contend that a
loan of limited partnership units to a "short seller" constitutes a taxable
exchange, and if such a contention were successfully made, the lending
unitholder may be required to recognize gain or loss.
Our tax counsel has not rendered an opinion regarding the treatment of a
unitholder whose limited partnership units are loaned to a short seller to cover
a short sale of limited partnership units. Unitholders desiring to assure their
status as partners should modify any applicable brokerage account agreements to
prohibit their brokers from borrowing their limited partnership units. The IRS
announced that it is actively studying issues relating to the tax treatment of
short sales of partnership interests. Please read "-- Disposition of Limited
Partnership Units -- Gain or Loss in General".
ALTERNATIVE MINIMUM TAX
Each unitholder will be required to take into account his share of any
items of our income, gain, loss and deduction for purposes of the alternative
minimum tax. A portion of our depreciation deductions may be treated as an item
of tax preference for this purpose. A unitholder's alternative minimum taxable
income derived from us may be higher than his share of our net income because we
may use more accelerated methods of depreciation for purposes of computing
federal taxable income or loss. Each prospective unitholder should consult with
his tax advisors as to the impact of an investment in limited partnership units
on his liability for the alternative minimum tax.
37
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 limited partnership units following the close of our
taxable year but before the close of his taxable year must include his share of
our items of 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 items of income, gain, loss and
deduction. Please read "-- Disposition of Limited Partnership
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 the general partner and its
affiliates and unitholders acquiring limited partnership units prior to this
offering. Please read "-- Tax Consequences of Limited Partnership Unit
Ownership -- Allocation of Income, Gain, Loss and Deduction".
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the 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 limited partnership
units. Please read "-- Tax Consequences of Limited Partnership Unit Ownership --
Allocation of Income, Gain, Loss and Deduction" and "-- Disposition of Limited
Partnership Units -- Gain or Loss in General".
The costs incurred in selling our limited partnership units (called
"syndication expenses") must be capitalized and cannot be deducted currently,
ratably or upon our termination. There are uncertainties regarding the
classification of costs as organization expenses, which may be amortized by us,
and as syndication expenses, which may not be amortized by us. The underwriting
discounts and commissions we incur will be treated as a syndication expenses.
ESTIMATES OF RELATIVE FAIR MARKET VALUES AND BASIS OF PROPERTIES
The federal income tax consequences of the acquisition, ownership and
disposition of limited partnership units will depend in part on estimates by us
as to the relative fair market values and determinations of the initial tax
bases of our assets. Although we may consult from time to time with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates and determinations of basis
may be subject to challenge and will not be binding on the IRS or the courts. If
the estimates of fair market value or determinations of basis were found to be
incorrect, the character and amount of items of income, gain, loss and deduction
previously reported by unitholders might change, and unitholders might be
required to amend their previously filed tax returns for prior years and incur
interest and penalties with respect to those adjustments. Please read
"-- Treatment of Operations -- Initial Tax Basis, Depreciation and
Amortization".
38
DISPOSITION OF LIMITED PARTNERSHIP UNITS
GAIN OR LOSS IN GENERAL
If a limited partnership unit is sold or otherwise disposed of, the
determination of gain or loss from the sale or other disposition will be based
on the difference between the amount realized and the unitholder's tax basis for
such limited partnership unit. A unitholder's "amount realized" will be measured
by the sum of the cash or the fair market value of other property received plus
the portion of our nonrecourse liabilities allocated to the limited partnership
units sold. To the extent that the amount realized exceeds the unitholder's
basis for the limited partnership units disposed of, the unitholder will
recognize gain. Because the amount realized includes the portion of our
nonrecourse liabilities allocated to the limited partnership units sold, the tax
liability resulting from such gain could exceed the amount of cash received upon
the disposition of such limited partnership units. Please read "-- Tax
Consequences of Limited Partnership Unit Ownership -- Tax Basis of Limited
Partnership Units".
Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in limited partnership units, on the sale or exchange of a limited
partnership unit held for more than one year will generally be taxable as
capital gain or loss. A portion of this gain or loss, however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Code to the extent attributable to assets giving rise to depreciation
recapture or other "unrealized receivables" or to "inventory items" we own.
Ordinary income attributable to unrealized receivables, inventory items and
depreciation recapture may exceed net taxable gain realized upon the sale of a
limited partnership unit and may be recognized even if there is a net taxable
loss realized on the sale of a limited partnership unit. Thus, a unitholder may
recognize both ordinary income and a capital loss upon a sale of limited
partnership units. Net capital loss may offset capital gains and no more than
$3,000 of ordinary income, in the case of individuals, and may only be used to
offset capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. Although the
ruling is unclear as to how the holding period of these interests is determined
once they are combined, the Treasury Regulations allow a selling unitholder who
can identify limited partnership units transferred with an ascertainable holding
period to elect to use the actual holding period of the limited partnership
units transferred. Thus, according to the ruling, a unitholder will be unable to
select high or low basis limited partnership units to sell as would be the case
with corporate stock, but, according to the Treasury Regulations, may designate
specific limited partnership units sold for purposes of determining the holding
period of limited partnership units transferred. A unitholder electing to use
the actual holding period of limited partnership units transferred must
consistently use that identification method for all subsequent sales or
exchanges of limited partnership units. A unitholder considering the purchase of
additional limited partnership units or a sale of limited partnership units
purchased in separate transactions should consult his tax advisor as to the
possible consequences of this ruling and application of the Treasury
Regulations.
Specific provisions of the Code affect the taxation of some financial
products and securities, including partnership interests, by treating a taxpayer
as having sold an "appreciated" partnership interest, one in which gain would be
recognized if it were sold, assigned or terminated at its fair market value, if
the taxpayer or related persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be
39
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 Treasury 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 are determined annually and are
prorated on a monthly basis and subsequently apportioned among the unitholders
in proportion to the number of limited partnership units owned by them as of the
opening of the NYSE on the first business day of the month. However, gain or
loss realized on a sale or other disposition of our assets other than in the
ordinary course of business is allocated among the unitholders of record as of
the opening of the NYSE on the first business day of the month in which such
gain or loss is recognized. As a result of this monthly allocation, a unitholder
transferring limited partnership units in the open market may be allocated items
of income, gain, loss and deduction realized after the date of transfer.
The use of the monthly conventions discussed above may not be permitted by
existing Treasury Regulations and, accordingly, our tax counsel is unable to
opine on the validity of the method of allocating income and deductions between
the transferors and transferees of limited partnership units. If the IRS treats
transfers of limited partnership units as occurring throughout each month and a
monthly convention is not allowed by the Treasury Regulations, the IRS may
contend that our taxable income or losses must be reallocated among the
unitholders. If any such contention were sustained, the tax liabilities of some
unitholders would be adjusted to the possible detriment of other unitholders.
Our general partner is authorized to revise our method of allocation (1) between
transferors and transferees and (2) as among unitholders whose interests
otherwise vary during a taxable period, to comply with any future Treasury
Regulations.
A unitholder who owns limited partnership units at any time during a
quarter and who disposes of such limited partnership units prior to the record
date set for a cash distribution with respect to such quarter will be allocated
items of our income, gain, loss and deduction attributable to such quarter but
will not be entitled to receive that cash distribution.
NOTIFICATION REQUIREMENTS
A unitholder who sells or exchanges limited partnership units is required
to notify us in writing of that sale or exchange within 30 days after the sale
or exchange. We are required to notify the IRS of that transaction and to
furnish specified information to the transferor and transferee. However, these
reporting requirements do not apply to a sale by an individual who is a citizen
of the United States and who effects the sale or exchange through a broker.
Additionally, a transferor and a transferee of a limited partnership unit will
be required to furnish statements to the IRS, filed with their income tax
returns for the taxable year in which the sale or exchange occurred, that
describe the amount of the consideration received for the limited partnership
unit that is allocated to our goodwill or going concern value. Failure to
satisfy these reporting obligations may lead to the imposition of substantial
penalties.
CONSTRUCTIVE TERMINATION
We will be considered to have been terminated for federal income tax
purposes if there is a sale or exchange of 50% or more of our limited
partnership units within a twelve-month period, and our constructive termination
would cause a termination of each of our subsidiary partnerships. 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
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
40
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject us to, any tax legislation
enacted before the termination.
UNIFORMITY OF LIMITED PARTNERSHIP UNITS
Because we cannot match transferors and transferees of limited partnership
units, we must maintain uniformity of the economic and tax characteristics of
the limited partnership units to a purchaser of these limited partnership units.
Without uniformity in the intrinsic tax characteristics of limited partnership
units sold pursuant to this offering and limited partnership units we issue
before or after this offering, our compliance with several federal income tax
requirements, both statutory and regulatory, could be substantially diminished,
and non-uniformity of our limited partnership units could have a negative impact
on the ability of a unitholder to dispose of his limited partnership units. A
lack of uniformity can result from a literal application of Treasury Regulation
section 1.167(c)-1(a)(6) and Treasury Regulations under Sections 197 and 743 of
the Code and from the application of the "ceiling limitation" on our ability to
make allocations to eliminate Book-Tax Disparities attributable to Contributed
Property and Adjusted Property.
We depreciate and amortize the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property and
Adjusted 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 such property
or treat that portion as nonamortizable, to the extent attributable to property
the common basis of which is not amortizable, despite its inconsistency with the
Treasury Regulations. Please read "-- Tax Consequences of Limited Partnership
Unit Ownership -- Section 754 Election".
If we determine that our adopted depreciation and amortization conventions
cannot reasonably be taken, we may adopt a depreciation and amortization
position under which all purchasers acquiring limited partnership 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 latter 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
economic and tax characteristics of any limited partnership 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 limited
partnership units might be affected, and the gain from the sale of limited
partnership units might be increased without the benefit of additional
deductions. Please read "-- Disposition of Limited Partnership Units -- Gain or
Loss in General".
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN INVESTORS
Ownership of limited partnership units by employee benefit plans, other tax
exempt organizations, nonresident aliens, foreign corporations, other foreign
persons and regulated investment companies may raise issues unique to such
persons and, as described below, may have substantial adverse tax consequences.
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 the taxable income such an organization derives from the
ownership of a limited partnership unit will be unrelated business taxable
income and thus will be taxable to such a unitholder.
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Regulated investment companies are required to derive 90% or more of their
gross income from interest, dividends, gains from the sale of stocks, securities
or foreign currency or other qualifying income. We do not anticipate that any
significant amount of our gross income will be qualifying income for regulated
investment companies purposes.
Nonresident aliens and foreign corporations, trusts or estates that acquire
limited partnership units will be considered to be engaged in business in the
United States on account of ownership of such limited partnership units and as a
consequence will be required to file federal tax returns in respect of their
distributive shares of our income, gains, losses and deductions and pay federal
income tax at regular rates, net of credits including withholding, on such
income. Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income that is effectively connected with the
conduct of a United States trade or business and that is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly traded
partnerships, we will withhold on actual cash distributions made quarterly to
foreign unitholders at the highest effective rate applicable to individuals.
Each foreign unitholder must obtain a taxpayer identification number from the
IRS and submit that number to our transfer agent on a Form W-8 BEN or applicable
substitute form in order to obtain credit for the taxes withheld. A change in
applicable law may require us to change these procedures.
Because a foreign corporation that owns limited partnership units will be
treated as engaged in a United States trade or business, such a unitholder may
be subject to United States branch profits tax at a rate of 30%, in addition to
regular federal income tax, on its allocable share of our earnings and profits,
as adjusted for changes in the foreign corporation's "U.S. net equity," that are
effectively connected with the conduct of a United States trade or business.
Such a tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate
unitholder is a "qualified resident". In addition, such a unitholder is subject
to special information reporting requirements under Section 6038C of the Code.
The IRS has ruled that a foreign partner who sells or otherwise disposes of
a partnership interest will be subject to federal income tax on gain realized on
the disposition of such partnership interest to the extent that such gain is
effectively connected with a United States trade or business of the foreign
partner. We do not expect that any material portion of any gain from the sale of
a limited partnership unit will avoid United States taxation. Moreover, a gain
of a foreign unitholder will be subject to United States income tax if that
foreign unitholder has held more than 5% in value of the limited partnership
units during the five-year period ending on the date of the disposition or if
the limited partnership units are not regularly traded on an established
securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
ENTITY-LEVEL COLLECTIONS
If we are required or elect under applicable law to pay any federal, state
or local income tax on behalf of any unitholder, former unitholder or the
general partner, we are authorized to pay those taxes from our funds. That
payment, if made, will be treated as a distribution of cash to the partner on
whose behalf the payment was made. If the payment is made on behalf of a person
whose identity cannot be determined, we are authorized to treat the payment as a
distribution to all current unitholders. We are authorized to amend the
partnership agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of limited partnership units and to adjust later
distributions, so that after giving effect to these distributions, the priority
and characterization of distributions otherwise applicable under the partnership
agreement is maintained as nearly as is practicable. Payments by us as described
above could give rise to an overpayment of tax on behalf of an individual
partner in which event the partner would be required to file a claim in order to
obtain a credit or refund.
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INCOME TAX INFORMATION RETURNS AND AUDIT PROCEDURES
We will use all reasonable efforts to furnish unitholders with tax
information within 75 days after the close of each taxable year. Specifically,
we intend to furnish to each unitholder a Schedule K-1 which sets forth his
allocable share of our items of income, gain, loss, deduction and credit. In
preparing such information, we will necessarily use various accounting and
reporting conventions to determine each unitholder's allocable share of such
items. Neither we nor our tax counsel can assure you that any such conventions
will yield a result that conforms to the requirements of the Code, Treasury
Regulations thereunder or administrative pronouncements of the IRS. We cannot
assure prospective unitholders that the IRS will not contend that such
accounting and reporting conventions are impermissible. Contesting any such
allegations could result in substantial expense to us. In addition, if the IRS
were to prevail, unitholders may incur substantial liabilities for taxes and
interest.
Our federal income tax information returns may be audited by the IRS. The
Code contains partnership audit procedures that significantly simplify the
manner in which IRS audit adjustments of partnership items are resolved.
Adjustments, if any, resulting from such an audit may require each unitholder to
file an amended tax return, which may result in an audit of the unitholder's
return. Any audit of a unitholder's return could result in adjustments to items
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, deduction and credit and the imposition of penalties and other
additions to unitholders' tax liability are determined at the partnership level
in a unified partnership proceeding rather than in separate proceedings with the
partners. The Code provides for one partner to be designated as the "Tax Matters
Partner" for these purposes. Our partnership agreement appoints our general
partner as our Tax Matters Partner.
The Tax Matters Partner is entitled to make elections for us and our
unitholders and can extend the statute of limitations for assessment of tax
deficiencies against unitholders with respect to our taxable items. In
connection with adjustments to our tax returns proposed by the IRS, the Tax
Matters Partner may bind any unitholder with less than a 1% profits interest in
us to a settlement with the IRS unless the unitholder elects, by filing a
statement with the IRS, not to give such authority to the Tax Matters Partner.
The Tax Matters Partner may seek judicial review to which all the unitholders
are bound. If the Tax Matters Partner fails to seek judicial review, such review
may be sought by any unitholder having at least a 1% profit interest in us and
by unitholders having, in the aggregate, at least a 5% profits interest. Only
one judicial proceeding will go forward, however, and each unitholder with an
interest in the outcome may participate.
The unitholders will generally be required to treat their allocable shares
of our taxable items on their federal income tax returns in a manner consistent
with the treatment of the items on our information return. In general, that
consistency requirement is waived if the unitholder files a statement with the
IRS identifying the inconsistency. Failure to satisfy the consistency
requirement, if not waived, will result in an adjustment to conform the
treatment of the item by the unitholder to the treatment on our return. Even if
the consistency requirement is waived, adjustments to the unitholder's tax
liability with respect to our items may result from an audit of our or the
unitholder's tax return. Intentional or negligent disregard of the consistency
requirement may subject a unitholder to substantial penalties.
NOMINEE REPORTING
Persons who hold our limited partnership units as a nominee for another
person are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owners and the nominee;
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(b) whether the beneficial owner is:
(1) a person that is not a United States person as defined in
Section 7701(a)(30) of the Code,
(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 limited partnership units held,
acquired or transferred for the beneficial owners; and
(d) 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 a United States person and information
on limited partnership 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 for failure to report such information to us. The nominee is
required to supply the beneficial owner of the limited partnership units with
the information furnished to us.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. Our general partner, as
our principal organizer, has registered us as a tax shelter with the IRS in the
absence of assurance that we are not subject to tax shelter registration and in
light of the substantial penalties which might be imposed if registration is
required and not undertaken. We have received tax shelter registration number
90036000017 from the IRS. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE
THAT AN INVESTMENT IN LIMITED PARTNERSHIP UNITS OR THE CLAIMED TAX BENEFITS HAVE
BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. We must furnish our registration
number to our unitholders, and a unitholder who sells or otherwise transfers a
limited partnership unit in a subsequent transaction must furnish the
registration number to the transferee. The penalty for failure of the transferor
of a limited partnership unit to furnish such registration number to the
transferee is $100 for each such failure. The unitholder must disclose our tax
shelter registration number on Form 8271 to be attached to the tax return on
which any deduction, loss, credit or other benefit generated by us is claimed or
income from us is included. A unitholder who fails to disclose the tax shelter
registration number on his return, without reasonable cause for such failure,
will be subject to a $250 penalty for each such failure. Any penalties discussed
herein are not deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax that is attributable to one or more specified causes,
including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, for any portion of an
underpayment if it is shown that there was a reasonable cause for that portion
and that the taxpayer acted in good faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($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 (i)
for which there is, or was, "substantial authority," or (ii) as to which there
is a reasonable basis and the pertinent facts of that position are disclosed on
the return. More stringent rules apply to "tax shelters," a term that in this
context does not appear to include us. If any item of income, gain, loss,
deduction or credit included in the distributive shares of unitholders might
result in that kind of an "understatement" of income for which no
44
"substantial authority" exists, we must disclose the pertinent facts on our
return. In addition, we will make a reasonable effort to furnish sufficient
information for unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
Unitholders may be subject to state and local income taxes, unincorporated
business taxes, and estate, inheritance or intangible taxes that may be imposed
by the various jurisdictions in which the unitholders reside or in which we or
our subsidiary partnerships do business or own property. Although an analysis of
those various taxes is not presented here, each prospective unitholder should
consider the potential impact of such taxes on his investment in limited
partnership units. Our operating subsidiaries own property and do business in
Alabama, Arkansas, Colorado, Illinois, Indiana, Kansas, Kentucky, Louisiana,
Missouri, Montana, Nebraska, New Mexico, New York, North Dakota, Ohio, Oklahoma,
Pennsylvania, Rhode Island, South Dakota, Texas, Utah and Wyoming. A unitholder
will likely be required to file state income tax returns in such states, other
than South Dakota, Texas and Wyoming, and may be subject to penalties for
failure to comply with such requirements. In addition, an obligation to file tax
returns or to pay taxes may arise in other states. Moreover, in some states, tax
losses may not produce a tax benefit in the year incurred and also may not be
available to offset income in subsequent taxable years. This could occur, for
example, if the unitholder has no income from sources within that state. We are
authorized but not required to pay any state or local income tax on behalf of
all the unitholders even though such payment may be greater than the amount that
would have been required to be paid if such payment had been made directly by a
particular partner or assignee; provided, however, that such tax payment shall
be in the same amount with respect to each limited partnership unit and, in the
general partner's sole discretion, payment of such tax on behalf of all the
unitholders or assignees is in the best interests of the unitholders or the
assignees as a whole. Any amount so paid on behalf of all unitholders or
assignees shall be deducted as a cash operating expenditure of us in calculating
"Cash from Operations".
It is the responsibility of each prospective unitholder to investigate the
legal and tax consequences, under the laws of pertinent states or localities, of
his investment in limited partnership units. Accordingly, each prospective
unitholder should consult, and must depend on, his own tax advisors with regard
to state and local tax matters. Further, it is the responsibility of each
unitholder to file all state and local, as well as federal, tax returns that may
be required of such unitholder.
INVESTMENT IN LIMITED PARTNERSHIP UNITS BY EMPLOYEE BENEFIT PLANS
An investment in limited partnership units by an employee benefit plan is
subject to additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
restrictions imposed by Section 4975 of the Code. As used herein, 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 Individual Retirement Accounts established
or maintained by an employer or employee organization. Among other things,
consideration should be given to:
- whether such investment is prudent under Section 404(a)(1)(B) of ERISA;
- whether in making such investment such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA;
45
- the fact that such investment could result in recognition of unrelated
business taxable income by such plan even if there is no net income;
- the effect of an imposition of income taxes on the potential investment
return for an otherwise tax-exempt investor; and
- whether, as a result of the investment, the plan will be required to file
an exempt organization business income tax return with the IRS.
Please read "-- Tax-Exempt Entities, Regulated Investment Companies and
Foreign Investors". The person with investment discretion with respect to the
assets of an employee benefit plan should determine whether an investment in us
is authorized by the appropriate governing instrument and is a proper investment
for such plan.
In addition, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in limited partnership units, be deemed to
own an undivided interest in our assets. If so, the general partner also would
be a fiduciary of such plan, and we would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Code.
Section 406 of ERISA and Section 4975 of the Code prohibit an employee
benefit plan from engaging in transactions involving "plan assets" with parties
that are "parties in interest" under ERISA or "disqualified persons" under the
Code with respect to the plan. These provisions also apply to Individual
Retirement Accounts which are not considered part of an employee benefit plan.
The Department of Labor issued final regulations on November 13, 1986, that
provide guidance with respect to whether the assets of an entity in which
employee benefit plans acquire equity interests would be deemed "plan assets".
Pursuant to these regulations, an entity's assets would not be considered to be
"plan assets" if, among other things:
(1) 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 the federal securities laws;
(2) 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
(3) 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 employee benefit plans (as defined in Section 3(3) of
ERISA), whether or not they are subject to the provisions of Title I of
ERISA, plans described in Section 4975(e)(1) of the Code, and any entities
whose underlying assets include plan assets by reason of a plan's
investments in the entity.
Our assets would not be considered "plan assets" under these regulations
because it is expected that the investment will satisfy the requirements in (1)
above, and also may satisfy requirements (2) and (3) above.
Plan fiduciaries contemplating a purchase of limited partnership units
should consult with their own counsel concerning the consequences under ERISA
and the Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.
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PLAN OF DISTRIBUTION
We may sell securities to one or more underwriters for public offering and
sale, or we may sell the securities to investors directly or through agents. The
applicable prospectus supplement will name any underwriter or agent involved in
the offer and sale of the securities.
Underwriters may offer and sell the securities at fixed prices, which may
be changed, at prices related to the prevailing market prices at the time of
sale or at negotiated prices. We also may authorize underwriters acting as our
agents to offer and sell the securities upon the terms and conditions as are set
forth in the applicable prospectus supplement. In connection with the sale of
securities, underwriters may be deemed to have received compensation from us in
the form of underwriting discounts or commissions and also may receive
commissions from purchasers of the securities for whom they may act as agent.
Underwriters may sell the securities to or though dealers. Dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agent.
The applicable prospectus supplement will disclose any underwriting
compensation we pay to underwriters or agents in connection with the offering of
the securities, and any discounts, concessions or commissions allowed by
underwriters to participating dealers. Underwriters, dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters, and any discounts and commissions they receive and any profit they
realize on resale of the securities may be deemed to be underwriting discounts
and commissions under the Securities Act. Underwriters, dealers and agents may
be entitled, under agreements entered into with us, to indemnification against,
or contribution toward, certain civil liabilities, including liabilities under
the Securities Act.
If a prospectus supplement so indicates, we will authorize agents,
underwriters or dealers to solicit offers by certain institutional investors to
purchase the securities to which such prospectus supplement relates, providing
for payment and delivery on a future date specified in such prospectus
supplement. There may be limitations on the minimum amount that may be purchased
by any such institutional investor or on the number of the securities that may
be sold pursuant to such arrangements. Institutional investors include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and such other institutions
as we may approve. The obligations of the purchasers pursuant to such delayed
delivery and payment arrangements will not be subject to any conditions except
that (i) the purchase by an institution of the securities shall not be
prohibited under the applicable laws of any jurisdiction in the United States
and (ii) if the securities are being sold to underwriters, we shall have sold to
such underwriters the total number of such securities less the number thereof
covered by such arrangements. Underwriters will not have any responsibility in
respect of the validity of such arrangements or our performance or such
institutional investors thereunder.
If a prospectus supplement so indicates, the underwriters engaged in an
offering of securities may purchase and sell securities in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of securities than they are
required to purchase in the offering. "Covered" short sales are sales made in an
amount not greater than the underwriters' option to purchase additional
securities from us in the offering. The underwriters may close out any covered
short position by either exercising their option to purchase additional
securities or purchasing securities in the open market. In determining the
source of securities to close out the covered short position, the underwriters
will consider, among other things, the price of securities available for
purchase in the open market as compared to the price at which they may purchase
securities through the overallotment option. "Naked" short sales are any sales
in excess of such option. The underwriters must close out any naked short
position by purchasing securities 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 securities in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of securities
made by the underwriters in the open market prior to the completion of the
offering.
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The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives of the underwriters have
repurchased securities sold by or for the account of such underwriter in
stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
securities, and together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the securities. As a result,
the price of the securities may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on the NYSE, in the
over-the-counter market or otherwise.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for us in the ordinary course
of business.
LEGAL
Certain legal matters in connection with the securities will be passed upon
by Fulbright & Jaworski L.L.P., Houston, Texas, as our counsel. Any underwriter
will be advised about other issues relating to any offering by their own legal
counsel.
EXPERTS
The consolidated financial statements of TEPPCO Partners, L.P. as of
December 31, 2001 and 2000 and for each of the years in the three-year period
ended December 31, 2001, the consolidated financial statements of TE Products
Pipeline Company, Limited Partnership as of December 31, 2001 and 2000 and for
each of the years in the three-year period ended December 31, 2001, and the
consolidated balance sheet of Texas Eastern Products Pipeline Company, LLC and
subsidiary as of December 31, 2001 (included in TEPPCO Partners, L.P.'s Current
Reports on Form 8-K filed on April 16, 2002 and October 9, 2002), have been
incorporated by reference herein in reliance upon the reports of KPMG LLP,
independent accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The audit report covering the December 31, 2001 consolidated financial
statements of TEPPCO Partners, L.P. refers to a change in the method of
accounting for derivative financial instruments and hedging activities on
January 1, 2001, and, effective July 1, 2001, adoption of the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and certain provisions of SFAS No. 142, Goodwill and Other
Intangible Assets.
The combined financial statements of the Burlington Resources Gathering
Inc. Val Verde Gathering and Processing System as of December 31, 2001 and 2000,
and for the years then ended incorporated by reference in this prospectus from
TEPPCO Partners, L.P.'s Current Report on Form 8-K filed July 2, 2002, as
amended by the Current Reports on Form 8-K/A filed on August 12, 2002 and
October 8, 2002, have been audited by PricewaterhouseCoopers LLP, independent
accountants, as indicated in their report with respect thereto. Such combined
financial statements have been so incorporated in reliance on the report of such
independent accountants given on the authority of said firm as experts in
auditing and accounting.
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3,425,000 UNITS
(TEPPCO PARTNERS, L.P. LOGO)
TEPPCO PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
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PROSPECTUS SUPPLEMENT
APRIL 2, 2003
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SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
UBS WARBURG
GOLDMAN, SACHS & CO.
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