FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-66102
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE NOT AN
OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 2001
PROSPECTUS SUPPLEMENT
(To Prospectus dated August 9, 2001)
(TEPPCO LOGO)
TEPPCO PARTNERS, L.P.
5,500,000 UNITS
REPRESENTING LIMITED PARTNER INTERESTS
- --------------------------------------------------------------------------------
We are offering up to 5,500,000 units representing limited partner interests in
TEPPCO Partners, L.P. Our units are listed on the New York Stock Exchange under
the symbol "TPP". The last reported sale price of the units on November 9, 2001
was $35.71 per unit.
INVESTING IN THE UNITS INVOLVES RISK. RISK FACTORS BEGIN ON PAGE S-5.
PER UNIT TOTAL
---------- ----------
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to TEPPCO Partners, L.P............................ $ $
We have granted the underwriters a 30-day option to purchase up to 825,000
additional units from us to cover over-allotments, if any.
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 PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the units on
or about November , 2001.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
UBS WARBURG
BANC OF AMERICA SECURITIES LLC
A.G. EDWARDS & SONS,
INC.
RBC CAPITAL MARKETS
NOVEMBER , 2001
[MAP SHOWING THE LOCATION OF REGISTRANT'S PIPELINE AND GATHERING SYSTEMS]
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE
- --------------------- ----
TEPPCO Partners....................... S-1
Recent Developments................... S-2
The Offering.......................... S-4
Risk Factors.......................... S-5
Use of Proceeds....................... S-7
Capitalization........................ S-8
Price Range of Units and
Distributions....................... S-9
Summary Selected Financial
Information......................... S-10
Results of Operations of the Jonah
Natural Gas Gathering System........ S-12
Business and Properties of the Jonah
Natural Gas Gathering System........ S-13
Ratio of Taxable Income to
Distributions....................... S-15
Tax Considerations.................... S-15
Underwriting.......................... S-32
Legal Matters......................... S-34
PROSPECTUS PAGE
- ---------- ----
About This Prospectus................. 1
Where You Can Find More Information... 1
Forward-looking Statements and
Associated Risks.................... 2
About TEPPCO Partners................. 2
Recent Developments................... 3
The Subsidiary Guarantors............. 3
Risk Factors.......................... 4
TEPPCO Partners....................... 11
Use of Proceeds....................... 12
Ratio of Earnings to Fixed Charges.... 12
Description of Debt Securities........ 12
Cash Distributions.................... 21
Tax Considerations.................... 26
Investment in Us by Employee Benefit
Plans............................... 41
Plan of Distribution.................. 42
Legal................................. 42
Experts............................... 42
Index to Financial Statements......... F-1
This document is in two parts. The first part is this prospectus
supplement, which describes the specific terms of this offering. The second part
is the accompanying prospectus, which gives more general information, some of
which may not apply to this offering. If the description of the offering varies
between the prospectus supplement and the accompanying prospectus, you should
rely on the information in the prospectus supplement. Sections which appear in
both the prospectus supplement and the prospectus are deemed to be superceded by
the sections included in this prospectus supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with additional or different information.
If anyone provides you with additional, different or inconsistent information,
you should not rely on it. We are offering to sell the units, and seeking offers
to buy the units, only in jurisdictions where offers and sales are permitted.
You should not assume that the information we have included in this prospectus
supplement or the accompanying prospectus is accurate as of any date other than
the date of this prospectus supplement or the accompanying prospectus or that
any information we have incorporated by reference is accurate as of any date
other than the date of the document incorporated by reference. Our business,
financial condition, results of operations and prospects may have changed since
that date.
i
SUMMARY
The information in this prospectus supplement is not complete. You should
review carefully all of the detailed information appearing in this prospectus
supplement, the accompanying prospectus and the documents we have incorporated
by reference before making any investment decision. Certain capitalized terms
used but not defined in this prospectus supplement have the meanings assigned to
them in the accompanying prospectus. Throughout this prospectus supplement and
the accompanying prospectus, we refer to ourselves, TEPPCO Partners, L.P., as
"we" or "us" or "our" or "TEPPCO Partners" or "the Partnership". Unless we
indicate otherwise, all information in this prospectus supplement assumes that
the underwriters' over-allotment option is not exercised and excludes units
reserved for issuance on the exercise of options granted under our option plans.
TEPPCO PARTNERS
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 (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 central and midwest states to the northeast United States.
Our system includes a products pipeline system to the Midwest that is the
only pipeline system that transports liquified petroleum gas to the
northeast United States from the Texas Gulf Coast. We recently initiated
new service to the petrochemical industry through the construction,
ownership and operation of three pipelines in Texas between Mont Belvieu
and Port Arthur.
- Transporting and marketing crude oil and transporting natural gas liquids
(Upstream Segment). We own and operate approximately 3,000 miles of crude
oil trunk line and gathering pipelines and approximately 700 miles of
natural gas liquids 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 undivided
interests in two crude oil pipelines operating in New Mexico, Oklahoma
and Texas.
- Gathering natural gas (Midstream Segment). Since the acquisition of the
Jonah gas gathering system on September 30, 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 gathering system consists of approximately 300 miles of pipelines
ranging in size from four to 20 inches in diameter, four compressor
stations with an aggregate of approximately 21,200 horsepower and related
metering facilities. Gas gathered on the system is primarily processed by
others and delivered to several interstate pipeline systems that provide
access to a number of West Coast, Rocky Mountain and midwest markets.
Our goals are to increase cash flow and distributions to our unitholders.
Our business strategy to accomplish these goals is to:
- Pursue a growth strategy that is balanced between internal projects and
targeted acquisitions;
- Improve service in our current markets; and
- Maintain the integrity of our pipeline systems.
To execute our business strategy, we intend to leverage the advantages inherent
in our pipeline systems to maintain our status as the incremental provider of
choice in the markets we serve. We also intend to grow by acquiring, from both
third parties and affiliates, assets that complement our existing businesses or
allow us to establish new core businesses.
S-1
RECENT DEVELOPMENTS
CASH DISTRIBUTION INCREASE
On November 5, 2001, we paid a cash distribution of $0.575 per unit to
unitholders of record on October 31, 2001. This quarterly distribution covers
the period from July 1, 2001 through September 30, 2001. This distribution
represents an increase of $0.20 in our annualized distribution rate and raises
our distribution rate to $2.30 per unit on an annualized basis. We based our
decision to increase our distribution rate on our operating results for the
first nine months of 2001, our expectations for the fourth quarter and the
anticipated contribution from the Jonah system.
JONAH ACQUISITION
On September 30, 2001, we completed the acquisition of the Jonah system
from Alberta Energy Company for $360.0 million. This acquisition marks our entry
into the business of gathering natural gas from the wellhead and delivering it
to processing facilities for ultimate transportation to end-users. The Jonah
system serves the Green River Basin in southwestern Wyoming, one of the most
prolific natural gas basins in the United States. We have multiple long-term
contracts with producers operating in the Green River Basin and earn revenues
from gathering fees based on the volume and pressure of natural gas they gather
on our system. Major producers utilizing our system include Alberta Energy
Company, BP p.l.c. and The Williams Companies, Inc. We do not take title to the
natural gas gathered on our system, and the results of the Jonah system are not
directly affected by changes in the prices of natural gas or other commodities.
The Jonah system consists of approximately 300 miles of pipelines, four
compressor stations totaling approximately 21,200 horsepower and related
metering facilities. In connection with the acquisition, we assumed
responsibility for the completion of an ongoing expansion of the Jonah system
and other associated costs of approximately $25.0 million. The expansion is
expected to be completed in the first quarter of 2002 and to increase the
capacity of the Jonah system by 62%, from 450 million cubic feet per day, or
MMcf/day, to 730 MMcf/day. We expect to immediately utilize substantially all of
the increased capacity of our system once it becomes operational in the first
quarter of 2002. As results for the Jonah system are primarily driven by volumes
gathered, we expect our Midstream Segment revenues and cash flow to increase
from historical levels as a result of the system capacity expansion.
We initially financed the acquisition with borrowings under a $400.0
million term loan facility with a nine month maturity. Approximately $160.0
million of the net proceeds of this offering will be used to reduce indebtedness
outstanding under the term loan facility, and the balance of the net proceeds
will be used to reduce indebtedness outstanding under our bank revolving credit
facility.
S-2
The following chart summarizes our organization and ownership structure as
of the date of this prospectus supplement and as adjusted to give effect to this
offering. Texas Eastern Products Pipeline Company, LLC serves as our general
partner and is a wholly owned subsidiary of DEFS.
[Chart showing that Texas Eastern Products Pipeline Company, LLC owns a 2.0%
general partner interest in TEPPCO Partners, L.P. Duke Energy Corporation owns a
14.2% limited partner interest in TEPPCO Partners, L.P. Public unit holders own
83.8% of the limited partner interests in TEPPCO Partners, L.P. Texas Eastern
Products Pipeline Company, LLC is wholly owned by Duke Energy Field Services,
LLC. Duke Energy owns 69.7% of Duke Energy Field Services, LLC and Phillips
Petroleum Corporation owns 30.3% of Duke Energy Field Services, LLC. TEPPCO
Partners, L.P. owns all of the capital stock of TEPPCO GP, Inc. TEPPCO Partners,
L.P. owns a 99.999% limited partner interest in the operating partnerships.
TEPPCO GP, Inc. owns a 0.001% general partner interest in the operating
partnership.]
S-3
THE OFFERING
Units offered by TEPPCO.......... 5,500,000 units
6,325,000 units if the underwriters
exercise their over-allotment option in
full
Units to be outstanding after the
offering......................... 44,366,547(1)
Units.......................... 40,450,000(1)
Class B units.................. 3,916,547(2)
Use of proceeds.................. We estimate that we will receive net
proceeds from the offering of approximately
$ million, or approximately $ million if
the underwriters' over-allotment option is
exercised in full. We plan to use net
proceeds to:
- Reduce, by approximately $160.0 million,
indebtedness incurred to finance the
Jonah acquisition
- Reduce, with any remaining net proceeds,
indebtedness outstanding under our bank
revolving credit facility
See "Use of Proceeds" on page S-7.
Distribution policy.............. We currently pay a quarterly cash
distribution based on our available cash
from operations. See "Cash Distributions"
on page 21 of the accompanying prospectus.
Our current quarterly distribution rate is
$0.575 per unit, or $2.30 per unit on an
annualized basis.
Risk factors..................... An investment in our units involves risks.
See "Risk Factors" beginning on page S-5 of
this prospectus supplement and on page 4 of
the accompanying prospectus.
New York Stock Exchange symbol... TPP
- ---------------
(1) The number of units outstanding after the offering is based on the number of
units outstanding as of September 30, 2001 and assumes that the
underwriters' over-allotment option is not exercised.
(2) 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.
S-4
RISK FACTORS
The risk factors included below relate to our natural gas gathering
business. For other risk factors, you should read carefully the discussion of
the material risks relating to an investment in the units offered by us under
the caption "Risk Factors" beginning on page 4 of the accompanying prospectus.
RISKS INHERENT IN THE NATURAL GAS GATHERING BUSINESS
COMPETITION COULD LEAD TO LOWER LEVELS OF PROFITS AND LOWER OUR CASH FLOW OVER
TIME.
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 is based in large part on reputation,
efficiency, reliability, gathering system capacity and price arrangements.
Typically, competition is concentrated in geographic regions, such as the Green
River Basin, based upon the location of gathering systems, natural gas
processing plants and access to end-user markets. Our key competitors in the gas
gathering segment include independent gas gatherers and major integrated energy
companies. Alternate gathering facilities are available to producers we serve,
and those producers may also elect to construct proprietary gas gathering
systems. If the production delivered to our gathering system declines, our
revenues from such operations will decline.
OUR PROFITS AND CASH FLOW DEPEND ON THE VOLUMES OF NATURAL GAS PRODUCED FROM THE
FIELDS WE SERVE, WHICH IS SUBJECT TO FACTORS BEYOND OUR CONTROL.
Regional production levels drive the volume of natural gas gathered on our
system. We cannot influence or control the operation or development of the gas
fields we serve. Production levels may be affected by:
- the absolute price of, volatility in the price of, and market demand for
natural gas;
- changes in laws and regulations, particularly with regard to taxes,
denial of reduced well density spacing, safety and protection of the
environment;
- the depletion rates of existing wells;
- adverse weather and other natural phenomena;
- the availability of drilling and service rigs; and
- industry changes, including the effect of consolidations or divestitures.
Any declines in the volumes of natural gas delivered for gathering on our system
will adversely affect our revenues and could, if sustained or pronounced,
materially adversely affect our financial position or results of operation.
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.
FEDERAL, STATE OR LOCAL REGULATORY MEASURES COULD ADVERSELY AFFECT OUR BUSINESS.
While the Federal Energy Regulatory Commission, or FERC, does not directly
regulate our natural gas gathering operations, federal regulation, directly or
indirectly, influences the parties that gather natural
S-5
gas on the Jonah 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, but FERC regulation still
significantly affects our business. In recent years, FERC has pursued pro-
competition policies in its regulation of interstate natural gas pipelines.
However, we cannot assure you that FERC will continue this approach as it
considers proposals by 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.
The Jonah system gathers natural gas within Wyoming only. The Wyoming
Public Utility Commission administers U.S. Department of Transportation
regulations under the Natural Gas Pipeline Safety Act of 1968. The Jonah system
is not currently subject to federal or state pipeline safety regulations based
upon its qualification for the "rural gathering exemption" under the Natural Gas
Pipeline Safety Act of 1968. In the future, the rural gathering exemption status
of some or all of the system may no longer apply if certain changes occur,
including changes to delivery or sale points, and non-exempt facilities would
then become subject to U.S. Department of Transportation regulations with
respect to pipeline design, installation, testing, construction, replacement and
management. These regulations provide for safe pipeline operations and include
potential fines and penalties for violations. If these regulations were applied
to the Jonah system, such application could result in material costs to our
Midstream Segment.
OUR BUSINESS INVOLVES HAZARDOUS SUBSTANCES AND MAY BE ADVERSELY AFFECTED BY
ENVIRONMENTAL REGULATION.
Many of the operations and activities of our natural gas gathering system
are subject to significant federal and state environmental laws and regulations.
These include, for example, laws and regulations that impose obligations related
to air emissions and discharge of wastes from our facilities and 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 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 for the
remediation of contaminated areas. Private parties, including the owners of
properties through which our gathering system passes, 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 natural gas, air
emissions related to our operations, historical industry operations, waste
disposal practices and the prior use of natural gas flow meters containing
mercury. 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. We cannot assure you that we
will not incur material environmental costs and liabilities. Furthermore, we
cannot assure you that our insurance will 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.
OUR BUSINESS INVOLVES MANY HAZARDS AND OPERATIONAL RISKS, SOME OF WHICH MAY NOT
BE COVERED BY INSURANCE.
Our natural gas gathering operations are subject to the many hazards
inherent in 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. If a significant accident or event
occurs that is not fully insured, it could adversely affect our financial
position or results of operations.
S-6
USE OF PROCEEDS
We intend to use approximately $160.0 million of the net proceeds from the
offering of approximately $ million ($ million if the underwriters exercise
their over-allotment option in full) to reduce indebtedness incurred in
connection with the Jonah acquisition and to apply the remainder of the net
proceeds to reduce the amount outstanding under our bank revolving credit
facility. As of September 30, 2001, $360.0 million was outstanding under our
Jonah acquisition term loan, which matures on June 28, 2002, and $472.0 million
was outstanding under our bank revolving credit facility, which matures on April
6, 2004. Indebtedness under our bank revolving credit facility was incurred in
connection with the ARCO Pipe Line Company acquisition, to fund ongoing
development projects and for working capital. As of September 30, 2001, the
weighted average annual interest rates under our Jonah acquisition term loan and
our bank revolving credit facility were 3.63% and 4.90%, respectively.
S-7
CAPITALIZATION
The following table sets forth our unaudited consolidated historical and as
adjusted capitalization as of September 30, 2001. The as adjusted information
gives effect as of September 30, 2001, to:
- the offering and application of the net proceeds (assuming a price of
$35.71, the last reported sale price of our units on November 9, 2001) to
reduce the amount outstanding under our Jonah acquisition term loan and
bank revolving credit facility; and
- the capital contribution of our general partner to maintain its two
percent general partner interest in us in connection with the issuance of
additional units.
For a discussion of the application of these proceeds, see "Use of Proceeds" on
page S-7. 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
prospectus.
AS OF SEPTEMBER 30, 2001
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Short-term debt:
Jonah acquisition term loan............................... $ 360,000 $ 200,000
Long-term debt:
6.45% Senior Notes due 2008............................... 179,807 179,807
7.51% Senior Notes due 2028............................... 210,000 210,000
Bank revolving credit facility............................ 472,000 440,604
---------- ----------
Total long-term debt...................................... $ 861,807 $ 830,411
---------- ----------
Redeemable Class B units held by related party.............. 106,270 106,270
Partners' capital........................................... 360,246 551,642
---------- ----------
Total capitalization........................................ $1,688,323 $1,688,323
========== ==========
S-8
PRICE RANGE OF UNITS AND DISTRIBUTIONS
As of September 30, 2001, there were 34,950,000 units outstanding, held by
approximately 25,000 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.
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 November 9, 2001 was $35.71 per unit.
PRICE RANGE CASH
----------------- DISTRIBUTIONS
HIGH LOW PER UNIT(1)
------- ------- -------------
YEAR ENDED 2001
Fourth Quarter (through November 9, 2001)........... $ 35.84 $ 31.90 N/A(2)
Third Quarter....................................... 32.90 26.00 $ 0.575
Second Quarter...................................... 30.10 25.76 0.525
First Quarter....................................... 27.44 24.38 0.525
YEAR ENDED 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
YEAR ENDED 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 Class B units for each period shown in
this table.
(2) The cash distribution for the fourth quarter has not yet been declared or
paid.
S-9
SUMMARY SELECTED FINANCIAL 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, 2000 was
derived from our audited consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2000, which is
incorporated in this prospectus supplement by reference. The data as of and for
the period ended September 30, 2001 was derived from our unaudited quarterly
financial statements included in our Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001, which is incorporated in this
prospectus supplement by reference.
The pro forma statement of income data for the year ended December 31, 2000
and for the nine months ended September 30, 2001 was derived from our unaudited
pro forma condensed combined statements of income included in our Current Report
on Form 8-K/A filed November 9, 2001, which is incorporated in this prospectus
supplement. The pro forma data gives effect to the purchase of certain assets of
ARCO Pipe Line Company, which was completed on July 21, 2000, and the purchase
of the Jonah system, which was completed on September 30, 2001, in each case as
if the acquisitions were consummated on January 1, 2000. The pro forma data is
presented for illustration purposes only and is not necessarily indicative of
the results of operations which would have occurred had the purchases been
consummated on January 1, 2000, nor is it necessarily indicative of future
results of operations. Specifically, the pro forma data does not give effect to
expected revenue growth attributable to the ongoing expansion of the Jonah
system or cost savings related to the Jonah system expected to result from
improved operating efficiencies.
The summary data set forth below includes EBITDA and EBITDA from Seaway.
EBITDA from Seaway represents our proportional interest in the EBITDA of Seaway.
We define EBITDA as operating income plus depreciation, depletion 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.
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------- SEPTEMBER 30, 2001
PRO FORMA ---------------------
1998 1999 2000 2000 ACTUAL PRO FORMA
------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN MILLIONS)
STATEMENT OF INCOME DATA:
Revenues.......................................... $ 429.6 $ 1,934.9 $ 3,087.9 $3,128.6 $ 2,849.7 $ 2,873.0
Operating income.................................. 80.0 100.1 108.0 107.9 116.5 114.2
Equity earnings................................... -- -- 12.2 25.2 15.3 15.3
Net income(1)..................................... (19.4) 72.1 77.4 61.3 87.9 77.1
BALANCE SHEET DATA (END OF PERIOD):
Total assets...................................... $ 916.9 $ 1,041.4 $ 1,622.8 $ 2,073.6
Total debt........................................ 427.7 455.8 835.8 1,221.8
Redeemable Class B units.......................... 105.0 105.9 105.4 106.3
Partner's capital................................. 227.2 229.8 315.1 360.2
SUPPLEMENTAL DATA:
EBITDA............................................ $ 106.9 $ 132.7 $ 143.2 $ 164.5 $ 147.7 $ 164.6
EBITDA from Seaway................................ -- -- 15.4 32.1 22.0 22.0
Cash distribution paid per unit................... 1.75 1.85 2.00 2.00 1.63 1.63
Weighted average limited partner units and Class B
units outstanding............................... 29.7 32.9 33.6 33.6 38.5 38.5
- ---------------
(1) Net income for 1998 includes an extraordinary charge of $72.8 million
related to the early extinguishment of debt.
S-10
Presented below is historical data for the Jonah system as of and for each
of the periods indicated. The annual financial data set forth below for the year
ended December 31, 2000 was derived from the audited financial statements of
Jonah Gas Gathering Company included in our Current Report on Form 8-K/A filed
November 9, 2001, which is incorporated in this prospectus supplement. The data
as of and for the period ended September 30, 2001 was derived from the unaudited
financial statements of Jonah Gas Gathering Company included in our Current
Report on Form 8-K/A filed November 9, 2001, which is incorporated in this
prospectus supplement.
We purchased the Jonah system from Alberta Energy Company as of September
30, 2001. Alberta Energy Company acquired the Jonah system as of June 1, 2000 as
part of its acquisition of McMurry Oil Company. In the financial statements set
forth below, McMurry Oil Company is presented as the predecessor, with separate
financial disclosure for the period from January 1, 2000 to May 31, 2000. The
period from June 1, 2000 to December 31, 2000 represents the period after the
acquisition of McMurry Oil Company by Alberta Energy Company.
FOR THE PERIOD FOR THE PERIOD NINE MONTHS
JANUARY 1 TO JUNE 1 TO ENDING
MAY 31, 2000 DECEMBER 31, SEPTEMBER 30,
(PREDECESSOR) 2000 2001
-------------- -------------- -------------
(IN THOUSANDS)
GROSS REVENUE
Gathering and transportation revenue................. $8,772 $14,629 $22,383
Product sales........................................ 691 342 888
------ ------- -------
$9,463 $14,971 $23,271
COSTS AND EXPENSES
Operating expenses................................... 1,102 3,175 5,339
General and administrative expenses.................. 1,154 948 1,047
Depreciation......................................... 1,170 5,213 7,165
Write-off of contract advance........................ 428 -- --
(Gain) loss on sale of property and equipment........ 56 -- (1,155)
------ ------- -------
INCOME FROM OPERATIONS............................... $5,553 $ 5,635 $10,875
OTHER INCOME (EXPENSE)
Interest expense..................................... (166) (1) 0
Interest income...................................... 3 13 50
Settlement of litigation............................. 1,640 -- --
------ ------- -------
NET INCOME........................................... $7,030 $ 5,647 $10,925
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
SELECTED BALANCE SHEET ITEMS:
Property, plant and equipment, net.......................... $221,053 $241,402
Due to affiliates........................................... 10,049 4,900
Partners' capital........................................... 213,569 230,822
S-11
RESULTS OF OPERATIONS OF THE JONAH NATURAL GAS GATHERING SYSTEM
GENERAL
We have historically operated in two reportable segments: the Downstream
Segment, which includes refined products and liquified petroleum gas
transportation, and the Upstream Segment, which includes crude oil and natural
gas liquids transportation and marketing. On September 30, 2001, we completed
the acquisition of the Jonah natural gas gathering system, marking our entry
into the natural gas gathering business. We report the results of the Jonah
system in our Midstream Segment.
The Jonah system is located in the Green River Basin in southwestern
Wyoming and is engaged in the business of gathering natural gas from the
wellhead and delivering it to processing facilities for ultimate transportation
to end-users. We earn revenues from gathering fees charged to natural gas
producers based on the volume and pressure of natural gas they gather on our
system. We do not take title to the natural gas gathered on our system, and the
results of the Jonah system are not directly affected by changes in the prices
of natural gas or other commodities. In addition to gathering fees, we also earn
revenues from the sale of condensate.
Typically, we enter into long-term contracts with natural gas producers
that establish our gathering fee and pursuant to which the producers dedicate to
us natural gas reserves to be extracted from a designated gas lease for a
specified term. Our contracts provide for the recovery from the producers of
fuel costs and any product shrinkage, the obligations we and the producers have
regarding connection of wells to the Jonah system, the quality and pressure of
the producers' natural gas, measurement and force majeure.
RESULTS OF OPERATIONS
The following information describes the financial and operating results of
the Jonah system for 2000 and for the nine months ended September 30, 2001.
Currently, our system has the capacity to gather approximately 450 MMcf/day of
natural gas, increasing to approximately 730 MMcf/day in the first quarter of
2002 upon the completion of an ongoing expansion project. We expect to
immediately utilize substantially all of the increased capacity of our system
once it becomes operational in the first quarter of 2002. As results for the
Jonah system are primarily driven by volumes gathered, we expect our Midstream
Segment revenues and cash flow to increase from historical levels as a result of
the expansion.
Alberta Energy Company acquired the Jonah system as of June 1, 2000 upon
its acquisition of McMurry Oil Company. Accordingly, financial data for the
Jonah system in 2000 is divided between the periods before and after June 1,
2000, with the period prior to the acquisition designated as the predecessor
period and the period after the acquisition designated as the successor period.
Cumulative revenues for the predecessor and successor periods for the Jonah
system in 2000 were $24.4 million, including $1.0 million of condensate product
sales. Cumulative gathering and transportation revenues for the periods were
$23.4 million on average daily natural gas gathering volumes of 338 MMcf/day.
During 2000, the Jonah system gathered a total of 123.4 Bcf from approximately
220 wells. Operating expenses and general and administrative expenses were an
aggregate of $6.4 million for the predecessor and successor periods, implying an
operating margin before depreciation, depletion and amortization of 73.7%. In
2000, a total of 62 new wells were connected to the Jonah system at a total
capital cost of $1.7 million.
For the nine months ended September 30, 2001, revenues for the Jonah system
were $23.3 million, including $0.9 million of condensate product sales.
Gathering and transportation revenues for the period were $22.4 million on
average daily natural gas gathering volumes of 443 MMcf/day. During the first
nine months of 2001, the Jonah system gathered a total of 121.0 Bcf from
approximately 325 wells. Average daily volumes for the nine-month period were
31% above average daily volumes for the year ended December 31, 2000,
principally as a result of capacity expansion on the Jonah system. Operating
expenses and general and administrative expenses totaled $6.4 million, implying
an operating margin before depreciation, depletion and amortization of 72.6%. In
the first nine months of 2001, a total of 83 new wells were connected to the
Jonah system at a total capital cost of $6.0 million.
S-12
BUSINESS AND PROPERTIES OF THE JONAH NATURAL GAS GATHERING SYSTEM
The following discussion describes the business and properties of our
recently acquired Midstream Segment. For a discussion of the business and
properties of our Downstream and Upstream Segments, please see "Items 1 and 2,
Business and Properties" in our Annual Report on Form 10-K for the year ended
December 31, 2000, which is incorporated by reference in this prospectus
supplement and the accompanying prospectus.
NATURAL GAS GATHERING OPERATIONS
We conduct the operations of the Midstream Segment through TEPPCO Midstream
Companies, L.P., which utilizes the Jonah system to gather natural gas from the
wellhead and deliver it to processing facilities for ultimate transportation to
end-users. The Jonah system serves the Green River Basin in southwestern
Wyoming, one of the most prolific natural gas basins in the United States. We
acquired the Jonah system in September 2001 from Alberta Energy Company, and the
acquisition was accounted for under the purchase method of accounting. The
results of the acquisition will be included in our consolidated statements of
income for periods subsequent to September 30, 2001.
We earn revenues from gathering fees charged to natural gas producers based
on the volume and pressure of natural gas they gather on our system. Currently
our system has capacity to gather approximately 450 MMcf/day of natural gas,
increasing to approximately 730 MMcf/day in the first quarter of 2002 upon the
completion of an ongoing expansion project.
New supplies of natural gas are necessary to offset natural declines in
production from connected wells and to increase throughput volume. We are able
to increase system volumes through production from new wells, production
increases from existing dedicated wells or by contracts to gather production
that has been released from other gathering systems. Over the last four years,
production in the areas served by our system has grown at a rate of
approximately 100 MMcf/day each year. We expect to immediately utilize
substantially all of the increased capacity of our system once it becomes
operational in the first quarter of 2002 primarily for production increases in
the areas the Jonah system serves.
NATURAL GAS GATHERING SYSTEM
The Jonah system consists of approximately 300 miles of pipelines ranging
in size from four to 20 inches in diameter, four compressor stations with an
aggregate of approximately 21,200 horsepower and related metering facilities.
The Jonah system was constructed in 1992 and was significantly expanded in 1997.
An additional expansion project is currently under construction and is expected
to be completed in the first quarter of 2002. The expansion includes
approximately 50 miles of new 20-inch diameter pipeline and compression
facilities adding approximately 12,000 horsepower to the system. In connection
with our acquisition of the Jonah system, we assumed responsibility for the
completion of the expansion project and other associated costs of approximately
$25.0 million. The expansion project is expected to be completed in the first
quarter of 2002 and to increase the capacity of the Jonah system by 62%, from
approximately 450 MMcf/day of natural gas to approximately 730 MMcf/day.
Gas gathered on the Jonah system is collected from approximately 325
producing wells in the Green River Basin in southwestern Wyoming. Gas is
delivered to gas processing facilities owned by others, including the Williams
gas processing facility in Lincoln County, Wyoming and the Questar and Western
Gas Resources facilities in Sublette County, Wyoming. From these processing
facilities, the natural gas is delivered to several interstate pipeline systems
located in the region for transportation to end-use markets. Interstate
pipelines in the region include systems owned by DEFS, Kern River, Northwest,
Colorado Interstate Gas and Questar. These pipeline systems provide access for
natural gas gathered on the Jonah system to end-user markets throughout the
Midwest, the West Coast and the Rocky Mountain regions. We also own a 80
MMcf/day facility, which extracts condensate before the processed natural gas is
delivered to other transportation systems. This facility is currently being
considered for expansion and for the addition of condensate stabilization
capabilities.
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CUSTOMERS
Currently, the Jonah system gathers gas from 15 producers in the Green
River Basin. In 2000, Alberta Energy, BP and Williams accounted for 37%, 29% and
19%, respectively, of the volume of natural gas gathered on our system.
Contracts with customers include provisions primarily related to terms,
fees and connections from producers' wells to the gathering system. Terms range
from one year, renewable from year to year thereafter, to economic life of
lease, with the majority having terms from eight years to life of lease. Our
fees are charged based on the volume of gas gathered from producers' wells in
the field with rate adjustments based on a range of operating pressures. Well
connection provisions are typically based on the location of wells relative to
the gathering system, the proven deliverability of wells and the system
operator's ability to obtain the necessary rights-of-way. The costs of well
connections to our gathering system are typically borne by the producers, who
recover their costs through contractual credits against their gathering fees.
Typically, connection facilities are initially owned by the producer, and once
the producer recoups its construction costs, title is transferred to us. In some
instances, we may pay for the connection facilities and own them from the
outset.
COMPETITION
We encounter competition in securing natural gas gathering commitments
under new contracts. Competition is based in large part on reputation,
efficiency, reliability, gathering system capacity and price arrangements.
Typically, competition is concentrated in geographic regions, such as the Green
River Basin, based upon the location of gathering systems, processing plants and
available downstream pipeline capacity. Our key competitors include independent
gas gatherers and major integrated energy companies. Although our gathering
system has an established presence in the Green River Basin, alternate gathering
facilities are available to producers and producers may also elect to construct
proprietary gathering systems in the future.
REGULATION AND ENVIRONMENT
The operations of the Jonah system are subject to federal and state laws
and regulations pertaining to health, safety and the environment. Although we
believe that the operations are in material compliance with applicable
regulations, risks of significant costs and liabilities are inherent in pipeline
operations, and there can be no assurance that significant costs and liabilities
will not be incurred. Moreover, it is possible that other developments, such as
increasingly strict laws and regulations and enforcement policies thereunder,
and claims for damages to natural resources, property or persons resulting from
operations could result in substantial costs and liabilities to us.
With respect to the Jonah system, the Wyoming Department of Environmental
Quality has primary jurisdiction for air, water and waste issues. The majority
of issues for the Jonah system relate to air permits that require corrective
actions, which actions we are currently performing and the costs of which will
be funded by the system's prior owners under an indemnity agreement. The Jonah
system was placed in service in 1992 and is undergoing an expansion currently
and has no known material environmental contamination or impacts or related
remediation requirements. The safety of the Jonah system employees is within the
jurisdiction of the Wyoming Department of Employment and the U.S. Occupational
Safety and Health Administration.
EMPLOYEES
We manage the Jonah system through an arrangement with our affiliate, DEFS.
Approximately 14 former employees of Alberta Energy joined DEFS at the time of
our acquisition of the Jonah system and are engaged on a full-time basis in the
operation of the system. An additional 12 DEFS administrative employees support
the operation of the system on a part-time basis. Pursuant to an agreement with
DEFS, we reimburse DEFS for the costs of those employees, who remain subject to
the direction and control of our general partner with respect to the operation
of the system.
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RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
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 2001 (assuming quarterly distributions on the units with respect to
that period are equal to the current quarterly distribution date of $0.575 per
unit), you will be allocated an amount of U.S. federal taxable income for the
tax year ended December 31, 2001, that is less than 5% of the amount of cash
distributed to you with respect to the tax year ended December 31, 2001. We
further 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 are equal to $0.575
per unit).
These estimates are based on numerous assumptions regarding our business
and operations, including assumptions as to tariffs, capital expenditures,
growth, financings, cash flows and anticipated cash distributions. In
particular, these estimates take into account the Jonah acquisition described
above, but do not assume any other acquisitions. 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 might disagree. Accordingly, the
estimates may not turn out to be correct. The actual percentage of distributions
that will constitute taxable income could be higher or lower, and any
differences could be material.
TAX CONSIDERATIONS
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.
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. 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. The costs of any contest with the IRS will be
borne directly or indirectly by some or all of 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.
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,
S-15
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 his circumstances with respect to the ownership and
disposition of units.
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 income, gains, losses and deductions, 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 and continue to be so treated.
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 or marketing of any mineral or natural resource. Transportation
includes pipelines transporting gas, oil or products thereof. 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".
Our pipelines, like other pipeline systems transporting petroleum products,
include ancillary storage facilities which are an integral component of the
system and are necessary for efficient and competitive operation. The general
partner advised our tax counsel that we provide storage of petroleum products
before transportation through our pipelines or after transportation through our
pipelines while awaiting delivery to our customers. Based on these facts, and on
statements made by Congressman Rostenkowski and Senator Bentsen on the floors of
the House of Representatives and Senate, respectively, indicating that storage
fees can be "qualifying income" for purposes of qualifying for the Natural
Resource Exception, our tax counsel is of the opinion that any fees charged for
such storage facilities are "qualifying income".
S-16
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, more than 90% 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 income, gains, losses
and deductions 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.
S-17
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.
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 partners for federal income tax purposes. As such rule does
not extend, on its facts, to assignees of units who are entitled to execute and
deliver transfer applications and thereby become entitled to direct the exercise
of attendant rights, 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".
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
We will not pay any federal income tax. Our income, gains, losses and
deductions will consist of our allocable share of the income, gains, losses and
deductions of our subsidiary partnerships and dividends from our corporate
subsidiaries. Each unitholder will be required to take into account his
allocable share of our income, gains, losses and deductions 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 Unit".
Any reduction in a unitholder's share of our liabilities included in his tax
basis in his units will be treated as a distribution of cash to such unitholder.
Please read "-- Tax Basis of Units". If a unitholder's percentage interest
decreases because we offer additional units, then such unitholder's share of
nonrecourse liabilities will decrease, and this will result in a corresponding
deemed distribution of cash. To the extent our distributions cause a
unitholder's "at risk" amount to be less than zero at the end of any taxable
year, he must recapture any losses deducted in previous years. Please read
"-- 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
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treated as having received his proportionate share of the Section 751 Assets and
having exchanged such assets with us in return for the non-pro rata portion of
the actual distribution made to him. This latter deemed exchange will generally
result in the unitholder's realization of ordinary income under Section 751(b)
of the Code. Such income will equal the excess of (1) the non-pro rata portion
of such distribution over (2) the unitholder's tax basis for the share of such
Section 751 Assets deemed relinquished in the exchange.
TAX BASIS OF UNITS
In general, a unitholder's tax basis for his units initially will be equal
to the amount paid for the units. A unitholder's tax basis in his units will be
increased by his share of our taxable income and his share of our liabilities
that are without recourse to any partner ("nonrecourse liabilities"), if any. A
unitholder's share of nonrecourse liabilities will generally be based on his
share of our profits. Please read "-- Disposition of Units -- Gain or Loss in
General". 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 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 only 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 to be 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
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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.
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 to account for the difference between the fair
market value of our assets and their carrying value on our books at the time of
any offering made pursuant to this prospectus ("Adjusted Property"). The effect
of these allocations to a unitholder purchasing units offered by this prospectus
will be the same as if the tax basis of our assets were equal to their fair
market value at the time of this offering. In addition, items of recapture
income will be allocated to the extent possible to the partner allocated the
deduction giving rise to the treatment of such gain as recapture income in order
to minimize the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of income and gain will be allocated in an amount and manner sufficient to
eliminate the negative balances as quickly as possible.
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"). Treasury Regulations
permit a partnership to make reasonable curative allocations to reduce or
eliminate disparities between the tax basis and value attributable to
partnership properties caused by the ceiling limitation. Similar to the
principles in the Treasury Regulations, our partnership agreement requires that
items of income and deduction be allocated in a way designed to effectively
eliminate the impact of the ceiling limitation with respect to Contributed
Property and Adjusted Property.
Counsel is of the opinion that, with the exception of the issues described
in "-- Tax Consequences of Unit Ownership -- Section 754 Election" and
"-- Disposition of Units -- Allocations Between Transferors and Transferees",
allocations under our partnership agreement will be given effect for federal
income tax purposes in determining a unitholder's allocable share of our income,
gains, losses and deductions.
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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
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 in accordance with Section 1060 of the Code 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
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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 recovery 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. 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 lent 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 income, gains, losses 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. Unitholders desiring to
assure their status as partners should modify their brokerage account
agreements, if any, 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 Units --
Recognition of Gain or Loss".
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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.
TAX TREATMENT OF OPERATIONS
INCOME AND DEDUCTIONS IN GENERAL
We will not pay any federal income tax. Instead, each unitholder must
report on his income tax return his allocable share of our income, gains, losses
and deductions. Such items must be included on the unitholder's federal income
tax return without regard to whether we make a distribution of cash to the
unitholder. A unitholder is generally entitled to offset his allocable share of
our passive income with his allocable share of losses that we generate, if any.
Please read "-- Tax Consequences of Unit Ownership -- Limitations on
Deductibility of Losses".
A unitholder who owns units as of the first day of each month during a
quarter and who disposes of such units before the record date for a distribution
with respect to such quarter will be allocated items of our income and gain
attributable to the months in such quarter during which such units were owned
but will not be entitled to receive such cash distribution.
ACCOUNTING METHOD AND TAXABLE YEAR
We use the year ending December 31 as our taxable year and the accrual
method of accounting for federal income tax purposes. Each unitholder will be
required to include in income his share of our income, gain, loss and deduction
for our taxable year ending within or with his taxable year. In addition, a
unitholder who has a taxable year ending on a date other than December 31 and
who disposes of all of his units following the close of our taxable year but
before the close of his taxable year must include his share of our income, gain,
loss and deduction in income for his taxable year, with the result that he will
be required to include in income for his taxable year his share of more than one
year of our income, gain, loss and deduction. Please read "-- Disposition of
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.
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Please read "-- Tax Consequences of Unit Ownership -- Allocation of Income,
Gain, Loss and Deduction" and "-- Disposition of Units -- Recognition of Gain or
Loss".
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 "-- Tax Consequences of
Unit Ownership-Initial Tax Basis, Depreciation and Amortization".
DISPOSITION OF 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. 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 -- 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. The term "unrealized receivables" includes potential
recapture items, including depreciation recapture. Ordinary income attributable
to unrealized receivables, inventory items and depreciation recapture may exceed
net taxable gain realized upon the sale of a unit and may be recognized even if
there is a net taxable loss realized on the sale of a unit. Thus, a unitholder
may recognize both ordinary income and a capital loss upon a sale of units. Net
capital 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
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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.
TRANSFEROR/TRANSFEREE ALLOCATIONS
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 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
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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
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 the application of Treasury
Regulations under Sections 167, 197 and 743 to our Section 743(b) adjustments or
the determination that our Section 704(c) curative allocations to prevent the
application of the "ceiling limitation" to eliminate book-tax disparities are
unreasonable. We may adopt depreciation conventions or specially allocate items
of income and deduction in a manner intended to preserve the uniformity of the
intrinsic tax characteristics among all our units, despite their inconsistency
with Treasury Regulations.
Since we cannot match transferees and transferors of units, we depreciate
the portion of a Section 743(b) adjustment attributable to unrealized
appreciation in the value of contributed recovery 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, which is inconsistent with Treasury
Regulations under Section 167, 197 and 743. 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. 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 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. However, 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 Units -- Recognition of Gain or Loss". In the event our
method of making Section 704(c) allocations is disallowed, some or all of the
adverse consequences described in the preceding paragraph could result. Please
read "-- Tax Consequences of Unit Ownership -- Allocation of Income, Gain, Loss
and Deduction".
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
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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 income, gains, losses and deductions. In preparing such
information, we will necessarily use various accounting and reporting
conventions to determine each unitholder's allocable share of income, gains,
losses and deductions. Neither we nor our tax counsel can assure you that any
such conventions will yield a result that conforms to the requirements of the
Code, Treasury Regulations thereunder or administrative pronouncements of the
IRS. We cannot assure prospective unitholders that the IRS will not contend that
such accounting and reporting conventions are impermissible. Contesting any such
allegations could result in substantial expense to us. In addition, if the IRS
were to prevail, unitholders may incur substantial liabilities for taxes and
interest.
Our federal income tax information returns may be audited by the IRS. The
Code contains partnership audit procedures that significantly simplify the
manner in which IRS audit adjustments of partnership items are resolved.
Adjustments, if any, resulting from such an audit may require each unitholder to
file an amended tax return, which may result in an audit of the unitholder's
return. Any audit of a unitholder's return could result in adjustments to items
not related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction 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.
S-27
INFORMATION RETURN FILING REQUIREMENTS
A unitholder who sells or exchanges units is required by the Code to notify
us in writing of such sale or exchange, and we are required to notify the IRS of
such transaction and to furnish information to the transferor and transferee.
However, these reporting requirements do not apply with respect to a sale by an
individual who is a citizen of the United States and who effects such sale
through a broker. In addition, a transferor and a transferee of a unit will be
required to furnish to the IRS the amount of the consideration received for such
unit that is allocated to our goodwill or going concern value. Failure to
satisfy such reporting obligations may lead to the imposition of substantial
penalties.
NOMINEE REPORTING
Persons who hold our units as a nominee for another person must report
information to us. Temporary Treasury Regulations provide that such information
should include:
(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)(3) 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. Although it is arguable
that we will not be subject to the registration requirement, our general
partner, as our principal organizer, has registered us as a tax shelter with the
IRS in the absence of assurance that we will not be 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
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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.
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. Under
Section 512 of the Code, 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 (currently at a rate of 38.6%) made quarterly to foreign
unitholders. Each foreign unitholder must obtain a taxpayer identification
number from the IRS and submit that number to our transfer agent on a Form W-8
in order to obtain credit for the taxes withheld. A change in applicable law may
require us to change these procedures.
Because a foreign corporation that owns 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.
STATE 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
S-29
those various taxes cannot be 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 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.
S-30
Section 406 of ERISA and Section 4975 of the Code prohibit an employee
benefit plan from engaging in transactions involving "plan assets" with parties
that are "parties in interest" under ERISA or "disqualified persons" under the
Code with respect to the plan. These provisions also apply to Individual
Retirement Accounts which are not considered part of an employee benefit plan.
The Department of Labor issued final regulations on November 13, 1986, that
provide guidance with respect to whether the assets of an entity in which
employee benefit plans acquire equity interests would be deemed "plan assets".
Pursuant to these regulations, an entity's assets would not be considered to be
"plan assets" if, among other things:
(1) the equity interests acquired by employee benefit plans are
publicly offered securities, i.e., the equity interests are widely held by
100 or more investors independent of the issuer and each other, freely
transferable and registered under the federal securities laws;
(2) the entity is an "operating company," i.e., it is primarily
engaged in the production or sale of a product or service other than the
investment of capital either directly or through a majority-owned
subsidiary or subsidiaries; or
(3) there is no significant investment by benefit plan investors,
which is defined to mean that less than 25% of the value of each class of
equity interest is held by employee benefit plans (as defined in Section
3(3) of ERISA), whether or not they are subject to the provisions of Title
I of ERISA, plans described in Section 4975(e)(1) of the Code, and any
entities whose underlying assets include plan assets by reason of a plan's
investments in the entity.
Our assets would not be considered "plan assets" under these regulations
because it is expected that the investment will satisfy the requirements in (1)
above, and also may satisfy requirements (2) and (3) above.
S-31
UNDERWRITING
Under the underwriting agreement, which will be filed as an exhibit to our
current report on Form 8-K relating to this offering, Lehman Brothers Inc.,
Goldman, Sachs & Co., UBS Warburg LLC, Banc of America Securities LLC, A.G.
Edwards & Sons, Inc. and RBC Dain Rauscher Inc. are acting as representatives of
each of the underwriters named below. Under the underwriting agreement, each of
the underwriters will agree to purchase from us the number of units indicated in
the following table:
NUMBER OF
UNDERWRITERS UNITS
- ------------ ---------
Lehman Brothers Inc. .......................................
Goldman, Sachs & Co. .......................................
UBS Warburg LLC.............................................
Banc of America Securities LLC..............................
A.G. Edwards & Sons, Inc. ..................................
RBC Dain Rauscher Inc. .....................................
---------
Total............................................. 5,500,000
=========
The underwriting agreement provides that the underwriters' obligations to
purchase units depend on the satisfaction of the conditions contained in the
underwriting agreement, including:
- the representations and warranties made by us to the underwriters are
true;
- the obligation to purchase all of the units offered hereby, if any of the
units are purchased;
- if an underwriter defaults, purchase commitments of the non-defaulting
underwriters may be increased or the underwriting agreement may be
terminated;
- the lack of material change in the financial markets; and
- the delivery of customary closing documents to the underwriters.
We have granted the underwriters an option to purchase up to an aggregate of
825,000 additional units, exercisable to cover over-allotments, if any, at the
public offering price less the underwriting discount shown on the cover of this
prospectus supplement. The underwriters may exercise this option at any time and
from time to time until 30 days after the date of the underwriting agreement. If
this option is exercised, each underwriter will be committed, so long as the
conditions of the underwriting agreement are satisfied, to purchase a number of
additional units proportionate to the underwriter's initial commitment as
indicated in the table above and we will be obligated, under the over-allotment
option, to sell the units to the underwriters.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional units described below. The underwriting fee is the
difference between the public offering price and the amount the underwriters pay
to us to purchase the units from us.
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------------------- ---------------------
Per Unit.......................................
Total.....................................
Units sold by the underwriters to the public will be offered at the price
to the public set forth on the cover of this prospectus supplement. Any units
sold by the underwriters to securities dealers may be sold at a discount of up
to $ per unit from the price to the public. Any such securities dealers may
resell any units purchased from the underwriters to certain other brokers or
dealers at a discount of up to $ per unit from the price to the public. If
all the units are not sold at the price to the public, the underwriters may
change the offering price and the other selling terms. We estimate that the
total
S-32
expenses of the offering, excluding underwriting discounts and commissions, will
be approximately $500,000.
We and our executive officers and directors have agreed, with exceptions,
not to sell or transfer any units for 90 days after the date of this prospectus
supplement without first obtaining the written consent of Lehman Brothers Inc.
This agreement does not apply to any existing employee benefit plans, but
otherwise the executive officers and directors have generally agreed not to:
- offer, pledge, hedge, sell or contract to sell any units;
- sell any option, right or warrant with respect to any units;
- purchase any option or contract to sell any units;
- grant any option, right or warrant with respect to any units;
- lend or otherwise dispose of or transfer any units; or
- enter into any swap or other derivatives transaction that transfers, in
whole or in part, any of the economic consequences of ownership of units,
whether any such aforementioned transaction is to be settled by delivery
of those units or other securities, in cash or otherwise.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids or purchases for the purpose
of pegging, fixing or maintaining the price of the units in accordance with
Regulation M under the Securities Exchange Act of 1934:
- Over-allotment involves sales by the underwriters of units in excess of
the number of units the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of units over-allotted by the underwriters is not
greater than the number of units that they may purchase in the
over-allotment option. In a naked short position, the number of units
involved is greater than the number of units in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing the units in the
open market.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the units in the
open market after the distribution has been completed in order to cover
syndicate short positions. In determining the source of units to close
out the 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. If the underwriters sell more units than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying units in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there could 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.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the units originally sold by the syndicate
member are purchased in a stabilizing or syndicate covering transaction
to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our units
or preventing or retarding a decline in the market price of the units. As a
result, the price of the units may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, the underwriters
may discontinue them at any time. These transactions may be effected on the New
York Stock Exchange or otherwise and, if commenced, may be discontinued at any
time.
S-33
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the units. In addition, neither we nor
any of the underwriters make any representation that the representatives will
engage in these stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
Our units are traded on the New York Stock Exchange under the symbol "TPP".
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933 and
liabilities arising from breaches of the representations and warranties
contained in the underwriting agreement and to contribute to payments that the
underwriters may be required to make for these liabilities.
Certain of the underwriters have performed certain investment banking,
commercial 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 in the future, 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 Internet
sites or through other online services maintained by one or more of the
underwriters and/or selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view offering terms
online and, depending upon the particular underwriter or selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the representatives on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any
underwriter's or selling group members' web site and any information contained
in any other web site maintained by an underwriter or selling group member is
not part of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter or selling group member in its capacity as underwriter or selling
group member and should not be relied upon by investors.
UBS AG, an affiliate of UBS Warburg LLC, Banc of America, N.A., an
affiliate of Bank of America Securities LLC, and the Royal Bank of Canada, an
affiliate of RBC Dain Rauscher Inc. are, among other things, lenders to us under
our bank revolving credit facility. UBS, Bank of America and the Royal Bank of
Canada will receive their respective share of the repayment by us of amounts
outstanding under the bank revolving credit facility from the proceeds of this
offering. Because we intend to use more than 10% of the net proceeds from the
sale of the units to repay indebtedness owed by us to such affiliates under our
revolving credit facility, the offering is being made in compliance with the
requirements of Rule 2710(c)(8) of the Conduct Rules of the National Association
of Securities Dealers, Inc.
Because the National Association of Securities Dealers, Inc. views the
units offered hereby as interests in a direct participation program, the
offering is being made in compliance with Rule 2810 of the NASD's Conduct Rules.
Investor suitability with respect to the units should be judged similarly to the
suitability with respect to other securities that are listed for trading on a
national securities exchange.
No sales to accounts of which the underwriter exercises discretionary
authority may be made without the prior written approval of the customer.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for us by Fulbright & Jaworski L.L.P., Houston, Texas, and for the underwriters
by Andrews & Kurth Mayor, Day, Caldwell & Keeton L.L.P., Houston, Texas.
S-34
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.
- --------------------------------------------------------------------------------
We, TEPPCO Partners, L.P., may from time to time offer and sell limited
partnership units and debt securities which may be fully and unconditionally
guaranteed by our subsidiaries, TE Products Pipeline Company, Limited
Partnership and TCTM, L.P. This prospectus describes the general terms of these
securities and the general manner in which we will offer the securities. The
specific terms of any securities we offer will be included in a supplement to
this prospectus. The prospectus supplement will also describe the specific
manner in which we will offer the securities.
The New York Stock Exchange has listed our limited partnership units under the
symbol "TPP." On July 26, 2001, the closing price of the limited partnership
units on the New York Stock Exchange was $31.14 per unit.
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 4 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 AUGUST 9, 2001
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS....................................... 1
WHERE YOU CAN FIND MORE INFORMATION......................... 1
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS............. 2
ABOUT TEPPCO PARTNERS....................................... 2
General................................................... 2
RECENT DEVELOPMENTS......................................... 3
THE SUBSIDIARY GUARANTORS................................... 3
RISK FACTORS................................................ 4
Risks Inherent in our Business............................ 4
Risks Relating to our Partnership Structure............... 6
Tax Risks to Unitholders.................................. 8
TEPPCO PARTNERS............................................. 11
USE OF PROCEEDS............................................. 12
RATIO OF EARNINGS TO FIXED CHARGES.......................... 12
DESCRIPTION OF DEBT SECURITIES.............................. 12
General................................................... 12
Subsidiary Guarantees..................................... 14
Covenants................................................. 14
Events of Default......................................... 14
Amendments and Waivers.................................... 16
Defeasance................................................ 17
No Personal Liability of General Partner.................. 18
Subordination............................................. 18
Book Entry, Delivery and Form............................. 19
The Trustee............................................... 20
Governing Law............................................. 20
CASH DISTRIBUTIONS.......................................... 21
General................................................... 21
Quarterly Distributions of Available Cash................. 22
Adjustment of the Target Distributions.................... 23
Distributions of Cash Upon Liquidation.................... 23
Defined Terms............................................. 25
TAX CONSIDERATIONS.......................................... 26
Partnership Status........................................ 27
Limited Partner Status.................................... 29
Tax Consequences of Unit Ownership........................ 29
Treatment of Operations................................... 34
Disposition of Limited Partnership Units.................. 35
Uniformity of Units....................................... 37
Tax-Exempt Organizations and Other Investors.............. 37
Administrative Matters.................................... 38
State, Local and Other Tax Considerations................. 40
Tax Consequences of Ownership of Debt Securities.......... 40
INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS.................. 41
PLAN OF DISTRIBUTION........................................ 42
LEGAL....................................................... 42
EXPERTS..................................................... 42
---------------------
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 SEC incorporated
by reference in this prospectus.
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 $600 million in
principal amount of the limited partnership units or debt securities 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 July 27, 2001. 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."
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 and at the SEC's regional offices at
Seven World Trade Center, New York, New York 10048, and at 500 West Madison
Street, Chicago, Illinois 60661. 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.
- Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2001.
- Current Report on Form 8-K filed January 24, 2001.
- Current Report on Form 8-K filed February 5, 2001.
- Current Report on Form 8-K filed April 23, 2001.
- Current Report on Form 8-K filed May 9, 2001.
- Current Report on Form 8-K filed July 27, 2001.
- 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.
- The combined financial statements of ARCO Pipe Line Company's APL
Business and the financial statements of Seaway Crude Pipeline Company
included in TEPPCO Partners, L.P.'s Amended Current Report on Form 8-K/A
filed on October 3, 2000.
1
TE Products Pipeline Company, Limited Partnership
- Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001
- Current Report on Form 8-K filed July 27, 2001.
You may request a copy of this filing, at no cost, by writing or calling us
at the following address:
Investor Relations Department
TEPPCO Partners, L.P.
TE Products Pipeline Company, Limited Partnership
2929 Allen Parkway
P.O. Box 2521
Houston, Texas 77252-2521
(713) 759-3636
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus, any accompanying prospectus supplement and the documents
we have incorporated by reference contain forward-looking statements. The words
"believe," "expect," "estimate" and "anticipate" and similar expressions
identify forward-looking statements. Forward-looking statements include those
that address activities, events or developments that we expect or anticipate
will or may occur in the future. These include the following:
- the amount and nature of future capital expenditures,
- business strategy and measures to carry out strategy,
- competitive strengths,
- goals and plans,
- expansion and growth of our business and operations,
- references to intentions as to future matters and
- other similar matters.
A forward-looking statement may include a statement of the assumptions or
bases underlying the forward-looking statement. We believe we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the risk factors set forth under the caption
"Risk Factors" and other cautionary statements in this prospectus, any
prospectus supplement and the documents we have incorporated by reference. We
will not update these statements unless the securities laws require us to do so.
ABOUT TEPPCO PARTNERS
GENERAL
We are one of the largest publicly traded limited partnerships engaged in
the transportation of refined products and liquefied petroleum gases and the
transportation and marketing of crude oil and natural gas liquids. 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.
2
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.
RECENT DEVELOPMENTS
On July 26, 2001, we restructured the general partner ownership of our two
principal subsidiary operating partnerships to cause them to be wholly owned by
us. The restructuring had no adverse economic impact on our unitholders. The
general partner interest of TEPPCO LLC in each of TE Products and TCTM, L.P. was
transferred to a newly formed corporation, TEPPCO GP, Inc., which succeeded
TEPPCO LLC as general partner of each of the two subsidiary operating
partnerships. The stock of TEPPCO GP and all remaining partnership interests in
the subsidiary partnerships not already owned by our partnership were
transferred to us. In exchange for this contribution, TEPPCO LLC received an
increased percentage interest as general partner of our partnership. The
increased percentage is the economic equivalent to the aggregate interest that
TEPPCO LLC had prior to the restructuring through its combined interests in our
partnership and our two subsidiary operating partnerships. As a result, we hold
a 99.999% limited partner interest in our two subsidiary operating partnerships
and TEPPCO GP, a corporate subsidiary wholly owned by us, holds a .001% general
partner interest.
THE SUBSIDIARY GUARANTORS
TE Products and TCTM are our primary directly held operating subsidiaries,
as of the date of this prospectus. The general partner of TE Products and TCTM
is TEPPCO GP, which is wholly owned by us. TEPPCO GP owns a .001% general
partner interest in each of TE Products and TCTM. We sometimes refer to TE
Products and TCTM in this prospectus as the "Subsidiary Guarantors." Each or
both of 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.
3
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks, including those described below. 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 INHERENT IN 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.
WE MAY BE REQUIRED TO REFUND A PORTION OF OUR TARIFFS AND HAVE DEFERRED REVENUE
RECOGNITION ON THIS PORTION.
The Federal Energy Regulatory Commission, 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.
The FERC's primary rate making methodology is price indexing. In the
alternative, pipelines may elect to support rate filings by using a
cost-of-service methodology, competitive market showings or agreements between
shippers and the pipeline that the rate is acceptable. On May 11, 1999, we filed
an application with the FERC requesting permission to charge market-based rates
for substantially all refined products transportation tariffs. Along with our
application for market-based rates, we filed a petition for waiver, pending the
FERC's determination on our application for market-based rates, of the
requirements that would otherwise have been imposed by the FERC's regulations
requiring us to reduce our rates in conformity with the PPI Index. On June 30,
1999, the FERC granted the waiver stating that it was temporary in nature and
that we would be required to make refunds, with interest, of all amounts
collected under rates in excess of the PPI Index ceiling level after July 1,
1999, if our application for market-based rates was ultimately denied. As a
result of the refund obligation potential, we have deferred all revenue
4
recognition of rates charged in excess of the PPI Index. On March 31, 2001, the
amount deferred for possible rate refund, including interest totaled
approximately $2.6 million.
On July 31, 2000, the FERC issued an order granting us market-based rates
in certain markets and set for hearing our application for market-based rates in
the Little Rock, Arkansas; Shreveport-Arcadia, Louisiana; Cincinnati-Dayton,
Ohio; and Memphis, Tennessee, destination markets and the Shreveport, Louisiana,
origin market. After the matter was set for hearing, and the protesting shippers
entered into a settlement agreement resolving their respective difference. On
January 9, 2001, the presiding Administrative Law Judge assigned to the hearing
determined that the offer of settlement provided resolution of issues set for
hearing in our pending case in a fair and reasonable manner and in the public
interest and certified the offer of settlement. On April 25, 2001, the FERC
issued an order approving the offer of settlement.
As a result of the FERC approval of the settlement, we will withdraw the
application for market-based rates to the Little Rock, Arkansas, destination
market and the Arcadia, Louisiana, destination in the Shreveport-Arcadia,
Louisiana, destination market. We also have agreed to recalculate rates to these
destination markets to conform with the PPI Index from July 1, 1999, and make
appropriate refunds. The refund obligation under the settlement as of March 31,
2001, was $1.0 million. As a result of the settlement, we will recognize
approximately $1.6 million of previously deferred transportation revenue during
the second quarter of 2001.
WE FACE UNCERTAINTIES 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. This issue
does not currently affect us because we do not use the cost-of-service
methodology to support our rates. However, these decisions might affect us
should we elect in the future to use the cost-of-service methodology or be
required to use that methodology to defend our rates. If those circumstances
arise, there can be no assurance with respect to the effect of these precedents
on our rates.
COMPETITION COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Our refined products and 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 lease crude oil. 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. Some of our competitors in each of our business
segments have financial resources substantially greater than ours.
WE FACE CREDIT RISKS IN OUR CRUDE OIL MARKETING BUSINESS.
Risks of nonpayment and nonperformance by customers are a major
consideration in our crude oil marketing business. We attempt to manage our
exposure to credit risks through credit analysis, credit approvals, credit
limits and monitoring procedures. We also use letters of credit, prepayments and
guarantees for some of our receivables. We are nevertheless subject to risks of
loss resulting from nonpayment or nonperformance by our customers.
5
OUR CRUDE OIL MARKETING BUSINESS INVOLVES RISKS RELATING TO PRODUCT PRICES.
Generally, as we purchase crude oil we simultaneously establish a margin by
selling crude oil for physical delivery to third-party users or by entering into
a future delivery obligation with respect to futures contracts on the New York
Mercantile Exchange. We seek to maintain a balanced position until we make
physical delivery of the crude oil, thereby minimizing or eliminating exposure
to price fluctuations occurring after the initial purchase. It is our policy not
to acquire crude oil, future contracts or other derivative products for the
purpose of speculating on price changes. Even so, certain 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 accounts for a substantial portion of our shipments, 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 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 OPERATIONS ARE SUBJECT TO GOVERNMENTAL LAWS AND REGULATIONS RELATING TO THE
PROTECTION OF THE ENVIRONMENT WHICH MAY EXPOSE US TO SIGNIFICANT COSTS AND
LIABILITIES.
We face risks of environmental costs and liabilities. Our operations are
subject to federal, state and local laws and regulations relating to protection
of the environment. Although we believe that our operations comply with
applicable environmental regulations, risks of substantial costs and liabilities
are inherent in pipeline operations and terminaling operations. We cannot assure
you that we will not incur substantial costs and liabilities. 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.
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 will be issued by the parent partnership and will be
structurally subordinated to the claims of our operating subsidiaries'
creditors. Holders of the debt securities will not be creditors of our operating
partnerships. The claims to the assets of our operating subsidiaries derive from
our own partnership interests in those operating subsidiaries. Claims of our
operating subsidiaries' creditors will generally have priority as to the assets
of our operating subsidiaries over our own partnership interest
6
claims and will therefore have priority over the holders of our debt, including
the debt securities. Our operating subsidiaries' creditors may include:
- general creditors,
- trade creditors,
- secured creditors,
- taxing authorities, and
- creditors holding guarantees.
On July 14, 2000, we entered into a $75 million term loan and a $475
million revolving credit facility. On July 21, 2000, we borrowed $75 million
under the term loan and $340 million under the revolving credit facility. The
funds were used to finance the acquisition of ARCO Pipe Line Company and to
refinance our existing credit facilities, other than the senior notes of TE
Products. On April 6, 2001, we amended our revolving credit facility to permit
borrowings up to $500 million and to allow for letters of credit up to $20
million. The term of the revised credit agreement was extended to April 6, 2004.
Additionally, on April 6, 2001, we entered into a 364-day, $200 million
revolving credit agreement.
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 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. We would not
expect to make an acquisition unless our general partner believes that the
transaction is likely to increase our cash distributions per unit to our
unitholders.
7
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 80% of the limited partnership units and only after receiving state
regulatory approvals required for the transfer of control of a public utility.
As a result, unitholders will have limited influence on matters affecting our
operations, and third parties may find it difficult to gain control of us or
influence our actions.
OUR PARTNERSHIP AGREEMENT LIMITS THE LIABILITY OF OUR GENERAL PARTNER.
Our general partner owes duties of loyalty and care to the unitholders.
Provisions of our partnership agreement and the partnership agreements for each
of the operating partnerships, however, contain language limiting the liability
of the general partner to the unitholders for actions or omissions taken in good
faith. In addition, the partnership agreements grant broad rights of
indemnification to the general partner and its directors, officers, employees
and affiliates for acts taken in good faith in a manner believed to be in or not
opposed to our best interests.
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN SOME CIRCUMSTANCES.
The limitations on the liability of holders of limited partnership
interests for the obligations of a limited partnership have not been clearly
established in some states. If it were determined that we had been conducting
business in any state without compliance with the applicable limited partnership
statute, or that the unitholders as a group took any action pursuant to our
partnership agreement that constituted participation in the "control" of our
business, then the unitholders could be held liable under some circumstances for
our obligations to the same extent as a general partner.
TAX RISKS TO UNITHOLDERS
You should read "Tax Considerations" 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. We have not requested, and do not plan to request,
a ruling from the IRS on this or any other matter affecting us.
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.
The partnership agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal, state
or local income tax purposes, then the minimum quarterly distribution and the
target distribution levels will be decreased to reflect that impact on us.
8
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.
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, currently at the rate of 39.6%, 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.
9
WE WILL TREAT EACH PURCHASER OF UNITS 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.
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. 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.
10
TEPPCO PARTNERS
We are a publicly traded Delaware limited partnership engaged in the
transportation of refined products and liquefied petroleum gases and the
transportation and marketing of crude oil and natural gas liquids. 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.
[Chart showing that Texas Eastern Products Pipeline Company, LLC owns a 2.0%
general partner interest in TEPPCO Partners, L.P. Duke Energy Corporation owns a
16.2% limited partner interest in TEPPCO Partners, L.P. Public unit holders own
81.8% of the limited partner interests in TEPPCO Partners, L.P. Texas Eastern
Products Pipeline Company, LLC is wholly owned by Duke Energy Field Services,
LLC. Duke Energy owns 69.7% of Duke Energy Field Services, LLC and Phillips
Petroleum Corporation owns 30.3% of Duke Energy Field Services, LLC. TEPPCO
Partners, L.P. owns all of the capital stock of TEPPCO GP, Inc. TEPPCO Partners,
L.P. owns a 99.999% limited partner interest in TE Products Pipeline Company,
Limited Partnership and a 99.999% limited partnership interest in TCTM, L.P.
TEPPCO GP, Inc. owns a 0.001% general partnership interest in TE Products
Pipeline Company, Limited Partnership and a 0.001% general partnership interest
in TCTM, L.P.]
11
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:
THREE
MONTHS
TWELVE MONTHS ENDED DECEMBER 31, ENDED
------------------------------------- MARCH 31,
1996 1997 1998 1999 2000 2001
----- ----- ----- ----- ----- ---------
Ratio of Earnings to Fixed Charges... 2.59x 2.70x 2.72x 3.06x 2.10x 2.91x
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
The debt securities will be issued under an Indenture, among TEPPCO
Partners, as issuer, First Union National Bank, as trustee, and TE Products and
TCTM, as subsidiary guarantors, and any supplements to the Indenture that may be
entered into from time to time. The terms of the debt securities will include
those expressly set forth in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended. If we issue one or
more series of debt securities subordinated to our Senior Indebtedness (as
defined below), then these series will be issued under a separate Indenture
containing subordination provisions. This description of debt securities is
intended to be a useful overview of the material provisions of the debt
securities and the Indentures. The forms of the Senior Indenture and the
Subordinated Indenture have been filed as exhibits to this registration
statement. You should read the Indentures for provisions that may be important
to you because the 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 a series of debt securities is issued.
GENERAL
The Indenture does not limit the amount of debt securities that may be
issued thereunder. Debt securities may be issued under the Indenture from time
to time in separate series, each up to the aggregate amount authorized for such
series. Any series of debt securities may be fully and unconditionally
guaranteed by the TE Products and TCTM, our two first-tier operating
subsidiaries. TE Products and TCTM are sometimes referred to in this description
of debt securities as the "Subsidiary Guarantors." The debt securities will be
our general obligations and those 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. Please read "Description of
Debt Securities -- Subordination."
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A prospectus supplement and a supplemental indenture (or a resolution of
our Board of Directors and accompanying officers' certificate) relating to any
series of debt securities being offered will include specific terms relating to
the offering. These terms will include 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 as well;
- 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.
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 administered in the
United States or at the office of the Trustee or the Trustee's agent in New York
City, subject to the limitations provided in the Indenture, without the payment
of any service charge, other than any applicable tax or governmental charge.
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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 thereafter look only to us for payment
thereof.
SUBSIDIARY GUARANTEES
Our payment obligations under any series of the debt securities may be
jointly and severally unconditionally guaranteed by both of the Subsidiary
Guarantors. If a series of debt securities are so guaranteed, the Indenture, or
a supplemental indenture thereto, will be executed by the Subsidiary Guarantors.
The terms of any subsidiary guarantee will be set forth in the applicable
prospectus supplement. The obligations of each Subsidiary Guarantor under its
Guarantee will be limited to the maximum amount that will, after giving effect
to all other contingent and fixed liabilities of the Subsidiary Guarantor and to
any collections from or payments made by or on behalf of any other Subsidiary
Guarantors in respect of the obligations of the other Subsidiary Guarantor under
its Guarantee, result in the obligations of the Subsidiary Guarantor under the
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
Federal or state law.
The Indenture will provide that the Guarantee of any Subsidiary Guarantor
may be released under certain circumstances. Provided that no default shall have
occurred and shall be continuing under 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, or all or substantially all the assets of,
the Subsidiary Guarantor (provided such sale, exchange or transfer is not
prohibited by the Indenture);
- automatically upon the merger of the Subsidiary Guarantor into us or any
other Subsidiary Guarantor or the liquidation and dissolution of the
Subsidiary Guarantor (in each case to the extent not prohibited by this
Indenture); or
- following delivery of a written notice of the release from the Guarantee
by us to the Trustee, upon the release of all guarantees by the
Subsidiary Guarantor of any debt for borrowed money of us (or a guarantee
of such debt) and, after giving effect to the proposed release, the
aggregate total consolidated assets of all our subsidiaries that are not
Subsidiary Guarantors will not exceed 2% of our consolidated assets.
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, as described in "-- Subordination."
COVENANTS
A series of debt securities may contain certain financial and other
covenants applicable to us and our subsidiaries. A description of any such
affirmative and negative covenants will be contained in the prospectus
supplement applicable to such series.
EVENTS OF DEFAULT
Each of the following 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, continued 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;
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- 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, 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, either of the guarantees by the Subsidiary Guarantors ceases
to be in full force and effect or is declared null and void in a judicial
proceeding, or any of the Subsidiary Guarantors denies or disaffirms its
obligations under the Indenture or its guarantee.
However, 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 (other than an Event of Default described in the
fourth bullet point above) occurs and is continuing, the Trustee by notice to
us, or the holders of at least 25% in principal amount of the outstanding debt
securities of that series by notice to us and the Trustee, may, and the Trustee
at the request of such holders shall, declare the 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. Upon such a declaration, the principal, premium
and accrued and unpaid interest will be due and payable immediately. 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 or other act on the part of the Trustee or any
holders. 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 such acceleration
with respect to the debt securities of that series and its consequences if
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction and all existing Events of Default, other than the
nonpayment of the principal of, premium, if any, and interest on the debt
securities of that series that have become due solely by such declaration of
acceleration, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation 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 loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the debt securities unless:
- such holder has previously given the Trustee notice that an Event of
Default is continuing;
- holders of at least 25% in principal amount of the outstanding debt
securities of that series have requested the Trustee to pursue the
remedy;
- such holders have offered the Trustee reasonable indemnity against any
loss, 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; 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.
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Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding debt securities of a series are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any trust 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 or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder or that would involve the Trustee in personal liability. Prior to taking
any action under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
The Indenture provides that if an Event of Default occurs and is continuing
and is known to the Trustee, the Trustee must mail to each holder notice of the
Event of Default within 90 days after it occurs. Except in the case of a default
in the payment of principal of, premium, if any, or interest on any debt
securities, the Trustee may withhold notice 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 notice is in
the interests of the holders. In addition, we are required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a compliance
certificate indicating we have complied with all covenants contained in the
Indenture or whether any default or Event of Default has occurred during the
previous year. We are also required to deliver to the Trustee, within 30 days
after the occurrence thereof, written notice of any Event of Default, its status
and what action we are taking or propose to take with respect to the default.
AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by us, the
Subsidiary Guarantors (if any) and the Trustee with the consent of the holders
of a majority in principal amount of all debt securities then outstanding under
the Indenture (including consents obtained in connection with a tender offer or
exchange offer for the debt securities). However, without the consent of each
holder of outstanding debt securities of each series affected thereby, no
amendment may, among other things:
- reduce the percentage in principal amount of debt securities 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 be redeemed under an
optional redemption or any similar provision;
- make any debt securities payable in other than U.S. dollars;
- impair the right of any holder to receive payment of, premium, if any,
principal of and interest on such holder's debt securities on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or 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 or in the waiver provisions; or
- release a Subsidiary Guarantor or modify such Subsidiary Guarantor's
guarantee in any manner adverse to the holders.
The holders of a majority in aggregate principal amount of the outstanding
debt securities of each series affected thereby, on behalf of all such holders,
may waive compliance by us or a Subsidiary Guarantor with certain restrictive
provisions of the Indenture. Subject to certain rights of the Trustee as
provided in the Indenture, the holders of a majority in aggregate principal
amount of the debt securities of each series affected thereby, on behalf of all
such holders, may waive any past default under the Indenture (including any such
waiver obtained in connection with a tender offer or exchange offer for the debt
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securities), except a default in the payment of principal, premium or interest
or a default in respect of a provision that under the Indenture cannot be
modified or amended without the consent of all holders of the series of debt
securities that is affected.
Without the consent of any holder, we, the Subsidiary Guarantors (if any)
and the Trustee may amend the Indenture 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 corporation, partnership, trust
or limited liability company of our obligations or those of a Subsidiary
Guarantor under the Indenture;
- add guarantees with respect to the debt securities;
- change or eliminate any restriction on the payment of principal of, or
premium 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.
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 the holders a notice
briefly describing such amendment. However, the failure to give such notice to
all the holders, or any defect therein, will not impair or affect the validity
of the amendment.
DEFEASANCE
At any time we may terminate all our obligations under a series of debt
securities and the Indenture, a "legal defeasance," except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the debt securities, to replace mutilated,
destroyed, lost or stolen debt securities and 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 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, a "covenant defeasance".
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 thereto. 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.
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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, (a "defeasance trust")
and must comply with certain other conditions, including that no default has
occurred and is continuing after the deposit in trust and the delivery 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, shall
have no liability for any of our obligations or the obligations of the
Subsidiary Guarantors (if any) under the debt securities, the Indenture or the
guarantees (if any) or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder by accepting a debt security
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the debt securities. Such waiver may not be
effective 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 Senior Indebtedness (as
defined below) to the extent set forth in the prospectus supplement relating to
such series. 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. "Senior Indebtedness" is
defined 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, provided that these
obligations are not expressed to be subordinate or junior in right of payment to
any of our other indebtedness.
Upon any payment or distribution of our assets or, if applicable to any
series of outstanding debt securities, the Subsidiary Guarantors' assets to
creditors or 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, the holders of Senior Indebtedness of us or, if
applicable, a Subsidiary Guarantor shall be entitled to receive payment in full
in cash of the Senior Indebtedness before holders of subordinated debt
securities shall be entitled to receive any payment of principal, premium or
interest with respect to the subordinated debt securities, and until the Senior
Indebtedness is paid in full, any distribution to which holders of subordinated
debt securities would otherwise be entitled shall 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.
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 (except, in the case of subordinated debt securities that
provide for a mandatory sinking fund, by our delivery of subordinated debt
securities to the Trustee in satisfaction of our sinking fund obligation) any
subordinated debt securities if (a) any principal, premium or interest with
respect to Senior Indebtedness is not paid within any applicable grace period
(including at maturity), or (b) any other default on Senior Indebtedness occurs
and the maturity of the Senior Indebtedness is accelerated in accordance with
its terms, unless, in either case, the default has been cured
18
or waived and the 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" (which, unless otherwise provided in the prospectus
supplement relating to the series of subordinated debt securities, will include
indebtedness for borrowed money under a bank credit agreement ("Bank Debt") and
any other specified issue of Senior Indebtedness of at least $100 million or
other indebtedness for borrowed money that we may designate). During the
continuance of any default (other than a default described in clause (a) or (b)
above), with respect to any Senior Indebtedness pursuant to which the maturity
thereof may be accelerated immediately without further notice (except such
notice as may be required to effect the acceleration) or the expiration of any
applicable grace periods, we and, if applicable to any series of outstanding
debt securities, the Subsidiary Guarantors may not pay the subordinated debt
securities for a period, the "Payment Blockage Period", commencing on the
receipt by us and the Trustee of written notice of the default from the
representative of any Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period, a "Blockage Notice". The Payment Blockage
Period may be terminated before its expiration by written notice to the Trustee,
to us and, if applicable to any series of outstanding debt securities, to the
Subsidiary Guarantors 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 because the default giving rise to the Payment
Blockage Period is no longer continuing. Unless the holders of Senior
Indebtedness shall have accelerated the maturity thereof, we and, if applicable
to any series of outstanding debt securities, the Subsidiary Guarantors may
resume payments on the subordinated debt securities after the expiration of the
Payment Blockage Period. Unless otherwise provided in the prospectus supplement
relating to the series of subordinated debt securities, 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 or on behalf of
holders of Designated Senior Indebtedness other than the Bank Indebtedness, in
which case, the representative of the Bank Indebtedness may give another
Blockage Notice within the period. In no event, however, may the total number of
days during which any Payment Blockage Period or Periods is in effect exceed 179
days in the aggregate 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.
By reason of the subordination, in the event of insolvency, our creditors
who are 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
The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a depositary
identified in a prospectus supplement.
Unless otherwise stated in any prospectus supplement, The Depository Trust
Company, New York, New York, or "DTC," will act as depositary. Book-entry debt
securities of a series will be issued in the form of a global security that will
be deposited with DTC. This means that we will not issue certificates to each
holder. One global security will be issued to DTC who will keep a computerized
record of its participants (for example, your broker) whose clients have
purchased the debt securities. The participant will then keep a record of its
clients who purchased the debt securities. Unless it is exchanged in whole or in
part for a certificated security, a global security may not be transferred;
except that DTC, its nominees and their successors may transfer a global
security as a whole to one another.
Beneficial interests in global securities will be shown on, and transfers
of global securities will be made only through, records maintained by DTC and
its participants.
DTC has provided us the following information: DTC 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
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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 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.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
participant. The rules that apply to DTC and its participants are on file with
the Securities and Exchange Commission.
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.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee 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 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, and
voting by participants, will be governed by the customary practices between the
participants and owners of beneficial interests, as is the case with debt
securities held for the account of customers registered in "street name."
However, payments will be the responsibility of the participants and not of DTC,
the Trustee or us.
Debt securities represented by a global security 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. As
used herein in the description of a series of debt securities, the term
"Trustee" refers 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 provides that it and the debt securities will be governed by,
and construed in accordance with, the laws of the State of New York.
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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."
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
- ----------- ------------ --------
October 30, 1998 November 6, 1998 $0.450
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*
- ---------------
* Declared
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
21
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 by (1)
borrowings and sales of debt securities other than for working capital purposes,
(2) sales of equity interests and (3) 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");
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."
22
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions of Available Cash that constitutes 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.
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
(1) the maximum marginal federal corporate income tax rate, plus
(2) 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.
23
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");
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
(a) any distributions of Available Cash constituting Cash from Interim
Capital Transactions, and
(b) 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.
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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
- to provide for the proper conduct of our business, including reserves
for future rate refunds or capital expenditures, or
- 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.
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,
25
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
- 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 is a summary of all the material tax considerations that may
be relevant to prospective unitholders who are individual citizens or residents
of the United States and, unless otherwise noted in the following discussion,
expresses the opinion of Vinson & Elkins L.L.P., special counsel to the general
partner and us, insofar as it relates to matters of United States federal income
tax law and legal conclusions with respect to those matters. This section is
based upon current provisions of the Internal Revenue Code, existing and
proposed regulations and current administrative rulings and court decisions, all
of which are subject to change. Later changes in these authorities may cause the
tax consequences to vary substantially from the consequences described below.
Unless the context otherwise requires, references in this section to "us" or
"we" are references to TEPPCO Partners, L.P. and our operating partnerships.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, nonresident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions,
26
foreign persons, individual retirement accounts (IRAs), real estate investment
trusts (REITs) or mutual funds. Accordingly, we recommend that each prospective
unitholder consult, and depend on, his own tax advisor in analyzing the federal,
state, local and foreign tax consequences particular to him of the ownership or
disposition of limited partnership units.
All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section, unless otherwise noted, are the
opinion of counsel and are based on the accuracy of the representations made by
us.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the limited partnership units and
the prices at which limited partnership units trade. In addition, the costs of
any contest with the IRS will be borne directly or indirectly by the unitholders
and the general partner. Furthermore, the tax treatment of us, or of an
investment in us, may be significantly modified by future legislative or
administrative changes or court decisions. Any modifications may or may not be
retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose limited partnership units are
loaned to a short seller to cover a short sale of limited partnership units
(please read "-- Tax Consequences of Unit Ownership -- Treatment of Short
Sales");
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"-- Disposition of Limited Partnership Units -- Allocations Between
Transferors and Transferees"); and
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "-- Tax Consequences of Unit Ownership -- Section
754 Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of whether
cash distributions are made to him by the partnership. Distributions by a
partnership to a partner generally are not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our status or the status of our operating subsidiaries as
partnerships for federal income tax purposes or whether our operations generate
"qualifying income" under Section 7704 of the Internal Revenue Code. Instead, we
will rely on the opinion of counsel that, based upon the Internal Revenue Code,
its regulations, published revenue rulings and court decisions and the
representations described below, we and our operating subsidiaries will be
classified as partnerships for federal income tax purposes.
Treasury Regulations pertaining to the classification of entities such as
us as partnerships or 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 corporations. Domestic limited partnerships in existence prior to
1997 and classified as partnerships as of December 31, 1996, under the prior
Treasury Regulations would continue to be classified as partnerships after 1996
unless they formally elected another form of classification under the "check the
box" regulations. Neither we nor our operating partnerships have filed an
election to be treated as a corporation under the "check-the-box" regulations,
and counsel has rendered
27
its opinion that we and our operating partnerships were treated as partnerships
on December 31, 1996, under the prior Treasury Regulations and continue to be so
treated.
Section 7704 of the Internal Revenue Code provides that publicly traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "qualifying income exception," exists with respect
to publicly traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
income and gains derived from the 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. We estimate that less than
five percent of our current gross income is not qualifying income; however, this
estimate could change from time to time. Based upon and subject to this
estimate, the factual representations made by us and the general partner and a
review of the applicable legal authorities, counsel is of the opinion that at
least 90% of our current gross income constitutes qualifying income.
In rendering its opinion that we and our operating partnerships were
treated as partnerships for federal income tax purposes as of December 31, 1996,
our tax counsel has relied on the following factual representations that the
general partner made about us and our operating partnerships with respect to
periods prior to 1997:
- As to us and each of our operating 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 Internal Revenue
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, more than 90% our gross income was from sources
that, in our counsel's opinion, generated "qualifying income" within the
meaning of Section 7704 of the Internal Revenue Code.
- Our general partner and the general partner of each of our operating
partnerships acted independently of the limited partners of such
partnerships.
In rendering its opinion that we and our operating partnerships have been
and will continue to be treated as partnerships for federal income tax purposes
after 1996, our tax counsel has relied on the following factual representations
that the general partner made about us and our operating partnerships with
respect to periods after 1996:
- Neither we nor our operating subsidiaries will elect to be treated as a
corporation; and
- For each taxable year, more than 90% of our gross income will be income
from sources that, in our counsel's opinion, generate "qualifying income"
within the meaning of Section 7704(d) of the Internal Revenue Code.
If we fail to meet the qualifying income exception, other than a failure
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 that corporation, and then distributed that stock to the
unitholders in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and us so long as we, at that
time, do not have liabilities
28
in excess of the tax basis of our assets. Thereafter, we would be treated as a
corporation for federal income tax purposes.
If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the qualifying income exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
tax basis in his limited partnership units, or taxable capital gain, after the
unitholder's tax basis in his limited partnership units is reduced to zero.
Accordingly, taxation 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 of the value of the units.
The discussion below is based on the conclusion that we will be classified
as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of TEPPCO Partners will be
treated as partners of TEPPCO Partners for federal income tax purposes. Also:
(a) assignees who have executed and delivered transfer applications,
and are awaiting admission as limited partners, and
(b) unitholders whose limited partnership units are held in street
name or by a nominee and who have the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of their
limited partnership units,
will be treated as partners of TEPPCO Partners for federal income tax
purposes. As there is no direct authority addressing assignees of limited
partnership units who are entitled to execute and deliver transfer applications
and become entitled to direct the exercise of attendant rights, but who fail to
execute and deliver transfer applications, counsel's opinion does not extend to
these persons. Furthermore, a purchaser or other transferee of limited
partnership units who does not execute and deliver a transfer application may
not receive some federal income tax information or reports furnished to record
holders of limited partnership units unless the limited partnership units are
held in a nominee or street name account and the nominee or broker has executed
and delivered a transfer application for those limited partnership units.
A beneficial owner of limited partnership units whose units have been
transferred to a short seller to complete a short sale would appear to lose his
status as a partner with respect to those units for federal income tax purposes.
Please read "-- Tax Consequences of Unit Ownership -- Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in TEPPCO Partners for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income. We do not pay any federal income tax.
Instead, each unitholder is required to report on his income tax return his
share of our income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by him. Consequently, we may
allocate income to a unitholder even if he has not received a cash distribution.
Each unitholder will be required to include in income his allocable share of our
income, gains, losses and deductions for our taxable year ending with or within
his taxable year.
29
Treatment of Distributions. Distributions by us to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his limited partnership units immediately before the
distribution. Our cash distributions in excess of a unitholder's tax basis
generally will be considered to be gain from the sale or exchange of the limited
partnership units, taxable in accordance with the rules described under
"-- Disposition of Limited Partnership Units" below. 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 "-- Limitations on Deductibility of Losses."
Any reduction in a unitholder's share of our liabilities for which no
partner, including the general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. A decrease in a unitholder's percentage interest in us because of
our issuance of additional limited partnership units will decrease his share of
our nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his tax basis in his
limited partnership units, if the distribution reduces the unitholder's share of
our "unrealized receivables," including depreciation recapture, and/or
substantially appreciated "inventory items," both as defined in the Internal
Revenue Code, and collectively, "Section 751 assets." To that extent, he will be
treated as having been distributed his proportionate share of the Section 751
assets and having exchanged those assets with us in return for the non-pro rata
portion of the actual distribution made to him. This latter deemed exchange will
generally result in the unitholder's realization of ordinary income. That income
will equal the excess of (1) the non-pro rata portion of that distribution over
(2) the unitholder's tax basis for the share of Section 751 assets deemed
relinquished in the exchange.
Basis of Limited Partnership Units. A unitholder's initial tax basis for
his limited partnership units will be the amount he paid for the limited
partnership units plus his share of our nonrecourse liabilities. That basis will
be increased by his share of our income and by any increases in his share of our
nonrecourse liabilities. That basis will be decreased, but not below zero, by
distributions from us, by the unitholder's share of our losses, by any decreases
in his share of our nonrecourse liabilities and by his share of our expenditures
that are not deductible in computing taxable income and are not required to be
capitalized. A limited partner will have no share of our debt which is recourse
to the general partner, but will have a share, generally based on his share of
profits, of our nonrecourse liabilities. Please read "-- Disposition of Limited
Partnership Units -- Recognition of Gain or Loss."
Limitations on Deductibility of Losses. The deduction by a unitholder of
his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder, if more than 50%
of the value of the corporate unitholder's stock is owned directly or indirectly
by five or fewer individuals or some tax-exempt organizations, to the amount for
which the unitholder is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A unitholder must recapture
losses deducted in previous years to the extent that distributions cause his at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that his tax basis or at risk
amount, whichever is the limiting factor, is subsequently increased. Upon the
taxable disposition of a unit, any gain recognized by a unitholder can be offset
by losses that were previously suspended by the at risk limitation but may not
be offset by losses suspended by the basis limitation. Any excess loss above
that gain previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire or
hold his units, if the lender of those borrowed funds owns an interest in us, is
related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our nonrecourse
liabilities.
30
The passive loss limitations generally provide that individuals, estates,
trusts and some closely held corporations and personal service corporations can
deduct losses from passive activities, which are generally 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 we generate will only be available to offset
our passive income generated in the future and will not be available to offset
income from other passive activities or investments, including our investments
or investments in other publicly traded partnerships, or salary or active
business income. Passive losses that are not deductible because they exceed a
unitholder's share of income we generate may be deducted in full when he
disposes of his entire investment in us in a fully taxable transaction with an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions, including the at risk rules and the basis
limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly traded partnerships.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." The IRS has indicated that net passive
income earned by a publicly traded partnership will be treated as investment
income for purposes of the limitations on the deductibility of investment
interest. In addition, the 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;
- our 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 under the passive loss rules,
less deductible expenses, other than interest, directly connected with the
production of investment income, but generally does not include gains
attributable to the disposition of property held for investment.
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 or the
general partner or any former unitholder, we are authorized to pay those taxes
from our funds. That payment, if made, will be treated as a distribution of cash
to the partner on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are authorized to
treat the payment as a distribution to all current unitholders. We are
authorized to amend 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.
Allocation of Income, Gain, Loss and Deduction. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with their
percentage interests in us. If we have a net loss for the entire year, that loss
will be allocated first to the general partner and the unitholders in accordance
with their percentage interests in us to the extent of their positive capital
accounts and, second, to the general partner.
Specified items of our income, gain, loss and deduction will be allocated
to account for the difference between the tax basis and fair market value of
property contributed to us by the general partner and its
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affiliates, referred to in this discussion as "contributed property." The effect
of these allocations to a unitholder purchasing limited partnership units
offered by this prospectus will be essentially the same as if the tax basis of
our assets were equal to their fair market value at the time of the offering. In
addition, items of recapture income will be allocated to the extent possible to
the partner who was allocated the deduction giving rise to the treatment of that
gain as recapture income in order to minimize the recognition of ordinary income
by some unitholders. Finally, although we do not expect that our operations will
result in the creation of negative capital accounts, if negative capital
accounts nevertheless result, items of our income and gain will be allocated in
an amount and manner to eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction, other than
an allocation required by Section 704(c) of the Internal Revenue Code to
eliminate the difference between a partner'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", generally will be given effect for
federal income tax purposes in determining a partner's share of an item of
income, gain, loss or deduction only if the allocation has substantial economic
effect. In any other case, a partner's share of an item will be determined on
the basis of his interest in us, which will be determined by taking into account
all the facts and circumstances, including his relative contributions to us, the
interests of all the partners in profits and losses, the interest of all the
partners in cash flow and other nonliquidating distributions and rights of all
the partners to distributions of capital upon liquidation.
Under our method of making Section 704(c) allocations, unitholders cannot
be allocated more depreciation, gain or loss than the total amount of any such
item recognized by us in a particular taxable period (the "ceiling limitation").
To the extent the ceiling limitation is or becomes applicable, our partnership
agreement will require that items of income and deduction be allocated in a way
designed to effectively "cure" this problem and eliminate the impact of the
ceiling limitation. Treasury Regulations under Section 704(c) of the Internal
Revenue Code permit a partnership to make reasonable curative allocations to
reduce or eliminate disparities between the tax basis and value attributable to
property contributed to us.
Counsel is of the opinion that, with the exception of the issues described
in "-- Tax Consequences of Unit Ownership -- Section 754 Election" and
"-- Disposition of Limited Partnership Units -- Allocations Between Transferors
and Transferees," allocations under our partnership agreement will be given
effect for federal income tax purposes in determining a partner's share of an
item of income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
those units. If so, he would no longer be a partner for those units during the
period of the loan and may recognize gain or loss from the disposition. As a
result, during this period:
- any of our income, gain, loss or deduction with respect to those units
would not be reportable by the unitholder;
- any cash distributions received by the unitholder as to those units would
be fully taxable; and
- all of these distributions would appear to be ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
where limited partnership units are loaned to a short seller to cover a short
sale of limited partnership units; therefore, unitholders desiring to assure
their status as partners and avoid the risk of gain recognition from a loan to a
short seller should modify any applicable brokerage account agreements to
prohibit their brokers from borrowing their units. The IRS has announced that it
is actively studying issues relating to the tax treatment of short sales of
partnership interests. Please also read "-- Disposition of Limited Partnership
Units -- Recognition of Gain or Loss."
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The
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current minimum tax rate for noncorporate taxpayers is 26% on the first $175,000
of alternative minimum taxable income in excess of the exemption amount and 28%
on any additional alternative minimum taxable income. Prospective unitholders
should consult with their tax advisors as to the impact of an investment in
units on their liability for the alternative minimum tax.
Tax Rates. In general the highest effective United States federal income
tax rate for individuals for 2001 is 39.6% and the maximum United States federal
income tax rate for net capital gains of an individual for 2001 is 20% if the
asset disposed of was held for more than one year at the time of disposition.
Section 754 Election. We and our operating partnerships have made the
election permitted by Section 754 of the Internal Revenue Code. That election is
irrevocable without the consent of the IRS. The election will generally permit
us to adjust a limited partnership unit purchaser's tax basis in our assets
("inside basis") under Section 743(b) of the Internal Revenue Code to reflect
his purchase price. This election does not apply to a person who purchases
limited partnership units directly from us. The Section 743(b) adjustment
belongs to the purchaser and not to other partners. For purposes of this
discussion, a partner's inside basis in our assets will be considered to have
two components: (1) his share of our tax basis in our assets ("common basis")
and (2) his Section 743(b) adjustment to that basis.
Treasury Regulations under Sections 743 and 197 of the Internal Revenue
Code generally require, unless the remedial allocation method is adopted, 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 Internal Revenue 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 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 tax
characteristics of our units. To avoid such a lack of uniformity, the general
partner has adopted an accounting convention under Section 743(b) to preserve
the uniformity of units despite its inconsistency with these Treasury
Regulations. Please read "-- Tax Treatment of Operations -- Uniformity of
Units."
Although 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 recovery 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. This kind of aggregate approach may
result in lower annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read "-- Tax Treatment of
Operations -- 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
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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.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue Code. The IRS could
seek to reallocate some or all of any Section 743(b) adjustment allocated by us
to our tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. We cannot assure you that the determinations we
make will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether. Should the IRS
require a different basis adjustment to be made, and should, in our opinion, the
expense of compliance exceed the benefit of the election, we may seek permission
from the IRS to revoke our Section 754 election. If permission is granted, a
subsequent purchaser of units may be allocated more income than he would have
been allocated had the election not been revoked.
TREATMENT OF OPERATIONS
Accounting Method and Taxable Year. We use the year ending December 31 as
our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of our
income, gain, loss and deduction for our taxable year ending within or with his
taxable year. In addition, a unitholder who has a taxable year ending on a date
other than December 31 and who disposes of all of his units following the close
of our taxable year but before the close of his taxable year must include his
share of our income, gain, loss and deduction in income for his taxable year,
with the result that he will be required to include in income for his taxable
year his share of more than one year of our income, gain, loss and deduction.
Please read "-- Disposition of Limited Partnership Units -- Allocations Between
Transferors and Transferees."
Initial Tax Basis, Depreciation and Amortization. The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between the fair market
value of our assets and their tax basis immediately prior to this offering will
be borne by the general partner and its affiliates. Please read "-- 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 Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property we own will likely be required to recapture some or all, of
those deductions as ordinary income upon a sale of his interest in us. Please
read "-- Tax Consequences of Unit Ownership -- Allocation of Income, Gain, Loss
and Deduction" and "-- Disposition of Limited Partnership Units -- Recognition
of Gain or Loss."
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 cost.
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Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates of basis are subject to
challenge and will not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the character and
amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years and incur interest and penalties with respect to those
adjustments.
DISPOSITION OF LIMITED PARTNERSHIP UNITS
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured by
the sum of the cash or the fair market value of other property received by him
plus his share of our nonrecourse liabilities. Because the amount realized
includes a unitholder's share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability in excess of any
cash received from the sale.
Prior distributions from us in excess of cumulative net taxable income for
a limited partnership unit that decreased a unitholder's tax basis in that
limited partnership unit will, in effect, become taxable income if the limited
partnership unit is sold at a price greater than the unitholder's tax basis in
that limited partnership unit, even if the price received is less than his
original cost.
Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally be
taxed at a maximum rate of 20%. A portion of this gain or loss, which will
likely be substantial, however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Net capital 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, recently finalized regulations allow a selling
unitholder who can identify limited partnership units transferred with an
ascertainable holding period to elect to use the actual holding period of the
limited partnership units transferred. Thus, according to the ruling, a limited
partnership unitholder will be unable to select high or low basis limited
partnership units to sell as would be the case with corporate stock, but,
according to the regulations, may designate specific limited partnership units
sold for purposes of determining the holding period of units transferred. A
unitholder electing to use the actual holding period of limited partnership
units transferred must consistently use that identification method for all
subsequent sales or exchanges of limited partnership units. A unitholder
considering the purchase of additional units or a sale of limited partnership
units purchased in separate transactions should consult his tax advisor as to
the possible consequences of this ruling and application of the final
regulations.
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Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or related persons enter(s) into:
- 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 Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the applicable
exchange on the first business day of the month (the "Allocation Date").
However, gain or loss realized on a sale or other disposition of our assets
other than in the ordinary course of business will be allocated among the
unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be allocated
income, gain, loss and deduction realized after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between unitholders. If this method
is not allowed under the Treasury Regulations, or only applies to transfers of
less than all of the unitholder's interest, our taxable income or losses might
be reallocated among the unitholders. We are authorized to revise our method of
allocation between unitholders to conform to a method permitted under future
Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes
of them prior to the record date set for a cash distribution for that quarter
will be allocated items of our income, gain, loss and deductions attributable to
that quarter but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who sells 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 tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than 12
months of our taxable income or loss being includable in his taxable income for
the year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if
36
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. In the absence of uniformity, we may be unable to
completely comply with a number of federal income tax requirements, both
statutory and regulatory. A lack of uniformity can result from the application
of Treasury Regulations under Sections 167, 197 and 743 to our Section 743(b)
adjustments or the determination that our Section 704(c) curative allocations to
prevent the application of "ceiling" limitations on our ability to make
allocations to eliminate book-tax disparities are unreasonable.
We depreciate the portion of a Section 743(b) adjustment attributable to
unrealized appreciation in the value of contributed recovery 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 Treasury Regulations. 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. Please
read "-- Tax Consequences of Unit Ownership -- Section 754 Election." If we
determine that this position cannot reasonably be taken, we may adopt a
depreciation and amortization position under which all purchasers acquiring
units in the same month would receive depreciation and amortization deductions,
whether attributable to a common basis or Section 743(b) adjustment, based upon
the same applicable rate as if they had purchased a direct interest in our
property. If this position is adopted, it may result in lower annual
depreciation and amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and amortization deductions
not taken in the year that these deductions are otherwise allowable. This
position will not be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on the unitholders.
If we choose not to utilize this aggregate method, we may use any other
reasonable depreciation and amortization method to preserve the uniformity of
the intrinsic tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If this
challenge were sustained, the uniformity of units might be affected, and the
gain from the sale of units might be increased without the benefit of additional
deductions. Please read "-- Disposition of Limited Partnership
Units -- Recognition of Gain or Loss."
In the event our method of making Section 704(c) allocations is disallowed,
some or all of the adverse consequences described in the preceding paragraph
could result. See "-- Allocation of Partnership Income, Gain, Loss and
Deduction."
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder which is a tax-exempt
organization will be unrelated business taxable income and will be taxable to
them.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
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Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States because
of the ownership of units. As a consequence they will be required to file
federal tax returns to report their share of our income, gain, loss or deduction
and pay federal income tax at regular rates on their share of our net income or
gain. And, under rules applicable to publicly traded partnerships, we will
withhold tax (currently at the rate of 39.6%) from cash distributions made
quarterly to foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our transfer agent
on a Form W-8 or applicable substitute form in order to obtain credit for these
withholding taxes.
In addition, because a foreign corporation that owns units will be treated
as engaged in a United States trade or business, that corporation may be subject
to the United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its share of our income and gain, as adjusted for changes
in the foreign corporation's "U.S. net equity," which are effectively connected
with the conduct of a United States trade or business. That tax may be reduced
or eliminated by an income tax treaty between the United States and the country
in which the foreign corporate unitholder is a "qualified resident." In
addition, this type of unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
sale or disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business of the foreign unitholder.
Apart from the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has owned less than 5%
in value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the sale or disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 75 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take various
accounting and reporting positions, some of which have been mentioned earlier,
to determine his share of income, gain, loss and deduction. We cannot assure you
that those positions will yield a result that conforms to the requirements of
the Internal Revenue Code, regulations or administrative interpretations of the
IRS. Neither we nor counsel can assure prospective unitholders that the IRS will
not successfully contend in court that those positions are impermissible. Any
challenge by the IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each unitholder to adjust a prior year's
tax liability, and possibly may result in an audit of his own return. Any audit
of a unitholder's return could result in adjustments not related to our returns
as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code requires
that one partner be designated as the "Tax Matters Partner" for these purposes.
The partnership agreement names the general partner as our Tax Matters Partner.
The Tax Matters Partner is entitled to make elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review, by which all the unitholders are bound, of a final partnership
administrative adjustment
38
and, if the Tax Matters Partner fails to seek judicial review, judicial review
may be sought by any unitholder having at least a 1% interest in profits or by
any group of unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go forward, and each
unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of this
consistency requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;
(b) whether the beneficial owner is
(1) a person that is not a United States person,
(2) a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the foregoing, or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred
for the beneficial owner; and
(d) specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
Registration as a Tax Shelter. The Internal Revenue 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
Internal Revenue Code are extremely broad. It is arguable that we are not
subject to the registration requirement on the basis that we will not constitute
a tax shelter. However, the general partner, as our principal organizer, has
registered us as a tax shelter with the Secretary of Treasury because of the
absence of assurance that we will not be subject to tax shelter registration and
in light of the substantial penalties which might be imposed if registration is
required and not undertaken.
The IRS has issued to us the following tax-shelter registration number:
90036000017. A unitholder who sells or otherwise transfers a unit in a later
transaction must furnish the registration number to the transferee. The penalty
for failure of the transferor of a unit to furnish the registration number to
the transferee is $100 for each failure. In addition, the unitholders must
disclose our tax shelter registration number on Form 8271 to be attached to the
tax return on which any deduction, loss or other benefit we generate is claimed
or on which any of our income is included. A unitholder who fails to disclose
the tax shelter registration number on his return, without reasonable cause for
that failure, will be subject to a $250 penalty for each failure. Any penalties
discussed are not deductible for federal income tax purposes.
ISSUANCE OF THIS REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN US
OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
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,
39
is imposed by the Internal Revenue Code. No penalty will be imposed, however,
for any portion of an underpayment if it is shown that there was a reasonable
cause for that portion and that the taxpayer acted in good faith regarding that
portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:
(1) for which there is, or was, "substantial authority," or
(2) as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.
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 or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns 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
In addition to federal income taxes, you will be subject to other taxes,
including state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in which you are a
resident. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in us. You will be required to file state income tax returns and to
pay state income taxes in some or all of the states in which we do business or
own property and may be subject to penalties for failure to comply with those
requirements. 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. Some of the states may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a unitholder who is not a
resident of the state. Withholding, the amount of which may be greater or less
than a particular unitholder's income tax liability to the state, generally does
not relieve a nonresident unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to unitholders for
purposes of determining the amounts distributed by us. Please read "-- Tax
Consequences of Unit Ownership -- Entity-Level Collections." We may also own
property or do business in other states in the future.
It is the responsibility of each unitholder to investigate the legal and
tax consequences, under the laws of pertinent states and localities, of his
investment in us. Accordingly, each prospective unitholder should consult, and
must depend upon, his own tax counsel or other advisor with regard to those
matters. Further, it is the responsibility of each unitholder to file all state
and local, as well as United States federal tax returns, that may be required of
him. Counsel has not rendered an opinion on the state or local tax consequences
of an investment in us.
TAX CONSEQUENCES OF OWNERSHIP OF DEBT SECURITIES
A description of the material federal income tax consequences of the
acquisition, ownership and disposition of debt securities will be set forth in
the prospectus supplement relating to the offering of debt securities.
40
INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to certain
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 Internal Revenue 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 IRAs established or
maintained by an employer or employee organization. Among other things,
consideration should be given to (a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA; (b) whether in making such investment, such plan
will satisfy the diversification requirement of Section 404(a)(1)(C) of ERISA;
and (c) whether such investment will result in recognition of unrelated business
taxable income by such plan and, if so, the potential after-tax investment
return. Please read "Tax Considerations -- Tax-Exempt Organizations and Other
Investors." The person with investment discretion with respect to the assets of
an employee benefit plan (a "fiduciary") should determine whether an investment
in us is authorized by the appropriate governing instrument and is a proper
investment for such plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code (which
also applies to IRAs that are not considered part of an employee benefit plan)
prohibit an employee benefit plan from engaging in certain transactions
involving "plan assets" with parties that are "parties in interest" under ERISA
or "disqualified persons" under the Internal Revenue Code with respect to the
plan.
In addition to considering whether the purchase of limited partnership
units is a prohibited transaction, a fiduciary of an employee benefit plan
should consider whether such plan will, by investing in us, be deemed to own an
undivided interest in our assets, with the result that the General Partner also
would be a fiduciary of such plan and our operations would be subject to the
regulatory restrictions of ERISA, including its prohibited transaction rules, as
well as the prohibited transaction rules of the Internal Revenue Code.
The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant to
these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interest 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 pursuant to certain provisions of the federal
securities laws, (b) the entity is an "Operating Partnership'-- i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority owned subsidiary
or subsidiaries, or (c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the value of each
class of equity interest (disregarding certain interests held by the General
Partner, its affiliates, and certain other persons) is held by the employee
benefit plans referred to above, IRAs and other employee benefit plans not
subject to ERISA (such as governmental plans). Our assets should not be
considered "plan assets" under these regulations because it is expected that the
investment will satisfy the requirements in (a) and (b) above and may also
satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of limited partnership units
should consult with their own counsel regarding the consequences under ERISA and
the Internal Revenue Code in light of the serious penalties imposed on persons
who engage in prohibited transactions or other violations.
41
PLAN OF DISTRIBUTION
We may sell the securities being offered hereby:
- directly to purchasers,
- through agents,
- through underwriters, and
- through dealers.
We, or agents designated by us, may directly solicit, from time to time,
offers to purchase the securities. Any such agent may be deemed to be an
underwriter as that term is defined in the Securities Act of 1933, as amended.
We will name the agents involved in the offer or sale of the securities and
describe any commissions payable by us to these agents in the prospectus
supplement. Unless otherwise indicated in the prospectus supplement, these
agents will be acting on a best efforts basis for the period of their
appointment. The agents may be entitled under agreements which may be entered
into with us to indemnification by us against specific civil liabilities,
including liabilities under the Securities Act of 1933, as amended. The agents
may also be our customers or may engage in transactions with or perform services
for us in the ordinary course of business.
If any underwriters are utilized in the sale of the securities in respect
of which this prospectus is delivered, we will enter into an underwriting
agreement with those underwriters at the time of sale to them. The names of
these underwriters and the terms of the transaction will be set forth in the
prospectus supplement, which will be used by the underwriters to make resales of
the securities in respect of which this prospectus is delivered to the public.
The underwriters may be entitled, under the relevant underwriting agreement, to
indemnification by us against specific liabilities, including liabilities under
the Securities Act. The underwriters may also be our customers or may engage in
transactions with or perform services for us in the ordinary course of business.
If a dealer is utilized in the sale of the securities in respect of which
this prospectus is delivered, we will sell those securities to the dealer, as
principal. The dealer may then resell those securities to the public at varying
prices to be determined by the dealer at the time of resale. Dealers may be
entitled to indemnification by us against specific liabilities, including
liabilities under the Securities Act. The dealers may also be our customers or
may engage in transactions with, or perform services for us in the ordinary
course of business.
The place and time of delivery for the securities in respect of which this
prospectus is delivered are set forth in the accompanying prospectus supplement.
LEGAL
Certain legal matters in connection with the securities will be passed upon
by Vinson & Elkins 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, 2000 and 1999 and for each of the years in the
three-year period ended December 31, 2000, incorporated by reference herein
(included in TEPPCO Partners, L.P.'s Annual Report on Form 10-K for the year
ended December 31, 2000 and as amended and included in TEPPCO Partners, L.P.'s
Current Report on Form 8-K filed on July 27, 2001), the consolidated financial
statements of TE Products Pipeline Company, Limited Partnership and subsidiaries
as of December 31, 2000 and 1999 and for each of the years in the three-year
period ended December 31, 2000, and the consolidated balance sheet of Texas
Eastern Products Pipeline Company, LLC and subsidiary as of December 31, 2000,
included herein, have
42
been incorporated by reference and included herein, respectively, in reliance
upon the reports of KPMG LLP, independent certified public accountants,
incorporated by reference and included herein, and upon the authority of said
firm as experts in accounting and auditing.
The combined financial statements of ARCO Pipe Line Company's APL Business
(as defined in the Amended and Restated Purchase Agreement with Texas Eastern
Products Pipeline Company, LLC) at December 31, 1999 and 1998 and for the years
then ended incorporated in this prospectus by reference to the audited
historical financial statements included on pages 4 through 17 of TEPPCO
Partners, L.P's Report 8-K/A filed October 3, 2000 and the financial statements
of Seaway Crude Pipeline Company at December 31, 1999 and 1998 and for the years
then ended incorporated in this prospectus by reference to the audited
historical financial statements included on pages 18 through 29 of TEPPCO
Partners, L.P's Report 8-K/A filed October 3, 2000 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.
43
INDEX TO FINANCIAL STATEMENTS
TEXAS EASTERN PRODUCTS PIPELINE COMPANY, LLC
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Notes to Consolidated Balance Sheets........................ F-4
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Texas Eastern Products Pipeline Company, LLC:
We have audited the accompanying consolidated balance sheet of Texas
Eastern Products Pipeline Company, LLC and subsidiary as of December 31, 2000
(see Note 1 of the Notes to the Consolidated Balance Sheets). This consolidated
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this consolidated financial statement
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit of a balance sheet includes
examining, on a test basis, evidence supporting the amounts and disclosures in
that balance sheet. An audit of a balance sheet also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Texas Eastern
Products Pipeline Company, LLC and subsidiary as of December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Houston, Texas
June 1, 2001
F-2
TEXAS EASTERN PRODUCTS PIPELINE COMPANY, LLC
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current Assets:
Accounts receivable, TE Products Pipeline Company, Limited
Partnership............................................ $ 6,393 $ 5,053
Accounts receivable, TCTM, L.P............................ -- 1,584
-------- --------
Total current assets.............................. 6,393 6,637
Advances to related parties................................. 4,486 387
Investment in TE Products Pipeline Company, Limited
Partnership............................................... 2,402 2,383
Investment in TEPPCO Partners, L.P.......................... 2,749 1,823
Investment in TCTM, L.P..................................... 2,481 1,913
-------- --------
Total assets...................................... $ 18,511 $ 13,143
======== ========
LIABILITIES AND MEMBER'S EQUITY
Current liabilities -- accrued income taxes................. $ 477 $ 382
Deferred income taxes....................................... 1,318 979
Member's equity:
Member's equity........................................... 26,716 21,782
Note receivable, Duke Energy Field Services, LP........... (10,000) (10,000)
-------- --------
Total member's equity............................. 16,716 11,782
-------- --------
Total liabilities and member's equity............. $ 18,511 $ 13,143
======== ========
See accompanying Notes to Consolidated Balance Sheets
F-3
TEXAS EASTERN PRODUCTS PIPELINE COMPANY, LLC
AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS
INFORMATION AT MARCH 31, 2001 IS UNAUDITED
(1) BASIS OF PRESENTATION
The accompanying consolidated balance sheets include the accounts of Texas
Eastern Products Pipeline Company, LLC and its wholly-owned subsidiary TEPPCO
Investments, LLC (collectively, the Company). On March 31, 2000, Texas Eastern
Products Pipeline Company and TEPPCO Investments, Inc. were converted to limited
liability companies, with a resulting name change for both companies to Texas
Eastern Products Pipeline Company, LLC and TEPPCO Investments, LLC,
respectively. Additionally on March 31, 2000, Texas Eastern Products Pipeline
Company, LLC (the LLC) distributed its ownership of a wholly-owned subsidiary,
TEPPCO Holdings, Inc. to Duke Energy Corporation (Duke Energy), the Company's
ultimate parent. The LLC also distributed to, and Duke Energy assumed, all
assets and liabilities of the LLC, except those relating to the performance of
its duties as general partner of the Partnership (see below) and $10 million of
the demand note receivable due from Duke Energy Field Services, LP (DEFS), a
joint venture formed between Duke Energy and Phillips Petroleum Corporation.
Also on March 31, 2000, Duke Energy indirectly contributed its remaining
investment in the LLC to DEFS.
The Company is the general partner of TEPPCO Partners, L.P., TE Products
Pipeline Company, Limited Partnership and TCTM, L.P. (collectively, the
Partnership). The Company, as general partner, performs all management and
operating functions required for the Partnership pursuant to the Agreements of
Limited Partnership of TEPPCO Partners, L.P., TE Products Pipeline Company,
Limited Partnership and TCTM, L.P. (collectively, the Partnership Agreements).
The general partner is reimbursed by the Partnership for all reasonable direct
and indirect expenses incurred in managing the Partnership.
These consolidated balance sheets should be read in conjunction with the
consolidated financial statements and notes thereto presented in the TEPPCO
Partners, L.P. Annual Report on Form 10-K for the year ended December 31, 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated balance sheets include the accounts of the Company.
Significant intercompany items have been eliminated in consolidation. The
Company's investments in the Partnership are accounted for using the equity
method.
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as all highly marketable securities with a
maturity of three months or less when purchased. The Company generally does not
maintain cash balances. Cash transactions are generally settled through
intercompany accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounts receivable and accounts payable approximate fair value due to the
short-term maturity of these financial instruments. The fair value of the
Company's note receivable is more fully described in note 4, Note Receivable.
USE OF ESTIMATES
The preparation of the consolidated balance sheets in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that
F-4
TEXAS EASTERN PRODUCTS PIPELINE COMPANY, LLC
AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS
affect certain reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities. Actual results could differ from these
estimates.
INCOME TAXES
As discussed in note 1, Basis of Presentation, on March 31, 2000, Texas
Eastern Products Pipeline Company and TEPPCO Investments, Inc. were converted to
limited liability companies, and the Company's ownership of TEPPCO Holdings,
Inc. was distributed to Duke Energy. As such, the Company became a nontaxable
entity for federal income tax purposes as of March 31, 2000, but remains a
taxable entity for state income taxes.
Prior to March 31, 2000, the Company followed the asset and liability
method of accounting for federal income tax. Under this method, deferred income
taxes reflect the impact of temporary differences between the amount of assets
and liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations. These deferred income taxes are measured by applying
enacted tax laws and statutory tax rates applicable to the period in which the
differences are expected to affect taxable income. Also prior to March 31, 2000,
under an agreement with Duke Energy, the Company computed federal taxes as if it
was filing a separate consolidated tax return and paid such tax, if any, to Duke
Energy in lieu of federal taxes otherwise payable to the government. The Company
continues to follow the asset and liability method of accounting for state
income taxes.
INTERIM FINANCIAL STATEMENT
The accompanying interim unaudited consolidated balance sheet reflects all
adjustments which are, in the opinion of management, of a normal and recurring
nature and necessary for a fair statement of financial position of the Company
as of March 31, 2001.
(3) RELATED-PARTY TRANSACTIONS
Pursuant to the Partnership Agreements, the Company is entitled to
reimbursement of all direct and indirect expenses related to business activities
of the Partnership (see note 1). Accounts receivable, TE Products Pipeline
Company, Limited Partnership and accounts receivable, TCTM, L.P. on the
consolidated balance sheets represent unpaid amounts charged to the Partnership
for these costs. Advances to related parties on the consolidated balance sheets
primarily represent advances made to DEFS.
(4) NOTE RECEIVABLE
As of March 31, 2001 and December 31, 2000, the Company held a $10 million
demand note receivable due from DEFS. Interest is payable quarterly. The rate on
the note fluctuates quarterly based on the one-month LIBOR rate, plus 50 basis
points, as of the last day of the preceding calendar quarter. Under the terms of
the note, DEFS may prepay the note, in whole or in part, without premium or
penalty. The Company believes that the amount included in the consolidated
balance sheets for the note receivable materially represents fair value at March
31, 2001 and December 31, 2000, as the underlying interest rate is based on
market rates. The note receivable due from DEFS is classified as contra-equity
on the consolidated balance sheet as of March 31, 2001 and December 31, 2000. On
March 31, 2000, the LLC distributed $115 million of the note receivable to Duke
Energy (see note 1), reducing the note receivable balance from $125 million to
$10 million.
F-5
TEXAS EASTERN PRODUCTS PIPELINE COMPANY, LLC
AND SUBSIDIARY
NOTES TO CONSOLIDATED BALANCE SHEETS
(5) INVESTMENTS
On March 7, 1990, in conjunction with the formation of the Partnership, the
Company contributed cash and conveyed all assets and liabilities (other than
certain intercompany and tax-related items) to the Partnership in return for a
1.0101% general partner interest in TE Products Pipeline Company, Limited
Partnership and a 1% general partner interest in TEPPCO Partners, L.P.
In conjunction with the formation of the Partnership, TEPPCO Holdings, Inc.
also received 2,500,000 Deferred Participation Interests (DPIs) in the
Partnership, which were valued at $17.25 million. The DPIs represented an
effective 8.45% limited partner interest in the Partnership. Effective April 1,
1994, the DPIs began participating in distributions of cash and allocations of
profit and loss of the Partnership. As of December 31, 1999, 94% of the DPIs
have been converted into an equal number of Limited Partner Interests (Units) of
the Partnership. On March 31, 2000, the DPIs and Units were distributed to Duke
Energy via the distribution of TEPPCO Holdings, Inc. (see note 1). The assets
and liabilities of the Partnership are summarized below (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Current assets.............................................. $ 318,238 $ 363,397
Property, plant and equipment, net.......................... 969,917 949,705
Other assets................................................ 308,382 309,708
---------- ----------
$1,596,537 $1,622,810
========== ==========
Current liabilities......................................... $ 313,182 $ 358,271
Long-term debt.............................................. 802,791 835,784
Other liabilities and deferred credits...................... 10,538 3,991
Redeemable Class B Units held by related party.............. 105,547 105,411
Minority interest........................................... 4,883 4,296
Partners' capital........................................... 359,596 315,057
---------- ----------
$1,596,537 $1,622,810
========== ==========
(6) INCOME TAXES
As discussed in note 1, Basis of Presentation, as of March 31, 2000, Texas
Eastern Products Pipeline Company and TEPPCO Investments, Inc. were converted to
limited liability companies, and the Company's ownership of TEPPCO Holdings,
Inc. was distributed to Duke Energy. As such, the Company became a nontaxable
entity for federal income tax purposes as of March 31, 2000. In connection with
the conversion to limited liability companies, the federal deferred tax
liability balance of $39.2 million at March 31, 2000 was recorded as a tax
benefit in earnings. Also discussed in note 1, Basis of Presentation, in
connection with the contribution of the LLC to DEFS on March 31, 2000, accrued
income taxes of $15.7 million and deferred taxes of $2.2 million of the Company
were assumed by Duke Energy.
At March 31, 2001 and December 31, 2000, accrued income taxes payable was
comprised of $477,000 and $382,000, respectively, of state income taxes.
As of March 31, 2001 and December 31, 2000, the difference between the
financial statement carrying value and related tax basis of existing assets and
liabilities, primarily the Company's equity investments in the Partnership,
resulted in a deferred tax liability for state income taxes of $1.3 million and
$979,000, respectively.
F-6
(TEPPCO PARTNERS, L.P. LOGO)
TEPPCO PARTNERS, L.P.
5,500,000 UNITS
REPRESENTING LIMITED PARTNER INTERESTS
----------------------------
PROSPECTUS SUPPLEMENT
NOVEMBER , 2001
----------------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
UBS WARBURG
BANC OF AMERICA SECURITIES LLC
A.G. EDWARDS & SONS, INC.
RBC CAPITAL MARKETS
