sv3asr
As filed with the Securities and Exchange
Commission on January 13, 2011
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-3
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
ENERGY TRANSFER PARTNERS,
L.P.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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73-1493906
(I.R.S. Employer
Identification No.)
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3738 Oak Lawn Avenue
Dallas, TX 75219
(214) 981-0700
(Address, including zip code,
and telephone number,
including area code, of
registrants principal executive offices)
Martin Salinas, Jr.
Chief Financial Officer
Energy Transfer Partners, L.P.
3738 Oak Lawn Avenue
Dallas, TX 75219
(214) 981-0700
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
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Thomas P. Mason
Vice President, General Counsel and Secretary
Energy Transfer Partners, L.P.
3738 Oak Lawn Avenue
Dallas, TX 75219
(214) 981-0700
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William N. Finnegan IV
Sean T. Wheeler
Latham & Watkins LLP
717 Texas Avenue,
16th
Floor
Houston, TX 77002
(713) 546-7400
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following
box. o
If any of the securities registered on this form are being
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, other than
securities offered only in connection with dividend or interest
reinvestment plans, check the following
box. þ
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that
shall become effective upon filing with the Commission pursuant
to Rule 462(e) under the Securities Act, check the
following
box. þ
If this form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed to
register additional securities or additional classes of
securities pursuant to Rule 413(b) under the Securities
Act, check the following
box. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting
company o
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CALCULATION
OF REGISTRATION FEE
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Amount to be registered/ proposed maximum offering
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price per unit/ proposed maximum aggregate offering price
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Title of Each Class of Securities to be Registered
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per unit/ amount of registration fee(1)
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Common Units
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Debt Securities
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Total
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(1) |
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An indeterminate aggregate initial
offering price or number of the securities of each identified
class is being registered as may from time to time be offered
hereunder at indeterminate prices. In accordance with
Rules 456(b) and 457(r) under the Securities Act of 1933,
the registrant is deferring payment of all of the registration
fee.
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Prospectus
ENERGY TRANSFER PARTNERS,
L.P.
Common Units
Debt Securities
We may offer and sell the common units representing limited
partner interests and debt securities of Energy Transfer
Partners, L.P. as described in this prospectus from time to time
in one or more classes or series and in amounts, at prices and
on terms to be determined by market conditions at the time of
our offerings.
We may offer and sell these securities to or through one or more
underwriters, dealers and agents, or directly to purchasers, on
a continuous or delayed basis. This prospectus describes the
general terms of these common units and debt securities and the
general manner in which we will offer the common units and debt
securities. The specific terms of any common units and debt
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 common units and debt
securities.
Investing in our common units and debt securities involves
risks. Limited partnerships are inherently different from
corporations. You should carefully consider the risk factors
described under Risk Factors beginning on
page 4 of this prospectus before you make an investment in
our securities.
Our common units are traded on the New York Stock Exchange, or
the NYSE, under the symbol ETP. We will provide
information in the prospectus supplement for the trading market,
if any, for any debt securities we may offer.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved 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 January 13, 2011.
TABLE OF
CONTENTS
In making your investment decision, you should rely only on
the information contained or incorporated by reference in this
prospectus. We have not authorized anyone to provide you with
any other information. If anyone provides you with different or
inconsistent information, you should not rely on it.
You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the
front cover of this prospectus. You should not assume that the
information contained in the documents incorporated by reference
in this prospectus is accurate as of any date other than the
respective dates of those documents. Our business, financial
condition, results of operations and prospects may have changed
since those dates.
ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission, or the SEC,
using a shelf registration process. Under this shelf
registration process, we may, over time, offer and sell any
combination of the securities described in this prospectus in
one or more offerings. This prospectus generally describes
Energy Transfer Partners, L.P. and the securities. Each time we
sell securities with this prospectus, we will provide you with 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.
Before you invest in our securities, you should carefully read
this prospectus and any prospectus supplement and the additional
information described under the heading Where You Can Find
More Information. To the extent information in this
prospectus is inconsistent with information contained in a
prospectus supplement, you should rely on the information in the
prospectus supplement. You should read both this prospectus and
any prospectus supplement, together with additional information
described under the heading Where You Can Find More
Information, and any additional information you may need
to make your investment decision. All references in this
prospectus to we, us, ETP,
the Partnership and our refer to Energy
Transfer Partners, L.P.
ENERGY
TRANSFER PARTNERS, L.P.
We are a publicly traded limited partnership that owns and
operates a diversified portfolio of energy assets. Our natural
gas operations include intrastate natural gas gathering and
transportation pipelines, two interstate pipelines, natural gas
gathering, processing and treating assets located in Texas, New
Mexico, Arizona, Louisiana, Arkansas, Mississippi, West
Virginia, Colorado and Utah, and three natural gas storage
facilities located in Texas. These assets include more than
17,500 miles of pipeline in service and a 50% interest in a
joint venture that has approximately 185 miles of
interstate pipeline in service. Our intrastate and interstate
pipeline systems transport natural gas from several significant
natural gas producing areas, including the Barnett Shale in the
Fort Worth Basin in north Texas, the Bossier Sands in east
Texas, the Permian Basin in west Texas and New Mexico, the
San Juan Basin in New Mexico, the Fayetteville Shale in
Arkansas, the Haynesville Shale in north Louisiana, the Eagle
Ford Shale in south and central Texas, and other producing areas
in Texas and Louisiana. Our gathering and processing operations
are conducted in many of these same producing areas as well as
in the Piceance and Uinta Basins in Colorado and Utah. We are
also one of the three largest retail marketers of propane in the
United States, serving more than one million customers across
the country.
Our principal executive offices are located at 3738 Oak Lawn
Avenue, Dallas, Texas 75219, and our telephone number at that
location is
(214) 981-0700.
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CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus contains various forward-looking statements and
information that are based on our beliefs and those of our
general partner, as well as assumptions made by and information
currently available to us. These forward-looking statements are
identified as any statement that does not relate strictly to
historical or current facts. When used in this prospectus, words
such as anticipate, project,
expect, plan, goal,
forecast, intend, could,
believe, may, and similar expressions
and statements regarding our plans and objectives for future
operations, are intended to identify forward-looking statements.
Although we and our general partner believe that the
expectations on which such forward-looking statements are based
are reasonable, neither we nor our general partner can give
assurances that such expectations will prove to be correct.
Forward-looking statements are subject to a variety of risks,
uncertainties and assumptions. If one or more of these risks or
uncertainties materialize, or if underlying assumptions prove
incorrect, our actual results may vary materially from those
anticipated, estimated, projected or expected. Among the key
risk factors that may have a direct bearing on our results of
operations and financial condition are:
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the amount of natural gas transported on our pipelines and
gathering systems;
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the level of throughput in our natural gas processing and
treating facilities;
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the fees we charge and the margins we realize for our gathering,
treating, processing, storage and transportation services;
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the prices and market demand for, and the relationship between,
natural gas and natural gas liquids, or NGLs;
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energy prices generally;
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the prices of natural gas and propane compared to the price of
alternative and competing fuels;
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the general level of petroleum product demand and the
availability and price of propane supplies;
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the level of domestic oil, propane and natural gas production;
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the availability of imported oil and natural gas;
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the ability to obtain adequate supplies of propane for retail
sale in the event of an interruption in supply or transportation
and the availability of capacity to transport propane to market
areas;
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actions taken by foreign oil and gas producing nations;
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the political and economic stability of petroleum producing
nations;
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the effect of weather conditions on demand for oil, natural gas
and propane;
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availability of local, intrastate and interstate transportation
systems;
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the continued ability to find and contract for new sources of
natural gas supply;
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availability and marketing of competitive fuels;
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the impact of energy conservation efforts;
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energy efficiencies and technological trends;
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governmental regulation and taxation;
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changes to, and the application of, regulation of tariff rates
and operational requirements related to our interstate and
intrastate pipelines;
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hazards or operating risks incidental to the gathering,
treating, processing and transporting of natural gas and NGLs or
to the transporting, storing and distributing of propane that
may not be fully covered by insurance;
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the maturity of the propane industry and competition from other
propane distributors;
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competition from other midstream companies, interstate pipeline
companies and propane distribution companies;
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loss of key personnel;
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loss of key natural gas producers or the providers of
fractionation services;
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reductions in the capacity or allocations of third-party
pipelines that connect with our pipelines and facilities;
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the effectiveness of risk-management policies and procedures and
the ability of our liquids marketing counterparties to satisfy
their financial commitments;
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the nonpayment or nonperformance by our customers;
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regulatory, environmental, political and legal uncertainties
that may affect the timing and cost of our internal growth
projects, such as our construction of additional pipeline
systems;
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risks associated with the construction of new pipelines and
treating and processing facilities or additions to our existing
pipelines and facilities, including difficulties in obtaining
permits and rights-of-way or other regulatory approvals and the
performance by third-party contractors;
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the availability and cost of capital and our ability to access
certain capital sources;
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a deterioration of the credit and capital markets;
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the ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to our
financial results and to successfully integrate acquired
businesses;
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changes in laws and regulations to which we are subject,
including tax, environmental, transportation and employment
regulations or new interpretations by regulatory agencies
concerning such laws and regulations; and
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the costs and effects of legal and administrative proceedings.
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You should not put undue reliance on any forward-looking
statements. When considering forward-looking statements, please
review the risk factors described under Risk Factors
in this prospectus.
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RISK
FACTORS
An investment in our securities involves a high degree of
risk. You should carefully consider the following risk factors,
together with all of the other information included in, or
incorporated by reference into, this prospectus in evaluating an
investment in our securities. If any of these risks were to
occur, our business, financial condition or results of
operations could be adversely affected. In that case, the
trading price of our common units or debt securities could
decline and you could lose all or part of your investment. When
we offer and sell any securities pursuant to a prospectus
supplement, we may include additional risk factors relevant to
such securities in the prospectus supplement.
Risks
Inherent in an Investment in Us
Cash
distributions are not guaranteed and may fluctuate with our
performance and other external factors.
The amount of cash we can distribute to holders of our common
units or other partnership securities depends upon the amount of
cash we generate from our operations. The amount of cash we
generate from our operations will fluctuate from quarter to
quarter and will depend upon, among other things:
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the amount of natural gas transported in our pipelines and
gathering systems;
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the level of throughput in our processing and treating
operations;
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the fees we charge and the margins we realize for our gathering,
treating, processing, storage and transportation services;
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the price of natural gas;
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the relationship between natural gas and NGL prices;
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the weather in our operating areas;
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the cost to us of the propane we buy for resale and the prices
we receive for our propane;
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the level of competition from other midstream companies,
interstate pipeline companies, propane companies and other
energy providers;
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the level of our operating costs;
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prevailing economic conditions; and
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the level of our derivative activities.
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In addition, the actual amount of cash we will have available
for distribution will also depend on other factors, such as:
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the level of capital expenditures we make;
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the level of costs related to litigation and regulatory
compliance matters;
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the cost of acquisitions, if any;
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the levels of any margin calls that result from changes in
commodity prices;
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our debt service requirements;
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fluctuations in our working capital needs;
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our ability to make working capital borrowings under our credit
facilities to make distributions;
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our ability to access capital markets;
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restrictions on distributions contained in our debt
agreements; and
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the amount, if any, of cash reserves established by our general
partner in its discretion for the proper conduct of our business.
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Because of all these factors, we cannot guarantee that we will
have sufficient available cash to pay a specific level of cash
distributions to our unitholders.
Furthermore, unitholders should be aware that the amount of cash
we have available for distribution depends primarily upon our
cash flow, including cash flow from financial reserves and
working capital borrowings, and is not solely a function of
profitability, which will be affected by non-cash items. As a
result, we may make cash distributions during periods when we
record net losses and may not make cash distributions during
periods when we record net income.
We may
sell additional limited partner interests, diluting existing
interests of unitholders.
Our partnership agreement allows us to issue an unlimited number
of additional limited partner interests, including securities
senior to the common units, without the approval of our
unitholders. The issuance of additional common units or other
equity securities will have the following effects:
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the current proportionate ownership interest of our unitholders
in us will decrease;
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the amount of cash available for distribution on each common
unit or partnership security may decrease;
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the relative voting strength of each previously outstanding
common unit may be diminished; and
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the market price of the common units or partnership securities
may decline.
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Future
sales of our units or other limited partner interests in the
public market could reduce the market price of unitholders
limited partner interests.
As of December 31, 2010, Energy Transfer Equity, L.P., or
ETE, owned 50,226,967 ETP common units. ETE also owns our
general partner. If ETE were to sell
and/or
distribute its common units to the holders of its equity
interests in the future, those holders may dispose of some or
all of these units. The sale or disposition of a substantial
portion of these units in the public markets could reduce the
market price of our outstanding common units.
In August 2009, we filed a registration statement to register
12,000,000 ETP common units held by ETE, which allows ETE to
offer and sell these ETP common units from time to time in one
or more public offerings, direct placements or by other means.
Our
debt level and debt agreements may limit our ability to make
distributions to unitholders and may limit our future financial
and operating flexibility.
As of September 30, 2010, we had approximately
$6.0 billion of consolidated debt, excluding the credit
facilities of our joint ventures and of Midcontinent Express
Pipeline, LLC, which we guarantee in part. Our level of
indebtedness affects our operations in several ways, including,
among other things:
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a significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on
outstanding debt and will not be available for other purposes,
including payment of distributions;
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covenants contained in our existing debt agreements require us
to meet financial tests that may adversely affect our
flexibility in planning for and reacting to changes in our
business;
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our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and general partnership
purposes may be limited;
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we may be at a competitive disadvantage relative to similar
companies that have less debt;
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we may be more vulnerable to adverse economic and industry
conditions as a result of our significant debt level; and
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failure to comply with the various restrictive covenants of our
debt agreements could negatively impact our ability and the
ability of our subsidiaries to incur additional debt, including
our ability to utilize the available capacity under our
revolving credit facilities, and our ability to pay our
distributions.
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Construction
of new pipeline projects will require significant amounts of
debt and equity financing which may not be available to us on
acceptable terms, or at all.
We plan to fund our growth capital expenditures, including any
new pipeline construction projects we may undertake, with
proceeds from sales of our debt and equity securities and
borrowings under our revolving credit facility; however, we
cannot be certain that we will be able to issue our debt and
equity securities on terms satisfactory to us, or at all. If we
are unable to finance our expansion projects as expected, we
could be required to seek alternative financing, the terms of
which may not be attractive to us, or to revise or cancel our
expansion plans.
As of September 30, 2010, we had approximately
$6.0 billion of total debt. A significant increase in our
indebtedness that is proportionately greater than our issuances
of equity could negatively impact our credit ratings or our
ability to remain in compliance with the financial covenants
under our revolving credit agreement, which could have a
material adverse effect on our financial condition, results of
operations and cash flows.
Increases
in interest rates could adversely affect our business, results
of operations, cash flows and financial condition.
In addition to our exposure to commodity prices, we have
exposure to increases in interest rates. As of
September 30, 2010, we had no variable rate debt
outstanding. However, we had fixed-to-floating interest rate
swaps outstanding as of September 30, 2010 with total
notional amounts of $400.0 million that are not designated
as hedges for accounting purposes. To the extent that we have
variable rate debt or interest rate swaps outstanding, our
results of operations, cash flows and financial condition could
be adversely affected by increases in interest rates.
An increase in interest rates may also cause a corresponding
decline in demand for equity investments, in general, and in
particular for yield-based equity investments such as our common
units. Any such reduction in demand for our common units
resulting from other more attractive investment opportunities
may cause the trading price of our common units to decline.
The
credit and risk profile of our general partner and its owners
could adversely affect our credit ratings and
profile.
The credit and business risk profiles of our general partner,
and of ETE as the indirect owner of our general partner, may be
factors in credit evaluations of us as a publicly traded limited
partnership due to the significant influence of our general
partner and ETE over our business activities, including our cash
distributions, acquisition strategy and business risk profile.
Another factor that may be considered is the financial condition
of our general partner and its owners, including the degree of
their financial leverage and their dependence on cash flow from
us to service their indebtedness.
ETE has significant indebtedness outstanding and is dependent
principally on the cash distributions from its general and
limited partner equity interests in us and in Regency Energy
Partners LP, or Regency, to service such indebtedness. Any
distributions by us to ETE will be made only after satisfying
our then current obligations to our creditors. Although we have
taken certain steps in our organizational structure, financial
reporting and contractual relationships to reflect the
separateness of us, Energy Transfer Partners GP, L.P., or ETP
GP, and Energy Transfer Partners, L.L.C., or ETP LLC, from the
entities that control ETP GP (ETE and its general partner), our
credit ratings and business risk profile could be adversely
affected if the ratings and risk profiles of such entities were
viewed as substantially lower or riskier than ours.
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The
general partner is not elected by the unitholders and cannot be
removed without its consent.
Unlike the holders of common stock in a corporation, unitholders
have only limited voting rights on matters affecting our
business, and therefore limited ability to influence
managements decisions regarding our business. Unitholders
did not elect our general partner and will have no right to
elect our general partner on an annual or other continuing
basis. Although our general partner has a fiduciary duty to
manage us in a manner beneficial to our unitholders, the
directors of our general partner and its general partner have a
fiduciary duty to manage the general partner and its general
partner in a manner beneficial to the owners of those entities.
Furthermore, if the unitholders are dissatisfied with the
performance of our general partner, they will have little
ability to remove our general partner. The general partner
generally may not be removed except upon the vote of the holders
of
662/3%
of the outstanding units voting together as a single class,
including units owned by the general partner and its affiliates.
As of December 31, 2010, ETE and its affiliates held
approximately 26% of our outstanding units, with an additional
approximate 1% of our outstanding units held by our officers and
directors. Consequently, it could be difficult to remove our
general partner without the consent of the general partner and
our related parties.
Furthermore, unitholders voting rights are further
restricted by the partnership agreement provision providing that
any units held by a person that owns 20% or more of any class of
units then outstanding, other than the general partner and its
affiliates, cannot be voted on any matter.
The
control of our general partner may be transferred to a third
party without unitholder consent.
Our general partner may transfer its general partner interest to
a third party without the consent of the unitholders.
Furthermore, the general partner of our general partner may
transfer its general partner interest in our general partner to
a third party without the consent of the unitholders. Any new
owner of the general partner or the general partner of the
general partner would be in a position to replace the officers
of the general partner with its own choices and to control the
decisions taken by such officers.
Unitholders
may be required to sell their units to the general partner at an
undesirable time or price.
If at any time less than 20% of the outstanding units of any
class are held by persons other than the general partner and its
affiliates, the general partner will have the right to acquire
all, but not less than all, of those units at a price no less
than their then-current market price. As a consequence, a
unitholder may be required to sell his common units at an
undesirable time or price. The general partner may assign this
purchase right to any of its affiliates or to us.
The
interruption of distributions to us from our operating
subsidiaries and equity investees may affect our ability to
satisfy our obligations and to make distributions to our
partners.
We are a holding company with no business operations other than
that of our operating subsidiaries. Our only significant assets
are the equity interests we own in our operating subsidiaries
and equity investees. As a result, we depend upon the earnings
and cash flow of our operating subsidiaries and equity investees
and the distribution of that cash to us in order to meet our
obligations and to allow us to make distributions to our
partners.
Cost
reimbursements due to our general partner may be substantial and
may reduce our ability to pay the distributions to
unitholders.
Prior to making any distributions to our unitholders, we will
reimburse our general partner for all expenses it has incurred
on our behalf. In addition, our general partner and its
affiliates may provide us with services for which we will be
charged reasonable fees as determined by the general partner.
The reimbursement of these expenses and the payment of these
fees could adversely affect our ability to make distributions to
the unitholders. Our general partner has sole discretion to
determine the amount of these expenses and fees.
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Unitholders
may have liability to repay distributions.
Under certain circumstances, unitholders may have to repay us
amounts wrongfully distributed to them. Under Delaware law, we
may not make a distribution to unitholders if the distribution
causes our liabilities to exceed the fair value of our assets.
Liabilities to partners on account of their partnership
interests and non-recourse liabilities are not counted for
purposes of determining whether a distribution is permitted.
Delaware law provides that a limited partner who receives such a
distribution and knew at the time of the distribution that the
distribution violated Delaware law, will be liable to the
limited partnership for the distribution amount for three years
from the distribution date. Under Delaware law, an assignee who
becomes a substituted limited partner of a limited partnership
is liable for the obligations of the assignor to make
contributions to the partnership. However, such an assignee is
not obligated for liabilities unknown to him at the time he or
she became a limited partner if the liabilities could not be
determined from the partnership agreement.
Risks
Related to Conflicts of Interest
Our
partnership agreement limits our general partners
fiduciary duties to our unitholders and restricts the remedies
available to unitholders for actions taken by our general
partner that might otherwise constitute breaches of fiduciary
duty.
Our partnership agreement contains provisions that waive or
consent to conduct by our general partner and its affiliates and
which reduce the obligations to which our general partner would
otherwise be held by state-law fiduciary duty standards. The
following is a summary of the material restrictions contained in
our partnership agreement on the fiduciary duties owed by our
general partner to the limited partners. Our partnership
agreement:
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permits our general partner to make a number of decisions in its
sole discretion. This entitles our general partner
to consider only the interests and factors that it desires, and
it has no duty or obligation to give any consideration to any
interest of, or factors affecting, us, our affiliates or any
limited partner;
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provides that our general partner is entitled to make other
decisions in its reasonable discretion;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not involving a required vote of
unitholders must be fair and reasonable to us and
that, in determining whether a transaction or resolution is
fair and reasonable, our general partner may
consider the interests of all parties involved, including its
own. Unless our general partner has acted in bad faith, the
action taken by our general partner shall not constitute a
breach of its fiduciary duty; and
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for errors of judgment or for any acts or
omissions if our general partner and those other persons acted
in good faith.
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In order to become a limited partner of our partnership, a
unitholder is required to agree to be bound by the provisions in
the partnership agreement, including the provisions discussed
above.
Some
of our executive officers and directors face potential conflicts
of interest in managing our business.
Certain of our executive officers and directors are also
officers
and/or
directors of ETE. These relationships may create conflicts of
interest regarding corporate opportunities and other matters.
The resolution of any such conflicts may not always be in our or
our unitholders best interests. In addition, these
overlapping executive officers and directors allocate their time
among us and ETE. These officers and directors face potential
conflicts regarding the allocation of their time, which may
adversely affect our business, results of operations and
financial condition.
The
general partners absolute discretion in determining the
level of cash reserves may adversely
affect our ability to make cash distributions to our
unitholders.
Our partnership agreement requires the general partner to deduct
from operating surplus cash reserves that in its reasonable
discretion are necessary to fund our future operating
expenditures. In addition, the
8
partnership agreement permits the general partner to reduce
available cash by establishing cash reserves for the proper
conduct of our business, to comply with applicable law or
agreements to which we are a party or to provide funds for
future distributions to partners. These cash reserves will
affect the amount of cash available for distribution to
unitholders.
Our
general partner has conflicts of interest and limited fiduciary
responsibilities that may permit our general partner to favor
its own interests to the detriment of unitholders.
ETE owns our general partner and as a result controls us. ETE
also owns the general partner of Regency, a publicly traded
partnership with which we compete in the natural gas gathering,
processing and transportation business. The directors and
officers of our general partner and its affiliates have
fiduciary duties to manage our general partner in a manner that
is beneficial to ETE, the sole owner of our general partner. At
the same time, our general partner has fiduciary duties to
manage us in a manner that is beneficial to our unitholders.
Therefore, our general partners duties to us may conflict
with the duties of its officers and directors to ETE as its sole
owner. As a result of these conflicts of interest, our general
partner may favor its own interest or those of ETE, Regency or
their owners or affiliates over the interest of our unitholders.
Such conflicts may arise from, among others, the following:
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Our partnership agreement limits the liability and reduces the
fiduciary duties of our general partner while also restricting
the remedies available to our unitholders for actions that,
without these limitations, might constitute breaches of
fiduciary duty. Unitholders are deemed to have consented to some
actions and conflicts of interest that might otherwise be deemed
a breach of fiduciary or other duties under applicable state law.
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Our general partner is allowed to take into account the
interests of parties in addition to us, including ETE, Regency
and their affiliates, in resolving conflicts of interest,
thereby limiting its fiduciary duties to us.
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Our general partners affiliates, including ETE, Regency
and their affiliates, are not prohibited from engaging in other
businesses or activities, including those in direct competition
with us.
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Our general partner determines the amount and timing of our
asset purchases and sales, capital expenditures, borrowings,
repayments of debt, issuances of equity and debt securities and
cash reserves, each of which can affect the amount of cash that
is distributed to unitholders and to ETE.
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Neither our partnership agreement nor any other agreement
requires ETE or its affiliates, including Regency, to pursue a
business strategy that favors us. The directors and officers of
the general partners of ETE and Regency have a fiduciary duty to
make decisions in the best interest of their members, limited
partners and unitholders, which may be contrary to our best
interests.
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Some of the directors and officers of ETE who provide advice to
us also may devote significant time to the businesses of ETE,
Regency and their affiliates and will be compensated by them for
their services.
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Our general partner determines which costs, including allocated
overhead costs, are reimbursable by us.
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Our general partner is allowed to resolve any conflicts of
interest involving us and our general partner and its
affiliates, and any resolution of a conflict of interest by our
general partner that is fair and reasonable to us will be deemed
approved by all partners and will not constitute a breach of the
partnership agreement.
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Our general partner controls the enforcement of obligations owed
to us by it.
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Our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
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Our general partner is not restricted from causing us to pay it
or its affiliates for any services rendered on terms that are
fair and reasonable to us or entering into additional
contractual arrangements with any of these entities on our
behalf.
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Our general partner intends to limit its liability regarding our
contractual and other obligations and, in some circumstances,
may be entitled to be indemnified by us.
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In some instances, our general partner may cause us to borrow
funds in order to permit the payment of distributions, even if
the purpose or effect of the borrowing is to make incentive
distributions.
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In addition, certain conflicts may arise as a result of our
pursuing acquisitions or development opportunities that may also
be advantageous to Regency. If we are limited in our ability to
pursue such opportunities, we may not realize any or all of the
commercial value of such opportunities. In addition, if Regency
is allowed access to our information concerning any such
opportunity and Regency uses this information to pursue the
opportunity to our detriment, we may not realize any of the
commercial value of this opportunity. In either of these
situations, our business, results of operations and the amount
of our distributions to our unitholders may be adversely
affected. Although we, ETE and Regency have adopted a policy to
address these conflicts and to limit the commercially sensitive
information that we furnish to ETE, Regency and their
affiliates, we cannot assure you that such conflicts will not
occur or that this policy will be effective in all circumstances
to protect our commercially sensitive information or to realize
the commercial value of our business opportunities.
Affiliates
of our general partner may compete with us.
Except as provided in our partnership agreement, affiliates and
related parties of our general partner are not prohibited from
engaging in other businesses or activities, including those that
might be in direct competition with us. On May 26, 2010,
our general partner acquired all of the general partner
interests in Regency, which competes with us with respect to our
natural gas operations. Additionally, two directors of Regency
GP LLC currently serve as directors of LE GP, LLC, the general
partner of ETE.
Risks
Related to Our Business
We are
exposed to the credit risk of our customers, and an increase in
the nonpayment and nonperformance by our customers could reduce
our ability to make distributions to our
unitholders.
The risks of nonpayment and nonperformance by our customers are
a major concern in our business. Participants in the energy
industry have been subjected to heightened scrutiny from the
financial markets in light of past collapses and failures of
other energy companies. We are subject to risks of loss
resulting from nonpayment or nonperformance by our customers.
The current tightening of credit in the financial markets may
make it more difficult for customers to obtain financing and,
depending on the degree to which this occurs, there may be a
material increase in the nonpayment and nonperformance by our
customers. Any substantial increase in the nonpayment and
nonperformance by our customers could have a material adverse
effect on our results of operations and operating cash flows.
The
profitability of certain activities in our midstream and
intrastate transportation and storage operations are largely
dependent upon natural gas commodity prices, price spreads
between two or more physical locations and market demand for
natural gas and NGLs, which are factors beyond our control and
have been volatile.
Income from our midstream and intrastate transportation and
storage operations is exposed to risks due to fluctuations in
commodity prices. For a portion of the natural gas gathered at
the North Texas System, Southeast Texas System and HPL System,
we purchase natural gas from producers at the wellhead and then
gather and deliver the natural gas to pipelines where we
typically resell the natural gas under various arrangements,
including sales at index prices. Generally, the gross margins we
realize under these arrangements decrease in periods of low
natural gas prices.
For a portion of the natural gas gathered and processed at the
North Texas System and Southeast Texas System, we enter into
percentage-of-proceeds
arrangements, keep-whole arrangements, and processing fee
agreements pursuant to which we agree to gather and process
natural gas received from the producers. Under
percentage-of-proceeds
arrangements, we generally sell the residue gas and NGLs at
market prices and remit
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to the producers an agreed upon percentage of the proceeds based
on an index price. In other cases, instead of remitting cash
payments to the producer, we deliver an agreed upon percentage
of the residue gas and NGL volumes to the producer and sell the
volumes we keep to third parties at market prices. Under these
arrangements, our revenues and gross margins decline when
natural gas prices and NGL prices decrease. Accordingly, a
decrease in the price of natural gas or NGLs could have an
adverse effect on our results of operations. Under keep-whole
arrangements, we generally sell the NGLs produced from our
gathering and processing operations to third parties at market
prices. Because the extraction of the NGLs from the natural gas
during processing reduces the Btu content of the natural gas, we
must either purchase natural gas at market prices for return to
producers or make a cash payment to producers equal to the value
of this natural gas. Under these arrangements, our revenues and
gross margins decrease when the price of natural gas increases
relative to the price of NGLs if we are not able to bypass our
processing plants and sell the unprocessed natural gas. Under
processing fee agreements, we process the gas for a fee. If
recoveries are less than those guaranteed the producer, we may
suffer a loss by having to supply liquids or its cash equivalent
to keep the producer whole with regard to contractual recoveries.
In the past, the prices of natural gas and NGLs have been
extremely volatile, and we expect this volatility to continue.
For example, during our year ended December 31, 2009, the
NYMEX settlement price for the prompt month contract ranged from
a high of $6.14 per MMBtu to a low of $2.84 per MMBtu. A
composite of the Mt. Belvieu average NGLs price based upon our
average NGLs composition during our year ended December 31,
2009 ranged from a high of approximately $1.17 per gallon to a
low of approximately $0.57 per gallon.
Our Oasis pipeline, East Texas pipeline, ET Fuel System and HPL
System receive fees for transporting natural gas for our
customers. Although a significant amount of the pipeline
capacity of the East Texas pipeline and various pipeline
segments of the ET Fuel System is committed under long-term
fee-based contracts, the remaining capacity of our
transportation pipelines is subject to fluctuation in demand
based on the markets and prices for natural gas, which factors
may result in decisions by natural gas producers to reduce
production of natural gas during periods of lower prices for
natural gas or may result in decisions by end-users of natural
gas to reduce consumption of these fuels during periods of
higher prices for these fuels. Our fuel retention fees are also
directly impacted by changes in natural gas prices. Increases in
natural gas prices tend to increase our fuel retention fees, and
decreases in natural gas prices tend to decrease our fuel
retention fees.
The markets and prices for natural gas and NGLs depend upon
factors beyond our control. These factors include demand for
oil, natural gas and NGLs, which fluctuate with changes in
market and economic conditions, and other factors, including:
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the impact of weather on the demand for oil and natural gas;
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the level of domestic oil and natural gas production;
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the availability of imported oil and natural gas;
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actions taken by foreign oil and gas producing nations;
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the availability of local, intrastate and interstate
transportation systems;
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the price, availability and marketing of competitive fuels;
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the demand for electricity;
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the impact of energy conservation efforts; and
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the extent of governmental regulation and taxation.
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The
use of derivative financial instruments could result in material
financial losses by us.
From time to time, we have sought to limit a portion of the
adverse effects resulting from changes in natural gas and other
commodity prices and interest rates by using derivative
financial instruments and other
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risk management mechanisms and by our marketing
and/or
system optimization activities. To the extent that we hedge our
commodity price and interest rate exposures, we forego the
benefits we would otherwise experience if commodity prices or
interest rates were to change in our favor. In addition, even
though monitored by management, our derivatives activities can
result in losses. Such losses could occur under various
circumstances, including if a counterparty does not perform its
obligations under the derivative arrangement, the hedge is
imperfect, commodity prices move unfavorably related to our
physical or financial positions or hedging policies and
procedures are not followed.
Our
success depends upon our ability to continually contract for new
sources of natural gas supply and natural gas transportation
services.
In order to maintain or increase throughput levels on our
gathering and transportation pipeline systems and asset
utilization rates at our treating and processing plants, we must
continually contract for new natural gas supplies and natural
gas transportation services. We may not be able to obtain
additional contracts for natural gas supplies for our natural
gas gathering systems, and we may be unable to maintain or
increase the levels of natural gas throughput on our
transportation pipelines. The primary factors affecting our
ability to connect new supplies of natural gas to our gathering
systems include our success in contracting for existing natural
gas supplies that are not committed to other systems and the
level of drilling activity and production of natural gas near
our gathering systems or in areas that provide access to our
transportation pipelines or markets to which our systems
connect. The primary factors affecting our ability to attract
customers to our transportation pipelines consist of our access
to other natural gas pipelines, natural gas markets, natural
gas-fired power plants and other industrial end-users and the
level of drilling and production of natural gas in areas
connected to these pipelines and systems.
Fluctuations in energy prices can greatly affect production
rates and investments by third parties in the development of new
oil and natural gas reserves. Drilling activity and production
generally decrease as oil and natural gas prices decrease. We
have no control over the level of drilling activity in our areas
of operation, the amount of reserves underlying the wells and
the rate at which production from a well will decline, sometimes
referred to as the decline rate. In addition, we
have no control over producers or their production decisions,
which are affected by, among other things, prevailing and
projected energy prices, demand for hydrocarbons, the level of
reserves, geological considerations, governmental regulation and
the availability and cost of capital.
A substantial portion of our assets, including our gathering
systems and our processing and treating plants, are connected to
natural gas reserves and wells for which the production will
naturally decline over time. Accordingly, our cash flows will
also decline unless we are able to access new supplies of
natural gas by connecting additional production to these systems.
Our transportation pipelines are also dependent upon natural gas
production in areas served by our pipelines or in areas served
by other gathering systems or transportation pipelines that
connect with our transportation pipelines. A material decrease
in natural gas production in our areas of operation or in other
areas that are connected to our areas of operation by third
party gathering systems or pipelines, as a result of depressed
commodity prices or otherwise, would result in a decline in the
volume of natural gas we handle, which would reduce our revenues
and operating income. In addition, our future growth will
depend, in part, upon whether we can contract for additional
supplies at a greater rate than the rate of natural decline in
our currently connected supplies.
Our subsidiary, Transwestern Pipeline Company, LLC, or
Transwestern, derives a significant portion of its revenue from
charging its customers for reservation of capacity, which
revenues Transwestern receives regardless of whether these
customers actually use the reserved capacity. Transwestern also
generates revenue from transportation of natural gas for
customers without reserved capacity. If the reserves available
through the supply basins connected to Transwesterns
systems decline, a decrease in development or production
activity could cause a decrease in the volume of natural gas
available for transmission or a decrease in demand for natural
gas transportation on the Transwestern system over the long run.
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The volumes of natural gas we transport on our intrastate
transportation pipelines may be reduced in the event that the
prices at which natural gas is purchased and sold at the Waha
Hub, the Katy Hub, the Carthage Hub and the Houston Ship Channel
Hub, the four major natural gas trading hubs served by our
pipelines, become unfavorable in relation to prices for natural
gas at other natural gas trading hubs or in other markets as
customers may elect to transport their natural gas to these
other hubs or markets using pipelines other than those we
operate.
We may
not be able to fully execute our growth strategy if we encounter
increased competition for qualified assets.
Our strategy contemplates growth through the development and
acquisition of a wide range of midstream, transportation,
storage, propane and other energy infrastructure assets while
maintaining a strong balance sheet. This strategy includes
constructing and acquiring additional assets and businesses to
enhance our ability to compete effectively and diversify our
asset portfolio, thereby providing more stable cash flow. We
regularly consider and enter into discussions regarding, and are
currently contemplating, the acquisition of additional assets
and businesses, stand alone development projects or other
transactions that we believe will present opportunities to
realize synergies and increase our cash flow.
Consistent with our acquisition strategy, we are continuously
engaged in discussions with potential sellers regarding the
possible acquisition of additional assets or businesses. Such
acquisition efforts may involve our participation in processes
that involve a number of potential buyers, commonly referred to
as auction processes, as well as situations in which
we believe we are the only party or one of a very limited number
of potential buyers in negotiations with the potential seller.
We cannot give assurance that our current or future acquisition
efforts will be successful or that any such acquisition will be
completed on terms considered favorable to us.
In addition, we are experiencing increased competition for the
assets we purchase or contemplate purchasing. Increased
competition for a limited pool of assets could result in us
losing to other bidders more often or acquiring assets at higher
prices, both of which would limit our ability to fully execute
our growth strategy. Inability to execute our growth strategy
may materially adversely impact our results of operations.
An
impairment of goodwill and intangible assets could reduce our
earnings.
At September 30, 2010, our consolidated balance sheet
reflected $772.8 million of goodwill and $261.4 million of
intangible assets. Goodwill is recorded when the purchase price
of a business exceeds the fair value of the tangible and
separately measurable intangible net assets. Accounting
principles generally accepted in the United States require us to
test goodwill for impairment on an annual basis or when events
or circumstances occur, indicating that goodwill might be
impaired. Long-lived assets such as intangible assets with
finite useful lives are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount
may not be recoverable. If we determine that any of our goodwill
or intangible assets were impaired, we would be required to take
an immediate charge to earnings with a correlative effect on
partners capital and balance sheet leverage as measured by
debt to total capitalization.
As of December 31, 2010, our goodwill impairment tests are
not yet completed for certain reporting units with an aggregate
goodwill balance of approximately $100 million.
If we
do not make acquisitions on economically acceptable terms, our
future growth could be limited.
Our results of operations and our ability to grow and to
increase distributions to unitholders will depend in part on our
ability to make acquisitions that are accretive to our
distributable cash flow per unit.
We may be unable to make accretive acquisitions for any of the
following reasons, among others:
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because we are unable to identify attractive acquisition
candidates or negotiate acceptable purchase contracts with them;
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because we are unable to raise financing for such acquisitions
on economically acceptable terms; or
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because we are outbid by competitors, some of which are
substantially larger than us and have greater financial
resources and lower costs of capital then we do.
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Furthermore, even if we consummate acquisitions that we believe
will be accretive, those acquisitions may in fact adversely
affect our results of operations or result in a decrease in
distributable cash flow per unit. Any acquisition involves
potential risks, including the risk that we may:
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fail to realize anticipated benefits, such as new customer
relationships, cost-savings or cash flow enhancements;
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decrease our liquidity by using a significant portion of our
available cash or borrowing capacity to finance acquisitions;
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significantly increase our interest expense or financial
leverage if we incur additional debt to finance acquisitions;
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encounter difficulties operating in new geographic areas or new
lines of business;
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incur or assume unanticipated liabilities, losses or costs
associated with the business or assets acquired for which we are
not indemnified or for which the indemnity is inadequate;
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be unable to hire, train or retrain qualified personnel to
manage and operate our growing business and assets;
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less effectively manage our historical assets, due to the
diversion of managements attention from other business
concerns; or
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incur other significant charges, such as impairment of goodwill
or other intangible assets, asset devaluation or restructuring
charges.
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If we consummate future acquisitions, our capitalization and
results of operations may change significantly. As we determine
the application of our funds and other resources, unitholders
will not have an opportunity to evaluate the economics,
financial and other relevant information that we will consider.
If we
do not continue to construct new pipelines, our future growth
could be limited.
During the past several years, we have constructed several new
pipelines, and are currently involved in constructing several
new pipelines. Our results of operations and ability to grow and
to increase distributable cash flow per unit will depend, in
part, on our ability to construct pipelines that are accretive
to our distributable cash flow. We may be unable to construct
pipelines that are accretive to distributable cash flow for any
of the following reasons, among others:
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we are unable to identify pipeline construction opportunities
with favorable projected financial returns;
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we are unable to raise financing for its identified pipeline
construction opportunities; or
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we are unable to secure sufficient natural gas transportation
commitments from potential customers due to competition from
other pipeline construction projects or for other reasons.
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Furthermore, even if we construct a pipeline that we believe
will be accretive, the pipeline may in fact adversely affect our
results of operations or results from those projected prior to
commencement of construction and other factors.
Expanding
our business by constructing new pipelines and treating and
processing facilities subjects us to risks.
One of the ways that we have grown our business is through the
construction of additions to our existing gathering,
compression, treating, processing and transportation systems.
The construction of a new pipeline or the expansion of an
existing pipeline, by adding additional compression capabilities
or by adding a second
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pipeline along an existing pipeline, and the construction of new
processing or treating facilities, involve numerous regulatory,
environmental, political and legal uncertainties beyond our
control and require the expenditure of significant amounts of
capital that we will be required to finance through borrowings,
the issuance of additional equity or from operating cash flow.
If we undertake these projects, they may not be completed on
schedule, at all, or at the budgeted cost. We currently have
several expansion and new build projects planned or underway. A
variety of factors outside our control, such as weather, natural
disasters and difficulties in obtaining permits and
rights-of-way
or other regulatory approvals, as well as the performance by
third party contractors has resulted in, and may continue to
result in, increased costs or delays in construction. Cost
overruns or delays in completing a project could have a material
adverse effect on our results of operations and cash flows.
Moreover, our revenues may not increase immediately following
the completion of a particular project. For instance, if we
build a new pipeline, the construction will occur over an
extended period of time, but we may not materially increase our
revenues until long after the projects completion. In
addition, the success of a pipeline construction project will
likely depend upon the level of natural gas exploration and
development drilling activity and the demand for pipeline
transportation in the areas proposed to be serviced by the
project as well as our ability to obtain commitments from
producers in this area to utilize the newly constructed
pipelines. In this regard, we may construct facilities to
capture anticipated future growth in natural gas production in a
region in which such growth does not materialize. As a result,
new facilities may be unable to attract enough throughput or
contracted capacity reservation commitments to achieve our
expected investment return, which could adversely affect our
results of operations and financial condition.
We
depend on certain key producers for our supply of natural gas on
the Southeast Texas System and North Texas System, and the loss
of any of these key producers could adversely affect our
financial results.
For our year ended December 31, 2009, EnCana Oil and Gas
(USA), Inc., XTO Energy Inc., or XTO, SandRidge Energy Inc., and
EnerVest Operating, LLC, supplied us with approximately 70% of
the Southeast Texas Systems natural gas supply. In June
2010, Exxon Mobil Corporation, or ExxonMobil, completed its
acquisition of XTO. For our year ended December 31, 2009,
Chesapeake Energy Marketing, Inc., XTO, EOG Resources, Inc., and
EnCana Oil and Gas (USA), Inc., supplied us with approximately
84% of the North Texas Systems natural gas supply. We are
not the only option available to these producers for disposition
of the natural gas they produce. To the extent that these and
other producers may reduce the volumes of natural gas that they
supply us, we would be adversely affected unless we were able to
acquire comparable supplies of natural gas from other producers.
We
depend on key customers to transport natural gas through our
pipelines.
We have nine- and ten-year fee-based transportation contracts
with XTO that terminate in 2013 and 2017, respectively, pursuant
to which XTO has committed to transport certain minimum volumes
of natural gas on pipelines in our ET Fuel System. The
acquisition of XTO by ExxonMobil has not resulted in any changes
to these commitments. We also have an eight-year fee-based
transportation contract with TXU Portfolio Management Company,
L.P., a subsidiary of TXU Corp., or TXU Shipper, to transport
natural gas on the ET Fuel System to TXUs electric
generating power plants. We have also entered into two
eight-year natural gas storage contracts that terminate in 2012
with TXU Shipper to store natural gas at the two natural gas
storage facilities that are part of the ET Fuel System. Each of
the contracts with TXU Shipper may be extended by TXU Shipper
for two additional five-year terms. The failure of XTO Energy or
TXU Shipper to fulfill their contractual obligations under these
contracts could have a material adverse effect on our cash flow
and results of operations if we were not able to replace these
customers under arrangements that provide similar economic
benefits as these existing contracts.
The major shippers on our intrastate transportation pipelines
include XTO, EOG Resources, Inc., Chesapeake Energy Marketing,
Inc., EnCana Marketing (USA), Inc. and Quicksilver Resources,
Inc. These shippers have long-term contracts that have remaining
terms ranging from 1 to 10 years.
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Transwestern generates the majority of its revenues from
long-term and short-term firm transportation contracts with
natural gas producers, local distribution companies and
end-users. During 2009, ConocoPhillips, Salt River Project and
BP Energy Company collectively accounted for 32% of
Transwesterns total revenues.
The failure of the major shippers on our intrastate and
interstate transportation pipelines to fulfill their contractual
obligations could have a material adverse effect on our cash
flow and results of operations if we were not able to replace
these customers under arrangements that provide similar economic
benefits as these existing contracts.
With respect to our interstate transportation operations,
Fayetteville Express Pipeline LLC, an entity in which we own a
50% interest, has secured binding
10-year
commitments from a small number of major shippers for
approximately 1.85 Bcf/d of firm transportation service on
the 2.0 Bcf/d Fayetteville Express pipeline. In connection
with our Tiger pipeline, we have an agreement with Chesapeake
Energy Marketing, Inc. that provides for a
15-year
commitment for firm transportation capacity of approximately
1.0 Bcf/d. We also have agreements with EnCana Marketing
(USA), Inc. and other shippers that provide for
10-year
commitments for firm transportation capacity on the Tiger
pipeline, bringing the initial design capacity to 2.0 Bcf/d
in the aggregate. In February 2010, we announced that we had
entered into a
10-year
commitment for an additional
400 MMcf/d.
The failure of any of our key shippers to fulfill their
contractual obligations could have a material adverse effect on
our cash flow and results of operations if we were not able to
replace these customers under arrangements that provide similar
economic benefits as our existing contracts.
Federal,
state or local regulatory measures could adversely affect the
business and operations of our midstream and intrastate
assets.
Our midstream and intrastate transportation and storage
operations are generally exempt from regulation by the Federal
Energy Regulatory Commission, or the FERC, under the Natural Gas
Act, or the NGA, but FERC regulation still significantly affects
our business and the market for our products. The rates, terms
and conditions of some of the transportation and storage
services we provide on the HPL System, the East Texas pipeline,
the Oasis pipeline and the ET Fuel System are subject to FERC
regulation under Section 311 of the Natural Gas Policy Act,
or the NGPA. Under Section 311, rates charged for
transportation and storage must be fair and equitable amounts.
Amounts collected in excess of fair and equitable rates are
subject to refund with interest, and the terms and conditions of
service, set forth in the pipelines statement of operating
conditions, are subject to FERC review and approval. Should the
FERC determine not to authorize rates equal to or greater than
our currently approved rates, we may suffer a loss of revenue.
Failure to observe the service limitations applicable to storage
and transportation service under Section 311, and failure
to comply with the rates approved by the FERC for
Section 311 service, and failure to comply with the terms
and conditions of service established in the pipelines
FERC-approved statement of operating conditions could result in
an alteration of jurisdictional status
and/or the
imposition of administrative, civil and criminal penalties.
FERC has adopted new market-monitoring and annual and quarterly
reporting regulations, which regulations are applicable to many
intrastate pipelines as well as other entities that are
otherwise not subject to FERCs NGA jurisdiction, such as
natural gas marketers. These regulations are intended to
increase the transparency of wholesale energy markets, to
protect the integrity of such markets, and to improve
FERCs ability to assess market forces and detect market
manipulation. These regulations may result in administrative
burdens and additional compliance costs for us.
We hold transportation contracts with interstate pipelines that
are subject to FERC regulation. As a shipper on an interstate
pipeline, we are subject to FERC requirements related to use of
the interstate capacity. Any failure on our part to comply with
the FERCs regulations or orders could result in the
imposition of administrative, civil and criminal penalties.
Our intrastate transportation and storage operations are subject
to state regulation in Texas, New Mexico, Arizona, Louisiana,
Utah and Colorado, the states in which we operate these types of
natural gas facilities. Our intrastate transportation operations
located in Texas are subject to regulation as common purchasers
and
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as gas utilities by the Texas Railroad Commission, or the TRRC.
The TRRCs jurisdiction extends to both rates and pipeline
safety. The rates we charge for transportation and storage
services are deemed just and reasonable under Texas law unless
challenged in a complaint. Should a complaint be filed or should
regulation become more active, our business may be adversely
affected.
Our midstream and intrastate transportation operations are also
subject to ratable take and common purchaser statutes in Texas,
New Mexico, Arizona, Louisiana, Utah and Colorado. Ratable take
statutes generally require gatherers to take, without undue
discrimination, natural gas production that may be tendered to
the gatherer for handling. Similarly, common purchaser statutes
generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These
statutes have the effect of restricting our right as an owner of
gathering facilities to decide with whom we contract to purchase
or transport natural gas. Federal law leaves any economic
regulation of natural gas gathering to the states, and some of
the states in which we operate have adopted complaint-based or
other limited economic regulation of natural gas gathering
activities. States in which we operate that have adopted some
form of complaint-based regulation, like Texas, generally allow
natural gas producers and shippers to file complaints with state
regulators in an effort to resolve grievances relating to
natural gas gathering rates and access. Other state and local
regulations also affect our business.
Our storage facilities are also subject to the jurisdiction of
the TRRC. Generally, the TRRC has jurisdiction over all
underground storage of natural gas in Texas, unless the facility
is part of an interstate gas pipeline facility. Because the
natural gas storage facilities of the ET Fuel System and HPL
System are only connected to intrastate gas pipelines, they fall
within the TRRCs jurisdiction and must be operated
pursuant to TRRC permit. Certain changes in ownership or
operation of TRRC-jurisdictional storage facilities, such as
facility expansions and increases in the maximum operating
pressure, must be approved by the TRRC through an amendment to
the facilitys existing permit. In addition, the TRRC must
approve transfers of the permits. Texas laws and regulations
also require all natural gas storage facilities to be operated
to prevent waste, the uncontrolled escape of gas, pollution and
danger to life or property. Accordingly, the TRRC requires
natural gas storage facilities to implement certain safety,
monitoring, reporting and record-keeping measures.
Violations of the terms and provisions of a TRRC permit or a
TRRC order or regulation can result in the modification,
cancellation or suspension of an operating permit
and/or civil
penalties, injunctive relief, or both.
The states in which we conduct operations administer federal
pipeline safety standards under the Pipeline Safety Act of 1968,
which requires certain pipeline companies to comply with safety
standards in constructing and operating the pipelines, and
subjects pipelines to regular inspections. Some of our gathering
facilities are exempt from the requirements of this Act. In
respect to recent pipeline accidents in other parts of the
country, Congress and the U.S. Department of
Transportation, or the DOT, have passed or are considering
heightened pipeline safety requirements.
Failure to comply with applicable laws and regulations could
result in the imposition of administrative, civil and criminal
remedies.
Our
interstate pipelines are subject to laws, regulations and
policies governing the rates they are allowed to charge for
their services.
Laws, regulations and policies governing interstate natural gas
pipeline rates could affect the ability of our interstate
pipelines to establish rates, to charge rates that would cover
future increases in its costs, or to continue to collect rates
that cover current costs. NGA-jurisdictional natural gas
companies must charge rates that are deemed just and reasonable
by the FERC. The rates charged by natural gas companies are
generally required to be on file with the FERC in FERC-approved
tariffs. Pursuant to the NGA, existing tariff rates may be
challenged by complaint and rate increases proposed by the
natural gas company may be challenged by protest. We also may be
limited by the terms of negotiated rate agreements from seeking
future rate increases, or constrained by competitive factors
from charging our FERC-approved maximum just and reasonable
tariff rates. Further, rates must, for the most part, be
cost-based and the FERC has the ability, on a prospective basis,
to order refunds of amounts collected under rates that have been
found by the FERC to be in excess of a just and reasonable level.
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Transwestern made a general rate case filing under
Section 4 of the NGA in September 2006. The rates in this
proceeding were settled and are final and no longer subject to
refund. Transwestern is not required to file a new general rate
case until October 2011. However, shippers (other than shippers
that have agreed, as parties to the Stipulation and Agreement,
not to challenge Transwesterns tariff rates through the
remaining term of the settlement) have the statutory ability to
challenge the lawfulness of tariff rates that have become final
and effective. The FERC may also investigate such rates absent
shipper complaint.
Most of the rates to be paid by the initial shippers on our
newly constructed interstate pipelines are established pursuant
to long-term, negotiated rate transportation agreements. Other
prospective shippers on our newly constructed interstate
pipelines that elect not to pay a negotiated rate for service
may opt instead to pay a cost-based recourse rate established by
the FERC as part of our newly constructed interstate
pipelines certificates of public convenience and
necessity. Negotiated rate agreements generally provide a degree
of certainty to the pipeline and shipper as to a fixed rate
during the term of the relevant transportation agreement, but
such agreements can limit the pipelines future ability to
collect costs associated with construction and operation of the
pipeline that might be higher than anticipated at the time the
negotiated rate agreement was entered. On December 17,
2009, the FERC issued an order granting authorization to
construct, own and operate the Fayetteville Express pipeline,
and on April 7, 2010, the FERC issued an order granting
authorization to construct, own and operate the Tiger pipeline.
On June 17, 2010, we filed an application for authorization
to construct, own and operate the Tiger pipeline expansion
project to add 400 MMcf/d of capacity to the Tiger pipeline. The
FERC has not yet determined whether the Tiger pipeline expansion
project should be granted the requested authority. We cannot
predict if, or when and with what conditions, FERC authorization
for the Tiger pipeline expansion project will be granted.
Any successful challenge to the rates of our interstate natural
gas companies, whether brought by complaint, protest or
investigation, could reduce our revenues associated with
providing transportation services on a prospective basis. We
cannot guarantee that our interstate pipelines will be able to
recover all of their costs through existing or future rates.
The
ability of interstate pipelines held in tax-pass-through
entities, like us, to include an allowance for income taxes in
their regulated rates has been subject to extensive litigation
before the FERC and the courts, and the FERCs current
policy is subject to future refinement or change.
The ability of interstate pipelines held in tax-pass-through
entities, like us, to include an allowance for income taxes as a
cost-of-service
element in their regulated rates has been subject to extensive
litigation before the FERC and the courts for a number of years.
It is currently the FERCs policy to permit pipelines to
include in
cost-of-service
a tax allowance to reflect actual or potential income tax
liability on their public utility income attributable to all
partnership or limited liability company interests, if the
ultimate owner of the interest has an actual or potential income
tax liability on such income. Whether a pipelines owners
have such actual or potential income tax liability will be
reviewed by the FERC on a
case-by-case
basis. Under the FERCs policy, we thus remain eligible to
include an income tax allowance in the tariff rates we charge
for interstate natural gas transportation. The application of
that policy remains subject to future refinement or change by
the FERC. With regard to rates charged and collected by
Transwestern, the allowance for income taxes as a
cost-of-service
element in our tariff rates is generally not subject to
challenge prior to the expiration of our settlement agreement in
2011.
The
interstate pipelines are subject to laws, regulations and
policies governing terms and conditions of service, which could
adversely affect their business and operations.
In addition to rate oversight, the FERCs regulatory
authority extends to many other aspects of the business and
operations of our interstate pipelines, including:
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terms and conditions of service;
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the types of services interstate pipelines may offer their
customers;
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construction of new facilities;
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acquisition, extension or abandonment of services or facilities;
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reporting and information posting requirements;
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accounts and records; and
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relationships with affiliated companies involved in all aspects
of the natural gas and energy businesses.
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Compliance with these requirements can be costly and burdensome.
Future changes to laws, regulations and policies in these areas
may impair the ability of our interstate pipelines to compete
for business, may impair their ability to recover costs or may
increase the cost and burden of operation.
We must on occasion rely upon rulings by the FERC or other
governmental authorities to carry out certain of our business
plans. For example, in order to carry out our plan to construct
the Fayetteville Express and Tiger pipelines we were required
to, among other things, file and support before the FERC NGA
Section 7(c) applications for certificates of public
convenience and necessity to build, own and operate such
facilities. Although the FERC has authorized the construction
and operation of the Fayetteville Express and Tiger pipelines,
the FERC has not yet ruled upon the Tiger pipeline expansion
project application, and we cannot guarantee that FERC will
authorize construction and operation of that project or any
future interstate natural gas transportation project we might
propose. Moreover, there is no guarantee that, if granted,
certificate authority for the Tiger expansion project, or any
future interstate projects, will be granted in a timely manner
or will be free from potentially burdensome conditions.
Failure to comply with all applicable FERC-administered
statutes, rules, regulations and orders, could bring substantial
penalties and fines. Under the Energy Policy Act of 2005, the
FERC has civil penalty authority under the NGA to impose
penalties for current violations of up to $1.0 million per
day for each violation. The FERC possesses similar authority
under the NGPA.
Finally, we cannot give any assurance regarding the likely
future regulations under which we will operate our interstate
pipelines or the effect such regulation could have on our
business, financial condition and results of operations.
Our
business involves hazardous substances and may be adversely
affected by environmental regulation.
Our natural gas and propane operations are subject to stringent
federal, state, and local laws and regulations that seek to
protect human health and the environment, including those
governing the emission or discharge of materials into the
environment. These laws and regulations may require the
acquisition of permits for our operations, result in capital
expenditures to manage, limit or prevent emissions, discharges
or releases of various materials from our pipelines, plants and
facilities and impose substantial liabilities for pollution
resulting from our operations. Several governmental authorities,
such as the U.S. Environmental Protection Agency, or the
EPA, have the power to enforce compliance with these laws and
regulations and the permits issued under them and frequently
mandate difficult and costly remediation measures and other
actions. Failure to comply with these laws, regulations and
permits may result in the assessment of significant
administrative, civil and criminal penalties, the imposition of
remedial obligations, and the issuance of injunctive relief.
We may incur substantial environmental costs and liabilities
because of the underlying risk inherent to our operations.
Certain environmental laws and regulations can provide for joint
and several strict liabilities for cleanup to address discharges
or releases of petroleum hydrocarbons or other materials or
wastes at sites to which we may have sent wastes or on, under or
from our properties and facilities, many of which have been used
for industrial activities for a number of years, even if such
discharges were caused by our predecessors. Private parties,
including the owners of properties through which our gathering
systems pass or facilities where our petroleum hydrocarbons or
wastes are taken for reclamation or disposal 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, personal injury or property damage. The total
accrued future estimated cost of remediation activities relating
to our Transwestern pipeline operations expected to continue
through 2018 was $8.3 million as of September 30, 2010.
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Changes in environmental laws and regulations occur frequently,
and any such changes that result in more stringent and costly
waste handling, emission standards, or storage, transport,
disposal or remediation requirements could have a material
adverse effect on our operations or financial position. For
example, the EPA in 2008 lowered the federal ozone standard from
0.08 parts per million to 0.075 parts per million, requiring the
environmental agencies in states with areas that do not
currently meet this standard to adopt new rules between to
further reduce NOx and other ozone precursor emissions. The EPA
recently proposed to lower the standard even further, to
somewhere between 0.060 and 0.070 ppm. We have previously
been able to satisfy the more stringent NOx emission reduction
requirements that affect our compressor units in ozone
non-attainment
areas at reasonable cost, but there is no guarantee that the
changes we may have to make in the future to meet the new ozone
standard or other evolving standards will not require us to
incur costs that could be material to our operations.
Climate
change legislation or regulations restricting emissions of
greenhouse gases could result in increased operating
costs and reduced demand for the natural gas and other
hydrocarbon products that we transport, store or otherwise
handle in connection with our transportation, storage, and
midstream services.
On December 15, 2009, the EPA published its findings that
emissions of carbon dioxide, methane and other greenhouse gases
present an endangerment to public health and the environment
because emissions of such gases are, according to the EPA,
contributing to warming of the earths atmosphere and other
climatic changes. These findings allow the EPA to adopt and
implement regulations that would restrict emissions of
greenhouse gases under existing provisions of the federal Clean
Air Act. Accordingly, the EPA recently adopted two sets of
regulations addressing greenhouse gas emissions under the Clean
Air Act. The first limits emissions of greenhouse gases from
motor vehicles beginning with the 2012 model year. The EPA has
asserted that these final motor vehicle greenhouse gas emission
standards trigger Clean Air Act construction and operating
permit requirements for stationary sources, commencing when the
motor vehicle standards took effect on January 2, 2011. On
June 3, 2010, the EPA published its final rule to address
the permitting of greenhouse gas emissions from stationary
sources under the Prevention of Significant Deterioration, or
PSD, and Title V permitting programs. This rule
tailors these permitting programs to apply to
certain stationary sources of greenhouse gas emissions in a
multi-step process, with the largest sources first subject to
permitting. It is widely expected that facilities required to
obtain PSD permits for their greenhouse gas emissions will be
required to also reduce those emissions according to best
available control technology standards for greenhouse
gases that have yet to be developed. Any regulatory or
permitting obligation that limits emissions of greenhouse gases
could require us to incur costs to reduce emissions of
greenhouse gases associated with our operations and also could
adversely affect demand for the natural gas and other
hydrocarbon products that we transport, store, process, or
otherwise handle in connection with our services.
In addition, on October 30, 2009, the EPA published a final
rule requiring the reporting of greenhouse gas emissions from
specified large greenhouse gas sources in the United States on
an annual basis, beginning in 2011 for emissions occurring after
January 1, 2010. On November 8, 2010, the EPA revised
its greenhouse gas reporting rule to expressly include onshore
oil and natural gas production, processing, transmission,
storage, and distribution facilities. Reporting of greenhouse
gas emissions from such facilities, including many of our
facilities, will be required on an annual basis, with reporting
beginning in 2012 for emissions occurring in 2011.
In June 2009, the United States House of Representatives passed
the American Clean Energy and Security Act of 2009,
or ACESA, which would establish an economy-wide cap on emissions
of greenhouse gases in the United States and would require most
sources of greenhouse gas emissions to obtain and hold
allowances corresponding to their annual emissions
of greenhouse gases. By steadily reducing the number of
available allowances over time, ACESA would require a
17 percent reduction in greenhouse gas emissions from 2005
levels by 2020 and just over an 80 percent reduction of
such emissions by 2050. Legislation to reduce emissions of
greenhouse gases by comparable amounts is currently pending in
the United States Senate, and more than one-third of the states
have already taken legal measures to reduce emissions of
greenhouse gases, primarily through the planned development of
greenhouse gas emission inventories
and/or
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regional greenhouse gas cap and trade programs. The passage of
legislation that limits emissions of greenhouse gases from our
equipment and operations could require us to incur costs to
reduce the greenhouse gas emissions from our own operations, and
it could also adversely affect demand for our transportation,
storage, and midstream services.
Some have suggested that one consequence of climate change could
be increased severity of extreme weather, such as increased
hurricanes and floods. If such effects were to occur, our
operations could be adversely affected in various ways,
including damages to our facilities from powerful winds or
rising waters, or increased costs for insurance. Another
possible consequence of climate change is increased volatility
in seasonal temperatures. The market for our propane and natural
gas is generally improved by periods of colder weather and
impaired by periods of warmer weather, so any changes in climate
could affect the market for the fuels that we produce. Despite
the use of the term global warming as a shorthand
for climate change, some studies indicate that climate change
could cause some areas to experience temperatures substantially
colder than their historical averages. As a result, it is
difficult to predict how the market for our fuels could be
affected by increased temperature volatility, although if there
is an overall trend of warmer temperatures, it would be expected
to have an adverse effect on our business.
Any
reduction in the capacity of, or the allocations to, our
shippers in interconnecting third-party pipelines could cause a
reduction of volumes transported in our pipelines, which would
adversely affect our revenues and cash flow.
Users of our pipelines are dependent upon connections to and
from third-party pipelines to receive and deliver natural gas
and NGLs. Any reduction in the capacities of these
interconnecting pipelines due to testing, line repair, reduced
operating pressures, or other causes could result in reduced
volumes being transported in our pipelines. Similarly, if
additional shippers begin transporting volumes of natural gas
and NGLs over interconnecting pipelines, the allocations to
existing shippers in these pipelines would be reduced, which
could also reduce volumes transported in our pipelines. Any
reduction in volumes transported in our pipelines would
adversely affect our revenues and cash flow.
The
recent adoption of derivatives legislation by the United States
Congress could have an adverse effect on our ability to use
derivative instruments to reduce the effect of commodity price,
interest rate and other risks associated with our
business.
The United States Congress recently adopted the Dodd-Frank Wall
Street Reform and Consumer Protection Act (HR 4173), which,
among other provisions, establishes federal oversight and
regulation of the
over-the-counter
derivatives market and entities that participate in that market.
The new legislation was signed into law by the President on
July 21, 2010 and requires the Commodities Futures Trading
Commission, or the CFTC, and the SEC to promulgate rules and
regulations implementing the new legislation within
360 days from the date of enactment. The CFTC has also
proposed regulations to set position limits for certain futures
and option contracts in the major energy markets, although it is
not possible at this time to predict whether or when the CFTC
will adopt those rules or include comparable provisions in its
rulemaking under the new legislation. The financial reform
legislation may also require us to comply with margin
requirements and with certain clearing and trade-execution
requirements in connection with our derivative activities,
although the application of those provisions to us is uncertain
at this time. The financial reform legislation may also require
the counterparties to our derivative instruments to spin off
some of their derivatives activities to a separate entity, which
may not be as creditworthy as the current counterparty. The new
legislation and any new regulations could significantly increase
the cost of derivative contracts (including through requirements
to post collateral, which could adversely affect our available
liquidity), materially alter the terms of derivative contracts,
reduce the availability of derivatives to protect against risks
we encounter, reduce our ability to monetize or restructure its
existing derivative contracts, and increase our exposure to less
creditworthy counterparties. If we reduce our use of derivatives
as a result of the legislation and regulations, our results of
operations may become more volatile and our cash flows may be
less predictable.
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We may
be impacted by competition from other midstream, transportation
and storage companies and propane companies.
We experience competition in all of our markets. Our principal
areas of competition include obtaining natural gas supplies for
the Southeast Texas System, North Texas System and HPL System
and natural gas transportation customers for our transportation
pipeline systems. Our competitors include major integrated oil
companies, interstate and intrastate pipelines and companies
that gather, compress, treat, process, transport, store and
market natural gas. The Southeast Texas System competes with
natural gas gathering and processing systems owned by DCP
Midstream, LLC. The North Texas System competes with Crosstex
North Texas Gathering, LP and Devon Gas Services, LP for
gathering and processing. The East Texas pipeline competes with
other natural gas transportation pipelines that serve the
Bossier Sands area in east Texas and the Barnett Shale region in
north Texas. The ET Fuel System and the Oasis pipeline compete
with a number of other natural gas pipelines, including
interstate and intrastate pipelines that link the Waha Hub. The
ET Fuel System competes with other natural gas transportation
pipelines serving the Dallas/Ft. Worth area and other
pipelines that serve the east central Texas and south Texas
markets. Pipelines that we compete with in these areas include
those owned by Atmos Energy Corporation, Enterprise Products
Partners, L.P. and Enbridge, Inc. Some of our competitors may
have greater financial resources and access to larger natural
gas supplies than we do.
The acquisitions of the HPL System and the Transwestern pipeline
increased the number of interstate pipelines and natural gas
markets to which we have access and expanded our principal areas
of competition to areas such as southeast Texas and the Texas
Gulf Coast. As a result of our expanded market presence and
diversification, we face additional competitors, such as major
integrated oil companies, interstate and intrastate pipelines
and companies that gather, compress, treat, process, transport,
store and market natural gas, that may have greater financial
resources and access to larger natural gas supplies than we do.
The Transwestern pipeline and the Fayetteville Express and Tiger
pipelines compete with other interstate and intrastate pipeline
companies in the transportation and storage of natural gas. The
principal elements of competition among pipelines are rates,
terms of service, access to sources of supply and the
flexibility and reliability of service. Natural gas competes
with other forms of energy available to our customers and
end-users, including for example, electricity, coal and fuel
oils. The primary competitive factor is price. Changes in the
availability or price of natural gas and other forms of energy,
the level of business activity, conservation, legislation and
governmental regulations, the capability to convert to alternate
fuels and other factors, including weather and natural gas
storage levels, affect the levels of natural gas transportation
volumes in the areas served by our pipelines.
Our propane business competes with a number of large national
and regional propane companies and several thousand small
independent propane companies. Because of the relatively low
barriers to entry into the retail propane market, there is
potential for small independent propane retailers, as well as
other companies that may not currently be engaged in retail
propane distribution, to compete with our retail outlets. As a
result, we are always subject to the risk of additional
competition in the future. Generally,
warmer-than-normal
weather further intensifies competition. Most of our propane
retail branch locations compete with several other marketers or
distributors in their service areas. The principal factors
influencing competition with other retail propane marketers are:
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price,
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reliability and quality of service,
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responsiveness to customer needs,
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safety concerns,
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long-standing customer relationships,
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the inconvenience of switching tanks and suppliers, and
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the lack of growth in the industry.
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The
inability to continue to access tribal lands could adversely
affect Transwesterns ability to operate its pipeline
system and the inability to recover the cost of
right-of-way
grants on tribal lands could adversely affect its financial
results.
Transwesterns ability to operate its pipeline system on
certain lands held in trust by the United States for the benefit
of a Native American Tribe, which we refer to as tribal lands,
will depend on its success in maintaining existing
rights-of-way
and obtaining new
rights-of-way
on those tribal lands. Securing extensions of existing and any
additional
rights-of-way
is also critical to Transwesterns ability to pursue
expansion projects. We cannot provide any assurance that
Transwestern will be able to acquire new
rights-of-way
on tribal lands or maintain access to existing
rights-of-way
upon the expiration of the current grants. Our financial
position could be adversely affected if the costs of new or
extended
right-of-way
grants cannot be recovered in rates. Transwesterns
existing
right-of-way
agreements with the Navajo Nation, Southern Ute, Pueblo of
Laguna and Fort Mojave tribes extend through November 2029,
September 2020, December 2022 and April 2019, respectively.
We may
be unable to bypass the processing plants, which could expose us
to the risk of unfavorable processing margins.
Because of our ownership of the Oasis pipeline and ET Fuel
System, we can generally elect to bypass our processing plants
when processing margins are unfavorable and instead deliver
pipeline-quality gas by blending rich gas from the gathering
systems with lean gas transported on the Oasis pipeline and ET
Fuel System. In some circumstances, such as when we do not have
a sufficient amount of lean gas to blend with the volume of rich
gas that we receive at the processing plant, we may have to
process the rich gas. If we have to process when processing
margins are unfavorable, our results of operations will be
adversely affected.
We may
be unable to retain existing customers or secure new customers,
which would reduce our revenues and limit our future
profitability.
The renewal or replacement of existing contracts with our
customers at rates sufficient to maintain current revenues and
cash flows depends on a number of factors beyond our control,
including competition from other pipelines, and the price of,
and demand for, natural gas in the markets we serve.
For the year ended December 31, 2009, approximately 26% of
our sales of natural gas was to industrial end-users and
utilities. As a consequence of the increase in competition in
the industry and volatility of natural gas prices, end-users and
utilities are increasingly reluctant to enter into long-term
purchase contracts. Many end-users purchase natural gas from
more than one natural gas company and have the ability to change
providers at any time. Some of these end-users also have the
ability to switch between gas and alternate fuels in response to
relative price fluctuations in the market. Because there are
many companies of greatly varying size and financial capacity
that compete with us in the marketing of natural gas, we often
compete in the end-user and utilities markets primarily on the
basis of price. The inability of our management to renew or
replace our current contracts as they expire and to respond
appropriately to changing market conditions could have a
negative effect on our profitability.
Our
storage business may depend on neighboring pipelines to
transport natural gas.
To obtain natural gas, our storage business depends on the
pipelines to which they have access. Many of these pipelines are
owned by parties not affiliated with us. Any interruption of
service on those pipelines or adverse change in their terms and
conditions of service could have a material adverse effect on
our ability, and the ability of our customers, to transport
natural gas to and from our facilities and a corresponding
material adverse effect on our storage revenues. In addition,
the rates charged by those interconnected pipelines for
transportation to and from our facilities affect the utilization
and value of our storage services. Significant changes in the
rates charged by those pipelines or the rates charged by other
pipelines with which the interconnected pipelines compete could
also have a material adverse effect on our storage revenues.
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Our
pipeline integrity program may cause us to incur significant
costs and liabilities.
Our pipeline operations are subject to regulation by the DOT
under the Pipeline and Hazardous Materials Safety
Administration, or PHMSA, pursuant to which the PHMSA has
established requirements relating to the design, installation,
testing, construction, operation, replacement and management of
pipeline facilities. Moreover, the PHMSA, through the Office of
Pipeline Safety, has promulgated a rule requiring pipeline
operators to develop integrity management programs to
comprehensively evaluate their pipelines, and take measures to
protect pipeline segments located in what the rule refers to as
high consequence areas. Activities under these
integrity management programs involve the performance of
internal pipeline inspections, pressure testing or other
effective means to assess the integrity of these regulated
pipeline segments, and the regulations require prompt action to
address integrity issues raised by the assessment and analysis.
Based on the results of our current pipeline integrity testing
programs, we estimate that compliance with these federal
regulations and analogous state pipeline integrity requirements
will result in capital costs of $16.8 million and operating
and maintenance costs of $15.0 million over the course of
the next year. For the year ended December 31, 2010,
capital costs of approximately $13.8 million and operating
and maintenance costs of approximately $15.9 million were
incurred for pipeline integrity testing, based on actual costs
incurred through September 30, 2010 and estimated costs for
the remainder of 2010. For the years ended December 31,
2009 and 2008, $31.4 million and $23.3 million,
respectively, of capital costs and $18.5 million and
$13.1 million, respectively, of operating and maintenance
costs have been incurred for pipeline integrity testing.
Integrity testing and assessment of all of these assets will
continue, and the potential exists that results of such testing
and assessment could cause us to incur even greater capital and
operating expenditures for repairs or upgrades deemed necessary
to ensure the continued safe and reliable operation of our
pipelines.
Changes in other forms of health and safety regulations are also
being considered. New pipeline safety legislation requiring more
stringent spill reporting and disclosure obligations has been
introduced in the U.S. Congress and was passed by the
U.S. House of Representatives in 2010, but was not voted on
in the U.S. Senate. Similar legislation is likely to be
considered in the next session of Congress. The DOT has also
recently proposed legislation providing for more stringent
oversight of pipelines and increased penalties for violations of
safety rules, which is in addition to the PHMSAs announced
intention to strengthen its rules. Such legislative and
regulatory changes could have a material effect on our
operations through more stringent and comprehensive safety
regulations and higher penalties for the violation of those
regulations.
Since
weather conditions may adversely affect demand for propane, our
financial conditions may be vulnerable to warm
winters.
Weather conditions have a significant impact on the demand for
propane for heating purposes because the majority of our
customers rely heavily on propane as a heating fuel. Typically,
we sell approximately two-thirds of our retail propane volume
during the peak-heating season of October through March. Our
results of operations can be adversely affected by warmer winter
weather, which results in lower sales volumes. In addition, to
the extent that warm weather or other factors adversely affect
our operating and financial results, our access to capital and
our acquisition activities may be limited. Variations in weather
in one or more of the regions where we operate can significantly
affect the total volume of propane that we sell and the profits
realized on these sales. Agricultural demand for propane may
also be affected by weather, including unseasonably cold or hot
periods or dry weather conditions that impact agricultural
operations.
A
natural disaster, catastrophe or other event could result in
severe personal injury, property damage and environmental
damage, which could curtail our operations and otherwise
materially adversely affect our cash flow and, accordingly,
affect the market price of our common units.
Some of our operations involve risks of personal injury,
property damage and environmental damage, which could curtail
our operations and otherwise materially adversely affect our
cash flow. For example, natural gas facilities operate at high
pressures, sometimes in excess of 1,100 pounds per square inch.
Virtually all of our operations are exposed to potential natural
disasters, including hurricanes, tornadoes, storms, floods
and/or
earthquakes.
24
If one or more facilities that are owned by us, or that deliver
natural gas or other products to us, are damaged by severe
weather or any other disaster, accident, catastrophe or event,
our operations could be significantly interrupted. Similar
interruptions could result from damage to production or other
facilities that supply our facilities or other stoppages arising
from factors beyond our control. These interruptions might
involve significant damage to people, property or the
environment, and repairs might take from a week or less for a
minor incident to six months or more for a major interruption.
Any event that interrupts the revenues generated by our
operations, or which causes us to make significant expenditures
not covered by insurance, could reduce our cash available for
paying distributions to our unitholders and, accordingly,
adversely affect the market price of our common units.
As a result of market conditions, premiums and deductibles for
certain insurance policies can increase substantially, and in
some instances, certain insurance may become unavailable or
available only for reduced amounts of coverage. As a result, we
may not be able to renew existing insurance policies or procure
other desirable insurance on commercially reasonable terms, if
at all. If we were to incur a significant liability for which we
were not fully insured, it could have a material adverse effect
on our financial position and results of operations. In
addition, the proceeds of any such insurance may not be paid in
a timely manner and may be insufficient if such an event were to
occur.
Terrorist
attacks aimed at our facilities could adversely affect our
business, results of operations, cash flows and financial
condition.
Since the September 11, 2001 terrorist attacks on the
United States, the United States government has issued warnings
that energy assets, including our nations pipeline
infrastructure, may be the future target of terrorist
organizations. Any terrorist attack on our facilities or
pipelines or those of our customers could have a material
adverse effect on our business.
Sudden
and sharp propane price increases that cannot be passed on to
customers may adversely affect our profit margins.
The propane industry is a margin-based business in
which gross profits depend on the excess of sales prices over
supply costs. As a result, our profitability is sensitive to
changes in energy prices, and in particular, changes in
wholesale prices of propane. When there are sudden and sharp
increases in the wholesale cost of propane, we may be unable to
pass on these increases to our customers through retail or
wholesale prices. Propane is a commodity and the price we pay
for it can fluctuate significantly in response to changes in
supply or other market conditions over which we have no control.
In addition, the timing of cost pass-throughs can significantly
affect margins. Sudden and extended wholesale price increases
could reduce our gross profits and could, if continued over an
extended period of time, reduce demand by encouraging our retail
customers to conserve their propane usage or convert to
alternative energy sources.
Our
results of operations could be negatively impacted by price and
inventory risk related to our propane business and management of
these risks.
We generally attempt to minimize our cost and inventory risk
related to our propane business by purchasing propane on a
short-term basis under supply contracts that typically have a
one-year term and at a cost that fluctuates based on the
prevailing market prices at major delivery points. In order to
help ensure adequate supply sources are available during periods
of high demand, we may purchase large volumes of propane during
periods of low demand or low price, which generally occur during
the summer months, for storage in our facilities, at major
storage facilities owned by third parties or for future
delivery. This strategy may not be effective in limiting our
cost and inventory risks if, for example, market, weather or
other conditions prevent or allocate the delivery of physical
product during periods of peak demand. If the market price falls
below the cost at which we made such purchases, it could
adversely affect our profits.
Some of our propane sales are pursuant to commitments at fixed
prices. To mitigate the price risk related to our anticipated
sales volumes under the commitments, we may purchase and store
physical product
and/or enter
into fixed price
over-the-counter
energy commodity forward contracts and options. Generally,
25
over-the-counter
energy commodity forward contracts have terms of less than one
year. We enter into such contracts and exercise such options at
volume levels that we believe are necessary to manage these
commitments. The risk management of our inventory and contracts
for the future purchase of product could impair our
profitability if the customers do not fulfill their obligations.
We also engage in other trading activities, and may enter into
other types of
over-the-counter
energy commodity forward contracts and options. These trading
activities are based on our managements estimates of
future events and prices and are intended to generate a profit.
However, if those estimates are incorrect or other market events
outside of our control occur, such activities could generate a
loss in future periods and potentially impair our profitability.
We are
dependent on our principal propane suppliers, which increases
the risk of an interruption in supply.
During 2009, we purchased approximately 50.3%, 14.3% and 15.1%
of our propane from Enterprise Products Operating L.P., Targa
Liquids Marketing and Trade and M.P. Oils, Ltd., respectively.
Titan purchases the majority of its propane from Enterprise
pursuant to an agreement that was extended until March 2015 and
contains an option to renew for an additional year. If supplies
from these sources were interrupted, the cost of procuring
replacement supplies and transporting those supplies from
alternative locations might be materially higher and, at least
on a short-term basis, margins could be adversely affected.
Supply from Canada is subject to the additional risk of
disruption associated with foreign trade such as trade
restrictions, shipping delays and political, regulatory and
economic instability.
Historically, a substantial portion of the propane that we
purchase has originated from one of the industrys major
markets located in Mt. Belvieu, Texas and has been shipped to us
through major common carrier pipelines. Any significant
interruption in the service at Mt. Belvieu or other major market
points, or on the common carrier pipelines we use, would
adversely affect our ability to obtain propane.
Competition
from alternative energy sources may cause us to lose propane
customers, thereby reducing our revenues.
Competition in our propane business from alternative energy
sources has been increasing as a result of reduced regulation of
many utilities. Propane is generally not competitive with
natural gas in areas where natural gas pipelines already exist
because natural gas is a less expensive source of energy than
propane. The gradual expansion of natural gas distribution
systems and the availability of natural gas in many areas that
previously depended upon propane could cause us to lose
customers, thereby reducing our revenues. Fuel oil also competes
with propane and is generally less expensive than propane. In
addition, the successful development and increasing usage of
alternative energy sources could adversely affect our operations.
Energy
efficiency and technological advances may affect the demand for
propane and adversely affect our operating
results.
The national trend toward increased conservation and
technological advances, including installation of improved
insulation and the development of more efficient furnaces and
other heating devices, has decreased the demand for propane by
retail customers. Stricter conservation measures in the future
or technological advances in heating, conservation, energy
generation or other devices could adversely affect our
operations.
26
Tax Risks
to Common Unitholders
In addition to reading the following risk factors, please
read Material Federal Income Tax Considerations for
a more complete discussion of the expected material federal
income tax consequences of owning and disposing of common
units.
Our
tax treatment depends on our status as a partnership for federal
income tax purposes, as well as our not being subject to a
material amount of entity-level taxation by individual states.
If the IRS were to treat us as a corporation for federal income
tax purposes or if we become subject to a material amount of
entity-level taxation for state tax purposes, it would
substantially reduce the amount of cash available for
distribution to unitholders.
The anticipated after-tax economic benefit of an investment in
our common 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,
with respect to our classification as a partnership for federal
income tax purposes.
Despite the fact that we are a limited partnership under
Delaware law, it is possible in certain circumstances for a
partnership such as ours to be treated as a corporation for
federal income tax purposes. If we are so treated, we would pay
federal income tax on our taxable income at the corporate tax
rate, which is currently a maximum of 35%, and we would likely
pay additional state income taxes as well. Distributions to
unitholders would generally be taxed again as corporate
distributions, and none of our income, gains, losses or
deductions would flow through to unitholders. Because a tax
would then be imposed upon us as a corporation, our cash
available for distribution to unitholders would be substantially
reduced. Therefore, treatment of us as a corporation would
result in a material reduction in the anticipated cash flow and
after-tax return to the unitholders, likely causing a
substantial reduction in the value of our common units.
Current law may change, causing us to be treated as a
corporation for federal income tax purposes or otherwise
subjecting us to entity-level taxation. For example, members of
Congress have recently considered substantive changes to the
existing federal income tax laws that would have affected
certain publicly traded partnerships. Specifically, federal
income tax legislation has been considered that would have
eliminated partnership tax treatment for certain publicly traded
partnerships and recharacterize certain types of income received
from partnerships. Several states currently impose entity-level
taxes on partnerships, including us. Further, because of
widespread state budget deficits and other reasons, several
additional states are evaluating ways to subject partnerships to
entity-level taxation through the imposition of state income,
franchise and other forms of taxation. If any additional states
were to impose a tax upon us as an entity, our cash available
for distribution would be reduced. We are unable to predict
whether any of these changes, or other proposals, will be
reintroduced or will ultimately be enacted. Any such changes
could negatively impact the value of an investment in our common
units.
Our partnership agreement provides that if a law is enacted or
existing law is modified or interpreted in a manner that
subjects us to taxation as a corporation or otherwise subjects
us to additional entity-level taxation for federal, state or
local income tax purposes, the minimum quarterly distribution
amount and the target distribution amounts may be adjusted to
reflect the impact of that law on us.
If the
IRS contests the federal income tax positions we take, the
market for our common units may be adversely affected and the
costs of any such contest will reduce cash available for
distributions to our unitholders.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes. The
IRS may adopt positions that differ from the positions we take.
It may be necessary to resort to administrative or court
proceedings to sustain some or all of the positions we take. A
court may not agree with some or all of the positions we take.
Any contest with the IRS may materially and adversely impact the
market for our common units and the prices at which they trade.
In addition, the costs of any contest with the IRS will be borne
by us reducing the cash available for distribution to our
unitholders.
27
Unitholders
may be required to pay taxes on their share of our income even
if they do not receive any cash distributions from
us.
Because our unitholders will be treated as partners to whom we
will allocate taxable income which could be different in amount
than the cash we distribute, unitholders will be required to pay
any federal income taxes and, in some cases, state and local
income taxes on their share of our taxable income even if they
receive no cash distributions from us. Unitholders may not
receive cash distributions from us equal to their share of our
taxable income or even equal to the actual tax liability that
results from the taxation of their share of our taxable income.
Tax
gain or loss on disposition of our common units could be more or
less than expected.
If unitholders sell their common units, they will recognize a
gain or loss equal to the difference between the amount realized
and the tax basis in those common units. Because distributions
in excess of the unitholders allocable share of our net
taxable income decrease the unitholders tax basis in their
common units, the amount, if any, of such prior excess
distributions with respect to the units sold will, in effect,
become taxable income to the unitholder if they sell such units
at a price greater than their tax basis in those units, even if
the price received is less than their original cost.
Furthermore, a substantial portion of the amount realized,
whether or not representing gain, may be taxed as ordinary
income due to potential recapture items, including depreciation
recapture. In addition, because the amount realized includes a
unitholders share of our nonrecourse liabilities, if a
unitholder sells units, the unitholder may incur a tax liability
in excess of the amount of cash received from the sale.
Tax-exempt
entities and
non-U.S.
persons face unique tax issues from owning common units that may
result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, including
employee benefit plans and individual retirement accounts (known
as IRAs) and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to unitholders who are organizations exempt
from federal income tax, may be taxable to them as
unrelated business taxable income. Distributions to
non-U.S. persons
will be reduced by withholding taxes, generally at the highest
applicable effective tax rate, and
non-U.S. persons
will be required to file United States federal and state income
tax returns and generally pay United States federal and state
income tax on their share of our taxable income.
We
treat each purchaser of common units as having the same tax
benefits without regard to the actual common units purchased.
The IRS may challenge this treatment, which could result in a
unitholder owing more tax and may adversely affect the value of
the common units.
The IRS may challenge the manner in which we calculate our
unitholders basis adjustment under Section 743(b) of
the Internal Revenue Code. If so, because neither we nor a
unitholder can identify the units to which this issue relates
once the initial holder has traded them, the IRS may assert
adjustments to all unitholders selling units within the period
under audit as if all unitholders owned such units.
Any position we take that is inconsistent with applicable
Treasury Regulations may have to be disclosed on our federal
income tax return. This disclosure increases the likelihood that
the IRS will challenge our positions and propose adjustments to
some or all of our unitholders.
A successful IRS challenge to this position or other positions
we may take could adversely affect the amount of taxable income
or loss allocated to our unitholders. It also could affect the
gain from a unitholders sale of common units and could
have a negative impact on the value of the common units or
result in audit adjustments to our unitholders tax returns
without the benefit of additional deductions. Moreover, because
one of our subsidiaries that is organized as a C corporation for
federal income tax purposes owns units in us, a successful IRS
challenge could result in this subsidiary having more tax
liability than we anticipate and, therefore, reduce the cash
available for distribution to our partnership and, in turn, to
our unitholders.
28
We
prorate our items of income, gain, loss and deduction between
transferors and transferees of our units each month based upon
the ownership of our units on the first day of each month,
instead of on the basis of the date a particular unit is
transferred. The IRS may challenge this treatment, which could
change the allocation of items of income, gain, loss and
deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between
transferors and transferees of our units each month based upon
the ownership of our units on the first day of each month,
instead of on the basis of the date a particular unit is
transferred. The use of this proration method may not be
permitted under existing Treasury Regulations. Recently,
however, the Department of the Treasury and the IRS issued
proposed Treasury Regulations that provide a safe harbor
pursuant to which a publicly traded partnership may use a
similar monthly simplifying convention to allocate tax items
among transferor and transferee unitholders. Although publicly
traded partnerships are entitled to rely on these proposed
Treasury Regulations, they are not binding on the IRS and are
subject to change until final Treasury Regulations are issued.
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, the unitholder would no longer
be treated for tax purposes as a partner with respect to those
units during the period of the loan and may recognize gain or
loss from the disposition.
Because a unitholder whose units are loaned to a short
seller to cover a short sale of units may be considered as
having disposed of the loaned units, the unitholder may no
longer be treated for tax purposes as a partner with respect to
those units during the period of the loan to the short seller
and the unitholder may recognize gain or loss from such
disposition. Moreover, during the period of the loan to the
short seller, any of our income, gain, loss or deduction with
respect to those units may not be reportable by the unitholder
and any cash distributions received by the unitholder as to
those units could be fully taxable as ordinary income.
Unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller
are urged to modify any applicable brokerage account agreements
to prohibit their brokers from borrowing their units.
We
have adopted certain valuation methodologies that may result in
a shift of income, gain, loss and deduction between us and our
public unitholders. The IRS may challenge this treatment, which
could adversely affect the value of our common
units.
When we issue additional units or engage in certain other
transactions, we determine the fair market value of our assets
and allocate any unrealized gain or loss attributable to such
assets to the capital accounts of our unitholders and our
general partner. Although we may from time to time consult with
professional appraisers regarding valuation matters, including
the valuation of our assets, we make many of the fair market
value estimates of our assets ourselves using a methodology
based on the market value of our common units as a means to
measure the fair market value of our assets. Our methodology may
be viewed as understating the value of our assets. In that case,
there may be a shift of income, gain, loss and deduction between
certain unitholders and our general partner, which may be
unfavorable to such unitholders. Moreover, under our current
valuation methods, subsequent purchasers of our common units may
have a greater portion of their Internal Revenue Code
Section 743(b) adjustment allocated to our tangible assets
and a lesser portion allocated to our intangible assets. The IRS
may challenge our valuation methods, or our allocation of
Section 743(b) adjustment attributable to our tangible and
intangible assets, and allocations of income, gain, loss and
deduction between our general partner and certain of our
unitholders.
A successful IRS challenge to these methods or allocations could
adversely affect the amount of taxable income or loss being
allocated to our unitholders. It also could affect the amount of
gain on the sale of common units by our unitholders and could
have a negative impact on the value of our common units or
result in audit adjustments to the tax returns of our
unitholders without the benefit of additional deductions.
29
The
sale or exchange of 50% or more of our capital and profit
interests during any twelve month period will result in the
termination of our partnership for federal income tax
purposes.
We will be considered technically terminated for federal income
tax purposes if there is a sale or exchange of 50% or more of
the total interests in our capital and profits within a
twelve-month period. For purposes of determining whether the 50%
threshold has been met, multiple sales of the same unit will be
counted only once. Our technical termination would, among other
things, result in the closing of our taxable year for all
unitholders which would require us to file two tax returns (and
our unitholders could receive two
Schedules K-1
if relief was not available, as described below) for one fiscal
year, and could result in a deferral of depreciation deductions
allowable in computing our taxable income. In the case of a
unitholder reporting on a taxable year other than a calendar
year, the closing of our taxable year may also result in more
than twelve months of our taxable income or loss being
includable in such unitholders taxable income for the year
of termination. Our termination currently would not affect our
classification as a partnership for federal income tax purposes.
We would be treated as a new partnership for tax purposes, and
would be required to make new tax elections and could be subject
to penalties if we were unable to determine in a timely manner
that a termination occurred. The IRS has recently announced a
publicly traded partnership technical termination relief program
whereby, if a publicly traded partnership that technically
terminated requests publicly traded partnership technical
termination relief and such relief is granted by the IRS, among
other things, the partnership will only have to provide one
Schedule K-1
to unitholders for the year notwithstanding two partnership tax
years. Please read Material Federal Income Tax
Considerations Disposition of Common
Units Constructive Termination for a
discussion of the consequences of our termination for federal
income tax purposes.
In November 2010, Enterprise GP Holdings L.P., which held
approximately 17.6% of the outstanding common units of ETE and
an approximate 40.6% interest in ETEs general partner,
merged into Enterprise Products Partners L.P. For federal income
tax purposes, this transaction will be treated as a change of
ownership of the interests in ETE and its general partner
formerly owned by Enterprise GP Holdings L.P. The completion of
this merger increased the likelihood that a termination of our
partnership for federal income tax purposes may have occurred at
that time or may occur at any time during the twelve-month
period following the consummation of the transaction, resulting
in a closing of our taxable year, as discussed above.
Unitholders
will likely be subject to state and local taxes and return
filing requirements in states where they do not live as a result
of investing in our common units.
In addition to federal income taxes, the unitholders may 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 conduct business or own property now or in the
future, even if they do not live in any of those jurisdictions.
Unitholders may be required to file state and local income tax
returns and pay state and local income taxes in some or all of
the jurisdictions. We currently own property or conduct business
in more than 40 states. Most of these states impose an
income tax on individuals, corporations and other entities. As
we make acquisitions or expand our business, we may control
assets or conduct business in additional states that impose a
personal or corporate income tax. Further, unitholders may be
subject to penalties for failure to comply with those
requirements. It is the responsibility of each unitholder to
file all federal, state and local tax returns. Our counsel has
not rendered an opinion on the state or local tax consequences
of an investment in our common units.
30
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 for general partnership purposes, which
may include repayment of indebtedness, the acquisition of
businesses and other capital expenditures and additions to
working capital.
Any allocation of the net proceeds of an offering of securities
to a specific purpose will be determined at the time of the
offering and will be described in a prospectus supplement.
31
RATIO OF
EARNINGS TO FIXED CHARGES
The following table sets forth our historical consolidated ratio
of earnings to fixed charges for the periods indicated therein:
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Four Months
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Year
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Year
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Nine Months
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Ended
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Ended
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Ended
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Ended
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Year Ended August 31,
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December 31,
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December 31,
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December 31,
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September 30,
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2005
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2006
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2007
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2007(1)
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2008
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2009
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2010
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Ratio of earnings to fixed charges
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3.02
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5.14
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4.28
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4.31
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3.95
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2.95
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2.28
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(1)
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In November 2007, we changed our
fiscal year end from a year ending August 31 to a year ending
December 31. Accordingly, the four months ended December 31,
2007 is treated as a transition period.
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For these ratios earnings is the amount resulting
from adding the following items:
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pre-tax income from continuing operations, before minority
interest and equity in earnings of affiliates;
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amortization of capitalized interest;
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distributed income of equity investees; and
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fixed charges.
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The term fixed charges means the sum of the
following:
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interest expensed;
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interest capitalized;
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amortized debt issuance costs; and
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estimated interest element of rentals.
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32
DESCRIPTION
OF UNITS
As of December 31, 2010, there were approximately 265,000
separate common unitholders, which includes common units held in
street name. Our common units represent limited partner
interests in us that entitle the holders to the rights and
privileges specified in our Second Amended and Restated
Agreement of Limited Partnership.
Common
Units, Class E Units and General Partner Interest
As of December 31, 2010, we had 193,212,590 common units
outstanding, of which 142,985,623 were held by the public,
including approximately 575,000 common units held by our
officers and directors, and 50,226,967 common units held by ETE.
Our common units are listed for trading on the NYSE under the
symbol ETP. The common units are entitled to
distributions of available cash as described below under
Cash Distribution Policy.
There are currently 8,853,832 Class E units outstanding,
all of which were issued in conjunction with our purchase of the
capital stock of Heritage Holdings Inc., or Heritage Holdings,
in January 2004, and are currently owned by our subsidiary
Heritage Holdings. The Class E units generally do not have
any voting rights. These Class E units are entitled to
aggregate cash distributions equal to 11.1% of the total amount
of cash distributed to all unitholders, including the
Class E unitholders, up to $1.41 per unit per year.
Management plans to continue its ownership of the Class E
units by Heritage Holdings as long as such units remain
outstanding.
As of December 31, 2010, our general partner owned an
approximate 1.8% general partner interest in us and the holders
of common units and Class E units collectively owned an
approximate 98.2% limited partner interest in us.
Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities and rights to buy
partnership securities for the consideration and on the terms
and conditions established by our general partner in its sole
discretion, without the approval of the unitholders. Any such
additional partnership securities may be senior to the common
units.
It is possible that we will fund acquisitions through the
issuance of additional common units or other equity securities.
Holders of any additional common units we issue will be entitled
to share equally with the then-existing holders of common units
in our distributions of available cash. In addition, the
issuance of additional partnership interests may dilute the
value of the interests of the then-existing holders of common
units in our net assets.
In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
securities that, in the sole discretion of the general partner,
have special voting rights to which the common units are not
entitled.
Upon issuance of additional partnership securities, our general
partner has the right to make additional capital contributions
to the extent necessary to maintain its then-existing general
partner interest in us. In the event that our general partner
does not make its proportionate share of capital contributions
to us based on its then-current general partner interest
percentage, its general partner percentage will be
proportionately reduced. Moreover, our general partner will have
the right, which it may from time to time assign in whole or in
part to any of its affiliates, to purchase common units or other
equity securities whenever, and on the same terms that, we issue
those securities to persons other than the general partner and
its affiliates, to the extent necessary to maintain its
percentage interest, including its interest represented by
common units, that existed immediately prior to each issuance.
The holders of common units will not have preemptive rights to
acquire additional common units or other partnership securities.
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Unitholder
Approval
The following matters require the approval of the majority of
the outstanding common units, including the common units owned
by the general partner and its affiliates:
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a merger of our partnership;
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a sale or exchange of all or substantially all of our assets;
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dissolution or reconstitution of our partnership upon
dissolution;
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certain amendments to the partnership agreement; and
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the transfer to another person of the incentive distribution
rights at any time, except for transfers to affiliates of the
general partner or transfers in connection with the general
partners merger or consolidation with or into, or sale of
all or substantially all of its assets to, another person.
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The removal of our general partner requires the approval of not
less than
662/3%
of all outstanding units, including units held by our general
partner and its affiliates. Any removal is subject to the
election of a successor general partner by the holders of a
majority of the outstanding common units, including units held
by our general partner and its affiliates.
Our general partner manages and directs all of our activities.
The activities of our general partner are managed and directed
by its general partner, ETP LLC. Our officers and directors are
officers and directors of ETP LLC. ETE, as the sole member of
ETP LLC, is entitled under the limited liability company
agreement of ETP LLC to appoint all of the directors of ETP LLC.
Our unitholders do not have the ability to nominate directors or
vote in the election of the directors of ETP LLC.
Amendments
to Our Partnership Agreement
Amendments to our partnership agreement may be proposed only by
or with the consent of our general partner. Certain amendments
require the approval of a majority of the outstanding common
units, including common units owned by the general partner and
its affiliates. Any amendment that materially and adversely
affects the rights or preferences of any class of partnership
interests in relation to other classes of partnership interests
will require the approval of at least a majority of the class of
partnership interests so affected. Our general partner may make
amendments to the partnership agreement without unitholder
approval to reflect:
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a change in our name, the location of our principal place of
business or our registered agent or office;
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the admission, substitution, withdrawal or removal of partners;
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a change to qualify or continue our qualification as a limited
partnership or a partnership in which the limited partners have
limited liability or to ensure that neither we nor our operating
partnership will be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income
tax purposes;
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a change that does not adversely affect our unitholders in any
material respect;
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a change (i) that is necessary or advisable to
(A) satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or
contained in any federal or state statute, or
(B) facilitate the trading of common units or comply with
any rule, regulation, guideline or requirement of any national
securities exchange on which the common units are or will be
listed for trading, (ii) that is necessary or advisable in
connection with action taken by our general partner with respect
to subdivision and combination of our securities or
(iii) that is required to effect the intent expressed in
our partnership agreement;
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a change in our fiscal year or taxable year and any changes that
are necessary or advisable as a result of a change in our fiscal
year or taxable year;
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an amendment that is necessary to prevent us, or our general
partner or its directors, officers, trustees or agents from
being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisors Act of 1940, as
amended, or plan asset regulations adopted under the
Employee Retirement Income Security Act of 1974, as amended;
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an amendment that is necessary or advisable in connection with
the authorization or issuance of any class or series of our
securities;
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any amendment expressly permitted in our partnership agreement
to be made by our general partner acting alone;
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an amendment effected, necessitated or contemplated by a merger
agreement approved in accordance with our partnership agreement;
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an amendment that is necessary or advisable to reflect, account
for and deal with appropriately our formation of, or investment
in, any corporation, partnership, joint venture, limited
liability company or other entity other than our operating
partnership, in connection with our conduct of activities
permitted by our partnership agreement;
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a merger or conveyance to effect a change in our legal form; or
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any other amendment substantially similar to the foregoing.
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Withdrawal
or Removal of Our General Partner
Our general partner may withdraw as general partner by giving
90 days written notice to the unitholders, and that
withdrawal will not constitute a violation of our partnership
agreement. Upon the voluntary withdrawal of our general partner,
the holders of a majority of our outstanding common units,
excluding the common units held by the withdrawing general
partner and its affiliates, may elect a successor to the
withdrawing general partner. If a successor is not elected, or
is elected but an opinion of counsel regarding limited liability
and tax matters cannot be obtained, we will be dissolved, wound
up and liquidated, unless within 90 days after that
withdrawal, the holders of a majority of our outstanding units,
excluding the common units held by the withdrawing general
partner and its affiliates, agree to continue our business and
to appoint a successor general partner.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
662/3%
of our outstanding units, including units held by our general
partner and its affiliates, and we receive an opinion of counsel
regarding limited liability and tax matters. In addition, if our
general partner is removed as our general partner under
circumstances where cause does not exist, our general partner
will have the right to receive cash in exchange for its
partnership interest as a general partner in us, its partnership
interest as the general partner of any member of the Energy
Transfer partnership group and its incentive distribution
rights. Cause is narrowly defined to mean that a court of
competent jurisdiction has entered a final, non-appealable
judgment finding the general partner liable for actual fraud,
gross negligence or willful or wanton misconduct in its capacity
as our general partner. Any removal of this kind is also subject
to the approval of a successor general partner by the vote of
the holders of the majority of our outstanding common units,
including those held by our general partner and its affiliates.
While our partnership agreement limits the ability of our
general partner to withdraw, it allows the general partner
interest to be transferred if, among other things, the
transferee assumes the rights and duties of our general partner,
furnishes an opinion of counsel regarding limited liability and
tax matters and agrees to purchase all (or the appropriate
portion thereof, if applicable) of our general partners
general partner interest in us and any of our subsidiaries. In
addition, our partnership agreement expressly permits the sale,
in whole or in part, of the ownership of our general partner.
Our general partner may also transfer, in whole or in part, any
common units it owns.
Transfer
of General Partner Interest
Our general partner may transfer its general partner interest to
a third party without the consent of the unitholders.
Furthermore, the general partner of our general partner may
transfer its general partner interest in our general partner to
a third party without the consent of the unitholders. Any new
owner of the general partner or the general partner of the
general partner would be in a position to replace the officers
of the general partner with its own choices and to control the
decisions taken by such officers.
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Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are reconstituted and continue
as a new limited partnership, the person authorized to wind up
our affairs (the liquidator) will, acting with all the powers of
our general partner that the liquidator deems necessary or
desirable in its good faith judgment, liquidate our assets. The
proceeds of the liquidation will be applied as follows:
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first, towards the payment of all of our creditors and the
creation of a reserve for contingent liabilities; and
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then, to all partners in accordance with the positive balance in
their respective capital accounts.
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Under some circumstances and subject to some limitations, the
liquidator may defer liquidation or distribution of our assets
for a reasonable period of time. If the liquidator determines
that a sale would be impractical or would cause a loss to our
partners, our general partner may distribute assets in kind to
our partners.
Limited
Call Right
If at any time less than 20% of the total limited partner
interests of any class are held by persons other than our
general partner and its affiliates, our general partner will
have the right to acquire all, but not less than all, of those
common units at a price no less than their then-current market
price. As a consequence, a unitholder may be required to sell
his common units at an undesirable time or price. Our general
partner may assign this purchase right to any of its affiliates
or us.
Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify our general partner, its affiliates and their officers
and directors to the fullest extent permitted by law, from and
against all losses, claims or damages any of them may suffer by
reason of their status as general partner, officer or director,
as long as the person seeking indemnity acted in good faith and
in a manner believed to be in or not opposed to our best
interest and, with respect to any criminal proceeding, had no
reasonable cause to believe the conduct was unlawful. Any
indemnification under these provisions will only be out of our
assets. Our general partner shall not be personally liable for,
or have any obligation to contribute or loan funds or assets to
us to effectuate any indemnification. We are authorized to
purchase insurance against liabilities asserted against and
expenses incurred by persons for our activities, regardless of
whether we would have the power to indemnify the person against
liabilities under our partnership agreement.
Listing
Our outstanding common units are listed on the NYSE under the
symbol ETP. Any additional common units we issue
also will be listed on the NYSE.
Transfer
Agent and Registrar
The transfer agent and registrar for the common units is
American Stock Transfer & Trust Company.
Transfer
of Common Units
Each purchaser of common units offered by this prospectus must
execute a transfer application. By executing and delivering a
transfer application, the purchaser of common units:
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becomes the record holder of the common units and is an assignee
until admitted into our partnership as a substituted limited
partner;
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automatically requests admission as a substituted limited
partner in our partnership;
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agrees to be bound by the terms and conditions of, and executes,
our partnership agreement;
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represents that such person has the capacity, power and
authority to enter into the partnership agreement;
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grants to our general partner the power of attorney to execute
and file documents required for our existence and qualification
as a limited partnership, the amendment of the partnership
agreement, our dissolution and liquidation, the admission,
withdrawal, removal or substitution of partners, the issuance of
additional partnership securities and any merger or
consolidation of the partnership; and
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makes the consents and waivers contained in the partnership
agreement, including the waiver of the fiduciary duties of the
general partner to unitholders as described in Risk
Factors Risks Related to Conflicts of
Interests Our partnership agreement limits our
general partners fiduciary duties to our unitholders and
restricts the remedies available to unitholders for actions
taken by our general partner that might otherwise constitute
breaches of fiduciary duty.
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An assignee will become a substituted limited partner of our
partnership for the transferred common units upon the consent of
our general partner and the recording of the name of the
assignee on our books and records. Although the general partner
has no current intention of doing so, it may withhold its
consent in its sole discretion. An assignee who is not admitted
as a limited partner will remain an assignee. An assignee is
entitled to an interest equivalent to that of a limited partner
for the right to share in allocations and distributions from us,
including liquidating distributions. Furthermore, our general
partner will vote and exercise other powers attributable to
common units owned by an assignee at the written direction of
the assignee.
Transfer applications may be completed, executed and delivered
by a purchasers broker, agent or nominee. We are entitled
to treat the nominee holder of a common unit as the absolute
owner. In that case, the beneficial holders rights are
limited solely to those that it has against the nominee holder
as a result of any agreement between the beneficial owner and
the nominee holder.
Common units are securities and are transferable according to
the laws governing transfer of securities. In addition to other
rights acquired, the purchaser has the right to request
admission as a substituted limited partner in our partnership
for the purchased common units. A purchaser of common units who
does not execute and deliver a transfer application obtains only:
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the right to assign the common unit to a purchaser or
transferee; and
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the right to transfer the right to seek admission as a
substituted limited partner in our partnership for the purchased
common units.
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Thus, a purchaser of common units who does not execute and
deliver a transfer application:
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will not receive cash distributions or federal income tax
allocations, unless the common units are held in a nominee or
street name account and the nominee or broker has
executed and delivered a transfer application; and
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may not receive some federal income tax information or reports
furnished to record holders of common units.
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Until a common unit has been transferred on our books, we and
the transfer agent, notwithstanding any notice to the contrary,
may treat the record holder of the common unit as the absolute
owner for all purposes, except as otherwise required by law or
NYSE regulations.
Status as
Limited Partner or Assignee
Except as described under Limited
Liability, the common units will be fully paid, and the
unitholders will not be required to make additional capital
contributions to us.
Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware
Revised Uniform Limited Partnership Act, or the Delaware Act,
and that he otherwise acts in conformity with the provisions of
our partnership agreement, his liability under the Delaware Act
will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common
units plus his share of any undistributed profits and assets. If
it were determined, however, that the right or exercise of the
right by the limited partners as a group to remove or replace
the general partner, to approve some amendments to our
partnership agreement, or to take other action under our
partnership
37
agreement, constituted participation in the control
of our business for the purposes of the Delaware Act, then the
limited partners could be held personally liable for our
obligations under Delaware law, to the same extent as the
general partner. This liability would extend to persons who
transact business with us and who reasonably believe that the
limited partner is a general partner. Neither our partnership
agreement nor the Delaware Act specifically provides for legal
recourse against our general partner if a limited partner were
to lose limited liability through any fault of the general
partner. While this does not mean that a limited partner could
not seek legal recourse, we have found no precedent for this
type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if after the distribution all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of our partnership, exceed the fair value of
the assets of the limited partnership. For the purpose of
determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of
property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was
in violation of the Delaware Act shall be liable to the limited
partnership for the amount of the distribution for three years.
Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to our
partnership, except the assignee is not obligated for
liabilities unknown to him at the time he became a limited
partner and which could not be ascertained from our partnership
agreement.
Our subsidiaries currently conduct business in 45 states:
Alabama, Arizona, Arkansas, California, Colorado, Connecticut,
Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Kansas,
Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Missouri, Minnesota, Mississippi, Montana, Nevada, New
Hampshire, New Jersey, New Mexico, New York, North Carolina,
Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas, Utah, Vermont,
Virginia, Wisconsin, Washington, West Virginia and Wyoming. To
maintain the limited liability for Energy Transfer Partners,
L.P., as the holder of a 100% limited partner interest in
Heritage Operating, L.P., we may be required to comply with
legal requirements in the jurisdictions in which Heritage
Operating, L.P. conducts business, including qualifying our
subsidiaries to do business there. Limitations on the liability
of limited partners for the obligations of a limited partnership
have not been clearly established in many jurisdictions. If it
were determined that we were, by virtue of our limited partner
interest in Heritage Operating, L.P. or otherwise, conducting
business in any state without compliance with the applicable
limited partnership statute, or that our right or the exercise
of our right to remove or replace Heritage Operating,
L.P.s general partner, to approve some amendments to
Heritage Operating, L.P.s partnership agreement, or to
take other action under Heritage Operating, L.P.s
partnership agreement constituted participation in the
control of Heritage Operating, L.P.s business for
purposes of the statutes of any relevant jurisdiction, then we
could be held personally liable for Heritage Operating,
L.P.s obligations under the law of that jurisdiction to
the same extent as our general partner under the circumstances.
We will operate in a manner as our general partner considers
reasonable and necessary or appropriate to preserve our limited
liability.
Meetings;
Voting
Except as described below regarding a person or group owning 20%
or more of any class of units then outstanding, unitholders or
assignees who are record holders of units on the record date
will be entitled to notice of, and to vote at, meetings of our
limited partners and to act upon matters for which approvals may
be solicited. Common units that are owned by an assignee who is
a record holder, but who has not yet been admitted as a limited
partner, shall be voted by our general partner at the written
direction of the record holder. Absent direction of this kind,
the common units will not be voted, except that, in the case of
common units held by our general partner on behalf of
non-citizen assignees, our general partner shall distribute the
votes on those common units in the same ratios as the votes of
limited partners on other units are cast.
Our general partner does not anticipate that any meeting of
unitholders will be called in the foreseeable future. If
authorized by our general partner, any action that is required
or permitted to be taken by the unitholders may be taken either
at a meeting of the unitholders or without a meeting if consents
in writing
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describing the action so taken are signed by holders of the
number of units as would be necessary to authorize or take that
action at a meeting. Meetings of the unitholders may be called
by our general partner or by unitholders owning at least 20% of
the outstanding units of the class for which a meeting is
proposed. Unitholders may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding units of
the class or classes for which a meeting has been called
represented in person or by proxy shall constitute a quorum
unless any action by the unitholders requires approval by
holders of a greater percentage of the units, in which case the
quorum shall be the greater percentage.
Each record holder of a unit has a vote according to his
percentage interest in us, although additional limited partner
interests having special voting rights could be issued. However,
if at any time any person or group, other than our general
partner and its affiliates, owns, in the aggregate, beneficial
ownership of 20% or more of the common units then outstanding,
the person or group will lose voting rights on all of its common
units and its common units may not be voted on any matter and
will not be considered to be outstanding when sending notices of
a meeting of unitholders, calculating required votes,
determining the presence of a quorum or for other similar
purposes. Common units held in nominee or street name account
will be voted by the broker or other nominee in accordance with
the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise.
Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of common
units under our partnership agreement will be delivered to the
record holder by us or by the transfer agent.
Books and
Reports
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. Reporting for tax purposes is done on a calendar year
basis.
We will furnish or make available to record holders of common
units, within 120 days after the close of each fiscal year,
an annual report containing audited financial statements and a
report on those financial statements by our independent public
accountants. Except for our fourth quarter, we will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
Our partnership agreement provides that a limited partner can,
for a purpose reasonably related to his interest as a limited
partner, upon reasonable demand and at his own expense, have
furnished to him:
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a current list of the name and last known address of each
partner;
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a copy of our tax returns;
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information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each became a partner;
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copies of our partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of
attorney under which they have been executed;
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information regarding the status of our business and financial
condition; and
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any other information regarding our affairs as is just and
reasonable.
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Our general partner may, and intends to, keep confidential from
the limited partners trade secrets or other information the
disclosure of which our general partner believes in good faith
is not in our best interests or that we are required by law or
by agreements with third parties to keep confidential.
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CASH
DISTRIBUTION POLICY
Following is a description of the relative rights and
preferences of holders of our common units in and to cash
distributions. Upon the issuance of any additional common units,
the general partner may make, but is not obligated to make,
capital contributions to maintain its then current general
partner interest. In the event the general partner elects not to
make such capital contribution, its general partner interest
will be diluted accordingly. As of December 31, 2010, our
general partner owned an approximate 1.8% general partner
interest in us.
Distributions
of Available Cash
General. We will distribute all of our
available cash to our unitholders and our general
partner within 45 days following the end of each fiscal
quarter.
Definition of Available Cash. Available cash
is defined in our partnership agreement and generally means,
with respect to any calendar quarter, all cash on hand at the
end of such quarter:
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less the amount of cash reserves that are necessary or
appropriate in the reasonable discretion of the general partner
to:
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provide for the proper conduct of our business;
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comply with applicable law or any debt instrument or other
agreement (including reserves for future capital expenditures
and for our future credit needs); or
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provide funds for distributions to unitholders and our general
partner in respect of any one or more of the next four quarters;
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plus all cash on hand on the date of determination of available
cash for the quarter resulting from working capital borrowings
made after the end of the quarter. Working capital borrowings
are generally borrowings that are made under our credit
facilities and in all cases are used solely for working capital
purposes or to pay distributions to partners.
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Operating
Surplus and Capital Surplus
General. All cash distributed to unitholders
will be characterized as either operating surplus or
capital surplus. We distribute available cash from
operating surplus differently than available cash from capital
surplus.
Definition of Operating Surplus. Operating
surplus for any period generally means:
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our cash balance on the closing date of our initial public
offering; plus
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$10.0 million (as described below); plus
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all of our cash receipts since the closing of our initial public
offering, excluding cash from interim capital transactions such
as borrowings that are not working capital borrowings, sales of
equity and debt securities and sales or other dispositions of
assets outside the ordinary course of business; plus
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our working capital borrowings made after the end of a quarter
but before the date of determination of operating surplus for
the quarter; less
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all of our operating expenditures after the closing of our
initial public offering, including the repayment of working
capital borrowings, but not the repayment of other borrowings,
and including maintenance capital expenditures; less
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the amount of cash reserves that the general partner deems
necessary or advisable to provide funds for future operating
expenditures.
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Definition of Capital Surplus. Generally,
capital surplus will be generated only by:
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borrowings other than working capital borrowings;
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sales of debt and equity securities; and
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sales or other disposition of assets for cash, other than
inventory, accounts receivable and other current assets sold in
the ordinary course of business or as part of normal retirements
or replacements of assets.
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Characterization of Cash Distributions. We
will treat all available cash distributed as coming from
operating surplus until the sum of all available cash
distributed since we began operations equals the operating
surplus as of the most recent date of determination of available
cash. We will treat any amount distributed in excess of
operating surplus, regardless of its source, as capital surplus.
As reflected above, operating surplus includes
$10.0 million in addition to our cash balance on the
closing date of our initial public offering, cash receipts from
our operations and cash from working capital borrowings. This
amount does not reflect actual cash on hand that is available
for distribution to our unitholders. Rather, it is a provision
that enables us, if we choose, to distribute as operating
surplus up to $10.0 million of cash we receive in the
future from non-operating sources, such as asset sales,
issuances of securities, and long-term borrowings, that would
otherwise be distributed as capital surplus. We have not made,
and we anticipate that we will not make, any distributions from
capital surplus.
Incentive
Distribution Rights
Incentive distribution rights represent the contractual right to
receive an increasing percentage of quarterly distributions of
available cash from operating surplus after the minimum
quarterly distribution has been paid. Please read
Distributions of Available Cash from Operating
Surplus below. The general partner owns all of the
incentive distribution rights.
Distributions
of Available Cash from Operating Surplus
The terms of our partnership agreement require that we make cash
distributions with respect to each calendar quarter within
45 days following the end of each calendar quarter. We are
required to make distributions of available cash from operating
surplus for any quarter in the following manner:
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First, 100% to all common and Class E unitholders and the
general partner, in accordance with their percentage interests,
until each common unit has received $0.25 per unit for such
quarter (the minimum quarterly distribution);
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Second, 100% to all common and Class E unitholders and the
general partner, in accordance with their respective percentage
interests, until each common unit has received $0.275 per unit
for such quarter (the first target distribution);
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Third, 87% to all common and Class E unitholders and the
general partner, in accordance with their respective percentage
interests, and 13% to the holders of incentive distribution
rights, pro rata, until each common unit has received $0.3175
per unit for such quarter (the second target
distribution);
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Fourth, 77% to all common and Class E unitholders and the
general partner, in accordance with their respective percentage
interests, and 23% to the holders of incentive distribution
rights, pro rata, until each common unit has received $0.4125
per unit for such quarter (the third target
distribution); and
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Fifth, thereafter, 52% to all common and Class E
unitholders and the general partner, in accordance with their
respective percentage interests, and 48% to the holders of
incentive distribution rights, pro rata.
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Notwithstanding the foregoing, the distributions on each
Class E unit may not exceed $1.41 per year.
41
Distributions
of Available Cash from Capital Surplus
The terms of our partnership agreement require that we make cash
distributions with respect to each calendar quarter within
45 days following the end of each calendar quarter. We will
make distributions of available cash from capital surplus, if
any, in the following manner:
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First, 100% to all unitholders and the general partner, in
accordance with their respective percentage interests, until we
distribute for each common unit an amount of available cash from
capital surplus equal to the initial public offering price;
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Thereafter, we will make all distributions of available cash
from capital surplus as if they were from operating surplus.
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Our partnership agreement treats a distribution of capital
surplus as the repayment of the initial unit price from the
initial public offering, which is a return of capital. The
initial public offering price per common unit less any
distributions of capital surplus per unit is referred to as the
unrecovered capital.
If we combine our units into fewer units or subdivide our units
into a greater number of units, we will proportionately adjust
our minimum quarterly distribution, our target cash distribution
levels, and our unrecovered capital.
For example, if a two-for-one split of our common units should
occur, our unrecovered capital would be reduced to 50% of our
initial level. We will not make any adjustment by reason of our
issuance of additional units for cash or property.
On January 14, 2005, our general partner announced a
two-for-one split of our common units that was effected on
March 15, 2005. As a result, our minimum quarterly
distribution and the target cash distribution levels were
reduced to 50% of their initial levels. Our adjusted minimum
quarterly distribution and the adjusted target cash distribution
levels are reflected in the discussion above under the caption
Distributions of Available Cash from Operating
Surplus.
In addition, if legislation is enacted or if existing law is
modified or interpreted in a manner that causes us to become
taxable as a corporation or otherwise subject to taxation as an
entity for federal, state or local income tax purposes, we will
reduce our minimum quarterly distribution and the target cash
distribution levels by multiplying the same by one minus the sum
of the highest marginal federal corporate income tax rate that
could apply and any increase in the effective overall state and
local income tax rates.
Distributions
of Cash Upon Liquidation
General. If we dissolve in accordance with our
partnership agreement, we will sell or otherwise dispose of our
assets in a process called liquidation. We will first apply the
proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and the
general partner, in accordance with their capital account
balances, as adjusted to reflect any gain or loss upon the sale
or other disposition of our assets in liquidation.
Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive
distribution rights of the general partner.
Manner of Adjustments for Gain. The manner of
the adjustment for gain is set forth in our partnership
agreement in the following manner:
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First, to the general partner and the holders of units who have
negative balances in their capital accounts to the extent of and
in proportion to those negative balances;
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Second, 100% to the common unitholders and the general partner,
in accordance with their respective percentage interests, until
the capital account for each common unit is equal to the sum of:
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the unrecovered capital; and
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the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;
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Third, 100% to all unitholders and the general partner, in
accordance with their respective percentage interests, until we
allocate under this paragraph an amount per unit equal to:
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the sum of the excess of the first target distribution per unit
over the minimum quarterly distribution per unit for each
quarter of our existence; less
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the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the minimum quarterly
distribution per unit that we distributed 100% to the
unitholders and the general partner, in accordance with their
percentage interests, for each quarter of our existence;
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Fourth, 87% to all unitholders and the general partner, in
accordance with their respective percentage interests, and 13%
to the holders of the incentive distribution rights, pro rata,
until we allocate under this paragraph an amount per unit equal
to:
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the sum of the excess of the second target distribution per unit
over the first target distribution per unit for each quarter of
our existence; less
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the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the first target
distribution per unit that we distributed 87% to the unitholders
and the general partner, in accordance with their percentage
interests, and 13% to the holders of the incentive distribution
rights, pro rata, for each quarter of our existence;
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Fifth, 77% to all unitholders and the general partner, in
accordance with their respective percentage interests, and 23%
to the holders of the incentive distribution rights, pro rata,
until we allocate under this paragraph an amount per unit equal
to:
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the sum of the excess of the third target distribution per unit
over the second target distribution per unit for each quarter of
our existence; less
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the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the second target
distribution per unit that we distributed 77% to the unitholders
and the general partner, in accordance with their respective
percentage interests, and 23% to the holders of the incentive
distribution rights, pro rata, for each quarter of our
existence; and
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Sixth, thereafter, 52% to all unitholders and the general
partner, in accordance with their respective percentage
interests, and 48% to the holders of the incentive distribution
rights, pro rata.
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Manner of Adjustment for Losses. Upon our
liquidation, we will generally allocate any loss to the general
partner and the unitholders in the following manner:
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First, 100% to the holders of common units and the general
partner in proportion to the positive balances in the common
unitholders capital accounts and the general
partners percentage interest, respectively, until the
capital accounts of the common unitholders have been reduced to
zero; and
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Second, thereafter, 100% to the general partner.
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Adjustments to Capital Accounts upon the Issuance of
Additional Units. We will make adjustments to
capital accounts upon the issuance of additional units. In doing
so, we will allocate any unrealized and, for tax purposes,
unrecognized gain or loss resulting from the adjustments to the
unitholders and the general partner in the same manner as we
allocate gain or loss upon liquidation. In the event that we
make positive adjustments to the capital accounts upon the
issuance of additional units, we will allocate any later
negative adjustments to the capital accounts resulting from the
issuance of additional units or upon our liquidation in a manner
which results, to the extent possible, in the general
partners capital account balances equaling the amount
which they would have been if no earlier positive adjustments to
the capital accounts had been made.
43
DESCRIPTION
OF THE DEBT SECURITIES
Energy Transfer Partners, L.P. may issue senior debt securities
on a senior unsecured basis under the indenture, dated
January 18, 2005, among Energy Transfer Partners, L.P., as
issuer, the subsidiary guarantors party thereto and
U.S. Bank National Association (as successor to Wachovia
Bank, National Association), as trustee. The debt securities
will be governed by the provisions of the indenture and those
made part of the indenture by reference to the
Trust Indenture Act of 1939, as amended, or the Trust
Indenture Act.
We have summarized material provisions of the indenture and the
debt securities below. This summary is not complete. We have
filed the indenture with the SEC as an exhibit to the
registration statement, and you should read the indenture for
provisions that may be important to you.
References in this Description of the Debt
Securities to we, us and
our mean Energy Transfer Partners, L.P.
Provisions
Applicable to the Indenture
General. Any series of debt securities will be
our general obligations.
The indenture does not limit the amount of debt securities that
may be issued under the indenture, and does not limit the amount
of other unsecured debt or securities that we may issue. We may
issue debt securities under the indenture from time to time in
one or more series, each in an amount authorized prior to
issuance.
The indenture does not contain any covenants or other provisions
designed to protect holders of the debt securities in the event
we participate in a highly leveraged transaction or upon a
change of control. The indenture also does not contain
provisions that give holders the right to require us to
repurchase their securities in the event of a decline in our
credit ratings for any reason, including as a result of a
takeover, recapitalization or similar restructuring or otherwise.
Terms. We will prepare a prospectus supplement
and either a supplemental indenture, or authorizing resolutions
of the board of directors of our general partners general
partner, accompanied by an officers certificate, relating
to any series of debt securities that we offer, which will
include specific terms relating to some or all of the following:
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the form and title of the debt securities of that series;
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the total principal amount of the debt securities of that series;
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whether the debt securities will be issued in individual
certificates to each holder or in the form of temporary or
permanent global securities held by a depositary on behalf of
holders;
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the date or dates on which the principal of and any premium on
the debt securities of that series will be payable;
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any interest rate which the debt securities of that series will
bear, the date from which interest will accrue, interest payment
dates and record dates for interest payments;
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any right to extend or defer the interest payment periods and
the duration of the extension;
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whether and under what circumstances any additional amounts with
respect to the debt securities will be payable;
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whether debt securities are entitled to the benefits of any
guarantee of any Subsidiary Guarantor;
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the place or places where payments on the debt securities of
that series will be payable;
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any provisions for optional redemption or early repayment;
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any provisions that would require the redemption, purchase or
repayment of debt securities;
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the denominations in which the debt securities will be issued;
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whether payments on the debt securities will be payable in
foreign currency or currency units or another form and whether
payments will be payable by reference to any index or formula;
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the portion of the principal amount of debt securities that will
be payable if the maturity is accelerated, if other than the
entire principal amount;
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any additional means of defeasance of the debt securities, any
additional conditions or limitations to defeasance of the debt
securities or any changes to those conditions or limitations;
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any changes or additions to the events of default or covenants
described in this prospectus;
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any restrictions or other provisions relating to the transfer or
exchange of debt securities;
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any terms for the conversion or exchange of the debt securities
for our other securities or securities of any other
entity; and
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any other terms of the debt securities of that series.
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This description of debt securities will be deemed modified,
amended or supplemented by any description of any series of debt
securities set forth in a prospectus supplement related to that
series.
We may sell the debt securities at a discount, which may be
substantial, below their stated principal amount. These debt
securities may bear no interest or interest at a rate that at
the time of issuance is below market rates. If we sell these
debt securities, we will describe in the prospectus supplement
any material United States federal income tax consequences and
other special considerations.
If we sell any of the debt securities for any foreign currency
or currency unit or if payments on the debt securities are
payable in any foreign currency or currency unit, we will
describe in the prospectus supplement the restrictions,
elections, tax consequences, specific terms and other
information relating to those debt securities and the foreign
currency or currency unit.
The Subsidiary Guarantees. Certain of our
subsidiaries, which we refer to collectively as Subsidiary
Guarantors, may fully, irrevocably and unconditionally guarantee
on an unsecured basis all series of our debt securities and will
execute a notation of guarantee as further evidence of their
guarantee. The applicable prospectus supplement will describe
the terms of any guarantee by the Subsidiary Guarantors.
If a series of debt securities is so guaranteed, the Subsidiary
Guarantors guarantee of the debt securities will be the
Subsidiary Guarantors unsecured and unsubordinated general
obligation, and will rank on a parity with all of the Subsidiary
Guarantors other unsecured and unsubordinated
indebtedness. The obligations of each Subsidiary Guarantor under
its guarantee of the debt securities will be limited to the
maximum amount that will not result in the obligations of the
Subsidiary Guarantor under the guarantee constituting a
fraudulent conveyance or fraudulent transfer under federal or
state law, after giving effect to:
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all other contingent and fixed liabilities of the Subsidiary
Guarantor; and
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any collections from or payments made by or on behalf of any
other Subsidiary Guarantors in respect of the obligations of the
Subsidiary Guarantor under its guarantee.
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The guarantee of any Subsidiary Guarantor may be released under
certain circumstances. If we exercise our legal or covenant
defeasance option with respect to debt securities of a
particular series as described below in
Defeasance, then the guarantee of any
Subsidiary Guarantor will be released with respect to that
series. Further, if no default has occurred and is continuing
under the indenture, and to the extent not otherwise prohibited
by the indenture, the guarantee of a Subsidiary Guarantor will
be unconditionally released and discharged:
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automatically upon any sale, exchange or transfer, whether by
way of merger or otherwise, to any person that is not our
affiliate, of all of our direct or indirect limited partnership
or other equity interests in the Subsidiary Guarantor;
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automatically upon the merger of the Subsidiary Guarantor into
us or any other Subsidiary Guarantor or the liquidation and
dissolution of the Subsidiary Guarantor; or
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following delivery of a written notice by us to the trustee,
upon the release of all guarantees by the Subsidiary Guarantor
of any debt of ours for borrowed money for a purchase money
obligation or for a guarantee of either, except for any series
of debt securities.
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Events of Default. Unless we inform you
otherwise in the applicable prospectus supplement, the following
are events of default with respect to a series of debt
securities:
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failure to pay interest on that series of debt securities for
30 days when due;
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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;
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failure by us or, if the series of debt securities is guaranteed
by any Subsidiary Guarantors, by such Subsidiary Guarantors, to
comply with the other agreements contained in the indenture, any
supplement to the indenture or any board resolution authorizing
the issuance of that series for 60 days after written
notice by the trustee or by the holders of at least 25% in
principal amount of the outstanding debt securities issued under
the indenture that are affected by that failure;
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certain events of bankruptcy, insolvency or reorganization of us
or, if the series of debt securities is guaranteed by any
Subsidiary Guarantor, of any such Subsidiary Guarantor;
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if the series of debt securities is guaranteed by any Subsidiary
Guarantor:
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any of the guarantees ceases to be in full force and effect,
except as otherwise provided in the indenture;
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any of the guarantees is declared null and void in a judicial
proceeding; or
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any Subsidiary Guarantor denies or disaffirms its obligations
under the indenture or its guarantee; and
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any other event of default provided for with respect to that
series of debt securities.
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A default under one series of debt securities will not
necessarily be a default under another series. The trustee may
withhold notice to the holders of the debt securities of any
default or event of default (except in any payment on the debt
securities) if the trustee considers it in the interest of the
holders of the debt securities to do so.
If an event of default for any series of debt securities occurs
and is continuing, the trustee or the holders of at least 25% in
principal amount of the outstanding debt securities of the
series affected by the default (or, in the case of the fourth
bullet point appearing above under the heading
Events of Default, at least 25% in
principal amount of all debt securities issued under the
indenture that are affected, voting as one class) may declare
the principal of and all accrued and unpaid interest on those
debt securities to be due and payable. If an event of default
relating to certain events of bankruptcy, insolvency or
reorganization occurs, the principal of and interest on all the
debt securities issued under the indenture will become
immediately due and payable without any action on the part of
the trustee or any holder. The holders of a majority in
principal amount of the outstanding debt securities of the
series affected by the default may in some cases rescind this
accelerated payment requirement (other than acceleration for
nonpayment of principal of or premium or interest on or any
additional amounts with respect to the debt securities).
A holder of a debt security of any series issued under the
indenture may pursue any remedy under the indenture only if:
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the holder gives the trustee written notice of a continuing
event of default for that series;
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the holders of at least 25% in principal amount of the
outstanding debt securities of that series make a written
request to the trustee to pursue the remedy;
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the holders offer to the trustee security or indemnity
satisfactory to the trustee;
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the trustee fails to act for a period of 60 days after
receipt of the request and offer of security or
indemnity; and
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during that
60-day
period, the holders of a majority in principal amount of the
debt securities of that series do not give the trustee a
direction inconsistent with the request.
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This provision does not, however, affect the right of a holder
of a debt security to sue for enforcement of any overdue payment.
46
In most cases, holders of a majority in principal amount of the
outstanding debt securities of a series (or of all debt
securities issued under the indenture that are affected, voting
as one class) may direct the time, method and place of:
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conducting any proceeding for any remedy available to the
trustee; and
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exercising any trust or power conferred upon the trustee
relating to or arising as a result of an event of default.
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Under the indenture we are required to file each year with the
trustee a written statement as to our compliance with the
covenants contained in the indenture.
Modification and Waiver. The indenture may be
amended or supplemented if the holders of a majority in
principal amount of the outstanding debt securities of all
series issued under the indenture that are affected by the
amendment or supplement (acting as one class) consent to it.
Without the consent of the holder of each debt security
affected, however, no modification may:
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reduce the percentage in principal amount of debt securities
whose holders must consent to an amendment, a supplement or a
waiver;
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reduce the rate of or extend the time for payment of interest on
the debt security;
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reduce the principal of, or any premium on, the debt security or
change its stated maturity;
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reduce any premium payable on the redemption of the debt
security or change the time at which the debt security may or
must be redeemed;
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change any obligation to pay additional amounts on the debt
security;
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make payments on the debt security payable in currency other
than as originally stated in the debt security;
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impair the holders right to receive payment of principal
of and premium, if any, and interest on or any additional
amounts with respect to such holders debt securities or to
institute suit for the enforcement of any payment on or with
respect to the debt security;
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make any change in the percentage of principal amount of debt
securities necessary to waive compliance with certain provisions
of the indenture or to make any change in the provision related
to modification;
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waive a continuing default or event of default regarding any
payment on the debt securities;
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except as provided in the indenture, release any security that
may have been granted in respect of any debt securities; or
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except as provided in the indenture, release, or modify the
guarantee any Subsidiary Guarantor in any manner adverse to the
holders.
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The indenture may be amended or supplemented or any provision of
the indenture may be waived without the consent of any holders
of debt securities issued under the indenture:
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to cure any ambiguity, omission, defect or inconsistency;
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to provide for the assumption of our obligations under the
indenture by a successor upon any merger, consolidation or asset
transfer permitted under the indenture;
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to provide for uncertificated debt securities in addition to or
in place of certificated debt securities or to provide for
bearer debt securities;
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to provide any security for, any guarantees of or any additional
obligors on any series of debt securities or the related
guarantees;
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to comply with any requirement to effect or maintain the
qualification of the indenture under the Trust Indenture
Act;
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to add covenants that would benefit the holders of any debt
securities or to surrender any rights we have under the
indenture;
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to add events of default with respect to any debt
securities; and
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to make any change that does not adversely affect any
outstanding debt securities of any series issued under the
indenture.
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The holders of a majority in principal amount of the outstanding
debt securities of any series (or, in some cases, of all debt
securities issued under the indenture that are affected, voting
as one class) may waive any existing or past default or event of
default with respect to those debt securities. Those holders may
not, however, waive any default or event of default in any
payment on any debt security or compliance with a provision that
cannot be amended or supplemented without the consent of each
holder affected.
Defeasance. When we use the term defeasance,
we mean discharge from some or all of our obligations under the
indenture. If any combination of funds or government securities
are deposited with the trustee under the indenture sufficient to
make payments on the debt securities of a series issued under
the indenture on the dates those payments are due and payable,
then, at our option, either of the following will occur:
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we will be discharged from our or their obligations with respect
to the debt securities of that series and, if applicable, the
related guarantees (legal defeasance); or
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we will no longer have any obligation to comply with the
restrictive covenants, the merger covenant and other specified
covenants under the indenture, and the related events of default
will no longer apply (covenant defeasance).
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If a series of debt securities is defeased, the holders of the
debt securities of the series affected will not be entitled to
the benefits of the indenture, except for obligations to
register the transfer or exchange of debt securities, replace
stolen, lost or mutilated debt securities or maintain paying
agencies and hold moneys for payment in trust. In the case of
covenant defeasance, our obligation to pay principal, premium
and interest on the debt securities and, if applicable,
guarantees of the payments will also survive.
Unless we inform you otherwise in the prospectus supplement, we
will be required to deliver to the trustee an opinion of counsel
that the deposit and related defeasance would not cause the
holders of the debt securities to recognize income, gain or loss
for U.S. federal income tax purposes. If we elect legal
defeasance, that opinion of counsel must be based upon a ruling
from the U.S. Internal Revenue Service or a change in law
to that effect.
No Personal Liability of General Partner. Our
general partner, and its directors, officers, employees,
incorporators and partners, in such capacity, will not be liable
for the obligations of Energy Transfer Partners, L.P. or any
Subsidiary Guarantor under the debt securities, the indenture or
the guarantees or for any claim based on, in respect of, or by
reason of, such obligations or their creation. By accepting a
debt security, each holder of that debt security will have
agreed to this provision and waived and released any such
liability on the part of our general partner and its directors,
officers, employees, incorporators and partners. This waiver and
release are part of the consideration for our issuance of the
debt securities. It is the view of the SEC that a waiver of
liabilities under the federal securities laws is against public
policy and unenforceable.
Governing Law. New York law governs the
indenture and will govern the debt securities.
Trustee. We may appoint a separate trustee for
any series of debt securities. We use the term
trustee to refer to the trustee appointed with
respect to any such series of debt securities. We may maintain
banking and other commercial relationships with the trustee and
its affiliates in the ordinary course of business, and the
trustee may own debt securities.
Form, Exchange, Registration and Transfer. The
debt securities will be issued in registered form, without
interest coupons. There will be no service charge for any
registration of transfer or exchange of the debt securities.
However, payment of any transfer tax or similar governmental
charge payable for that registration may be required.
Debt securities of any series will be exchangeable for other
debt securities of the same series, the same total principal
amount and the same terms but in different authorized
denominations in accordance with the indenture. Holders may
present debt securities for registration of transfer at the
office of the security registrar or any transfer agent we
designate. The security registrar or transfer agent will effect
the transfer or exchange if its requirements and the
requirements of the indenture are met.
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The trustee will be appointed as security registrar for the debt
securities. If a prospectus supplement refers to any transfer
agents we initially designate, we may at any time rescind that
designation or approve a change in the location through which
any transfer agent acts. We are required to maintain an office
or agency for transfers and exchanges in each place of payment.
We may at any time designate additional transfer agents for any
series of debt securities.
In the case of any redemption, we will not be required to
register the transfer or exchange of:
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any debt security during a period beginning 15 business days
prior to the mailing of the relevant notice of redemption and
ending on the close of business on the day of mailing of such
notice; or
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any debt security that has been called for redemption in whole
or in part, except the unredeemed portion of any debt security
being redeemed in part.
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Payment and Paying Agents. Unless we inform
you otherwise in a prospectus supplement, payments on the debt
securities will be made in U.S. dollars at the office of
the trustee and any paying agent. At our option, however,
payments may be made by wire transfer for global debt securities
or by check mailed to the address of the person entitled to the
payment as it appears in the security register. Unless we inform
you otherwise in a prospectus supplement, interest payments may
be made to the person in whose name the debt security is
registered at the close of business on the record date for the
interest payment.
Unless we inform you otherwise in a prospectus supplement, the
trustee under the indenture will be designated as the paying
agent for payments on debt securities issued under the
indenture. We may at any time designate additional paying agents
or rescind the designation of any paying agent or approve a
change in the office through which any paying agent acts.
If the principal of or any premium or interest on debt
securities of a series is payable on a day that is not a
business day, the payment will be made on the following business
day. For these purposes, unless we inform you otherwise in a
prospectus supplement, a business day is any day
that is not a Saturday, a Sunday or a day on which banking
institutions in New York, New York or a place of payment on the
debt securities of that series is authorized or obligated by
law, regulation or executive order to remain closed.
Subject to the requirements of any applicable abandoned property
laws, the trustee and paying agent will pay to us upon written
request any money held by them for payments on the debt
securities that remains unclaimed for two years after the date
upon which that payment has become due. After payment to us,
holders entitled to the money must look to us for payment. In
that case, all liability of the trustee or paying agent with
respect to that money will cease.
Book-Entry Debt Securities. The debt
securities of a series may be issued in the form of one or more
global debt securities that would be deposited with a depositary
or its nominee identified in the prospectus supplement. Global
debt securities may be issued in either temporary or permanent
form. We will describe in the prospectus supplement the terms of
any depositary arrangement and the rights and limitations of
owners of beneficial interests in any global debt security.
49
MATERIAL
FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of 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, is the
opinion of Latham & Watkins LLP, counsel to our
general partner and us, insofar as it relates to legal
conclusions with respect to matters of U.S. federal income
tax law. This section is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the Internal
Revenue Code), existing and proposed Treasury regulations
promulgated under the Internal Revenue Code (the Treasury
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 Energy
Transfer Partners, L.P. and our operating subsidiaries.
The following discussion does not comment on all federal income
tax matters affecting us or our 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, foreign persons, individual retirement
accounts (IRAs), real estate investment trusts (REITs) or mutual
funds. In addition, the discussion only comments to a limited
extent on state, local and foreign tax consequences.
Accordingly, we encourage each prospective unitholder to
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 common units.
No ruling has been or will be requested from the IRS regarding
our characterization as a partnership for tax purposes. Instead,
we will rely on opinions of Latham & Watkins LLP.
Unlike a ruling, an opinion of counsel represents only that
counsels best legal judgment and does not bind the IRS or
the courts. Accordingly, the opinions and statements made herein
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 common units and the prices at which
common units trade. In addition, the costs of any contest with
the IRS, principally legal, accounting and related fees, will
result in a reduction in cash available for distribution to our
unitholders and our general partner and thus will be borne
indirectly by our unitholders and our 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.
All statements as to matters of federal income tax law and legal
conclusions with respect thereto, but not as to factual matters,
contained in this section, unless otherwise noted, are the
opinion of Latham & Watkins LLP and are based on the
accuracy of the representations made by us.
For the reasons described below, Latham & Watkins LLP
has not rendered an opinion with respect to the following
specific federal income tax issues: (1) the treatment of a
unitholder whose common units are loaned to a short seller to
cover a short sale of common units (please read
Tax Consequences of Unit
Ownership Treatment of Short Sales);
(2) whether our monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations
(please read Disposition of Common
Units Allocations Between Transferors and
Transferees); and (3) whether our method for
depreciating Section 743 adjustments is sustainable in
certain cases (please read Tax Consequences of
Unit Ownership Section 754 Election and
Uniformity 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 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 are generally not taxable to the
partnership or the partner unless the amount of cash distributed
to him is in excess of the partners adjusted basis in his
partnership interest.
50
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 transportation, storage, processing and
marketing of crude oil, natural gas and products thereof,
including the retail and wholesale marketing of propane, certain
hedging activities and the transportation of propane and natural
gas liquids. 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 capital assets held for the production of income
that otherwise constitutes qualifying income. We estimate that
less than 6% 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 our general partner and a review
of the applicable legal authorities, Latham & Watkins
LLP is of the opinion that at least 90% of our current gross
income constitutes qualifying income. The portion of our income
that is qualifying income may change from time to time.
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 for federal income tax purposes. Instead,
we will rely on the opinion of Latham & Watkins LLP on
such matters. It is the opinion of Latham & Watkins
LLP that, based upon the Internal Revenue Code, its Treasury
Regulations, published revenue rulings and court decisions and
the representations described below, we will be classified as a
partnership and each of our operating subsidiaries will, except
as otherwise provided, be disregarded as an entity separate from
us or will be treated as a partnership for federal income tax
purposes. In rendering its opinion, Latham & Watkins
LLP has relied on factual representations made by us and our
general partner. The representations made by us and our general
partner upon which Latham & Watkins LLP has relied
include:
(a) Except for Heritage Holdings, Inc., Energy Transfer del
Peru S.R.L., Heritage LP, Inc., Heritage Service Corp., M-P Oils
Ltd., Oasis Partner Company, Oasis Pipe Line Company, Oasis Pipe
Line Finance Company, Oasis Pipe Line Management Company and
Titan Propane Services, Inc., neither we nor any of our
operating entities are taxed as corporations or have elected or
will elect to be treated as a corporation;
(b) For each taxable year, more than 90% of our gross
income has been and will be income of the type that
Latham & Watkins LLP has opined or will opine is
qualifying income within the meaning of
Section 7704(d) of the Internal Revenue Code; and
(c) Each hedging transaction that we treat as resulting in
qualifying income has been and will be appropriately identified
as a hedging transaction pursuant to applicable Treasury
Regulations, and has been and will be associated with oil, gas,
or products thereof that are held or to be held by us in
activities of the type that Latham & Watkins LLP has
opined or will opine result in qualifying income.
We believe that these representations have been true in the past
and expect that these representations will be true in the future.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery (in which case
the IRS may also require us to make adjustments with respect to
our unitholders or pay other amounts) 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
deemed contribution and liquidation should be tax-free to
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 treated as a corporation for federal
income tax purposes.
If we were treated as an association 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 our unitholders, and
our net
51
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 and
accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of
the unitholders tax basis in his common units, or taxable
capital gain, after the unitholders tax basis in his
common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a
unitholders 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 Latham &
Watkins LLPs opinion that we will be classified as a
partnership for federal income tax purposes.
Limited
Partner Status
Unitholders who have become limited partners of Energy Transfer
Partners, L.P. will be treated as partners of Energy Transfer
Partners, L.P. 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 common 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 common units
will be treated as partners of Energy Transfer Partners, L.P.
for federal income tax purposes. As there is no direct or
indirect controlling authority addressing assignees of common
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, Latham & Watkins LLPs
opinion does not extend to these persons. Furthermore, a
purchaser or other transferee of common 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 common units unless the common units are held in a
nominee or street name account and the nominee or broker has
executed and delivered a transfer application for those common
units. A beneficial owner of common 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 appear to be fully taxable as ordinary income. These
holders are urged to consult their own tax advisors with respect
to their tax consequences of holding common units in Energy
Transfer Partners, L.P. The references to
unitholders in the discussion that follows are to
persons who are treated as partners in Energy Transfer Partners,
L.P., for federal income tax purposes.
Tax
Consequences of Unit Ownership
Flow-Through of Taxable Income. Subject
to the discussion below under Entity-Level
Collections, we will not pay any federal income tax.
Instead, each unitholder will be required to report on his
income tax return his share of our income, gains, losses and
deductions without regard to whether we make cash distributions
to 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. Our taxable year ends on
December 31.
Treatment of
Distributions. Distributions by us to a
unitholder generally will not be taxable to the unitholder for
federal income tax purposes, except to the extent the amount of
any such cash distribution exceeds his tax basis in his common
units immediately before the distribution. Our cash
distributions in excess of a unitholders tax basis
generally will be considered to be gain from the sale or
exchange of the common units, taxable in accordance with the
rules described under Disposition of Common
Units below. Any reduction in a unitholders 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
52
unitholder. To the extent our distributions cause a
unitholders 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 decrease in a unitholders percentage interest in us
because of our issuance of additional common units will decrease
his share of our nonrecourse liabilities, and thus will result
in a corresponding deemed distribution of cash. This deemed
distribution may constitute a non-pro rata distribution. A
non-pro rata distribution of money or property may result in
ordinary income to a unitholder, regardless of his tax basis in
his common units, if the distribution reduces the
unitholders 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 then 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 unitholders realization of
ordinary income, which will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the
unitholders tax basis (generally zero) for the share of
Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units. A
unitholders initial tax basis for his common units will be
the amount he paid for the common 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 unitholders
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 unitholder will have no share of
our debt that is recourse to our general partner, but will have
a share, generally based on his share of profits, of our
nonrecourse liabilities. Please read
Disposition of Common 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 estate,
trust, or a corporate unitholder (if more than 50% of the value
of the corporate unitholders stock is owned directly or
indirectly by or for 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 common
unitholder subject to these limitations 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 as a deduction to the extent that his at-risk amount
is subsequently increased, provided such losses do not exceed
such common unitholders tax basis in his common units.
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 loss previously
suspended by the at-risk limitation in excess of that gain would
no longer be 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 (i) any portion of that
basis representing amounts otherwise protected against loss
because of a guarantee, stop loss agreement or other similar
arrangement and (ii) 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 unitholders at risk
amount will increase or decrease as the tax basis of the
unitholders units increases or decreases, other than tax
basis increases or decreases attributable to increases or
decreases in his share of our nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, 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 trade or business
activities in which the taxpayer does not materially
participate, only to the extent of the taxpayers 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
53
investments or a unitholders investments in other publicly
traded partnerships, or salary or active business income.
Passive losses that are not deductible because they exceed a
unitholders 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 loss
limitations are applied after other applicable limitations on
deductions, including the at risk rules and the basis limitation.
A unitholders share of our net income may be offset by any
of our 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 taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders 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 or (if applicable)
qualified dividend income. The IRS has indicated that the net
passive income earned by a publicly traded partnership will be
treated as investment income to its unitholders. In addition,
the unitholders share of our portfolio income will be
treated as investment income.
Entity-Level Collections. If we
are required or elect under applicable law to pay any federal,
state, local or foreign income tax on behalf of any unitholder
or our 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
unitholder 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 our 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 our 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 unitholder in which event the
unitholder 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 our general partner and the unitholders in
accordance with their percentage interests in us. At any time
that distributions are made to the common units or incentive
distributions are made to our general partner, gross income will
be allocated to the recipients to the extent of these
distributions. If we have a net loss, that loss will be
allocated first to our general partner and the unitholders in
accordance with their percentage interests in us to the extent
of their positive capital accounts and, second, to our 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 our assets at the time of the
offering, referred to in this discussion as Contributed
Property. The effect of these allocations, referred to as
Section 704(c) Allocations, to a unitholder purchasing
common units from us in an offering will be essentially the same
as if the tax bases of our assets were equal to their fair
market value at the time of this offering. In the event we issue
additional common units or engage in certain other transactions
in the future reverse Section 704(c)
Allocations, similar to the Section 704(c)
Allocations described above, will be made to all holders of
partnership interests immediately prior to, or in conjunction
with, such other transactions to account for the difference
between the book basis for purposes of maintaining
capital accounts and the fair
54
market value of all property held by us at the time of such
issuance or future transaction. In addition, items of recapture
income will be allocated to the extent possible to the
unitholder 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 the Internal Revenue Code to eliminate the
difference between a partners book capital
account, credited with the fair market value of Contributed
Property, and tax capital account, credited with the
tax basis of Contributed Property, referred to in this
discussion as the Book-Tax Disparity, will generally
be given effect for federal income tax purposes in determining a
partners share of an item of income, gain, loss or
deduction only if the allocation has substantial economic
effect. In any other case, a partners 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:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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Latham & Watkins LLP is of the opinion that, with the
exception of the issues described in
Section 754 Election and
Disposition of Common Units
Allocations Between Transferors and Transferees,
allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partners
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 treated for tax
purposes as a partner with respect to those units during the
period of the loan and may recognize gain or loss from the
disposition. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Because there is no direct or indirect controlling authority on
the issue relating to partnership interests, Latham &
Watkins LLP has not rendered an opinion regarding the tax
treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units; therefore,
unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller
are urged to modify any applicable brokerage account agreements
to prohibit their brokers from loaning their units. The IRS has
previously announced that it is studying issues relating to the
tax treatment of short sales of partnership interests. Please
also read Disposition of Common
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
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 are
urged to consult with their tax advisors as to the impact of an
investment in units on their liability for the alternative
minimum tax.
Tax Rates. Under current law, the
highest marginal U.S. federal income tax rate applicable to
ordinary income of individuals is 35% and the highest marginal
U.S. federal income tax rate applicable to long-term
capital gains (generally, capital gains on certain assets held
for more than 12 months) of individuals is 15%. These rates
are subject to change by new legislation at any time or as a
result of sunset provisions.
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The recently-enacted Patient Protection and Affordable Care Act
of 2010, as amended by the Health Care and Education
Reconciliation Act of 2010, is scheduled to impose a 3.8%
Medicare tax on certain net investment income earned by
individuals, estates and trusts for taxable years beginning
after December 31, 2012. For these purposes, net investment
income generally includes a unitholders allocable share of
our income and gain recognized by a unitholder from a sale of
units. In the case of an individual, the tax will be imposed on
the lesser of (i) the unitholders net investment
income or (ii) the amount by which the unitholders
modified adjusted gross income exceeds $250,000 (if the
unitholder is married and filing jointly or a surviving spouse),
$125,000 (if the unitholder is married and filing separately) or
$200,000 (in any other case). In the case of an estate or trust,
the tax will be imposed on the lesser of (i) undistributed
net investment income or (ii) the excess adjusted gross
income over the dollar amount at which the highest income tax
bracket applicable to an estate or trust begins.
Section 754 Election. We have made
the election permitted by Section 754 of the Internal
Revenue Code. That election is irrevocable without the consent
of the IRS unless there is a constructive termination of the
partnership. Please read Disposition of Common
Units Constructive Termination. The election
will generally permit us to adjust a common unit
purchasers 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 common units directly from us. The
Section 743(b) adjustment belongs to the purchaser and not
to other unitholders. For purposes of this discussion, the
inside basis in our assets with respect to a unitholder 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.
Where the remedial allocation method is adopted (which we have
historically adopted as to all property other than certain
goodwill properties and which we will generally adopt as to all
properties going forward), the Treasury Regulations under
Section 743 of the Internal Revenue Code require a portion
of the Section 743(b) adjustment that is attributable to
recovery property under Section 168 of the Internal Revenue
Code whose book basis is in excess of its tax basis to be
depreciated over the remaining cost recovery period for the
propertys unamortized Book-Tax Disparity. 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, is generally required to be depreciated using
either the straightline method or the 150% declining balance
method. If we elect a method other than the remedial method, 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 inside basis in such properties. Under our
partnership agreement, our general partner is authorized to take
a position to preserve the uniformity of units even if that
position is not consistent with these and any other Treasury
Regulations. If we elect a method other than the remedial method
with respect to a goodwill property, the common basis of such
property is not amortizable. Please read
Uniformity of Units.
Although Latham & Watkins LLP is unable to opine as to
the validity of this approach because there is no direct or
indirect controlling authority on this issue, we intend to
depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of
Contributed Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived
from the depreciation or amortization method and useful life
applied to the propertys unamortized Book-Tax Disparity,
or treat that portion as
non-amortizable
to the extent attributable to property which is not amortizable.
This method is consistent with the methods employed by other
publicly traded partnerships but is arguably inconsistent with
Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets, and Treasury
Regulation Section 1.197-2(g)(3).
To the extent this 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 and legislative history.
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
56
than would otherwise be allowable to some unitholders. Please
read Uniformity of Units. A
unitholders tax basis for his common units is reduced by
his share of our deductions (whether or not such deductions were
claimed on an individuals income tax return) so that any
position we take that understates deductions will overstate the
common unitholders basis in his common units, which may
cause the unitholder to understate gain or overstate loss on any
sale of such units. Please read Disposition of
Common Units Recognition of Gain or Loss. The
IRS may challenge our position with respect to depreciating or
amortizing the Section 743(b) adjustment we take to
preserve the uniformity of the units. If such a challenge were
sustained, the gain from the sale of units might be increased
without the benefit of additional deductions.
A Section 754 election is advantageous if the
transferees 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 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
transferees 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. A basis adjustment is required regardless of
whether a Section 754 election is made in the case of a
transfer of an interest in us if we have a substantial built-in
loss immediately after the transfer, or if we distribute
property and have a substantial basis reduction. Generally a
built-in loss or a basis reduction is substantial if it exceeds
$250,000.
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 nonamortizable or 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.
Tax
Treatment of Operations
Accounting Method and Taxable Year. We
use the year ending December 31 as our taxable year and the
accrual method of accounting for federal income tax purposes.
Each unitholder will be required to include in income his share
of our income, gain, loss and deduction for our taxable year
ending within or with his taxable year. In addition, a
unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his 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 twelve months of our income, gain, loss
and deduction. Please read Disposition of
Common 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 an offering
will be borne by our partners holding an interest in us prior to
such 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, including bonus depreciation to the
extent available, that will result in the largest deductions
being taken in the early years after assets subject to these
allowances are placed in service. Please read
Uniformity of Units. Property
57
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
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 interest in us. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction and
Disposition of Common 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 syndication expenses.
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 and
determinations 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 Common 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 unitholders
tax basis for the units sold. A unitholders 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 unitholders 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 that in the aggregate were in excess
of cumulative net taxable income for a common unit and,
therefore, decreased a unitholders tax basis in that
common unit will, in effect, become taxable income if the common
unit is sold at a price greater than the unitholders tax
basis in that common 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 will generally be taxable as capital gain or
loss. Capital gain recognized by an individual on the sale of
units held for more than twelve months will generally be taxed
at favorable rates, currently a maximum U.S. federal income
tax rate of 15%. However, a portion of this gain or loss, which
will likely be substantial, 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. Capital losses 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 gains in the
case of corporations.
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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, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partners tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partners entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling discussed
above, a common unitholder will be unable to select high or low
basis common units to sell as would be the case with corporate
stock, but, according to the Treasury Regulations, may designate
specific common units sold for purposes of determining the
holding period of units transferred. A unitholder electing to
use the actual holding period of common units transferred must
consistently use that identification method for all subsequent
sales or exchanges of common units. A unitholder considering the
purchase of additional units or a sale of common units purchased
in separate transactions is urged to consult his tax advisor as
to the possible consequences of this ruling and application of
the Treasury Regulations.
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:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract;
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in each case, with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue 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, which we refer to in this
prospectus as 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.
Although simplifying conventions are contemplated by the
Internal Revenue Code and most publicly traded partnerships use
similar simplifying conventions, the use of this method may not
be permitted under existing Treasury Regulations as there is no
direct or indirect controlling authority on this issue.
Recently, the Department of the Treasury and the IRS issued
proposed Treasury Regulations that provide a safe harbor
pursuant to which a publicly traded partnership may use a
similar monthly simplifying convention to allocate tax items
among transferor and transferee unitholders, although such tax
items must be prorated on a daily basis. Existing publicly
traded partnerships are entitled to rely on these proposed
Treasury Regulations; however, they are not binding on the IRS
and are subject to change until final Treasury Regulations are
issued. Accordingly, Latham & Watkins LLP is unable to
opine on the validity of this method of allocating income and
deductions between transferor and transferee unitholders because
the issue has not been finally resolved by the IRS or the
courts. If this method is not allowed under the Treasury
Regulations, or only applies to
59
transfers of less than all of the unitholders interest,
our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of
allocation between transferor and transferee unitholders, as
well as unitholders whose interests vary during a taxable year,
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 any of his units is generally required to notify us in
writing of that sale within 30 days after the sale (or, if
earlier, January 15 of the year following the sale). A purchaser
of units who purchases units from another unitholder is also
generally required to notify us in writing of that purchase
within 30 days after the purchase. Upon receiving such
notifications, we are required to notify the IRS of that
transaction and to furnish specified information to the
transferor and transferee. Failure to notify us of a purchase
may, in some cases, lead to the imposition of penalties.
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 who will satisfy
such requirements.
Technical Termination. We will be
considered to have been terminated for tax purposes if there are
sales or exchanges which, in the aggregate, constitute 50% or
more of the total interests in our capital and profits within a
twelve-month period. For purposes of measuring whether the 50%
threshold is reached, multiple sales of the same interest are
counted only once. A technical 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. A technical termination occurring on a date other
than December 31 will result in us filing two tax returns (and
unitholders could receive two Schedules K-1 if the relief
discussed below is not available) for one fiscal year and the
cost of the preparation of these returns will be borne by all
common unitholders. We would be required to make new tax
elections after a technical termination, including a new
election under Section 754 of the Internal Revenue Code,
and a technical termination would result in a deferral of our
deductions for depreciation. A technical termination could also
result in penalties if we were unable to determine that the
termination had occurred. Moreover, a technical termination
might either accelerate the application of, or subject us to,
any tax legislation enacted before the termination. The IRS has
recently announced a publicly traded partnership technical
termination relief program whereby, if a publicly traded
partnership that technically terminated requests publicly traded
partnership technical termination relief and such relief is
granted by the IRS, among other things, the partnership will
only have to provide one
Schedule K-1
to unitholders for the year notwithstanding two partnership tax
years.
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 a literal
application of Treasury
Regulation Section 1.167(c)-1(a)(6)
and Treasury
Regulation Section 1.197-2(g)(3).
Any non-uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of
Unit Ownership Section 754 Election.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the propertys unamortized Book-Tax
Disparity, or treat that portion as nonamortizable, to the
extent attributable to property the common basis of which is not
amortizable, consistent with the Treasury Regulations under
Section 743 of the Internal Revenue Code, even though that
position may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material
60
portion of our assets, and Treasury
Regulation Section 1.197-2(g)(3).
Please read Tax Consequences of Unit
Ownership Section 754 Election. To the
extent that the 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 and legislative history. 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. In either
case, and as stated above under Tax
Consequences of Unit Ownership Section 754
Election, Latham & Watkins LLP has not rendered
an opinion with respect to these methods. Moreover, 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 Common Units
Recognition of Gain or Loss.
Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations and
other foreign persons raises issues unique to those investors
and, as described to a limited extent below, may have
substantially adverse tax consequences to them. If you are a
tax-exempt entity or a
non-U.S. person,
you should consult your tax advisor before investing in our
common units.
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 that is a tax-exempt organization will
be unrelated business taxable income and will be taxable to it.
Non-resident aliens and foreign corporations, or beneficiaries
of 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. Moreover, under
rules applicable to publicly traded partnerships, we will
withhold at the highest applicable effective tax rate 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-8BEN
or applicable substitute form in order to obtain credit for
these withholding taxes. A change in applicable law may require
us to change these procedures.
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 earnings and profits, as adjusted for
changes in the foreign corporations U.S. net
equity, that is 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.
A foreign unitholder who sells or otherwise disposes of a common
unit will be subject to U.S. federal income tax on gain
realized from the sale or disposition of that unit to the extent
the gain is effectively connected with a U.S. trade or
business of the foreign unitholder. Under a ruling published by
the IRS, interpreting the scope of effectively connected
income, a foreign unitholder would be considered to be
engaged in a trade or business in the U.S. by virtue of the
U.S. activities of the partnership, and part or all of
61
that unitholders gain would be effectively connected with
that unitholders indirect U.S. trade or business.
Moreover, under the Foreign Investment in Real Property Tax Act,
a foreign common unitholder generally will be subject to
U.S. federal income tax upon the sale or disposition of a
common unit if (i) he owned (directly or constructively
applying certain attribution rules) more than 5% of our common
units at any time during the five-year period ending on the date
of such disposition and (ii) 50% or more of the fair market
value of all of our assets consisted of U.S. real property
interests at any time during the shorter of the period during
which such unitholder held the common units or the
5-year
period ending on the date of disposition. Currently, more than
50% of our assets consist of U.S. real property interests
and we do not expect that to change in the foreseeable future.
Therefore, foreign unitholders may be subject to federal income
tax on gain from the sale or disposition of their units.
Administrative
Matters
Information Returns and Audit
Procedures. We intend to furnish to each
unitholder, within 90 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 each unitholders
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, Treasury Regulations
or administrative interpretations of the IRS. Neither we nor
Latham & Watkins LLP 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 years tax liability, and possibly may
result in an audit of his return. Any audit of a
unitholders 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. Our partnership agreement names our general partner as
our Tax Matters Partner.
The Tax Matters Partner will make some 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 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;
62
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 dispositions.
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.
Accuracy-Related Penalties. An
additional tax equal to 20% of the amount of any portion of an
underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or
regulations, substantial understatements of income tax and
substantial valuation misstatements, is imposed by the 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.
For individuals, 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. 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.
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 and to
take other actions as may be appropriate to permit unitholders
to avoid liability for this penalty. More stringent rules apply
to tax shelters, which we do not believe includes
us, or any of our investments, plans or arrangements.
A substantial valuation misstatement exists if (a) the
value of any property, or the adjusted tax basis of any
property, claimed on a tax return is 150% or more of the amount
determined to be the correct amount of the valuation or adjusted
tax basis, (b) the price for any property or services (or
for the use of property) claimed on any such return with respect
to any transaction between persons described in Internal Revenue
Code Section 482 is 200% or more (or 50% or less) of the
amount determined under Section 482 to be the correct
amount of such price, or (c) the net Internal Revenue
Code Section 482 transfer price adjustment for the taxable
year exceeds the lesser of $5 million or 10% of the
taxpayers gross receipts. 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 200% or
more of the correct valuation or certain other thresholds are
met, the penalty imposed increases to 40%. We do not anticipate
making any valuation misstatements.
In addition, the 20% accuracy-related penalty also applies to
any portion of an underpayment of tax that is attributable to
transactions lacking economic substance. To the
extent that such transactions are not disclosed, the penalty
imposed is increased to 40%. Additionally, there is no
reasonable cause defense to the imposition of this penalty to
such transactions.
Reportable Transactions. If we were to
engage in a reportable transaction, we (and possibly
you and others) would be required to make a detailed disclosure
of the transaction to the IRS. A transaction may be a
63
reportable transaction based upon any of several factors,
including the fact that it is a type of tax avoidance
transaction publicly identified by the IRS as a listed
transaction or that it produces certain kinds of losses
for partnerships, individuals, S corporations, and trusts
in excess of $2 million in any single year, or
$4 million in any combination of 6 successive tax years.
Our participation in a reportable transaction could increase the
likelihood that our federal income tax information return (and
possibly your tax return) would be audited by the IRS. Please
read Information Returns and Audit
Procedures.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
additional consequences:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related
Penalties,
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
State,
Local, Foreign and Other Tax Considerations
In addition to federal income taxes, you likely will be subject
to other taxes, such as state, local and foreign income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various
jurisdictions in which we conduct 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. We
currently own property or conduct business in more than
40 states. Most of these states impose an income tax on
individuals, corporations and other entities. We may also own
property or do business in other jurisdictions in the future.
Although you may not be required to file a return and pay taxes
in some jurisdictions because your income from that jurisdiction
falls below the filing and payment requirement, you will be
required to file income tax returns and to pay income taxes in
many of these jurisdictions in which we do business or own
property and may be subject to penalties for failure to comply
with those requirements. In some jurisdictions, tax losses may
not produce a tax benefit in the year incurred and may not be
available to offset income in subsequent taxable years. Some of
the jurisdictions 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 jurisdiction.
Withholding, the amount of which may be greater or less than a
particular unitholders income tax liability to the
jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will 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. Based
on current law and our estimate of our future operations, our
general partner anticipates that any amounts required to be
withheld will not be material.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local and foreign, as well as United States federal tax
returns, that may be required of him. Latham & Watkins
LLP has not rendered an opinion on the state, local or foreign
tax consequences of an investment in us.
64
INVESTMENTS
IN US BY EMPLOYEE BENEFIT PLANS
An investment in our units or debt securities 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, or ERISA, and restrictions imposed by Section 4975
of the Internal Revenue Code of 1986, as amended, or the Code,
and provisions under any federal, state, local,
non-U.S. or
other laws or regulations that are similar to such provisions of
the Internal Revenue Code or ERISA, which we refer to
collectively as Similar Laws. 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 or other
arrangements established or maintained by an employer or
employee organization, and entities whose underlying assets are
considered to include plan assets of such plans,
accounts and arrangements.
General
Fiduciary Matters
ERISA and the Code impose certain duties on persons who are
fiduciaries of an employee benefit plan that is subject to
Title I of ERISA or Section 4975 of the Code, which we
refer to as an ERISA Plan, and prohibit certain transactions
involving the assets of an ERISA Plan and its fiduciaries or
other interested parties. Under ERISA and the Code, any person
who exercises any discretionary authority or control over the
administration of such an ERISA Plan or the management or
disposition of the assets of such an ERISA Plan, or who renders
investment advice for a fee or other compensation to such an
ERISA Plan, is generally considered to be a fiduciary of the
ERISA Plan. In considering an investment in our units or debt
securities, among other things, consideration should be given to
(a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA and any other applicable
Similar Laws; (b) whether in making such investment, such
plan will satisfy the diversification requirement of
Section 404(a)(1)(C) of ERISA and any other applicable
Similar Laws; (c) whether making such an investment will
comply with the delegation of control and prohibited transaction
provisions of ERISA, the Code and any other applicable Similar
Laws. and (d) 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 Material Federal Income Tax Considerations. The
person with investment discretion with respect to the assets of
an employee benefit plan, which we refer to as a fiduciary,
should determine whether an investment in our units or debt
securities is authorized by the appropriate governing instrument
and is a proper investment for such plan.
Prohibited
Transaction Issues
Section 406 of ERISA and Section 4975 of the 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 Code with respect to the plan, unless an exemption is
available. A party in interest or disqualified person who
engages in a non-exempt prohibited transaction may be subject to
excise taxes and other penalties and liabilities under ERISA and
the Code. In addition, the fiduciary of the ERISA Plan that
engaged in such a non-exempt prohibited transaction may be
subject to penalties and liabilities under ERISA and the Code.
The acquisition
and/or
holding of the common units or debt securities by an ERISA Plan
with respect to which we or the initial purchasers are
considered a party in interest or a disqualified person, may
constitute or result in a direct or indirect prohibited
transaction under Section 406 of ERISA
and/or
Section 4975 of the Code, unless the common units or debt
securities are acquired and held in accordance with an
applicable statutory, class or individual prohibited transaction
exemption. In this regard, the U.S. Department of Labor has
issued prohibited transaction class exemptions, or PTCEs, that
may apply to the acquisition, holding and, if applicable,
conversion of the common units or debt securities. These class
exemptions include, without limitation,
PTCE 84-14
respecting transactions determined by independent qualified
professional asset managers,
PTCE 90-1
respecting insurance company pooled separate accounts,
PTCE 91-38
respecting bank collective investment funds,
PTCE 95-60
respecting life insurance company general accounts and
PTCE 96-23
respecting transactions determined by in-house asset managers.
There can be no assurance that all of the conditions of any such
exemptions will be satisfied.
65
Because of the foregoing, the common units or debt securities
should not be purchased or held (or converted to equity
securities, in the case of any convertible debt) by any person
investing plan assets of any employee benefit plan,
unless such purchase and holding (or conversion, if any) will
not constitute a non-exempt prohibited transaction under ERISA
and the Code or similar violation of any applicable Similar Laws.
Representation
Accordingly, by acceptance of the common units or debt
securities, each purchaser and subsequent transferee of the
common units or debt securities will be deemed to have
represented and warranted that either (i) no portion of the
assets used by such purchaser or transferee to acquire and hold
the common units or debt securities constitutes assets of any
employee benefit plan or (ii) the purchase and holding (and
any conversion, if applicable) of the common units or debt
securities by such purchaser or transferee will not constitute a
non-exempt prohibited transaction under Section 406 of
ERISA or Section 4975 of the Code or similar violation
under any applicable Similar Laws.
Plan
Asset Issues
In addition to considering whether the purchase of our limited
partnership units or debt securities is a prohibited
transaction, a fiduciary of an employee benefit plan should
consider whether such plan will, by investing in our units or
debt securities, be deemed to own an undivided interest in our
assets, with the result that our 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 Code and any other applicable Similar Laws.
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 entitys 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
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 (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 our
general partner, its affiliates and certain other persons) is
held by the employee benefit plans that are subject to
part 4 of Title I of ERISA (which excludes
governmental plans and non-electing church plans) and/or
Section 4975 of the Code, IRAs and certain other employee
benefit plans not subject to ERISA (such as electing church
plans). With respect to an investment in our units, 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) above (although we do
not monitor the level of benefit plan investors as required for
compliance with (c)). With respect to an investment in our debt
securities, our assets should not be considered plan
assets under these regulations because such securities are
not equity securities or, even if they are considered to be
equity securities for purposes of the Department of Labor
Regulations, the investment will be expected to satisfy one or
both of the requirements in (a) and (b) above.
The foregoing discussion of issues arising for employee benefit
plan investments under ERISA, the Code and Similar Laws should
not be construed as legal advice. Plan fiduciaries contemplating
a purchase of our limited partnership units or debt securities
should consult with their own counsel regarding the consequences
under ERISA, the Code and other Similar Laws in light of the
serious penalties imposed on persons who engage in prohibited
transactions or other violations.
66
LEGAL
MATTERS
The validity of the securities offered in this prospectus will
be passed upon for us by Latham & Watkins LLP,
Houston, Texas. Latham & Watkins LLP will also render
an opinion on the material federal income tax considerations
regarding the securities. If certain legal matters in connection
with an offering of the securities made by this prospectus and a
related prospectus supplement are passed on by counsel for the
underwriters of such offering, that counsel will be named in the
applicable prospectus supplement related to that offering.
EXPERTS
The audited consolidated financial statements and
managements assessment of the effectiveness of internal
control over financial reporting of Energy Transfer Partners,
L.P. and the audited consolidated balance sheets of Energy
Transfer Partners GP, L.P. and Energy Transfer Partners, L.L.C.,
all incorporated by reference in this prospectus, have been so
incorporated by reference in reliance upon the reports of Grant
Thornton LLP, independent registered public accountants, upon
the authority of said firm as experts in giving said reports.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC under the
Securities Act of 1933 that registers the securities offered by
this prospectus. The registration statement, including the
attached exhibits, contains additional relevant information
about us. The rules and regulations of the SEC allow us to omit
some information included in the registration statement from
this prospectus.
In addition, we file annual, quarterly and other reports and
other information with the SEC. You may read and copy any
document we file at the SECs public reference room at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-732-0330
for further information on the operation of the SECs
public reference room. Our SEC filings are available on the
SECs web site at
http://www.sec.gov.
We also make available free of charge on our website, at
http://www.energytransfer.com,
all materials that we file electronically with the SEC,
including our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
Section 16 reports and amendments to these reports as soon
as reasonably practicable after such materials are
electronically filed with, or furnished to, the SEC.
Additionally, you can obtain information about us through the
New York Stock Exchange, 20 Broad Street, New York, New
York 10005, on which our common units are listed.
The SEC allows us to incorporate by reference the
information we have filed with the SEC. This means that we can
disclose important information to you without actually including
the specific information in this prospectus by referring you to
other documents filed separately with the SEC. These other
documents contain important information about us, our financial
condition and results of operations. The information
incorporated by reference is an important part of this
prospectus. Information that we file later with the SEC will
automatically update and may replace information in this
prospectus and information previously filed with the SEC.
We incorporate by reference in this prospectus the documents
listed below:
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our annual report on
Form 10-K
for the year ended December 31, 2009;
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our quarterly reports on
Form 10-Q
for the quarters ended March 31, 2010, June 30, 2010
(as amended by the Form 10-Q/A filed on September 7, 2010, which
is also incorporated by reference herein) and September 30,
2010;
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our current reports on
Forms 8-K
filed January 8, 2010, January 28, 2010,
April 29, 2010, May 11, 2010 (as amended by the Form
8-K/A filed on May 13, 2010, which was amended by the Form
8-K/A filed on June 2, 2010, each of which is also
incorporated by reference herein), July 29, 2010,
August 10, 2010, August 20, 2010, October 28,
2010, December 7, 2010 and December 8, 2010;
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the description of our common units in our registration
statement on
Form 8-A
(File
No. 1-11727)
filed pursuant to the Securities Exchange Act of 1934 on
May 16, 1996; and
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67
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all documents filed by us under Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 between the date
of this prospectus and the termination of the registration
statement.
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You may obtain any of the documents incorporated by reference in
this prospectus from the SEC through the SECs website at
the address provided above. You also may request a copy of any
document incorporated by reference in this prospectus (including
exhibits to those documents specifically incorporated by
reference in this document), at no cost, by visiting our
internet website at www.energytransfer.com, or by writing or
calling us at the following address:
Energy
Transfer Partners, L.P.
3738 Oak Lawn Avenue
Dallas, TX 75219
Attention: Thomas P. Mason
Telephone:
(214) 981-0700
68
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
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Item 14.
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Other
Expenses of Issuance and Distribution
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Set forth below are the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered
hereby. With the exception of the Securities and Exchange
Commission registration fee, the amounts set forth below are
estimates:
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Securities and Exchange Commission registration fee
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*
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Legal fees and expenses
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**
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Accounting fees and expenses
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**
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Printing and engraving expenses
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**
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Miscellaneous
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**
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Total
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$
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**
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* |
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The registrant is deferring payment of the registration fee in
reliance on Rule 456(b) and Rule 457(r). |
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These fees are calculated based on the number of issuances and
amount of securities offered and accordingly cannot be estimated
at this time. |
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Item 15.
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Indemnification
of Directors and Officers
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Energy Transfer Partners, L.P. is a partnership organized under
the laws of the State of Delaware. The partnership agreement of
Energy Transfer Partners, L.P. provides that the partnership
will indemnify (i) its general partner, any departing
partner (as defined therein), any person who is or was an
affiliate of its general partner or any departing partner,
(ii) any person who is or was a director, officer,
employee, agent or trustee of the partnership, (iii) any
person who is or was an officer, director, employee, agent or
trustee of its general partner or any departing partner or any
affiliate of its general partner or any departing partner, or
(iv) any person who is or was serving at the request of its
general partner or any departing partner or any affiliate of its
general partner or any departing partner as an officer,
director, employee, partner, agent, fiduciary or trustee of
another person (each, an Indemnitee), to the fullest
extent permitted by law, from and against any and all losses,
claims, damages, liabilities (joint and several), expenses
(including, without limitation, legal fees and expenses),
judgments, fines, penalties, interest, settlements and other
amounts arising from any and all claims, demands, actions, suits
or proceedings, whether civil, criminal, administrative or
investigative, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of
its status as any of the foregoing; provided that in each case
the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or not opposed to the
best interests of the partnership and, with respect to any
criminal proceeding, had no reasonable cause to believe its
conduct was unlawful. Any indemnification under these provisions
will be only out of the assets of the partnership, and the
general partner shall not be personally liable for, or have any
obligation to contribute or loan funds or assets to each
applicable partnership to enable it to effectuate, such
indemnification. Energy Transfer Partners, L.P. is authorized to
purchase (or to reimburse the general partner or its affiliates
for the cost of) insurance against liabilities asserted against
and expenses incurred by such persons in connection with each of
the partnerships activities, regardless of whether each of
the applicable partnerships would have the power to indemnify
such person against such liabilities under the provisions
described above.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, or the Act, may be permitted
to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
II-1
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Item 16.
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Exhibits
and Financial Statement Schedules
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(a) Exhibits
The following documents are filed as exhibits to this
registration:
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Exhibit
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Number
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Description
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1
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.1
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Form of Underwriting Agreement.(**)
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4
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.1
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Registration Rights Agreement for Limited Partner Interests of
Heritage Propane Partners, L.P.(1)
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4
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.2
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Unitholder Rights Agreement dated January 20, 2004 among
Heritage Propane Partners, L.P., Heritage Holdings, Inc., TAAP
LP and La Grange Energy, L.P.(2)
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4
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.3
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Indenture dated January 18, 2005 among Energy Transfer
Partners, L.P., the subsidiary guarantors named therein and
Wachovia Bank, National Association, as trustee.(3)
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4
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.4
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First Supplemental Indenture dated January 18, 2005, among
Energy Transfer Partners, L.P., the subsidiary guarantors named
therein and Wachovia Bank, National Association, as trustee.(4)
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4
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.5
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Second Supplemental Indenture dated as of February 24, 2005
to Indenture dated as of January 18, 2005, among Energy
Transfer Partners, L.P., the subsidiary guarantors named therein
and Wachovia Bank, National Association, as trustee.(5)
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4
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.9
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Third Supplemental Indenture dated as of July 29, 2005 to
Indenture dated January 18, 2005, among Energy Transfer
Partners, L.P., the subsidiary guarantors named therein and
Wachovia Bank, National Association, as trustee.(6)
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4
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.11
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Form of Senior Indenture of Energy Transfer Partners, L.P.(7)
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4
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.12
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Form of Subordinated Indenture of Energy Transfer Partners,
L.P.(7)
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4
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.13
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Fourth Supplemental Indenture dated as of June 29, 2006 to
Indenture dated January 18, 2005, among Energy Transfer
Partners, L.P., the subsidiary guarantors named therein and
Wachovia Bank, National Association, as trustee.(8)
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4
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.14
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Fifth Supplemental Indenture dated as of October 23, 2006
to Indenture dated January 18, 2005, among Energy Transfer
Partners, L.P., the subsidiary guarantors named therein and
Wachovia Bank, National Association, as trustee.(9)
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4
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.15
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Sixth Supplemental Indenture dated March 28, 2008, by and
between Energy Transfer Partners, L.P., as issuer, and U.S. Bank
National Association (as successor to Wachovia Bank, National
Association), as trustee.(10)
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4
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.16
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Seventh Supplemental Indenture dated December 23, 2008, by
and between Energy Transfer Partners, L.P., as issuer, and U.S.
Bank National Association (as successor to Wachovia Bank,
National Association), as trustee.(11)
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4
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.16.1
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Eighth Supplemental Indenture dated April 7, 2009, by and
between Energy Transfer Partners, L.P., as issuer, and U.S. Bank
National Association (as successor to Wachovia Bank, National
Association), as trustee.(12)
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4
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.17
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Registration Rights Agreement, dated November 1, 2006,
between Energy Transfer Partners, L.P. and Energy Transfer
Equity, L.P.(13)
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4
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.18
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Form of Debt Security.(**)
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5
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.1
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Opinion of Latham & Watkins LLP as to the legality of
the securities registered hereby.(*)
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8
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.1
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Opinion of Latham & Watkins LLP as to tax matters.(*)
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12
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.1
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Statement Regarding Computation of Ratios.(*)
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23
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.1
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Consent of Grant Thornton LLP.(*)
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24
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.1
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Powers of Attorney (included on the signature pages of this
registration statement).(*)
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25
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.1
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Form T-1
Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 of the Trustee under the Senior
Indenture.(*)
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* |
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Filed herewith. |
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** |
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To be filed by
8-K. |
II-2
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(1) |
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Incorporated by reference to the same numbered Exhibit to the
Registrants
Form 8-K
filed February 13, 2002. |
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(2) |
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Incorporated by reference as the same numbered exhibit to the
Registrants
Form 10-Q
for the quarter ended February 29, 2004. |
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(3) |
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Incorporated by reference to Exhibit 4.1 to the
Registrants
Form 8-K
filed January 19, 2005. |
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(4) |
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Incorporated by reference to Exhibit 4.2 to the
Registrants
Form 8-K
filed January 19, 2005. |
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(5) |
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Incorporated by reference to Exhibit 10.45 to the
Registrants Form
10-Q for the
quarter ended February 28, 2005. |
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(6) |
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Incorporated by reference to Exhibit 4.1 to the
Registrants
Form 8-K
filed August 2, 2005. |
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(7) |
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Incorporated by reference to the same numbered exhibit to the
Registrants Form
S-3 filed
August 9, 2006. |
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(8) |
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Incorporated by reference to the same numbered exhibit to the
Registrants
Form 10-K
for the year ended August 31, 2006. |
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(9) |
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Incorporated by reference to Exhibit 4.1 to the
Registrants
Form 8-K
filed October 25, 2006. |
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(10) |
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Incorporated by reference to Exhibit 4.2 to the
Registrants
Form 8-K
filed March 31, 2008. |
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(11) |
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Incorporated by reference to Exhibit 4.2 to the
Registrants
Form 8-K
filed December 23, 2008. |
|
(12) |
|
Incorporated by reference to Exhibit 4.2 to the
Registrants
Form 8-K
filed April 9, 2009. |
|
(13) |
|
Incorporated by reference to Exhibit 10.1 to the
Registrants
Form 8-K
filed November 3, 2006. |
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i), (a)(1)(ii)
and (a)(1)(iii) above do not apply if the registration statement
is on
Form S-3
and the information required to be included in a post-effective
amendment by those paragraphs is contained in reports filed with
or furnished to the Securities and Exchange Commission by the
registrant pursuant to section 13 or section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement, or is contained in a
form of prospectus filed pursuant to Rule 424(b) that is
part of the registration statement.
2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
4. That, for the purpose of determining liability under the
Securities Act of 1933 to any purchaser:
(i) Each prospectus filed by the registrant pursuant to
Rule 424(b)(3) shall be deemed to be part of the
registration statement as of the date the filed prospectus was
deemed part of and included in the registration
statement; and
(ii) Each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration
statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(i), (vii), or (x) for
the purpose of providing the information required by
section 10(a) of the Securities Act of 1933 shall be deemed
to be part of and included in the registration statement as of
the earlier of the date such form of prospectus is first used
after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date
shall be deemed to be a new effective date of the registration
statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is
part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or
made in any such document immediately prior to such effective
date.
5. That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
6. For purposes of determining any liability under the
Securities Act of 1933, each filing of the registrants
annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plans
annual report pursuant to section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
7. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any
II-4
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
8. To file an application for the purpose of determining
the eligibility of the trustee under subsection (a) of
Section 310 of the Trust Indenture Act
(Act) in accordance with the rules and regulations
prescribed by the Securities and Exchange Commission under
Section 305(b)(2) of the Act.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions set forth in response to Item 15, or
otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, each of the signatories hereto certifies that it has
reasonable grounds to believe that it meets all of the
requirements for filing this Registration Statement on
Form S-3
and has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on January 13, 2011.
ENERGY TRANSFER PARTNERS, L.P.
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By:
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Energy Transfer Partners GP, L.P.
Its: General Partner
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By:
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Energy Transfer Partners, L.L.C.
Its: General Partner
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By:
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/s/ Martin
Salinas, Jr.
|
Name: Martin Salinas, Jr.
Title: Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Martin
Salinas, Jr. and Thomas P. Mason, and each of them, his true and
lawful attorney-in-fact and agents, with full power to act
without the other, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same with all exhibits thereto and any and all other
documents in connection therewith, with the Securities and
Exchange Commission and any national exchange or self regulatory
agency, and to do and perform any and all acts and things
requisite and necessary to be done in connection with the
foregoing as fully as he might or could do in person hereby
ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities indicated on the dates indicated:
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Signature
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Title
|
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Date
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/s/ Kelcy
L. Warren
Kelcy
L. Warren
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Chief Executive Officer
(Principal Executive Officer),
Chairman of the Board of Directors
of Energy Transfer Partners, L.L.C.
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January 13, 2011
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/s/ Martin
Salinas, Jr.
Martin
Salinas, Jr.
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Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
of Energy Transfer Partners, L.L.C.
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January 13, 2011
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/s/ Marshall
S. McCrea, III
Marshall
S. McCrea, III
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President, Chief Operating
Officer and Director
of Energy Transfer Partners, L.L.C.
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January 13, 2011
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/s/ Ray
C. Davis
Ray
C. Davis
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Director of
Energy Transfer Partners, L.L.C.
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January 13, 2011
|
II-6
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Signature
|
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Title
|
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Date
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/s/ Bill
W. Byrne
Bill
W. Byrne
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Director of
Energy Transfer Partners, L.L.C.
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January 13, 2011
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/s/ David
R. Albin
David
R. Albin
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Director of
Energy Transfer Partners, L.L.C.
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January 13, 2011
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/s/ Paul
E. Glaske
Paul
E. Glaske
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Director of
Energy Transfer Partners, L.L.C.
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January 13, 2011
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/s/ K.
Rick Turner
K.
Rick Turner
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Director of
Energy Transfer Partners, L.L.C.
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January 13, 2011
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/s/ Ted
Collins, Jr.
Ted
Collins, Jr.
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Director of
Energy Transfer Partners, L.L.C.
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January 13, 2011
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/s/ Michael
K. Grimm
Michael
K. Grimm
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Director of
Energy Transfer Partners, L.L.C.
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January 13, 2011
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II-7
INDEX TO
EXHIBITS
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Exhibit
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Number
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|
Description
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1
|
.1
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Form of Underwriting Agreement.(**)
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4
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.1
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Registration Rights Agreement for Limited Partner Interests of
Heritage Propane Partners, L.P.(1)
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4
|
.2
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Unitholder Rights Agreement dated January 20, 2004 among
Heritage Propane Partners, L.P., Heritage Holdings, Inc., TAAP
LP and La Grange Energy, L.P.(2)
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4
|
.3
|
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Indenture dated January 18, 2005 among Energy Transfer
Partners, L.P., the subsidiary guarantors named therein and
Wachovia Bank, National Association, as trustee.(3)
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|
4
|
.4
|
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First Supplemental Indenture dated January 18, 2005, among
Energy Transfer Partners, L.P., the subsidiary guarantors named
therein and Wachovia Bank, National Association, as trustee.(4)
|
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4
|
.5
|
|
Second Supplemental Indenture dated as of February 24, 2005
to Indenture dated as of January 18, 2005, among Energy
Transfer Partners, L.P., the subsidiary guarantors named therein
and Wachovia Bank, National Association, as trustee.(5)
|
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4
|
.9
|
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Third Supplemental Indenture dated as of July 29, 2005 to
Indenture dated January 18, 2005, among Energy Transfer
Partners, L.P., the subsidiary guarantors named therein and
Wachovia Bank, National Association, as trustee.(6)
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4
|
.11
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Form of Senior Indenture of Energy Transfer Partners, L.P.(7)
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4
|
.12
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Form of Subordinated Indenture of Energy Transfer Partners,
L.P.(7)
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4
|
.13
|
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Fourth Supplemental Indenture dated as of June 29, 2006 to
Indenture dated January 18, 2005, among Energy Transfer
Partners, L.P., the subsidiary guarantors named therein and
Wachovia Bank, National Association, as trustee.(8)
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4
|
.14
|
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Fifth Supplemental Indenture dated as of October 23, 2006
to Indenture dated January 18, 2005, among Energy Transfer
Partners, L.P., the subsidiary guarantors named therein and
Wachovia Bank, National Association, as trustee.(9)
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4
|
.15
|
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Sixth Supplemental Indenture dated March 28, 2008, by and
between Energy Transfer Partners, L.P., as issuer, and U.S. Bank
National Association (as successor to Wachovia Bank, National
Association), as trustee.(10)
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4
|
.16
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Seventh Supplemental Indenture dated December 23, 2008, by
and between Energy Transfer Partners, L.P., as issuer, and U.S.
Bank National Association (as successor to Wachovia Bank,
National Association), as trustee.(11)
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4
|
.16.1
|
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Eighth Supplemental Indenture dated April 7, 2009, by and
between Energy Transfer Partners, L.P., as issuer, and U.S. Bank
National Association (as successor to Wachovia Bank, National
Association), as trustee.(12)
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4
|
.17
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Registration Rights Agreement, dated November 1, 2006,
between Energy Transfer Partners, L.P. and Energy Transfer
Equity, L.P.(13)
|
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4
|
.18
|
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Form of Debt Security.(**)
|
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5
|
.1
|
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Opinion of Latham & Watkins LLP as to the legality of
the securities registered hereby.(*)
|
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8
|
.1
|
|
Opinion of Latham & Watkins LLP as to tax matters.(*)
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12
|
.1
|
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Statement Regarding Computation of Ratios.(*)
|
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23
|
.1
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Consent of Grant Thornton LLP.(*)
|
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24
|
.1
|
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Powers of Attorney (included on the signature pages of this
registration statement).(*)
|
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25
|
.1
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Form T-1
Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 of the Trustee under the Senior
Indenture.(*)
|
|
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* |
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Filed herewith. |
|
** |
|
To be filed by
8-K. |
|
(1) |
|
Incorporated by reference to the same numbered Exhibit to the
Registrants
Form 8-K
filed February 13, 2002. |
|
(2) |
|
Incorporated by reference as the same numbered exhibit to the
Registrants
Form 10-Q
for the quarter ended February 29, 2004. |
|
|
|
(3) |
|
Incorporated by reference to Exhibit 4.1 to the
Registrants
Form 8-K
filed January 19, 2005. |
|
(4) |
|
Incorporated by reference to Exhibit 4.2 to the
Registrants
Form 8-K
filed January 19, 2005. |
|
(5) |
|
Incorporated by reference to Exhibit 10.45 to the
Registrants Form
10-Q for the
quarter ended February 28, 2005. |
|
(6) |
|
Incorporated by reference to Exhibit 4.1 to the
Registrants
Form 8-K
filed August 2, 2005. |
|
(7) |
|
Incorporated by reference to the same numbered exhibit to the
Registrants Form
S-3 filed
August 9, 2006. |
|
(8) |
|
Incorporated by reference to the same numbered exhibit to the
Registrants
Form 10-K
for the year ended August 31, 2006. |
|
(9) |
|
Incorporated by reference to Exhibit 4.1 to the
Registrants
Form 8-K
filed October 25, 2006. |
|
(10) |
|
Incorporated by reference to Exhibit 4.2 to the
Registrants
Form 8-K
filed March 31, 2008. |
|
(11) |
|
Incorporated by reference to Exhibit 4.2 to the
Registrants
Form 8-K
filed December 23, 2008. |
|
(12) |
|
Incorporated by reference to Exhibit 4.2 to the
Registrants
Form 8-K
filed April 9, 2009. |
|
(13) |
|
Incorporated by reference to Exhibit 10.1 to the
Registrants
Form 8-K
filed November 3, 2006. |