Filed Pursuant to Rule 424(b)(5)
Registration No. 333-86650
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 2, 2002)
3,800,000 UNITS
[TEPPCO PARTNERS, L.P. LOGO]
TEPPCO PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
$29.72 PER UNIT
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We are selling 3,800,000 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 570,000 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 September 5, 2002 was $29.72 per unit.
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INVESTING IN OUR UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-6 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 1 OF THE ACCOMPANYING 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.
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PER UNIT TOTAL
-------- ------------
Public Offering Price....................................... $29.72 $112,936,000
Underwriting Discount....................................... $ 1.26 $ 4,788,000
Proceeds to TEPPCO Partners, L.P. (before expenses)......... $28.46 $108,148,000
The underwriters are offering the units subject to various conditions. The
underwriters expect to deliver the units to purchasers on or about September 10,
2002.
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SALOMON SMITH BARNEY UBS WARBURG
GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
RAYMOND JAMES
September 5, 2002
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.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-1
Risk Factors................................................ S-6
Where You Can Find More Information......................... S-7
Use of Proceeds............................................. S-8
Capitalization.............................................. S-9
Price Range of Units and Cash Distributions................. S-10
Historical and Pro Forma Summary Selected Financial and
Operating Information..................................... S-11
Underwriting................................................ S-14
Legal Matters............................................... S-16
Experts..................................................... S-16
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
Cash Distributions.......................................... 23
Tax Considerations.......................................... 29
Investment in Units by Employee Benefit Plans............... 45
Plan of Distribution........................................ 47
Legal....................................................... 48
Experts..................................................... 48
i
PROSPECTUS SUPPLEMENT SUMMARY
This document is in two parts. The first part is the prospectus supplement,
which describes our business and the specific terms of this offering. The second
part is the 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 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 other documents
incorporated by reference to understand fully the terms of the 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 Phillips Petroleum Company. 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 30 storage facilities and 53 delivery terminals, extending from
southeast Texas through the central and midwest states to the northeast
United States. 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
while our Mont Belvieu 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. Finally, our Downstream Segment also
includes three petrochemical pipelines between Mont Belvieu and Port
Arthur, Texas.
- Gathering, transporting and marketing crude oil (our Upstream
Segment). We own and operate approximately 2,600 miles of crude oil trunk
pipelines 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 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 undivided
interests in two crude oil pipelines operating in New Mexico, Oklahoma and
Texas.
- Gathering natural gas, transporting natural gas liquids and fractionating
natural gas liquids (our Midstream Segment). We own and operate
approximately 650 miles of natural gas liquids, or NGLs, pipelines located
along the Texas Gulf Coast. We also own two fractionators in Colorado.
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
350 miles of pipelines. Natural gas gathered on the Jonah gas gathering
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 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. Certain of the assets of our Midstream
Segment are operated and commercially managed by DEFS under agreements
with us. On June 30, 2002, we acquired the Val Verde coal seam gas
gathering system from a subsidiary of Burlington Resources Inc. See
"-- Recent Strategic Developments -- Acquisition of the Val Verde
Gathering System."
S-1
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 are accretive to cash flow and distributions to
unitholders;
- - 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;
- - Increase throughput on our pipeline systems that have additional capacity;
- - Expand our existing pipeline and gathering systems to facilitate customer
generated growth;
- - Maintain and enhance the 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 leads or 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 Phillips Petroleum Company combined their natural gas gathering and
processing businesses. Duke Energy owns approximately 70% of DEFS and Phillips
Petroleum 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. Phillips Petroleum Company 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.
RECENT STRATEGIC DEVELOPMENTS
ACQUISITION OF THE VAL VERDE GATHERING SYSTEM
On June 30, 2002, we acquired the Val Verde gathering system from
Burlington Resources Gathering Inc., a subsidiary of Burlington Resources Inc.
We funded the purchase price of $444 million with borrowings under our revolving
credit facilities and a new six-month bank term loan. The Val Verde gathering
system is commercially managed and operated by our affiliate, DEFS.
The Val Verde gathering system consists of 360 miles of pipeline ranging in
size from 4 inches to 36 inches in diameter, 14 compressor stations operating
over 93,000 horsepower of compression and a large amine treating facility for
the removal of carbon dioxide, or CO(2). The system has a pipeline capacity of
approximately one billion cubic feet of gas per day. For the six months ended
June 30, 2002, the system's throughput averaged 553 million cubic feet per day,
or MMcf/d. In addition, the amine treating facility has a current treating
capacity of 575 MMcf/d. This capacity varies depending on the inlet CO(2)
concentration of the gas stream.
The Val Verde gathering system gathers coal seam gas from the Fruitland
Coal Formation of the San Juan Basin in New Mexico. The system is one of the
largest coal seam gas gathering and treating facilities in the United States,
gathering coal seam gas from more than 544 separate wells throughout New Mexico.
The system provides gathering and treating services pursuant to approximately 60
long-term contracts with approximately 40 different natural gas producers in the
San Juan Basin. Five producers account for approximately 90% of the current
volumes on the Val Verde gathering system, including contracts with subsidiaries
of Burlington Resources which account for approximately 50% of the current
S-2
contracted volumes. In addition, approximately 73% of the current volumes
gathered on the Val Verde gathering system are delivered under contracts that
dedicate production through 2011. Gas gathered on the Val Verde gathering system
is delivered to several interstate pipeline systems serving the western United
States and to local New Mexico markets. As with our other gas gathering
businesses, this coal seam gas gathering business is fee-based, and we do not
take title to the gas gathered on the Val Verde gathering system.
Coal seam gas differs from conventional natural gas in that it typically
contains high levels of carbon dioxide, which must be removed from the gas
before it is delivered to market. The levels of carbon dioxide in coal seam gas
tend to increase as a well is produced. Transportation contracts on the Val
Verde gathering system include provisions for fee escalations as carbon dioxide
content increases. Coal seam gas typically contains low levels of NGLs, allowing
little opportunity to process the gas for NGL recovery. Although the system
currently gathers only limited amounts of conventional natural gas, significant
reserves of conventional natural gas exist in the San Juan Basin, and the system
may compete for gathering of volumes produced from these reserves in the future.
The Val Verde gathering system competes for additional coal seam gas
gathering contracts with other systems designed to gather and treat high carbon
dioxide content gas. These systems include those operated by affiliates of The
Williams Companies, Inc., El Paso Corporation and Kinder Morgan Inc.
The Val Verde gathering system complements our business strategy since it
provides additional fee-based revenue in an existing line of business and holds
attractive organic growth opportunities. In addition, the acquisition is
complementary to our prior midstream acquisitions while providing geographic
diversification. We expect first full-year earnings before interest, taxes,
depreciation and amortization from the Val Verde gathering system of
approximately $55 million to $60 million. Additional information regarding the
Val Verde gathering system acquisition, including pro forma financial
information and historical financial information regarding the acquired
business, may be found in our Current Report on Form 8-K filed July 2, 2002, as
amended by the Current Report on Form 8-K/A filed August 12, 2002, with the
Securities and Exchange Commission.
RECENT FINANCIAL DEVELOPMENTS
CASH DISTRIBUTION INCREASE
In connection with the acquisition of the Val Verde gathering system, we
increased our annual distribution by 10 cents per unit, effective with the
distribution paid August 8, 2002. This increase raised our annual distribution
rate to $2.40 per unit and represents the fifth increase in cash distributions
in the past three years. The first distribution payable on the units offered by
this prospectus and prospectus supplement will be declared in October 2002 and
payable in November 2002 with respect to the third quarter of 2002.
ISSUANCE OF COMMON UNITS
On July 16, 2002, we completed a public offering of 3.0 million units
representing limited partner interests. Total net cash proceeds from the
offering after underwriting discount and issuance costs were approximately $86.4
million and were used to repay a portion of the indebtedness we incurred under a
bank term loan to fund the acquisition of the Val Verde gathering system. On
August 14, 2002, we sold an additional 175,000 units to cover over-allotments,
for additional net proceeds of approximately $5.0 million.
S-3
THE OFFERING
Units offered...................... 3,800,000 units (4,370,000 units if the
underwriters' over-allotment option is
exercised in full)
Units to be outstanding after the
offering
Units............................ 49,444,597 (50,014,597 units if the
underwriters' over-allotment option is
exercised in full)
Class B units.................... 3,916,547(1)
New York Stock Exchange symbol..... TPP
Use of proceeds.................... We will receive net proceeds from this
offering (after payment of offering
expenses) of approximately $107.9
million, or approximately $124.2 million
if the underwriters' over-allotment
option is exercised in full. We plan to
use net proceeds, together with the
related capital contribution of our
general partner of approximately $2.2
million, to repay all of the remaining
indebtedness we incurred under a bank
term loan to fund a portion of the
acquisition of the Val Verde gathering
system. See "Use of Proceeds" on page
S-8.
Timing of next quarterly
distribution....................... Cash distributions will be made on the
units in November 2002, when the
distribution will be made for the third
quarter 2002. Our current quarterly
distribution rate is $0.60 per unit, or
$2.40 per unit on an annualized basis.
Risk factors....................... An investment in our units involves
risks. See "Risk Factors" beginning 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 held by an affiliate of our general partner and are
economically identical to the units but are not publicly traded. The Class B
units may be converted at the option of the holder into an equal number of
units if specified conditions are met.
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 2004, you will be allocated an amount of U.S. federal taxable income
for 2002, 2003 and 2004 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 $0.60 per unit).
However, the taxable income allocable to a unitholder after 2004 may constitute
an increasing percentage of distributed cash.
S-4
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 acquisition of the Val Verde gathering system but do not
assume that we will 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 ("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 twelve-month period ended June 30, 2002, results, we believe
that at least 92% of our gross income for the twelve-month period ended June 30,
2002, constitutes qualifying income. We further estimate that this percentage
will increase for 2002 due to the impact of a full year of the operations of the
Jonah gas gathering system, the addition in March 2002 of the NGL transportation
business of the Chaparral and Quanah pipelines, and the acquisition of the Val
Verde gathering system, all of which generate qualifying income.
S-5
RISK FACTORS
As previously announced, 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 twelve month
period ending September 30, 2002, the maximum permitted ratio is 5.0-to-1 on a
pro forma basis. We anticipate that we will be in compliance with the September
30, 2002 requirement after giving effect to the estimated net proceeds of this
offering and the related capital contribution from the general partner as
described under "Use of Proceeds".
At December 31, 2002, the maximum permitted debt-to-EBITDA ratio returns to
its pre-amendment level of 4.5-to-1. This ratio is determined for each fiscal
quarter based on the preceding twelve months on a pro forma basis. Although we
expect to satisfy this additional requirement by reducing debt through sales of
additional 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, or Centennial.
You should read carefully the discussion of the material risks relating 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 crude oil marketing business requires extensive credit risk
management which may not be adequate to protect against customer
nonpayment like that experienced as a result of the recent bankruptcy by
Enron Corp.
- 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 gas gathering system from us.
S-6
- We are a holding company and depend entirely on our operating
subsidiaries' distributions to service our debt obligations.
- We may sell 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.
- 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 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 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 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,
2001 filed March 14, 2002, as amended by the Annual Report on Form 10-K/A
filed June 3, 2002.
- Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2002 filed May 13, 2002.
- Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2002 filed August 14, 2002.
S-7
- Our Current Report on Form 8-K filed January 14, 2002 (other than any
information furnished pursuant to item 9 thereof).
- Our Current Report on Form 8-K filed January 28, 2002 (other than any
information furnished pursuant to item 9 thereof).
- Our Current Report on Form 8-K filed February 8, 2002 (other than any
information furnished pursuant to item 9 thereof).
- Our Current Report on Form 8-K filed February 20, 2002.
- Our Current Report on Form 8-K filed March 20, 2002.
- Our Current Report on Form 8-K filed April 16, 2002.
- Our Current Report on Form 8-K filed April 24, 2002.
- Our Current Report on Form 8-K filed June 4, 2002.
- Our Current Report on Form 8-K filed July 2, 2002, as amended by the
Current Report on Form 8-K/A filed August 12, 2002.
- Our Current Report on Form 8-K filed July 15, 2002.
- Our Current Report on Form 8-K filed September 3, 2002.
- The description of the 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
USE OF PROCEEDS
We intend to use the net proceeds from this offering, estimated to be
approximately $107.9 million (after the payment of offering expenses), and from
the related capital contribution of our general partner of approximately $2.2
million to repay all of the remaining indebtedness we incurred under a bank term
loan to fund a portion of the acquisition of the Val Verde gathering system.
As of August 29, 2002, we had $110 million outstanding under this bank term
loan, which matures December 27, 2002. As of August 29, 2002, the interest rate
under our bank term loan was LIBOR plus 1.40 percentage points.
S-8
CAPITALIZATION
The following table sets forth as of June 30, 2002, our consolidated
historical capitalization, our pro forma consolidated capitalization and our pro
forma as adjusted consolidated capitalization. Our pro forma information as of
June 30, 2002, gives effect to the repayment of $90 million of the outstanding
balance of the six-month bank term loan and the sale of approximately 3.2
million units in July and August 2002 for aggregate net proceeds of
approximately $93.3 million, which includes the related $1.9 million capital
contribution from our general partner, as if those transactions occurred on June
30, 2002.
Our pro forma as adjusted information as of June 30, 2002, gives effect to
the application of the net proceeds from this offering of approximately $107.9
million and from the related capital contribution of our general partner of
approximately $2.2 million to repay all of the $110 million outstanding under
our six-month bank term loan, as if it occurred on June 30, 2002.
This table should be read in conjunction with our consolidated financial
statements and the notes to those financial statements that are incorporated by
reference in this prospectus supplement and the accompanying base prospectus.
AS OF JUNE 30, 2002
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents........................ $ 25,404 $ 28,704 $ 28,859
========== ========== ==========
Short-term debt:
Six-month bank term loan......................... $ 200,000 $ 110,000 --
364-day bank revolving credit facility........... 72,000 72,000 72,000
Reclassification to long-term debt(1)............ (86,606) -- --
---------- ---------- ----------
Total short-term debt......................... 185,394 182,000 72,000
Long-term debt:
Reclassification from short-term debt(1)......... 86,606 -- --
6.450% Senior Notes due 2008 of TE Products...... 179,830 179,830 179,830
7.510% Senior Notes due 2028 of TE Products...... 210,000 210,000 210,000
7.625% Senior Notes due 2012 of TEPPCO
Partners...................................... 497,884 497,884 497,884
Bank revolving credit facility................... 500,000 500,000 500,000
---------- ---------- ----------
Total long-term debt.......................... 1,474,320 1,387,714 1,387,714
Redeemable Class B units held by related party..... 104,360 104,360 104,360
Partners' capital.................................. 587,847 681,147 791,302
---------- ---------- ----------
Total capitalization.......................... $2,351,921 $2,355,221 $2,355,376
========== ========== ==========
- ---------------
(1) Amount represents the reclassification of short-term debt to long-term debt
in accordance with Statement of Financial Accounting Standards No. 6,
Classification of Short-term Obligations Expected to be Refinanced. The
amount, $86.6 million, represents the net proceeds that we received on July
16, 2002, from the issuance of 3 million units in an underwritten public
offering.
S-9
PRICE RANGE OF UNITS AND CASH DISTRIBUTIONS
As of August 29, 2002, there were 45,644,597 units outstanding, held by
approximately 32,000 holders, including units held in street name. The units are
traded on the NYSE under the symbol "TPP." An additional 3,916,547 Class B units
are outstanding. The Class B units are held by an affiliate of our general
partner and are economically identical to the units but are not publicly traded.
The Class B units may be converted at the option of the holder into an equal
number of units if specified conditions are met including the affirmative vote
of a majority of our outstanding units.
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 NYSE on September 5, 2002, was $29.72 per unit.
PRICE RANGE
--------------- CASH
HIGH LOW DISTRIBUTIONS(1)
------ ------ ----------------
2002
Third quarter (through September 5, 2002).......... $32.19 $23.90 N/A(2)
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
2000
Fourth quarter..................................... $27.00 $21.63 $0.525
Third quarter...................................... 26.75 22.75 0.525
Second quarter..................................... 24.38 19.88 0.500
First quarter...................................... 22.94 19.00 0.500
1999
Fourth quarter..................................... $23.88 $17.13 $0.475
Third quarter...................................... 26.44 20.00 0.475
Second quarter..................................... 28.25 22.94 0.475
First quarter...................................... 26.19 22.38 0.450
- ---------------
(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 third quarter of 2002
will be declared in October 2002 and paid in November 2002.
S-10
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, 2001, was
derived from our audited consolidated financial statements included in our
Annual Report on Form 10-K, as amended, for the year ended December 31, 2001,
which is incorporated in this prospectus supplement by reference. The data as of
and for the period ended June 30, 2002, was derived from our unaudited quarterly
financial statements included in our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, which is incorporated in this prospectus
supplement by reference.
The pro forma statement of income data for the year ended December 31,
2001, was derived from our unaudited pro forma condensed combined statements of
income included in our Current Report on Form 8-K filed July 2, 2002, as amended
by our Current Report on Form 8-K/A filed August 12, 2002, which is incorporated
by reference in this prospectus supplement. The pro forma statement of income
data for the six months ended June 30, 2002, was derived from the historical
internal financial reports of the Val Verde Gathering and Processing System. The
pro forma income statement data presents our pro forma results as if the
acquisitions of the Val Verde gathering system and the Jonah Gas Gathering
Company were consummated on January 1, 2001. 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 purchases been consummated on
January 1, 2001, nor is it necessarily indicative of future results of
operations.
The summary data set forth below includes EBITDA from us without our equity
investments in Seaway and Centennial and EBITDA from these equity investments.
EBITDA from our equity investments represents our proportional interest in the
EBITDA of these equity investments. We define EBITDA as operating income plus
depreciation and amortization. EBITDA is used as a supplemental financial
measurement in the evaluation of our business and should not be considered as an
alternative to net income as an indicator of our operating performance or as an
alternative to cash flows from operating activities or other cash flow data
calculated in accordance with accounting principles generally accepted in the
United States of America or as a measure of liquidity.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, which requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Beginning January 1, 2002,
effective with our adoption of SFAS 142, we no longer record amortization
expense related to goodwill or amortization expense related to the excess
investment on our equity investments. 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 years ended
December 31, 1999, 2000 and 2001.
Upon the adoption of SFAS 142, we were required to reassess the useful
lives and residual values of all intangible assets acquired, and to make
necessary amortization period adjustments by the end of the first interim period
after adoption. We completed this analysis during the three months ended March
31, 2002, resulting in no change to the amortization period for our intangible
assets.
In connection with the transitional goodwill impairment evaluation required
by SFAS 142, we were required to perform an assessment of whether there was an
indication that goodwill was impaired as of the date of adoption. We
accomplished this by identifying our reporting units and determining the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. We then determined the fair value of each reporting
unit and compared it to the carrying value of the reporting unit. We have
completed our analysis resulting in no transitional impairment loss.
S-11
HISTORICAL PRO FORMA (UNAUDITED)
-------------------------------------------------------------- -------------------------
SIX MONTHS
ENDED JUNE 30, SIX MONTHS
YEAR ENDED DECEMBER 31, ----------------------- YEAR ENDED ENDED
------------------------------------ (UNAUDITED) DECEMBER 31, JUNE 30,
1999 2000 2001 2001 2002 2001 2002
---------- ---------- ---------- ---------- ---------- ------------ ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
INCOME STATEMENT DATA:
Operating revenues................... $1,934,883 $3,087,941 $3,556,413 $1,858,917 $1,519,466 $3,659,496 $1,557,251
Purchases of crude oil and petroleum
products............................ 1,666,042 2,794,604 3,173,607 1,664,495 1,321,142 3,173,607 1,321,142
Depreciation and amortization........ 32,656 35,163 45,899 20,764 33,640 105,316 56,399
Operating, general and
administrative...................... 136,095 150,149 185,918 84,283 90,339 215,999 101,462
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses.......... 1,834,793 2,979,916 3,405,424 1,769,542 1,445,121 3,494,922 1,479,003
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income.................. 100,090 108,025 150,989 89,375 74,345 164,574 78,248
Interest expense -- net.............. (29,430) (44,423) (62,057) (30,751) (30,478) (87,881) (38,389)
Equity earnings...................... -- 12,214 17,398 9,625 5,986 17,398 5,986
Other income -- net.................. 1,460 1,560 2,801 524 1,332 2,201 1,332
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (as reported).......... 72,120 77,376 109,131 68,773 51,185 96,292 47,177
Amortization of goodwill and excess
investment.......................... -- 767 2,396 1,263 -- 2,396 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Adjusted net income............... $ 72,120 $ 78,143 $ 111,527 $ 70,036 $ 51,185 $ 98,688 $ 47,177
========== ========== ========== ========== ========== ========== ==========
Basic net income per Limited Partner
and Class B Unit:
As reported....................... $ 1.91 $ 1.89 $ 2.18 $ 1.45 $ 0.84 $ 1.92 $ 0.78
Amortization of goodwill and excess
investment.......................... -- 0.02 0.05 0.03 -- 0.05 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Adjusted net income per Unit...... $ 1.91 $ 1.91 $ 2.23 $ 1.48 $ 0.84 $ 1.97 $ 0.78
========== ========== ========== ========== ========== ========== ==========
Diluted net income per Limited
Partner and Class B Unit:
As reported....................... $ 1.91 $ 1.89 $ 2.18 $ 1.45 $ 0.84 $ 1.92 $ 0.78
Amortization of goodwill and excess
investment.......................... -- 0.02 0.05 0.02 -- 0.05 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Adjusted net income per Unit...... $ 1.91 $ 1.91 $ 2.23 $ 1.47 $ 0.84 $ 1.97 $ 0.78
========== ========== ========== ========== ========== ========== ==========
Weighted Average Limited Partner and
Class B Units Outstanding........... 32,917 33,594 39,258 38,380 45,457 39,258 45,457
HISTORICAL
--------------------------------------------------------------
JUNE 30,
DECEMBER 31, -----------------------
------------------------------------ (UNAUDITED)
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Property, plant and equipment -- net........................ $ 720,919 $ 949,705 $1,180,461 $ 982,707 $1,531,349
Total assets................................................ 1,041,373 1,622,810 2,065,348 1,695,154 2,738,646
Long-term debt (net of current maturities).................. 455,753 835,784 730,472 827,799 1,474,320
Redeemable Class B Units.................................... 105,859 105,411 105,630 106,969 104,360
Partners' capital........................................... 229,767 315,057 543,181 383,348 587,847
S-12
HISTORICAL PRO FORMA (UNAUDITED)
------------------------------------------------------- -------------------------
SIX MONTHS
ENDED JUNE 30, SIX MONTHS
YEAR ENDED DECEMBER 31, -------------------- YEAR ENDED ENDED
-------------------------------- (UNAUDITED) DECEMBER 31, JUNE 30,
1999 2000 2001 2001 2002 2001 2002
-------- --------- --------- -------- --------- ------------ ----------
(IN THOUSANDS, EXCEPT AS NOTED)
OTHER FINANCIAL DATA:
EBITDA................................ $132,746 $ 143,188 $ 196,888 $110,139 $ 107,985 $269,890 $134,647
EBITDA from equity investments........ -- 15,373 26,694 13,939 10,816 26,694 10,816
Net cash flow provided by (used in):
Operating activities................. 103,070 108,045 169,148 61,532 97,458 N/A N/A
Investing activities
Capital expenditures
Maintenance and growth........... (77,431) (68,481) (107,614) (33,398) (63,560) N/A N/A
Acquisitions and equity
investments.................... (2,250) (427,188) (455,787) (45,142) (591,331) N/A N/A
Other.............................. 3,040 1,475 5,536 4,536 3,380 N/A N/A
-------- --------- --------- -------- ---------
Total investing activities..... $(76,641) $(494,194) $(557,865) $(74,004) $(651,511) N/A N/A
Financing activities................. $(41,259) $ 380,652 $ 387,100 $ (1,822) $ 553,978 N/A N/A
OPERATING DATA:
Downstream (MBbls):
Refined products..................... 132,642 128,151 122,947 60,548 61,109 N/A N/A
LPGs................................. 37,575 39,633 39,957 18,558 19,091 N/A N/A
Mont Belvieu......................... 28,535 27,159 23,122 10,836 15,257 N/A N/A
Upstream:
Crude oil transportation (MBbls)..... 33,267 46,225 78,714 37,596 42,788 N/A N/A
Crude oil marketing (MBbls).......... 96,252 107,607 159,477 72,451 73,279 N/A N/A
Crude oil terminaling (MBbls)........ -- 56,473 121,932 57,122 62,339 N/A N/A
Lubricants and chemicals (thousand
gallons)........................... 8,891 7,974 8,769 4,389 4,892 N/A N/A
Midstream:
NGL transportation (MBbls)........... 4,580 5,201 21,538 10,198 23,471 N/A N/A
Gathering -- natural gas (MMcf)...... -- -- 45,496 -- 109,976 N/A N/A
Fractionation -- natural gas
(MBbls)............................ 3,819 4,078 4,078 2,059 2,043 N/A N/A
S-13
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. .................................. 1,254,000
UBS Warburg LLC............................................. 874,000
Goldman, Sachs & Co. ....................................... 874,000
A.G. Edwards & Sons, Inc. .................................. 608,000
Raymond James & Associates, Inc. ........................... 190,000
---------
Total............................................. 3,800,000
=========
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 $0.76 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 570,000 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, 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; we may, however,
issue units to sellers of terminaling facilities or pipelines in connection with
acquisitions by us, provided that we have received similar lock-up agreements
from such sellers. Duke Energy Corporation has entered into a similar lock-up
agreement, but for a period of 60 days from the date of this prospectus
supplement. 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.
S-14
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.................................................... $ 1.26 $ 1.26
Total....................................................... $4,788,000 $5,506,200
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 our portion of the total expenses of this offering will be
approximately $200,000.
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 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.
A.G. Edwards & Sons, Inc. acted as financial advisor to TEPPCO Partners,
L.P. 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 Corporation, 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.
We and our general partner, 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-15
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 Fulbright & Jaworski
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,
2001 and 2000 and for each of the years in the three-year period ended December
31, 2001 (included in TEPPCO Partners' Annual Report on Form 10-K/A for the year
ended December 31, 2001) 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 refers to a change in the method of accounting for derivative
financial instruments and hedging activities as of 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 Report on Form 8-K/A filed August 12, 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.
S-16
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
---------------------
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. and Jonah Gas
Gathering Company. 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 May 2, 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
Book entry, delivery and form............................. 22
The trustee............................................... 23
Governing law............................................. 23
Cash distributions.......................................... 23
General................................................... 23
Quarterly distributions of available cash................. 24
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 unit ownership........................ 32
Treatment of operations................................... 37
Disposition of Limited Partner units...................... 38
Uniformity of units....................................... 40
Tax-exempt entities, regulated investment companies and
foreign investors...................................... 41
Administrative matters.................................... 42
State, local and other tax considerations................. 44
Investment in 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 $1 billion 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 April 19, 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. and Jonah Gas Gathering Company 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 .001% general 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. We sometimes refer
to TE Products, TCTM, TEPPCO Midstream and Jonah 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.
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 TARIFF RATES ARE SUBJECT TO REVIEW AND POSSIBLE ADJUSTMENT BY FEDERAL
REGULATORS.
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, 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.
1
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 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 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 the Partnership at a competitive
disadvantage.
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.
2
OUR CRUDE OIL MARKETING BUSINESS REQUIRES EXTENSIVE CREDIT RISK MANAGEMENT WHICH
MAY NOT BE ADEQUATE TO PROTECT AGAINST CUSTOMER NONPAYMENT LIKE THAT EXPERIENCED
AS A RESULT OF THE RECENT BANKRUPTCY BY ENRON CORP.
Risks of nonpayment and nonperformance by customers are a major
consideration in our businesses. Our credit procedures and policies may not be
adequate to eliminate customer credit risk. Due to the recent bankruptcy of
Enron Corp. and certain of its subsidiaries, our collection of transportation
fees of approximately $4.3 million, or approximately $0.09 per limited partner
and Class B Units, is doubtful.
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.
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.
3
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, 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,
4
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.
THE PARTNERSHIP COULD BE ADVERSELY AFFECTED IF THIRD PARTIES ARE SUCCESSFUL IN
ASSERTING RIGHTS TO ACQUIRE THE JONAH GAS GATHERING SYSTEM FROM THE PARTNERSHIP.
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 our partnership. It is not clear whether this asserted
right covers all or some portion of the Jonah system. On September 30, 2001,
subsidiaries of our partnership 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.
We spent an additional $19 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 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 the parent partnership and the guarantees
issued by the 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,
5
- 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 SELL 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
stockholders. 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 stockholders.
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 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,
acquisitions funded though the issuance of 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.
6
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 after-tax benefit of an investment in the limited
partnership units depends largely on our being treated as a partnership for
federal income tax purposes.
If we were classified as a corporation for 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%. 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 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 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.
7
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 units than would be the case under those positions,
without the benefit of decreased income in prior years. Also, if you sell your
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 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.
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. 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 Units" for a
further discussion of the effect of the depreciation and amortization positions
we adopt.
8
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.
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.
- Current Report on Form 8-K filed January 14, 2002.
- Current Report on Form 8-K filed January 28, 2002.
- Current Report on Form 8-K filed February 8, 2002.
- 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.
- 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.
- Current Report on Form 8-K filed February 20, 2002.
- Current Report on Form 8-K filed April 16, 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
10
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)
---------------------- ----------------------
Duke Energy Phillips Petroleum
Corporation Company
---------------------- ----------------------
| | |
| 69.7% | | 30.3%
| | |
| ---------------------------
| Duke Energy Field
| Services, LLC
| ---------------------------
| |
| | 100%
| |
| ---------------------------
| Texas Eastern Products
| Pipeline Company, LLC
| ---------------------------
| |
13.6% LP | | 2% GP
| |
| --------------------------- 84.4% LP ---------------------
|________ TEPPCO Partners, L.P. _____________ Public Unitholders
--------------------------- ---------------------
| |
100% | |
| |
---------------------- |
TEPPCO GP, Inc. | 99.999%
---------------------- |
| |
0.001% | |
| |
---------------------------
Operating Partnerships
---------------------------
GP = General Partner Interest
LP = Limited Partner Interest
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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:
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999 2000 2001
----- ----- ----- ----- -----
Ratio of Earnings to Fixed Charges............. 2.70x 2.72x 3.06x 2.10x 2.79x
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;
- 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.
18
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 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
units representing limited partner interests and any debt securities that are
subordinated to Senior Indebtedness to at least the same extent as the
subordinated debt securities.
20
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.
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.
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.
22
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.
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.
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 the 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
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."
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 unit for
such calendar quarter (the "First Target Distribution");
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- second, 85% to all unitholders pro rata and 15% to the general partner
until all unitholders have received distributions of $0.325 per 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 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 unit acquired in our initial
public offering has received, with respect to that unit, distributions of
Available Cash constituting Cash from Interim Capital Transactions in an amount
per 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 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 (2) the sum
of all distributions theretofore made in respect of a hypothetical 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.
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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 unit then
outstanding is equal to the Unrecovered Capital attributable to that
unit.
- third, 100% to the partners in accordance with their percentage interests
until the per-unit capital account in respect of each unit is equal to
the sum of
- the Unrecovered Capital attributable to that unit, plus
- any cumulative arrearages in the payment of the Minimum Quarterly
Distribution in respect of that 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 unit is equal to the sum of
- the Unrecovered Capital with respect to that unit, plus
- any cumulative arrearages in the payment of the Minimum Quarterly
Distribution in respect of that 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 unit is equal to the sum of
- the Unrecovered Capital with respect to that 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 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 unit that was sold in the initial offering of the
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 instrument or other agreement or obligation to which we are a party
or by which we are bound or our assets are subject.
27
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 partners. Alternatively, in the discretion of our general partner,
those taxes that pertain to all partners 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 partners. 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 as an entity,
(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.
"Interim Capital Transactions" means our
28
- 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 the 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 units made by this prospectus and of an investment
in such 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 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 units
and the prices at which 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 units will not be significantly modified by future
legislation, administrative changes or court decisions, which may or may not be
retroactively applied.
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 common units are loaned to a short
seller to cover a short sale of common units (please read "-- Tax
Consequences of Unit Ownership -- Treatment of Short Sales and
Constructive Sales of Appreciated Financial Positions");
29
- whether our monthly convention for allocating taxable income and losses
is permitted by existing Treasury Regulations (please read
"-- Disposition of Limited Partner Units -- Allocations Between
Transferors and Transferees");
- whether our method for depreciating Section 743 adjustments is
sustainable (please read "-- Tax Consequences of Unit
Ownership -- Section 754 Election"); and
- whether assignees of 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 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 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.
30
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
that neither we nor any of our subsidiary partnerships has or 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 ceases to be a 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 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 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 units; or
- taxable capital gain, after the unitholder's tax basis in his units is
reduced to zero.
31
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 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 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
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 units who does not execute and
deliver a transfer application may not receive federal income tax information or
reports furnished to record holders of units unless the 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 units.
A beneficial owner of units whose units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such units for federal income tax purposes. These holders should
consult with their own tax advisors with respect to their status as partners for
federal income tax purposes. Please read "-- Tax Consequences of 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 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. 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 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 units,
taxable in accordance with the rules described under "-- Disposition of Limited
Partner Units". Any reduction in a unitholder's share of our nonrecourse
liabilities included in his tax basis in his units will be treated as a
distribution of cash to such unitholder. Please read "-- Tax Consequences of
Unit Ownership -- Tax Basis of Units". If a unitholder's percentage interest
decreases because we offer additional units, then such
32
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 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 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.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
We estimate that a purchaser of units in this offering who owns those units
from the date of closing of this offering through , will be
allocated an amount of federal taxable income for that period that will be less
than % of the cash distributed with respect to that period. We anticipate
that after the taxable year ending , , the ratio of
allocable taxable income to cash distributions to the unitholders will increase.
These estimates are based upon the assumption that gross income from operations
will approximate the amount required to make the minimum quarterly distribution
on all units and other assumptions with respect to capital expenditures, cash
flow and anticipated cash distributions. These estimates and assumptions are
subject to, among other things, numerous business, economic, regulatory,
competitive and political uncertainties beyond our control. Further, the
estimates are based on current tax law and tax reporting positions that we will
adopt and with which the IRS could disagree. Accordingly, we cannot assure you
that these estimates will prove to be correct. The actual percentage of
distributions that will constitute taxable income could be higher or lower, and
any differences could be material and could materially affect the value of the
units.
TAX BASIS OF UNITS
A unitholder's tax basis in his units initially will be equal to the amount
paid for the 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 Partner 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 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 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 units. A unitholder's "at risk"
amount increases or decreases as his tax basis in his 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
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less than zero at the end of any taxable year. Losses 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 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 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 units prior to this offering
("Adjusted Property"). In addition, items of recapture income will
34
be allocated to the extent possible to the partner allocated the deduction
giving rise 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, deduction, and credit,
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,
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 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 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
35
the following method to determine the Section 743(b) adjustment for transfers of
units made after this offering: the price paid by a transferee for his units
will be deemed to be the lowest quoted trading price for the 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 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 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 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 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 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 units. To avoid such a lack of uniformity, we have
adopted an accounting convention under Section 743(b) to preserve the uniformity
of units despite its inconsistency with these Treasury Regulations. Please read
"-- Uniformity of 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 units in the same month would
receive depreciation or amortization, whether attributable to common basis or a
Section 743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our assets.
36
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 Units".
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have, among other items, a greater amount of depreciation
and depletion deductions and his share of any gain or loss on a sale of our
assets would be less. Conversely, a Section 754 election is disadvantageous if
the transferee's tax basis in his units is lower than those units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the units 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
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
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 units are loaned to a "short
seller" to cover a short sale of units would be considered as having transferred
beneficial ownership of such units and would no longer be a partner with respect
to such 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
units would appear not to be reportable by such unitholder, any cash
distributions the unitholder receives with respect to such 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 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 units are loaned to a short seller to cover a short sale of
units. Unitholders desiring to assure their status as partners should modify any
applicable brokerage account agreements to prohibit their brokers from borrowing
their 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 Partner 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 units on his liability for
the alternative minimum tax.
TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
We use the year ending December 31 as our taxable year and the accrual
method of accounting for federal income tax purposes. Each unitholder will be
required to include in income his share of our income, gain, loss and deduction
for our taxable year ending within or with his taxable year. In addition, a
unitholder who has a taxable year ending on a date other than December 31 and
who disposes of all of his
37
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 Partner 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 units prior to this offering. Please read
"-- Tax Consequences of Unit Ownership -- Allocation of Income, Gain, Loss and
Deduction".
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. 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 units. Please read
"-- Tax Consequences of Unit Ownership -- Allocation of Income, Gain, Loss and
Deduction" and "-- Disposition of Limited Partner Units -- Gain or Loss in
General".
The costs incurred in selling our units (called "syndication expenses")
must be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may 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 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".
DISPOSITION OF LIMITED PARTNER UNITS
GAIN OR LOSS IN GENERAL
If a 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 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 units sold.
38
To the extent that the amount realized exceeds the unitholder's basis for the
units disposed of, the unitholder will recognize gain. Because the amount
realized includes the portion of our nonrecourse liabilities allocated to the
units sold, the tax liability resulting from such gain could exceed the amount
of cash received upon the disposition of such units. Please read "-- Tax
Consequences of Unit Ownership -- Tax Basis of Units".
Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. 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 unit and may be recognized even if there is a
net taxable loss realized on the sale of a unit. Thus, a unitholder may
recognize both ordinary income and a capital loss upon a sale of units. Net
capital 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 units transferred with an ascertainable holding period to elect to
use the actual holding period of the units transferred. Thus, according to the
ruling, a unitholder will be unable to select high or low basis units to sell as
would be the case with corporate stock, but, according to the Treasury
Regulations, may designate specific units sold for purposes of determining the
holding period of units transferred. A unitholder electing to use the actual
holding period of units transferred must consistently use that identification
method for all subsequent sales or exchanges of units. A unitholder considering
the purchase of additional units or a sale of 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 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 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
39
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 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 units. If the IRS treats transfers of 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. The 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 units at any time during a quarter and who disposes
of such 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 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 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 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 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 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 UNITS
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. Without uniformity in the intrinsic tax
characteristics of units sold pursuant to this offering and 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 units could have a negative impact on the ability of a
unitholder to dispose of his 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
40
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 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 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 units that would not have a material adverse effect on
the unitholders. The IRS may challenge any method of depreciating the Section
743(b) adjustment described in this paragraph. If this challenge were sustained,
the uniformity of units might be affected, and the gain from the sale of units
might be increased without the benefit of additional deductions. Please read
"-- Disposition of Limited Partner Units -- Gain or Loss in General".
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN INVESTORS
Ownership of 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 unit will be unrelated business taxable income and thus will be
taxable to such a unitholder.
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
units will be considered to be engaged in business in the United States on
account of ownership of such 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 in order to obtain credit for the taxes withheld. A change in
applicable law may require us to change these procedures.
41
Because a foreign corporation that owns 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 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 units during the five-year
period ending on the date of the disposition or if the 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 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.
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
42
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 the 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 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;
(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 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 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 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.
43
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 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 unit in a subsequent transaction must furnish the
registration number to the transferee. The penalty for failure of the transferor
of a 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 "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 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
44
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 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 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 UNITS BY EMPLOYEE BENEFIT PLANS
An investment in 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;
- the fact that such investment could result in recognition of UBTI 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 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".
45
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 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.
46
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.
47
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. and
subsidiaries 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 and subsidiaries 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 Report on Form 8-K filed on April 16, 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 financial statements of Jonah Gas Gathering Company as of December 31,
2000 and for the periods June 1, 2000 to December 31, 2000 and January 1, 2000
to May 31, 2000 (Predecessor) incorporated in this prospectus by reference to
the audited historical financial statements included in pages 5 through 14 of
TEPPCO Partners, L.P.'s Current Report 8-K/A filed November 9, 2001 have been so
incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
48
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3,800,000 UNITS
[TEPPCO PARTNERS, L.P. LOGO]
TEPPCO PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
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PROSPECTUS SUPPLEMENT
SEPTEMBER 5, 2002
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SALOMON SMITH BARNEY
UBS WARBURG
GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
RAYMOND JAMES
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