e424b3
This
prospectus supplement relates to an effective registration
statement under the Securities Act of 1933, but is not complete
and may be changed. This prospectus supplement is not an offer
to sell these securities and it is not soliciting an offer to
buy these securities in any jurisdiction where the offer or sale
is not permitted.
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Filed
pursuant to Rule 424(b)(3)
Registration No. 333-147990
SUBJECT TO COMPLETION, DATED
DECEMBER 18, 2008
PRELIMINARY PROSPECTUS
SUPPLEMENT
To Prospectus Dated December
11, 2007
$
Energy Transfer Partners,
L.P.
% SENIOR NOTES DUE
2019
Interest on the notes will accrue
from ,
2008 and will be payable semiannually
on
and
of each year, beginning
on ,
2009. The notes will mature
on ,
2019.
We may redeem some or all of the notes at any time at the
redemption price, which includes a make-whole premium, described
under Description of Notes beginning on
page S-24.
Each holder of a note will have the right to require us to
repurchase all or a portion of the notes held by such holder
on ,
2012 at a purchase price equal to 100% of the principal amount
of the notes tendered by the holder, plus accrued and unpaid
interest to, but excluding, the repurchase date.
The notes are our unsecured senior obligations. If we default,
your right to payment under the notes will rank equally in right
of payment with our other current and future unsecured senior
debt. The notes will not initially be guaranteed by our
subsidiaries.
Neither the Securities and Exchange Commission nor any
state securities commission has approved or disapproved of these
securities or determined if this prospectus supplement is
truthful or complete. Any representation to the contrary is a
criminal offense.
See Risk Factors beginning on
page S-10
of this prospectus supplement and on page 4 of the
accompanying prospectus and the other risks identified in the
documents incorporated by reference herein for a discussion of
risks that you should consider in connection with an investment
in the notes.
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Per Note
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Total
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Price to Public(1)
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%
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$
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Underwriting Discount
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%
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$
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Proceeds to Energy Transfer Partners, L.P. (Before Expenses)
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%
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$
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(1)
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Plus accrued interest
from ,
2008, if settlement occurs after that date.
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The underwriters expect to deliver the notes in book-entry form
only to purchasers through The Depository Trust Company on
or
about ,
2008.
Joint Book-Running Managers
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MORGAN
STANLEY |
CREDIT SUISSE |
J.P. MORGAN |
WACHOVIA SECURITIES |
Co-Managers
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BANC
OF AMERICA SECURITIES LLC |
SUNTRUST ROBINSON HUMPHREY |
The date of this prospectus supplement is
December , 2008.
TABLE OF
CONTENTS
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Page
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Prospectus Supplement
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S-1
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S-10
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S-18
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S-18
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S-19
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S-20
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S-24
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S-39
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S-43
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S-44
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S-44
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S-44
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Prospectus
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About This Prospectus
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1
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Energy Transfer Partners, L.P.
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1
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Cautionary Statement Concerning Forward-Looking Statements
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2
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Risk Factors
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4
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Use of Proceeds
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30
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Ratio of Earnings to Fixed Charges
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31
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Description of Units
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32
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Cash Distribution Policy
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39
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Description of the Debt Securities
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43
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Material Income Tax Considerations
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49
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Investments in Us by Employee Benefit Plans
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64
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Legal Matters
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66
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Experts
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66
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Where You Can Find More Information
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66
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You should rely only on the information contained or
incorporated by reference in this prospectus supplement and the
accompanying prospectus or any free writing prospectus prepared
by us or on our behalf. We have not authorized anyone to provide
you with additional or different information. We are not making
an offer to sell the notes in any jurisdiction where the offer
is not permitted. You should not assume that the information
contained in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date on the
front of this document or that any information we have
incorporated by reference is accurate as of any date other than
the date of the document incorporated by reference. Our
business, financial condition, results of operations and
prospects may have changed since these dates.
We provide information to you about this offering of the notes
in two separate documents that are bound together: (1) this
prospectus supplement, which describes the specific details
regarding this offering and the specific terms of the notes, and
(2) the accompanying prospectus, which provides general
information, some of which may not apply to this offering.
Generally, when we refer to this prospectus, we are
referring to both documents combined. If information in this
prospectus supplement is inconsistent with the accompanying
prospectus, you should rely on this prospectus supplement.
None of Energy Transfer Partners, L.P., the underwriters or any
of their respective representatives is making any representation
to you regarding the legality of an investment in the notes by
you under applicable laws. You should consult with your own
advisors as to the legal, tax, business, financial and related
aspects of an investment in the notes.
PROSPECTUS
SUPPLEMENT SUMMARY
This summary highlights information included or incorporated
by reference in this prospectus supplement. It does not contain
all of the information that may be important to you. You should
read carefully the entire prospectus supplement, the
accompanying prospectus, the documents incorporated by reference
and the other documents to which we refer herein for a more
complete understanding of this offering.
Unless the context otherwise requires, references to
(1) Energy Transfer, ETP,
we, us, our and similar
terms, as well as references to the Partnership, are
to Energy Transfer Partners, L.P. and all of its operating
limited partnerships and subsidiaries and
(2) ETE are to Energy Transfer Equity, L.P.
With respect to the cover page and in the sections entitled
Prospectus Supplement Summary The
Offering and Underwriting, we,
our and us refer only to Energy Transfer
Partners, L.P. and not to any of its operating limited
partnerships or subsidiaries.
The
Company
Overview
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, an interstate pipeline, natural gas
treating and processing assets located in Texas, New Mexico,
Arizona, Louisiana, Colorado and Utah, and three natural gas
storage facilities located in Texas. These assets include
approximately 14,500 miles of intrastate gas gathering and
transportation pipeline in service, with an additional
300 miles of intrastate pipeline under construction, and
2,450 miles of interstate pipeline. 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, the
San Juan Basin in New Mexico and other producing areas in
south Texas and central Texas. 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.
We have experienced substantial growth over the last five years
through a combination of internal growth projects and strategic
acquisitions. Our internal growth projects consist primarily of
the construction of natural gas transmission pipelines, both
intrastate and interstate. From September 1, 2003 through
September 30, 2008, we made growth capital expenditures,
excluding capital contributions made in connection with the
Midcontinent Express Pipeline project, of approximately
$3.5 billion, of which more than $2.7 billion was
related to natural gas transmission pipelines, and we have
budgeted an additional $0.9 billion of growth capital
expenditures from October 1, 2008 through December 31,
2009, excluding capital contributions expected to be made in
connection with the Midcontinent Express Pipeline and
Fayetteville Express Pipeline projects, which are expected to
total approximately $450 million for the same period.
Primarily as a result of these internal growth projects and
acquisitions, we have increased our cash flow from operating
activities from $162.7 million for the year ended
August 31, 2004 to $1.1 billion for the year ended
August 31, 2007 and $1.0 billion for the nine months
ended September 30, 2008.
Our
Business
Intrastate
Transportation and Storage Operations
We own and operate approximately 7,800 miles of intrastate
natural gas transportation pipelines and three natural gas
storage facilities. We own the largest intrastate pipeline
system in the United States. Our intrastate pipeline system
interconnects to many major consumption areas in the United
States. Our intrastate transportation and storage segment
focuses on the transportation of natural gas from various
natural gas producing areas to major natural gas consuming
markets through connections with other pipeline systems. Our
intrastate natural gas pipeline system has an aggregate
throughput capacity of approximately 11.3 billion cubic
feet per day, or Bcf/d, of natural gas. For the nine months
ended September 30, 2008, we transported an average of
10.5 Bcf/d of natural gas through
S-1
our intrastate natural gas pipeline system. We also utilize our
three natural gas storage facilities to engage in natural gas
storage transactions in which we seek to find and profit from
pricing differences that occur over time. These transactions
typically involve a purchase of physical natural gas that is
injected into our storage facilities and a related sale of
natural gas pursuant to financial futures contracts at a price
sufficient to cover our natural gas purchase price and related
carrying costs and provide for a gross profit margin. We also
provide natural gas storage services for third parties for which
we charge storage fees as well as injection and withdrawal fees.
Our storage facilities have an aggregate working gas capacity of
approximately 74.4 Bcf.
Our intrastate transportation and storage operations accounted
for approximately 59% of our total consolidated operating income
for the year ended August 31, 2007 and approximately 64% of
our total consolidated operating income for the nine months
ended September 30, 2008.
Based primarily on the increased drilling activities and
increased natural gas production in the Barnett Shale in north
Texas and the Bossier Sands in east Texas, we have pursued a
significant expansion of our natural gas pipeline system in
order to provide greater transportation capacity from these
natural gas supply areas to markets for natural gas. This
expansion initiative, which has resulted in approximately
650 miles of large diameter pipeline ranging from
20 inches to 42 inches with approximately
5.6 Bcf/d of natural gas transportation capacity, includes
the following completed pipeline construction projects:
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In April 2007, we completed the
243-mile
pipeline from Cleburne in north Texas to Carthage in east Texas,
which we refer to as the Cleburne to Carthage pipeline, to
expand our capacity to transport natural gas produced from the
Barnett Shale and the Bossier Sands to our Texoma pipeline and
other pipeline interconnections. The Cleburne to Carthage
pipeline is primarily a
42-inch
diameter natural gas pipeline. In December 2007, we completed
two natural gas compression projects that added approximately
90,000 horsepower on the Cleburne to Carthage pipeline,
increasing natural gas deliverability at the Carthage Hub to
more than 2.0 Bcf/d.
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In April 2008, we completed our
150-mile
Southeast Bossier
42-inch
natural gas pipeline, which we refer to as the Southeast Bossier
pipeline. This pipeline connects our
42-inch
Cleburne to Carthage pipeline and our
30-inch East
Texas pipeline to our
30-inch
Texoma pipeline. The Southeast Bossier pipeline has an initial
throughput capacity of 900 million cubic feet per day, or
MMcf/d, that
can be increased to 1.3 Bcf/d with the addition of
compression. The Southeast Bossier pipeline increases our
takeaway capacity from the Barnett Shale and Bossier Sands and
provides increased market access for natural gas produced in
these areas.
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In July 2008, we completed our
36-inch
Paris Loop natural gas pipeline expansion project in north
Texas. This
135-mile
pipeline initially provides us with an additional
400 MMcf/d
of capacity out of the Barnett Shale, with an anticipated
increase to
900 MMcf/d
by the second quarter of 2009. The Paris Loop originates near
Eagle Mountain Lake in northwest Tarrant County, Texas and
connects to our Houston Pipe Line system near Paris, Texas.
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In August 2008, we completed an expansion of our Cleburne to
Carthage pipeline from the Texoma pipeline interconnect to the
Carthage Hub through the installation of 32 miles of
42-inch
pipeline. This expansion, which we refer to as the Carthage
Loop, added
500 MMcf/d
of pipeline capacity from Cleburne to the Carthage Hub. We
expect to increase the capacity of the Carthage Loop to
1.1 Bcf/d by adding compression to this pipeline, which
capacity increase we expect to complete in the third quarter of
2009.
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In August 2008, we completed the first segment of our
36-inch
Maypearl to Malone natural gas pipeline expansion project. This
25-mile
pipeline extends from Maypearl, Texas to Malone, Texas, and
provides an additional
600 MMcf/d
of capacity out of the Fort Worth Basin.
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In October 2008, we completed the first segment of our Southern
Shale natural gas pipeline project, which consists of
30 miles of
36-inch
pipeline that originates in southern Tarrant County, Texas and
delivers natural gas to our Maypearl to Malone pipeline
expansion project. When fully completed, the Southern Shale
pipeline will provide an additional
600 MMcf/d
of take away capacity from the Barnett Shale.
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S-2
In addition, we have announced the following pipeline
construction projects that are not yet completed:
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In October 2007, we announced an expansion of our East Texas
pipeline with the installation of 56 miles of
36-inch
pipeline and the addition of 20,000 horsepower of compression.
This expansion, which we refer to as the Katy expansion, will
increase the capacity on the East Texas pipeline from
approximately
700 MMcf/d
to more than 1.1 Bcf/d and is expected to be in service by
the end of the first quarter of 2009.
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In April 2008, we announced another pipeline expansion project,
which we refer to as the Texas Independence Pipeline, that will
consist of 148 miles of
42-inch
pipeline connecting our ET Fuel System and North Texas System
with our East Texas pipeline. The Texas Independence Pipeline
will expand our ET Fuel Systems throughput capacity by an
incremental 1.1 Bcf/d and, with the addition of
compression, the capacity may be expanded to 1.75 Bcf/d.
Construction of this pipeline is expected to begin by the end of
2008, with completion expected in the third quarter of 2009.
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These pipeline projects are supported by principally fee-based
contracts for periods ranging from five to ten years.
Interstate
Transportation Operations
We own and operate the Transwestern pipeline, an open-access
natural gas interstate pipeline extending approximately
2,450 miles from the gas producing regions of west Texas,
eastern and northwest New Mexico, and southern Colorado
primarily to pipeline interconnects off the east end of its
system and to pipeline interconnects at the California border.
The Transwestern pipeline has access to three significant gas
basins: the Permian Basin in west Texas and eastern New Mexico,
the San Juan Basin in northwest New Mexico and southern
Colorado, and the Anadarko Basin in the Texas and Oklahoma
panhandle. Natural gas sources from the San Juan Basin and
surrounding producing areas can be delivered eastward to Texas
intrastate and mid-continent connecting pipelines and natural
gas market hubs as well as westward to markets like Arizona,
Nevada and California. Transwesterns customers include
local distribution companies, producers, marketers, electric
power generators and industrial end-users.
During 2007, we initiated the Phoenix project, consisting of
260 miles of
42-inch and
36-inch
pipeline lateral, with a throughput capacity of
500 MMcf/d,
connecting the Phoenix area to Transwesterns existing
mainline at Ash Fork, Arizona. We filed with the Federal Energy
Regulatory Commission, or FERC, for a certificate of public
convenience and necessity on September 15, 2006. On
November 15, 2007, the FERC issued a certificate
authorizing Transwestern to commence construction of the Phoenix
project, subject to certain conditions. This lateral pipeline
will have a throughput capacity of
500 MMcf/d
and the portion of the pipeline to the Phoenix area is expected
to be completed in the first quarter of 2009.
During the third quarter of 2008, we completed the San Juan
Loop pipeline, a
26-mile loop
that provides an additional
375 MMcf/d
of capacity to Transwesterns existing San Juan
lateral. This expansion project supports the Phoenix project by
providing additional throughput capacity from the San Juan
Basin natural gas supply area to Transwesterns primary
transmission pipeline that will provide natural gas for the
Phoenix project pipeline.
Our interstate pipeline segment also includes our development of
the Midcontinent Express Pipeline with Kinder Morgan Energy
Partners, L.P., or KMP. The Midcontinent Express Pipeline is an
approximately
500-mile
interstate natural gas pipeline that will originate near
Bennington, Oklahoma, be routed through Perryville, Louisiana,
and terminate at an interconnect with Transcontinental Gas Pipe
Line Corporations, or Transco, interstate natural gas
pipeline in Butler, Alabama. Transcos pipeline provides
producers in the Barnett Shale, Bossier Sands, the Fayetteville
Shale in Arkansas and the Woodford/Caney Shale in Oklahoma
access to the significant natural gas markets in the midwest,
northeast, mid-Atlantic and southeast portion of the United
States. The Midcontinent Express Pipeline will consist of
266 miles of
42-inch
pipeline, 202 miles of
36-inch
pipeline and 39 miles of
30-inch
pipeline and have up to 13 receipt
and/or
delivery interconnections. The pipeline is expected to have an
initial throughput capacity of 1.5 Bcf/d, which can be
increased to 1.8 Bcf/d with additional compression.
Midcontinent Express Pipeline, LLC, or MEP, the entity
developing this pipeline, has received firm transportation
commitments from customers for the expanded 1.8 Bcf/d of
throughput capacity for periods ranging from five to
10 years. The first phase of the pipeline, from Bennington,
Oklahoma to Perryville, Louisiana, is expected to be in
S-3
service during the second quarter of 2009, and the remainder of
the pipeline is expected to be in service during the third
quarter of 2009.
Our interstate transportation segment accounted for
approximately 12% of our total consolidated operating income for
the year ended August 31, 2007 and approximately 11% of our
total consolidated operating income for the nine months ended
September 30, 2008.
Midstream
Operations
We own and operate approximately 7,000 miles of in-service
natural gas gathering pipelines, three natural gas processing
plants, 11 natural gas treating facilities, and 10 natural gas
conditioning facilities. Our midstream segment focuses on the
gathering, compression, treating, blending, processing and
marketing of natural gas, and our operations are currently
concentrated in the Barnett Shale in north Texas, the Bossier
Sands in east Texas, the Austin Chalk trend of southeast Texas,
and the Piceance and Uinta Basins in Colorado and Utah.
Our midstream segment accounted for approximately 15% of our
total consolidated operating income for the year ended
August 31, 2007 and approximately 18% of our total
consolidated operating income for the nine months ended
September 30, 2008.
Retail
Propane Operations
We are one of the three largest retail propane marketers in the
United States, serving more than one million customers across
the country. Our propane operations extend from coast to coast
with concentrations in the western, upper midwestern,
northeastern and southeastern regions of the United States. Our
propane business has grown primarily through acquisitions of
retail propane operations and, to a lesser extent, through
internal growth.
Our retail propane operations accounted for approximately 15% of
our total consolidated operating income for the year ended
August 31, 2007 and approximately 7% of our total
consolidated operating income for the nine months ended
September 30, 2008. The retail propane segment is a
margin-based business in which gross profits depend on the
excess of sales price over propane supply cost. The market price
of propane is often subject to volatile changes as a result of
supply or other market conditions over which we have no control.
Our propane business is largely seasonal and dependent upon
weather conditions in our service areas. Historically,
approximately two-thirds of our retail propane volume and
substantially all of our propane-related operating income are
attributable to sales during the six-month peak-heating season
of October through March. This generally results in higher
operating revenues and net income in the propane segment during
the period from October through March of each year, and lower
operating revenues and either net losses or lower net income
during the period from April through September of each year.
Cash flow from operations is generally greatest during the
period from December to May of each year when customers pay for
propane purchased during the six-month peak-heating season.
Sales to commercial and industrial customers are much less
weather sensitive.
Recent
Developments
ETP
Enogex Partners LLC
In September 2008, we entered into an agreement with OGE Energy
Corp., or OGE, to form a joint venture entity to which OGE would
contribute its Enogex midstream business and we would contribute
our 100% equity interest in Transwestern Pipeline Company, LLC,
which we refer to as Transwestern Pipeline Company, our 50%
equity interest in MEP and our 100% equity interest in ETC
Canyon Pipeline, LLC, which we refer to as ETC Canyon Pipeline,
which owns and operates the Canyon Gathering System. The joint
venture entity, ETP Enogex Partners LLC, or ETP Enogex Partners,
will be jointly owned and managed by us and OGE on a 50/50
basis. We and OGE are contractually obligated to take various
actions to facilitate an initial public offering of ETP Enogex
Partners as a master limited partnership following the closing
of the transaction, including the creation of a master limited
partnership structure pursuant to which we and OGE would each
own 50% of the general partner entity that would be entitled to
receive incentive distribution payments from ETP Enogex Partners.
S-4
Enogex operates a pipeline system engaged in natural gas
gathering, compression, treating, dehydration, processing,
transportation and storage. The Enogex system, located
principally in Oklahoma, includes approximately 2,300 miles
of natural gas transmission pipe and two storage facilities with
total 2007 throughput of 1.52 Bcf/d, connecting to 11
different intrastate and interstate pipelines at 64
interconnection points. The storage fields have working gas
capacity of 23 Bcf. Enogex has 175,000 horsepower of
transmission compression. The Enogex gathering system has more
than 5,534 miles of pipeline with connections to
approximately 3,100 wells and 250 central receipt points,
plus six active processing plants, with
723 MMcf/d
of inlet capacity, and a 50% interest in an additional
processing plant with
20 MMcf/d
of inlet capacity. Enogex has 225,000 horsepower of owned
gathering and processing compression.
The completion of the joint venture transaction is subject to
obtaining specified financings on satisfactory terms, customary
regulatory approvals and various third-party consents, including
the consent of the lenders under our credit facility. Subsequent
to entering into this agreement, the credit markets have
deteriorated and we believe that financing for the joint venture
is not currently available on terms that would satisfy the
financing condition to closing this transaction. For additional
information, please see Risk Factors Risks
Related to Our Business The completion of the joint
venture with OGE is subject to the timely and successful
execution of a financing plan in accordance with specified terms
as well as numerous other closing conditions and we may
therefore not be able to successfully complete the joint
venture.
Although completion of this joint venture transaction would
significantly impact our financial position and results of
operations, we have not provided pro forma financial information
reflecting the transaction in this prospectus supplement or in
the documents we incorporate by reference due to the level of
uncertainty as to the availability of the financing required to
complete the transaction.
Fayetteville
Express Pipeline, LLC
In October, 2008, we entered into a 50/50 joint venture with KMP
for the development of the Fayetteville Express Pipeline, an
approximately
187-mile
pipeline that will originate in Conway County, Arkansas,
continue eastward through White County, Arkansas and terminate
at an interconnect with Trunkline Gas Company in Quitman County,
Mississippi. Fayetteville Express Pipeline, LLC, or FEP, the
entity formed to own and operate this pipeline, initiated public
review of the project pursuant to the FERCs National
Environmental Policy Act pre-filing review process in November
2008. The pipeline is expected to have an initial capacity of
2.0 Bcf/d. Pending necessary regulatory approvals, the
approximately $1.3 billion pipeline project is expected to
be in service by late 2010 or early 2011. FEP has secured
binding
10-year
commitments for transportation of quantities with energy
equivalents totaling 1.8 Bcf/d. The new pipeline will
interconnect with Natural Gas Pipeline Company of America, or
NGPL, in White County, Arkansas, Texas Gas Transmission in
Coahoma County, Mississippi, and ANR Pipeline Company in Quitman
County, Mississippi. NGPL is operated and partially owned by
Knight, Inc., which owns the general partner of KMP. Pursuant to
our agreement with KMP related to this project, we and KMP are
each obligated to fund 50% of the equity necessary to
construct the project. We intend to seek project financing for
the construction costs of this project; however, in light of
current conditions in the credit markets, we may not be
successful in our efforts to obtain project financing on
satisfactory terms.
Our
Principal Executive Offices
We are a limited partnership formed under the laws of the State
of Delaware. Our executive offices are located at 3738 Oak Lawn
Avenue, Dallas, Texas 75219. Our telephone number is
(214) 981-0700.
We maintain a website at
http://www.energytransfer.com
that provides information about our business and operations.
Information contained on this website, however, is not
incorporated into or otherwise a part of this prospectus
supplement or the accompanying prospectus.
S-5
THE
OFFERING
We provide the following summary solely for your convenience.
This summary is not a complete description of the notes. You
should read the more detailed information contained elsewhere in
this prospectus supplement and the accompanying prospectus. For
a more detailed description of the notes, see the section
entitled Description of Notes in this prospectus
supplement and the section entitled Description of the
Debt Securities in the accompanying prospectus.
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Issuer |
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Energy Transfer Partners, L.P. |
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Notes Offered |
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We are offering $ aggregate
principal amount of % Senior Notes
due 2019. |
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Maturity |
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The notes will mature
on ,
2019. |
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Interest Rate |
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Interest on the notes will accrue at the per annum rate
of %. |
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Interest Payment Dates |
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Interest on the notes will accrue
from ,
2008 and will be payable semiannually
on
and
of each year, beginning
on ,
2009. |
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Ranking |
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The notes will be our unsecured and unsubordinated obligations.
The notes will rank equally with all of our other existing and
future unsubordinated indebtedness. Assuming we had completed
this offering on September 30, 2008, after giving effect to
the use of proceeds of this offering, we would have had
approximately $ million of
unsubordinated indebtedness outstanding as of that date. The
notes will effectively rank junior to the indebtedness and other
obligations, including trade payables, of our subsidiaries. As
of September 30, 2008, the notes would have been
effectively subordinated to approximately $730 million of
indebtedness of our subsidiaries. See Description of
Notes Ranking on
page S-27.
In addition, we guarantee 50% of the obligations of MEP, our
unconsolidated joint venture with KMP, under MEPs
$1.4 billion senior revolving credit facility. As of
September 30, 2008, there were $525.0 million of
outstanding borrowings and $33.3 million of letters of
credit issued under the MEP facility. If our joint venture
transaction with OGE is completed, our guarantee of MEPs
obligations will be reduced to 25% and OGE will guarantee 25% of
the obligations of MEP. Please see The
Company Recent Developments ETP Enogex
Partners LLC and Description of Other
Indebtedness. |
|
Optional Redemption |
|
We may redeem the notes in whole, at any time, or in part, from
time to time, prior to maturity, at a redemption price with
respect to the notes that includes accrued and unpaid interest
and a make-whole premium. See Description of
Notes Optional Redemption beginning on
page S-25. |
|
Repurchase at the Option of Holder |
|
Each holder of the notes will have the right to require us to
repurchase all or a portion of the notes held by such holder
on ,
2012 at a purchase price equal to 100% of the principal amount
of the notes tendered by the holder, plus accrued and unpaid
interest to, but excluding, the repurchase date, as described in
Description of Notes under the heading
Repurchase at the Option of Holder. To exercise such
right, the holder must give notice and comply with other
procedures not more than 60 nor less than 45 calendar days prior
to the date of repurchase. |
S-6
|
|
|
Certain Covenants |
|
We will issue the notes under a supplement to an indenture with
U.S. Bank National Association, as trustee. The covenants in the
indenture supplement include a limitation on liens and a
restriction on sale-leaseback transactions. Each covenant is
subject to a number of important exceptions, limitations and
qualifications that are described in Description of
Notes under the heading Certain Covenants. |
|
Use of Proceeds |
|
We anticipate using the net proceeds of this offering to repay
approximately
$ million of
indebtedness outstanding under our revolving credit facility
(including our outstanding swingline loan) and for general
partnership purposes. See Use of Proceeds. |
|
Further Issuances |
|
We may create and issue additional notes ranking equally and
ratably with the notes offered by this prospectus supplement in
all respects, except for the issue price and in some cases, the
first interest payment date, so that such additional notes will
form a single series with the notes offered by this prospectus
supplement and will have substantially identical terms as the
notes offered hereby, including with respect to ranking,
redemption and otherwise. |
|
Risk Factors |
|
Investing in the notes involves risks. See Risk
Factors beginning on
page S-10
of this prospectus supplement and on page 4 of the
accompanying prospectus and the other risks identified in the
documents incorporated by reference herein for information
regarding risks you should consider before investing in the
notes. |
S-7
SUMMARY
HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial data
of ETP for the periods and as of the dates indicated. The
summary financial data for the four-month period ended
December 31, 2007 and for each of the years in the
three-year period ended August 31, 2007 have been derived
from our audited consolidated financial statements. The summary
financial data for the nine-month periods ended
September 30, 2008 and August 31, 2007 and the
four-month period ended December 31, 2006 have been derived
from our unaudited consolidated financial statements. As of
January 1, 2008, we changed our fiscal year end from August
31 to December 31 and, in connection with such change, we
reported financial results for a four-month transition period
ended December 31, 2007. You should read the following
information in conjunction with our historical consolidated
financial statements and related notes thereto incorporated by
reference in this prospectus supplement. The amounts in the
table below, except per unit data, are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Four Months Ended
|
|
|
Year Ended August 31,
|
|
|
|
September 30,
|
|
|
August 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream segment
|
|
$
|
4,555,340
|
|
|
$
|
2,245,313
|
|
|
$
|
1,166,313
|
|
|
$
|
905,392
|
|
|
$
|
2,853,496
|
|
|
$
|
4,223,544
|
|
|
$
|
3,246,772
|
|
Intrastate transportation and storage segment
|
|
|
4,862,641
|
|
|
|
3,105,079
|
|
|
|
1,254,401
|
|
|
|
1,195,871
|
|
|
|
3,915,932
|
|
|
|
5,013,224
|
|
|
|
2,608,108
|
|
Interstate transportation segment
|
|
|
176,663
|
|
|
|
178,663
|
|
|
|
76,000
|
|
|
|
19,003
|
|
|
|
178,663
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
(3,272,574
|
)
|
|
|
(1,205,607
|
)
|
|
|
(664,522
|
)
|
|
|
(451,599
|
)
|
|
|
(1,562,199
|
)
|
|
|
(2,359,256
|
)
|
|
|
(471,255
|
)
|
Retail propane segment
|
|
|
1,162,941
|
|
|
|
989,628
|
|
|
|
511,258
|
|
|
|
449,841
|
|
|
|
1,284,867
|
|
|
|
879,556
|
|
|
|
709,473
|
|
Other
|
|
|
14,051
|
|
|
|
90,516
|
|
|
|
6,060
|
|
|
|
43,958
|
|
|
|
121,278
|
|
|
|
102,028
|
|
|
|
75,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
7,499,062
|
|
|
|
5,403,592
|
|
|
|
2,349,510
|
|
|
|
2,162,466
|
|
|
|
6,792,037
|
|
|
|
7,859,096
|
|
|
|
6,168,798
|
|
Gross margin
|
|
|
1,761,818
|
|
|
|
1,412,729
|
|
|
|
675,856
|
|
|
|
472,623
|
|
|
|
1,713,831
|
|
|
|
1,290,780
|
|
|
|
787,283
|
|
Depreciation and amortization
|
|
|
191,757
|
|
|
|
145,353
|
|
|
|
71,333
|
|
|
|
48,767
|
|
|
|
179,162
|
|
|
|
117,415
|
|
|
|
92,943
|
|
Operating income
|
|
|
859,823
|
|
|
|
721,810
|
|
|
|
323,634
|
|
|
|
209,888
|
|
|
|
829,652
|
|
|
|
642,871
|
|
|
|
312,051
|
|
Interest expense
|
|
|
191,757
|
|
|
|
134,101
|
|
|
|
66,298
|
|
|
|
54,946
|
|
|
|
175,563
|
|
|
|
113,857
|
|
|
|
93,017
|
|
Income from continuing operations before income tax expense and
minority interests
|
|
|
723,811
|
|
|
|
616,057
|
|
|
|
272,613
|
|
|
|
164,055
|
|
|
|
690,939
|
|
|
|
544,006
|
|
|
|
209,409
|
|
Income tax
expense(1)
|
|
|
8,754
|
|
|
|
10,062
|
|
|
|
10,789
|
|
|
|
3,120
|
|
|
|
13,658
|
|
|
|
25,920
|
|
|
|
7,295
|
|
Income from continuing operations
|
|
|
715,057
|
|
|
|
605,107
|
|
|
|
261,824
|
|
|
|
160,445
|
|
|
|
676,139
|
|
|
|
515,852
|
|
|
|
201,383
|
|
Basic income from continuing operations per limited partner
unit(2)
|
|
|
3.06
|
|
|
|
2.79
|
|
|
|
1.22
|
|
|
|
0.70
|
|
|
|
3.32
|
|
|
|
3.16
|
|
|
|
1.51
|
|
Diluted income from continuing operations per limited partner
unit(2)
|
|
|
3.05
|
|
|
|
2.79
|
|
|
|
1.21
|
|
|
|
0.70
|
|
|
|
3.31
|
|
|
|
3.15
|
|
|
|
1.50
|
|
Cash distribution per limited partner
unit(3)
|
|
|
2.66
|
|
|
|
2.42
|
|
|
|
1.13
|
|
|
|
*
|
|
|
|
3.19
|
|
|
|
2.56
|
|
|
|
1.89
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
1,681,999
|
|
|
|
1,041,093
|
|
|
|
1,409,959
|
|
|
|
*
|
|
|
|
1,041,093
|
|
|
|
1,301,804
|
|
|
|
1,446,572
|
|
Total assets
|
|
|
10,721,308
|
|
|
|
7,708,428
|
|
|
|
9,008,161
|
|
|
|
*
|
|
|
|
7,708,428
|
|
|
|
5,455,013
|
|
|
|
4,415,458
|
|
Current liabilities
|
|
|
1,285,636
|
|
|
|
924,217
|
|
|
|
1,215,461
|
|
|
|
*
|
|
|
|
924,217
|
|
|
|
1,016,490
|
|
|
|
1,239,426
|
|
Long-term debt, less current maturities
|
|
|
5,509,484
|
|
|
|
3,626,977
|
|
|
|
4,297,264
|
|
|
|
*
|
|
|
|
3,626,977
|
|
|
|
2,589,124
|
|
|
|
1,675,705
|
|
Partners capital
|
|
|
3,810,107
|
|
|
|
3,039,833
|
|
|
|
3,379,191
|
|
|
|
*
|
|
|
|
3,039,833
|
|
|
|
1,736,862
|
|
|
|
1,326,192
|
|
S-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Four Months Ended
|
|
|
Year Ended August 31,
|
|
|
|
September 30,
|
|
|
August 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by operating activities
|
|
|
1,022,585
|
|
|
|
938,280
|
|
|
|
245,702
|
|
|
|
420,910
|
|
|
|
1,112,732
|
|
|
|
543,884
|
|
|
|
169,418
|
|
Cash flow used in investing activities
|
|
|
(1,467,412
|
)
|
|
|
(942,832
|
)
|
|
|
(995,943
|
)
|
|
|
(1,344,181
|
)
|
|
|
(2,158,090
|
)
|
|
|
(1,244,406
|
)
|
|
|
(1,133,749
|
)
|
Cash flow provided by financing activities
|
|
|
914,434
|
|
|
|
38,511
|
|
|
|
738,003
|
|
|
|
1,019,286
|
|
|
|
1,088,022
|
|
|
|
701,649
|
|
|
|
907,500
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance (accrual basis)
|
|
|
75,931
|
|
|
|
79,004
|
|
|
|
48,998
|
|
|
|
*
|
|
|
|
89,226
|
|
|
|
51,826
|
|
|
|
41,054
|
|
Growth (accrual basis)
|
|
|
1,532,458
|
|
|
|
759,906
|
|
|
|
604,371
|
|
|
|
*
|
|
|
|
998,075
|
|
|
|
677,861
|
|
|
|
155,405
|
|
Acquisition
|
|
|
62,002
|
|
|
|
57,856
|
|
|
|
337,091
|
|
|
|
*
|
|
|
|
90,695
|
|
|
|
586,185
|
|
|
|
1,131,844
|
|
|
|
|
(1)
|
|
As a partnership, we are generally
not subject to income taxes. However, our subsidiaries, Oasis
Pipe Line, Heritage Holdings, Heritage Service Corporation, and
Titan Propane Services, Inc. are corporations subject to income
taxes.
|
(2)
|
|
See the notes to our consolidated
financial statements included in the quarterly and annual
reports incorporated by reference in this prospectus supplement
for a discussion of the computation of income per limited
partner unit.
|
(3)
|
|
The cash distribution per unit for
fiscal year 2006 includes the special SCANA distribution of
$0.0325 per unit discussed in Notes 6 and 9 of our
consolidated financial statements included in our annual report
on Form 10-K
for the year ended August 31, 2007 incorporated by
reference in this prospectus supplement.
|
*
|
|
As a result of our recent change in
fiscal year end, we calculated financial data for the transition
period of the four months ended December 31, 2007, but
financial data were not calculated for the corresponding period
in 2006.
|
S-9
RISK
FACTORS
An investment in the notes involves risk. You should
carefully read the risk factors below and included under the
caption Risk Factors beginning on page 4 of the
accompanying prospectus, together with all of the other
information included in, or incorporated by reference into, this
prospectus supplement and the accompanying prospectus, when
evaluating an investment in the notes.
Risks
Related to an Investment in the Notes
We
have a holding company structure in which our subsidiaries
conduct our operations and own our operating
assets.
We are a holding company, and our subsidiaries conduct all of
our operations and own all of our operating assets. We do not
have significant assets other than the partnership interests and
the equity in our subsidiaries. As a result, our ability to make
required payments on the notes depends on the performance of our
subsidiaries and their ability to distribute funds to us. The
ability of our subsidiaries to make distributions to us may be
restricted by, among other things, credit facilities and
applicable state partnership laws and other laws and
regulations. If we are unable to obtain the funds necessary to
pay the principal amount at maturity of the notes, we may be
required to adopt one or more alternatives, such as a
refinancing of the notes. We cannot assure you that we would be
able to refinance the notes.
The
notes will be effectively subordinated to liabilities and
indebtedness of our subsidiaries and subordinated to any of our
future secured indebtedness to the extent of the assets securing
such indebtedness.
All of our operating assets are in our subsidiaries. However,
initially, none of our subsidiaries will guarantee our
obligations with respect to the notes. Creditors of our
subsidiaries that do not guarantee the notes will have claims,
with respect to the assets of those subsidiaries, that rank
effectively senior to the notes. In the event of any
distribution or payment of assets of such subsidiaries in any
dissolution, winding up, liquidation, reorganization or other
bankruptcy proceeding, the claims of those creditors must be
satisfied prior to making any such distribution or payment to us
in respect of its direct or indirect equity interests in such
subsidiaries. Accordingly, after satisfaction of the claims of
such creditors, there may be little or no amounts left available
to make payments in respect of the notes. Also, there are
federal and state laws that could invalidate any guarantee of
our subsidiary or subsidiaries that guarantee the notes. If that
were to occur, the claims of creditors of a guaranteeing
subsidiary would also rank effectively senior to the notes, to
the extent of the assets of that subsidiary. As of
September 30, 2008, the notes would have been effectively
subordinated to approximately $730 million of outstanding
indebtedness of our subsidiaries. Furthermore, such subsidiaries
are not prohibited under the indenture from incurring additional
indebtedness. In addition, MEP, our unconsolidated joint venture
with KMP, is a party to a $1.4 billion senior revolving
credit facility. As of September 30, 2008, there were
$525.0 million of outstanding borrowings and
$33.3 million of letters of credit issued under the MEP
facility.
In addition, holders of any future secured indebtedness of
Energy Transfer Partners, L.P. would have claims with respect to
the assets constituting collateral for such indebtedness that
are prior to the claims of the holders of the notes. Energy
Transfer Partners, L.P. (excluding its subsidiaries) does not
currently have any secured indebtedness, but may have secured
indebtedness in the future. In the event of a default on any
secured indebtedness or our bankruptcy, liquidation or
reorganization, our assets would be used to satisfy obligations
with respect to the indebtedness secured thereby before any
payment could be made on the notes. Accordingly, any such
secured indebtedness would effectively be senior to the notes to
the extent of the value of the collateral securing the
indebtedness. While the indenture governing the notes places
some limitations on our ability to create liens, there are
significant exceptions to these limitations that will allow us
to secure some kinds of indebtedness without equally and ratably
securing the notes. To the extent the value of the collateral is
not sufficient to satisfy the secured indebtedness, the holders
of that indebtedness would be entitled to share with the holders
of the notes and the holders of other claims against us with
respect to our other assets.
S-10
We do
not have the same flexibility as other types of organizations to
accumulate cash, which may limit cash available to service the
notes or to repay them at maturity.
Unlike a corporation, our partnership agreement requires us to
distribute, on a quarterly basis, 100% of our available cash to
our unitholders of record and our general partner. Available
cash is generally all of our cash on hand as of the end of a
quarter, adjusted for cash distributions and net changes to
reserves. Our general partner determines the amount and timing
of such distributions and has broad discretion to establish and
make additions to our reserves or the reserves of our operating
subsidiaries in amounts it determines in its reasonable
discretion to be necessary or appropriate:
|
|
|
|
|
to provide for the proper conduct of our business and the
businesses of our operating subsidiaries (including reserves for
future capital expenditures and for our anticipated future
credit needs);
|
|
|
|
to provide funds for distributions to our unitholders and our
general partner for any one or more of the next four calendar
quarters; or
|
|
|
|
to comply with applicable law or any of our loan or other
agreements.
|
Although our payment obligations to our unitholders are
subordinate to our payment obligations to you, the value of our
units may decrease with decreases in the amount we distribute
per unit. Accordingly, if we experience a liquidity problem in
the future, the value of our units may decrease and we may not
be able to issue equity to recapitalize.
Your
ability to transfer the notes at a time or price you desire may
be limited by the absence of an active trading market, which may
not develop.
The notes are a new issue of securities for which there is no
established public market. Although we have registered the offer
and sale of the notes under the Securities Act of 1933, we do
not intend to apply for the listing of the notes on any
securities exchange or for the quotation of the notes in any
automated dealer quotation system. In addition, although the
underwriters have informed us that they intend to make a market
in the notes, as permitted by applicable laws and regulations,
they are not obligated to make a market in the notes, and they
may discontinue their market making activities at any time
without notice. An active market for the notes may not develop
or, if developed, may not continue. In the absence of an active
trading market, you may not be able to transfer the notes within
the time or at the price you desire.
Risks
Related to Our Business
We may
not be able to obtain funding on acceptable terms or at all
under our revolving credit facility or otherwise because of the
deterioration of the credit and capital markets. This may hinder
or prevent us from meeting our future capital
needs.
Global financial markets and economic conditions have been, and
continue to be, disrupted and volatile due to a variety of
factors, including significant write-offs in the financial
services sector and the current weak economic conditions. As a
result, the cost of raising money in the debt and equity capital
markets has increased substantially while the availability of
funds from those markets has diminished significantly. In
particular, as a result of concerns about the stability of
financial markets generally and the solvency of lending
counterparties specifically, the cost of obtaining money from
the credit markets generally has increased as many lenders and
institutional investors have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt on
similar terms or at all and reduced, or in some cases ceased, to
provide funding to borrowers. In addition, lending
counterparties under existing revolving credit facilities and
other debt instruments may be unwilling or unable to meet their
funding obligations. Due to these factors, we cannot be certain
that new debt or equity financing will be available on
acceptable terms. If funding is not available when needed, or is
available only on unfavorable terms, we may be unable to meet
our obligations as they come due or we may be required to post
collateral to support our obligations. Moreover, without
adequate funding, we may be unable to execute our growth
strategy, complete future acquisitions or announced and future
pipeline construction projects, take advantage of other business
opportunities or respond to competitive pressures, any of which
could have a material adverse effect on our revenues and results
of operations.
S-11
Completion
of pipeline expansion 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 expansion capital expenditures, including
any future pipeline expansion projects we may undertake, with
proceeds from sales of our senior notes and common units and
borrowings under our revolving credit facility. However, we
cannot be certain that we will be able to issue our senior notes
and common units on terms satisfactory to us, or at all. In
addition, we may be unable to obtain adequate funding under our
current revolving credit facility because our lending
counterparties may be unwilling or unable to meet their funding
obligations. 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.
Our
indebtedness could impair our financial condition and our
ability to fulfill our debt obligations, including our
obligations under the notes.
As of September 30, 2008, on an as adjusted basis after
giving effect to this offering, we had total indebtedness of
approximately $ billion. Please
read Capitalization. Our indebtedness could have
important consequences to you. For example, it could:
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make it more difficult for us to satisfy our obligations with
respect to the notes and our other indebtedness, which could in
turn result in an event of default on such other indebtedness or
the notes;
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impair our ability to obtain additional financing in the future
for working capital, capital expenditures, acquisitions, or
general business purposes;
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diminish our ability to withstand a downturn in our business or
the economy generally;
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require us to dedicate a substantial portion of our cash flow
from operations to debt service payments, thereby reducing the
availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; and
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place us at a competitive disadvantage compared to our
competitors that have proportionately less debt.
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If we are unable to meet our debt service obligations, we could
be forced to restructure or refinance our indebtedness, seek
additional equity capital or sell assets. We may be unable to
obtain financing or sell assets on satisfactory terms, or at all.
We are not prohibited under the indenture governing the notes
from incurring additional indebtedness. Our incurrence of
significant additional indebtedness would exacerbate the
negative consequences mentioned above, and could adversely
affect our ability to repay the notes.
Many
of our customers drilling activity levels and spending for
transportation on our pipeline system may be impacted by the
current deterioration in commodity prices and the credit
markets.
Many of our customers finance their drilling activities through
cash flow from operations, the incurrence of debt or the
issuance of equity. Recently, there has been a significant
decline in the credit markets and the availability of credit.
Additionally, many of our customers equity values have
substantially declined. The combination of a reduction of cash
flow resulting from recent declines in natural gas prices, a
reduction in borrowing bases under reserve-based credit
facilities and the lack of availability of debt or equity
financing may result in a significant reduction in our
customers spending for natural gas drilling activity,
which could result in lower volumes being transported on our
pipeline system. For example, a number of our customers have
announced reduced drilling capital expenditure budgets for the
remainder of 2008 and 2009. A significant reduction in drilling
activity could have a material adverse effect on our operations.
S-12
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 service our indebtedness, including the
notes.
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 reduce have a material
adverse effect on our results of operations and operating cash
flows and, therefore, our ability to pay interest and principal
on our indebtedness, including the notes.
The
completion of the joint venture with OGE is subject to the
timely and successful execution of a financing plan in
accordance with specified terms as well as numerous other
closing conditions and we may therefore not be able to
successfully complete the joint venture.
Consummation of the joint venture transaction with OGE is
conditioned on receipt of certain third-party consents and
certain other customary closing conditions. The transaction is
also conditioned upon obtaining financing pursuant to a
specified financing plan that would provide ETP Enogex Partners
with funds to make payments to us and OGE at the closing of the
transaction, to refinance certain existing debt and to provide
longer-term credit capacity. Specifically, the financing plan,
which we refer to as the ETP Enogex Financing Plan, requires
that (a) ETP Enogex Partners enter into at least a
$700 million senior secured revolving credit facility
having an interest rate of no more than LIBOR plus 275 to 375
basis points (dependent on the facilitys credit ratings),
(b) ETP Enogex Partners issue a minimum of
$700 million of senior unsecured notes having an interest
rate of no more than 9.0% and (c) Transwestern Pipeline
Company issue approximately $800 million in senior
unsecured notes having an interest rate of no more than 8.0%. We
and OGE have agreed that, as a condition to consummation of the
transaction, the terms of the ETP Enogex Financing Plan must be
at least as favorable to ETP Enogex Partners as certain agreed
upon terms, which terms we and OGE believed approximated
existing market terms at the time the agreement for this
transaction was signed. Subsequent to entering into this
agreement, credit markets have deteriorated and we believe that
financing for the joint venture is not currently available on
terms that would satisfy the financing condition to closing this
transaction. Although we and OGE could waive this condition to
closing if we mutually agreed to financing terms less favorable
than those specified in the contribution agreement, we currently
do not intend to waive this condition to closing. As a result,
given the recent substantial disruption in the credit markets,
we believe it is unlikely we will be able to obtain financing
that meets the minimum specified terms or obtain the consents
required to complete the transaction. If the joint venture has
not been consummated by March 31, 2009, either we or OGE
may terminate the contribution agreement relating to the
formation of the joint venture. If the credit markets do not
improve significantly prior to March 31, 2009, the ETP
Enogex Financing Plan may not be put into place and the
agreement to enter into the joint venture may be terminated.
The
joint venture with OGE, if completed, may not be able to
successfully integrate the operations of Enogex and
ETP.
If the joint venture with OGE is completed, we will, pursuant to
a contribution agreement, contribute our 100% equity interest in
Transwestern Pipeline Company, our 100% equity interest in ETC
Canyon Pipeline and our 50% equity interest in MEP to ETP Enogex
Partners, and OGE will contribute its 100% equity interest in
Enogex to ETP Enogex Partners, in each case subject to the
satisfaction of closing conditions, including ETP Enogex
Partners obtaining financing in accordance with the ETP
Enogex Financing Plan. If ETP Enogex Partners is not able to
successfully integrate these operations, it could have an
adverse impact on our results of operations.
S-13
If the
joint venture is completed, we will own 50 percent of the
equity in ETP Enogex Partners and will not be able to exercise
full control over ETP Enogex Partners.
If the joint venture is completed, we will own 50% of the
ownership interests in ETP Enogex Partners and ETP Enogex
Partners will be managed by a four-person management council, of
which we will designate two members and OGE will designate two
members. Following an initial period, and assuming the
occurrence of certain events, ETP Enogex Partners will be
governed by a nine-member board of directors. We will be
entitled to designate three members of the board, OGE will be
entitled to designate three members of the board and the
remaining three members will be mutually agreed upon by us and
OGE. Accordingly, we will not be able to exercise full control
over ETP Enogex Partners, including with respect to:
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decisions relating to the incurrence of expenses;
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establishing reserves for working capital, maintenance capital
expenditures, environmental matters and legal and rate
proceedings;
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incurring additional indebtedness; and
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requiring us to make additional capital contributions to ETP
Enogex Partners to fund working capital, maintenance capital and
expansion capital expenditures, which could be material.
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If the
joint venture is completed and is subsequently unable to obtain
adequate financing, we may need to fund our share of ETP Enogex
Partners capital expenditure requirements.
If the joint venture is completed and is not able to obtain
adequate financing on favorable terms, we and OGE, as 50% owners
of ETP Enogex Partners, may be required to contribute additional
funds to support ETP Enogex Partners capital expenditure
programs.
The
FERC is pursuing legal action against us relating to certain
natural gas trading and transportation activities, and related
third party actions have been filed against us and
ETE.
On July 26, 2007, the FERC issued to us an Order to Show
Cause and Notice of Proposed Penalties, which we refer to as the
Order and Notice, that contains allegations that we violated
FERC rules and regulations. The FERC has alleged that we engaged
in manipulative or improper trading activities in the Houston
Ship Channel, primarily on two dates during the fall of 2005
following the occurrence of Hurricanes Katrina and Rita, as well
as on eight other occasions from December 2003 through August
2005, in order to benefit financially from our commodities
derivatives positions and from certain of our index-priced
physical gas purchases in the Houston Ship Channel. The FERC has
alleged that during these periods we violated the FERCs
then-effective Market Behavior Rule 2, an anti-market
manipulation rule promulgated by the FERC under authority of the
Natural Gas Act, or NGA. We allegedly violated this rule by
artificially suppressing prices that were included in the Platts
Inside FERC Houston Ship Channel index, published by McGraw-Hill
Companies, on which the pricing of many physical natural gas
contracts and financial derivatives are based. Additionally, the
FERC has alleged that we manipulated daily prices at the Waha
and Permian Hubs in west Texas on two dates. Our Oasis pipeline
transports interstate natural gas pursuant to Natural Gas Policy
Act, or NGPA, Section 311 authority and is subject to the
FERC-approved rates, terms and conditions of service. The
allegations related to the Oasis pipeline include claims that
the Oasis pipeline violated NGPA regulations from
January 26, 2004 through June 30, 2006 by granting
undue preference to its affiliates for interstate NGPA
Section 311 pipeline service to the detriment of similarly
situated non-affiliated shippers and by charging in excess of
the FERC-approved maximum lawful rate for interstate NGPA
Section 311 transportation. On October 29, 2008, we
moved for summary disposition of the claim that Oasis unduly
discriminated against non-affiliated shippers and unduly
preferred affiliated shippers. The presiding administrative law
judge granted this motion on November 18, 2008, holding
that FERC Staff had failed to make a prima facie case in
support of this claim. This ruling, if allowed to stand,
significantly narrows the FERCs Oasis-related claims in
the Order and Notice proceeding. The FERC also seeks to revoke,
for a period of 12 months, our blanket marketing authority
for sales of natural gas in interstate commerce at market-based
prices, which activity is expected to account for approximately
1.0% of our operating income for our 2008 calendar year. If the
FERC is successful in revoking our blanket marketing authority,
our sales of natural gas at market-based prices would be limited
to sales to retail
S-14
customers (such as utilities and other end users) and sales from
our own production, and any other sales of natural gas by us
would be required to be made at contract prices that would be
subject to individual FERC approval.
In its Order and Notice, the FERC specified that it was seeking
$70.1 million in disgorgement of profits, plus interest,
and $97.5 million in civil penalties relating to these
matters. The FERC has taken the position that, once it receives
our response, it has several options as to how to proceed,
including issuing an order on the merits, requesting briefs, or
setting specified issues for a trial- type hearing before an
administrative law judge. On August 27, 2007, ETP filed a
request for rehearing of the Order and Notice. On
December 20, 2007, the FERC issued an order denying
rehearing and directed the FERC Enforcement Staff to file a
brief recommending disposition of issues by order or by
evidentiary hearing. ETP filed its response to the Order and
Notice with the FERC on October 9, 2007, which response
refuted the FERCs claims and requested a dismissal of the
FERC proceeding. On February 14, 2008, the Enforcement
Staff of the FERC filed a brief recommending that the FERC refer
various matters relating to its market manipulation allegations
for an evidentiary hearing before a FERC administrative law
judge. The Enforcement Staff also recommended that the FERC
issue an order assessing the $15.5 million portion of the
above-referenced penalty against ETP with respect to the
allegations related to ETPs Oasis pipeline and that the
Oasis-related penalty assessment, if not paid, then be referred
by the FERC to a federal district court for de novo review. The
Enforcement Staff also recommended that the FERC impose certain
changes in Oasiss business operations and refunds to
certain Oasis customers as previously proposed in the Order and
Notice. Finally, the Enforcement Staff recommended that the FERC
pursue market manipulation claims related to ETPs trading
activities in October 2005, for November 2005 monthly
deliveries, a period not previously covered by FERCs
allegations in the Order and Notice, and that ETP be assessed an
additional civil penalty of $25.0 million and be required
to disgorge approximately $7.3 million of alleged unjust
profits related to this additional month. If the FERC pursues
the claims related to this additional month, the total amount of
civil penalties and disgorgement of profits sought by the FERC
would be approximately $200 million. On March 31,
2008, we responded to the Enforcement Staffs brief. On
April 25, 2008, the Enforcement Staff filed an answer to
our March 31, 2008 pleading. On May 15, 2008, the FERC
ordered hearings to be conducted by FERC administrative law
judges with respect to the FERCs Oasis claims and market
manipulation claims. The hearing related to the Oasis claims was
scheduled to commence in December 2008 with the administrative
law judges initial decisions due by May 11, 2009, and
the hearing related to the market manipulation claims is
scheduled to commence in April 2009 with the administrative law
judges initial decision due by October 26, 2009. The
FERC also ordered that, following the completion of the
hearings, the administrative law judges make initial findings
with respect to whether we engaged in market manipulation in
violation of the NGA and FERC regulations and whether Oasis
violated the NGPA and FERC regulations. The FERC reserved for
itself the issues of possible civil penalties, the revocation of
our blanket market certificate, the method by which we and Oasis
would disgorge any unjust profits and whether any conditions
should be placed on Oasiss Section 311 authorization.
Following the issuance of each of the administrative law
judges initial decisions, the FERC would then issue an
order with respect to each of these matters. On May 23,
2008, we requested rehearing and stay of the FERCs
May 15, 2008 order establishing hearing, and we renewed
those requests on June 26, 2008. On August 7, 2008,
FERC denied rehearing of its May 15, 2008 order. On
August 8, 2008, we filed a petition with the
U.S. Court of Appeals for the Fifth Circuit to review and
set aside FERCs May 15 and August 7, 2008 orders on
the grounds that we are entitled to adjudicate FERCs
claims in federal district court pursuant to the NGA and the
NGPA. On August 28, 2008, we filed an amended petition
seeking review of the Order and Notice and the December 20,
2007 order denying rehearing.
On November 18, 2008, the administrative law judge
presiding over the Oasis claims issued an initial decision
granting our motion for summary disposition of the claim that
Oasis unduly discriminated in favor of affiliates regarding the
provision of Section 311(a)(2) interstate transportation
service. Following this initial decision with respect to the
principal claim related to Oasis, in December 2008 we reached an
agreement in principle with the Enforcement Staff to settle all
of the claims related to Oasis. This agreement in principle is
subject to finalization of full settlement documents between us
and the Enforcement Staff and then approval by FERC. Until we
receive FERC approval of the settlement documents, the terms of
the proposed settlement are confidential. The proposed
settlement will thereafter be subject to further administrative
proceedings and possible judicial review. We do not believe the
Oasis settlement, as currently agreed upon in principle, will
have a material adverse effect on our business, financial
condition or results of operations.
S-15
It is our position that our trading and transportation
activities during the periods at issue complied in all material
aspects with applicable law and regulations, and we intend to
contest these cases vigorously. However, the laws and
regulations related to alleged market manipulation are vague,
subject to broad interpretation, and offer little guiding
precedent, while at the same time the FERC holds substantial
enforcement authority. At this time, we are unable to predict
the final outcome of these matters.
On July 26, 2007, the United States Commodity Futures
Trading Commission, or the CFTC, filed suit in United States
District Court for the Northern District of Texas alleging that
we violated provisions of the Commodity Exchange Act, or CEA, by
attempting to manipulate natural gas prices in the Houston Ship
Channel. On March 17, 2008, we entered into a consent order
with the CFTC, which we refer to as the Consent Order. Pursuant
to the Consent Order, we agreed to pay the CFTC
$10.0 million and the CFTC agreed to release us and our
affiliates, directors and employees from all claims or causes of
action asserted by the CFTC in this proceeding. The Consent
Order provides that we are permanently enjoined from attempting
to manipulate the price of any commodity in interstate commerce
in violation of the CEA. By consenting to the entry of the
Consent Order, we neither admitted nor denied the allegations
made by the CFTC in this proceeding. The settlement reduced our
existing accrual and was paid from cash flow from operations in
March 2008.
In addition to the pending FERC legal action, third parties have
asserted claims and may assert additional claims against us and
ETE for damages related to these matters. In this regard,
several natural gas producers and a natural gas marketing
company have initiated legal proceedings in Texas state courts
against us and ETE for claims related to the FERC claims. These
suits contain contract and tort claims relating to alleged
manipulation of natural gas prices at the Houston Ship Channel
and the Waha Hub in West Texas, as well as the natural gas price
indices related to these markets and the Permian Basin natural
gas price index during the period from December 2003 through
December 2006, and seek unspecified direct, indirect,
consequential and exemplary damages. One of the suits against us
and ETE contains an additional allegation that we and ETE
transported gas in a manner that favored our affiliates and
discriminated against the plaintiff, and otherwise artificially
affected the market price of gas to other parties in the market.
We have also been served with a complaint from an owner of
royalty interests in natural gas producing properties,
individually and on behalf of a putative class of similarly
situated royalty owners, working interest owners and
producer/operators, seeking arbitration to recover damages based
on alleged manipulation of natural gas prices at the Houston
Ship Channel. We have filed an original action in Harris County
state court seeking a stay of the arbitration on the ground that
the action is not arbitrable. The claimants agreed to a stay of
the arbitration pending resolution of crossmotions for summary
judgment in the state court proceeding. On November 12,
2008, the state court granted our motion for summary judgment.
A consolidated class action complaint has been filed against us
in the United States District Court for the Southern District of
Texas. This action alleges that we engaged in intentional and
unlawful manipulation of the price of natural gas futures and
options contracts on the New York Mercantile Exchange, or NYMEX,
in violation of the CEA. It is further alleged that during the
class period of December 29, 2003 to December 31,
2005, we had the market power to manipulate index prices, and
that we used this market power to artificially depress the index
prices at major natural gas trading hubs, including the Houston
Ship Channel, in order to benefit our natural gas physical and
financial trading positions, and that we intentionally submitted
price and volume trade information to trade publications. This
complaint also alleges that we violated the CEA by knowingly
aiding and abetting violations of the CEA. The plaintiffs state
that this allegedly unlawful depression of index prices by us
manipulated the NYMEX prices for natural gas futures and options
contracts to artificial levels during the class period, causing
unspecified damages to the plaintiffs and all other members of
the putative class who sold natural gas futures or who purchased
and/or sold
natural gas options contracts on NYMEX during the class period.
The plaintiffs have requested certification of their suit as a
class action and seek unspecified damages, court costs and other
appropriate relief. On January 14, 2008, we filed a motion
to dismiss this suit on the grounds of failure to allege facts
sufficient to state a claim. On March 20, 2008, the
plaintiffs filed a second consolidated class action complaint.
In response to this new pleading, on May 5, 2008, we filed
a motion to dismiss the complaint. On June 19, 2008, the
plaintiffs filed a response opposing our motion to dismiss. We
filed a reply in support of our motion on July 9, 2008.
On March 17, 2008, a second class action complaint was
filed against us in the United States District Court for the
Southern District of Texas. This action alleges that we engaged
in unlawful restraint of trade and intentional monopolization
and attempted monopolization of the market for fixed-price
natural gas baseload transactions at the
S-16
Houston Ship Channel from December 2003 through December 2005 in
violation of federal antitrust law. The complaint further
alleges that during this period we exerted monopoly power to
suppress the price for these transactions to non-competitive
levels in order to benefit our own physical natural gas
positions. The plaintiff has, individually and on behalf of all
other similarly situated sellers of physical natural gas,
requested certification of its suit as a class action and seeks
unspecified treble damages, court costs and other appropriate
relief. On May 19, 2008, we filed a motion to dismiss this
complaint. On July 2, 2008 the plaintiffs filed a response
opposing our motion to dismiss. We filed a reply in support of
our motion on August 18, 2008.
We are expensing the legal fees, consultants fees and
other expenses relating to these matters in the periods in which
such expenses are incurred. In addition, our existing accruals
for litigation and contingencies include an accrual related to
these matters. At this time, we are unable to predict the
outcome of these matters. However, it is possible that the
amount we become obliged to pay as a result of the final
resolution of these matters, whether on a negotiated settlement
basis or otherwise, will exceed the amount of our existing
accrual related to these matters. In accordance with applicable
accounting standards, we will review the amount of our accrual
related to these matters as developments related to these
matters occur and we will adjust our accrual if we determine
that it is probable that the amount we may ultimately become
obliged to pay as a result of the final resolution of these
matters is greater than the amount of our existing accrual for
these matters. As our accrual amounts are non-cash, any cash
payment of an amount in resolution of these matters would likely
be made from cash from operations or borrowings, which payments
would reduce our cash available to service the notes either
directly or as a result of increased principal and interest
payments necessary to service any borrowings incurred to finance
such payments. If these payments are substantial, we may
experience a material adverse impact on our results of
operations, cash available to service the notes and our
liquidity.
S-17
USE OF
PROCEEDS
We expect to receive net proceeds of approximately
$ million from the sale of
the notes we are offering, after deducting underwriting
discounts and commissions but before deducting other expenses
associated with the offering.
We anticipate using the proceeds of this offering to repay
approximately $ million of
the indebtedness outstanding under our revolving credit facility
(including our outstanding swingline loan) and for general
partnership purposes.
As of December 15, 2008, there was a balance of
$1.43 billion in revolving credit loans (including a
$226.2 million swingline loan) outstanding and
$60.9 million of letters of credit issued under our
revolving credit facility. The weighted average interest rate on
the total amount outstanding at December 15, 2008 was
2.75%. Our revolving credit facility matures on July 20,
2012. We use revolving credit loans to fund growth capital
expenditures and working capital requirements.
RATIO OF
EARNINGS TO FIXED CHARGES
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. The following table sets forth our historical
consolidated ratio of earnings to fixed charges for the four
months ended December 31, 2007 and the nine months ended
September 30, 2008:
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Four Months
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Nine Months
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Ended
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Ended
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December 31,
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September 30,
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2007
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2008
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Ratio of earnings to fixed charges
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4.31
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4.21
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For purposes of this ratio, earnings means 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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S-18
CAPITALIZATION
The following table sets forth our consolidated cash and
capitalization as of September 30, 2008:
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on an actual basis; and
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on an adjusted basis to give effect to the public offering of
the notes made pursuant to this prospectus supplement and the
application of the net proceeds therefrom as set forth under
Use of Proceeds as if the offering had occurred on
September 30, 2008.
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The following table does not give effect to the ETP Enogex
Partners joint venture described under the caption
Prospectus Supplement Summary The
Company Recent Developments ETP Enogex
Partners LLC. The actual information in the table is
derived from and should be read in conjunction with our
historical financial statements, including the accompanying
notes, included in our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2008, which is
incorporated by reference in this prospectus supplement.
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September 30, 2008
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Actual
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As Adjusted
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(in thousands)
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Cash and cash equivalents
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$
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526,074
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$
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526,074
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Debt, including current maturities:
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Debt of Energy Transfer Partners:
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5.650% Senior Notes due 2012
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$
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399,754
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$
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399,754
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5.950% Senior Notes due 2015
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748,418
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748,418
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6.000% Senior Notes due 2013
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349,393
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349,393
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6.125% Senior Notes due 2017
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399,698
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399,698
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6.625% Senior Notes due 2036
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397,789
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397,789
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6.700% Senior Notes due 2018
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598,297
|
|
|
|
598,297
|
|
7.500% Senior Notes due 2038
|
|
|
544,283
|
|
|
|
544,283
|
|
ETP revolving credit facility (other than swingline loan)
|
|
|
1,152,000
|
|
|
|
|
|
Swingline loan
|
|
|
235,785
|
|
|
|
|
|
% Senior Notes due 2019
offered hereby
|
|
|
|
|
|
|
|
|
Debt of our Subsidiaries:
|
|
|
|
|
|
|
|
|
HOLP senior secured notes
|
|
|
185,811
|
|
|
|
185,811
|
|
HOLP credit facility
|
|
|
10,000
|
|
|
|
10,000
|
|
Other HOLP long-term debt
|
|
|
9,783
|
|
|
|
9,783
|
|
Transwestern 5.39% Notes due 2014
|
|
|
91,644
|
|
|
|
91,644
|
|
Transwestern 5.54% Notes due 2016
|
|
|
120,538
|
|
|
|
120,538
|
|
Transwestern 5.64% Notes due 2017
|
|
|
82,000
|
|
|
|
82,000
|
|
Transwestern 5.89% Notes due 2022
|
|
|
150,000
|
|
|
|
150,000
|
|
Transwestern 6.16% Notes due 2037
|
|
|
75,000
|
|
|
|
75,000
|
|
Titan long-term debt
|
|
|
4,951
|
|
|
|
4,951
|
|
Total long-term debt
|
|
|
5,555,144
|
|
|
|
|
|
Less current maturities
|
|
|
(45,660
|
)
|
|
|
(45,660
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
5,509,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total partners capital
|
|
|
3,810,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
9,319,591
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2008, we had cash and cash equivalents
of approximately $70 million.
As of December 15, 2008, there was a balance of
$1.43 billion in revolving credit loans (including a
$226.2 million swingline loan) outstanding and
$60.9 million of letters of credit issued under our
revolving credit facility.
On February 29, 2008, MEP, a company in which we and KMP
each own a 50% interest, entered into a credit agreement that
provides for a $1.4 billion senior revolving credit
facility. We have guaranteed 50% of the obligations of MEP under
this facility, with the remaining 50% of MEPs obligations
guaranteed by KMP. As of September 30, 2008, there were
$525.0 million of outstanding borrowings and
$33.3 million of letters of credit issued under MEPs
senior revolving credit facility. If our pending transaction
with OGE is completed, our guarantee of MEPs obligations
will be reduced to 25% and OGE will guarantee 25% of the
obligations of MEP. See Description of Other
Indebtedness.
S-19
DESCRIPTION
OF OTHER INDEBTEDNESS
General
Our indebtedness as of September 30, 2008 (not including
debt of our subsidiaries) consists of $400.0 million in
principal amount of 5.65% Senior Notes due 2012, or the
2012 senior notes, $350.0 million in principal amount of
6.00% Senior Notes due 2013, or the 2013 senior notes,
$750.0 million in principal amount of 5.95% Senior
Notes due 2015, or the 2015 senior notes, $400.0 million in
principal amount of 6.125% Senior Notes due 2017, or the
2017 senior notes, $600.0 million in principal amount of
6.70% Senior Notes due 2018, or the 2018 senior notes,
$400.0 million in principal amount of 6.625% Senior
Notes due 2036, or the 2036 senior notes, $550.0 million in
principal amount of 7.50% Senior Notes due 2038, or the
2038 senior notes, and a revolving credit facility, which we
refer to as the ETP Credit Facility, that allows for borrowings
of up to $2.0 billion (expandable to $3.0 billion)
available through July 20, 2012, unless extended. Our
subsidiaries, Heritage Operating L.P., or HOLP, and
Transwestern, also have outstanding debt as described below.
Failure to comply with the various restrictive and affirmative
covenants of the credit agreements could require us, HOLP or
Transwestern to repay outstanding debt prior to its maturity and
could negatively affect our ability and the ability of our
subsidiaries to incur additional debt. We are required to
measure these financial tests and covenants quarterly and, as of
September 30, 2008, we were in compliance with all
financial requirements, tests, limitations, and covenants
related to financial ratios under our existing credit agreements.
ETP
Revolving Credit Facility
On July 20, 2007, we entered into the ETP Credit Facility
with Wachovia Bank, National Association, as administrative
agent and Bank of America, N.A., as syndication agent, and
certain other agents and lenders. The ETP Credit Facility
provides for $2.0 billion of revolving credit capacity that
is expandable to $3.0 billion at our option (subject to
obtaining the approval of the administrative agent and securing
lender commitments for the increased borrowing capacity). The
ETP Credit Facility matures on July 20, 2012, unless we
elect the option of one-year extensions (subject to the approval
of each such extension by the lenders holding a majority of the
aggregate lending commitments under the ETP Credit Facility).
Amounts borrowed under the ETP Credit Facility bear interest at
a rate based on either a Eurodollar rate or a prime rate. The
ETP Credit Facility has a swingline loan option of which
borrowings and aggregate principal amounts shall not exceed the
lesser of (i) the aggregate commitments ($2.0 billion
unless expanded to $3.0 billion) less the sum of all
outstanding revolving credit loans and the letter of credit
obligation and (ii) the swingline commitment. The aggregate
amount of swingline loans in any borrowing shall not be subject
to a minimum amount or increment. The indebtedness under the ETP
Credit Facility is prepayable at any time at our option without
penalty (other than Eurodollar Loan breakage costs, if any). The
commitment fee payable on the unused portion of the ETP Credit
Facility varies based on our credit rating, and the fee is 0.11%
based on our current rating, with a maximum fee of 0.125%.
The credit agreement relating to the ETP Credit Facility
contains covenants that limit (subject to certain exceptions)
our and certain of our subsidiaries ability to, among other
things:
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|
|
|
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incur indebtedness;
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grant liens;
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|
|
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enter into mergers;
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|
|
|
dispose of assets;
|
|
|
|
make certain investments;
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|
|
|
make distributions during certain defaults and during any event
of default;
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|
|
|
engage in business substantially different in nature than the
business currently conducted by us and our subsidiaries;
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|
|
|
engage in transactions with affiliates;
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S-20
|
|
|
|
|
enter into restrictive agreements; and
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|
|
|
enter into speculative hedging contracts.
|
This credit agreement also contains a financial covenant that
provides that on each date we make a distribution, the leverage
ratio, as defined in the ETP Credit Facility, shall not exceed
5.0 to 1, with a permitted increase to 5.5 to 1 during a
specified acquisition period, as defined in the ETP Credit
Facility.
As of September 30, 2008, there was a balance of
$1.39 billion in revolving credit loans (including
$235.8 million in swingline loans) and $24.6 million
in letters of credit. The weighted average interest rate on the
total amount outstanding at September 30, 2008, was 3.36%.
The total amount available under the ETP Credit Facility, as of
September 30, 2008, which is reduced by any amounts
outstanding under the swingline loan and letters of credit, was
$588.0 million. The indebtedness under the ETP Credit
Facility is unsecured and not guaranteed by any of our
subsidiaries. In connection with entering into the ETP Credit
Facility, all guarantees by ETC OLP, Titan and their direct and
indirect wholly-owned subsidiaries of the outstanding senior
notes were released and discharged. The indebtedness under the
ETP Credit Facility has equal rights to holders of our other
current and future unsecured debt. We anticipate using the net
proceeds of this offering to repay a portion of amounts
outstanding under the ETP Credit Facility.
ETP
Senior Notes
The 2012 senior notes, 2013 senior notes, 2015 senior notes,
2017 senior notes, 2018 senior notes, 2036 senior notes and 2038
senior notes, which we refer to collectively as the outstanding
senior notes, represent our senior unsecured obligations and
rank equally with all of our other existing and future unsecured
and unsubordinated indebtedness, including the notes offered
hereby. The outstanding senior notes effectively rank junior to
all indebtedness and other liabilities of our existing and
future subsidiaries. The senior notes are unsecured and not
guaranteed by any of our subsidiaries. The outstanding senior
notes were issued under an indenture containing covenants that
restrict our ability to, subject to certain exceptions, incur
debt secured by liens, engage in sale and leaseback
transactions, merge or consolidate with another entity or sell
substantially all of our assets.
HOLP
Debt
HOLP
Notes
Our subsidiary HOLP has outstanding several series of notes,
which we refer to collectively as the HOLP notes, that are
secured by all receivables, contracts, equipment, inventory,
general intangibles, cash concentration accounts of HOLP, and
the equity interests of HOLPs subsidiaries. As of
September 30, 2008, the outstanding principal balance of
the HOLP notes was $185.8 million. The HOLP notes mature at
various times from 2009 to 2020 and bear interest at fixed rates
that range from 7.17% to 8.87%. In addition to the stated
interest rate for the HOLP notes, HOLP is required to pay an
additional 1% per annum on the outstanding balance of the HOLP
notes at such time as the HOLP notes are not rated investment
grade status or higher. As of September 30, 2008, the HOLP
notes were rated investment grade, thereby alleviating the
requirement that HOLP pay the additional 1% interest. The HOLP
notes are subject to make-whole premiums if repaid prior to
their stated maturities.
HOLP
Credit Facility
Effective August 31, 2006, HOLP entered into the Fourth
Amended and Restated Credit Agreement that provides for a
$75.0 million senior revolving credit facility which may be
expanded to $150.0 million. The credit facility is
available through June 30, 2011. Amounts borrowed under
this credit facility bear interest at a rate based on either a
Eurodollar rate or a prime rate. The commitment fee payable on
the unused portion of the facility varies based on HOLPs
leverage ratio, as defined, with a maximum fee of 0.50%. This
credit facility also has a swingline loan option with a maximum
borrowing of $10.0 million at a prime rate. The sum of the
loans, swingline loans and letters of credit may not exceed the
maximum amount of revolving credit available under the credit
facility. The agreement related to this credit facility includes
provisions that may require contingent prepayments in the event
of dispositions, sale of assets, merger or change of control.
This credit facility is secured by all receivables, contracts,
equipment, inventory, general intangibles, and cash
concentration accounts of HOLP, and the equity interests of
S-21
HOLPs subsidiaries. As of September 30, 2008, HOLP
had $10.0 million of outstanding borrowings under this
credit facility and had outstanding letters of credit in the
amount of $1.0 million. The weighted average interest rate
on the total amount outstanding at September 30, 2008 was
4.0%. The total amount available under the HOLP Credit Facility
was $64.0 million.
Covenants
Related to HOLP Debt
The agreements related to the HOLP notes and the HOLP revolving
credit facility contain customary restrictive covenants
applicable to HOLP, including the maintenance of various
financial and leverage covenants and limitations on substantial
disposition of assets, changes in ownership, the level of
additional indebtedness and creation of liens. The financial
covenants require HOLP to maintain ratios of Adjusted
Consolidated Funded Indebtedness to Adjusted Consolidated EBITDA
(as these terms are similarly defined in the agreements related
to the HOLP notes and HOLP revolving credit facility) of not
more than 4.75 to 1 and Consolidated EBITDA to Consolidated
Interest Expense (as these terms are similarly defined in the
agreements related to the HOLP notes and HOLP revolving credit
facility) of not less than 2.25 to 1. These debt agreements also
provide that HOLP may declare, make, or incur a liability to
make restricted payments during each fiscal quarter, if:
(a) the amount of such restricted payment, together with
all other restricted payments during such quarter, do not exceed
the amount of Available Cash (as defined in the agreements
related to the HOLP notes and HOLP revolving credit facility)
with respect to the immediately preceding quarter (which amount
is required to reflect a reserve equal to 50% of the interest to
be paid on the HOLP notes during the last quarter and in
addition, in the third, second and first quarters preceding a
quarter in which a scheduled principal payment is to be made on
the HOLP notes, and a reserve equal to 25%, 50%, and 75%,
respectively, of the principal amount to be repaid on such
payment dates), (b) no default or event of default exists
before such restricted payments, and (c) the amounts of
HOLPs restricted payment is not disproportionately greater
than the payment amount from ETC OLP utilized to fund payment
obligations of ETP and its general partner with respect to
ETPs common units.
Transwestern
Debt
Transwestern has outstanding five series of unsecured notes,
which we refer to collectively as the Transwestern notes, with
the following terms:
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|
|
|
|
|
|
|
|
Outstanding Principal
|
|
|
|
|
|
|
Balance as of
|
|
|
Fixed Interest
|
|
|
|
September 30, 2008
|
|
|
Rate per Annum
|
|
|
Maturity Date
|
(in millions)
|
|
|
|
|
|
|
|
$
|
91.6
|
|
|
|
5.39
|
%
|
|
November 17, 2014
|
$
|
120.5
|
|
|
|
5.54
|
%
|
|
November 17, 2016
|
$
|
82.0
|
|
|
|
5.64
|
%
|
|
May 24, 2017
|
$
|
150.0
|
|
|
|
5.89
|
%
|
|
May 24, 2022
|
$
|
75.0
|
|
|
|
6.16
|
%
|
|
May 24, 2037
|
No principal payments are required with respect to the
Transwestern notes; however, Transwestern is required to make an
offer to purchase all of the Transwestern notes upon a change of
control of Transwestern, as defined in the indentures governing
the Transwestern notes. The Transwestern notes are prepayable by
Transwestern at any time subject to the payment of specified
make-whole premiums. Interest is payable semi-annually on the
Transwestern notes. The Transwestern notes rank pari passu with
Transwesterns other unsecured debt. The indentures
governing the Transwestern notes contain provisions that limit
the amount of Transwesterns debt, restrict its sale of
assets, restrict its payment of dividends and require it to
maintain certain debt to capitalization ratios.
Guarantee
of Midcontinent Express Pipeline, LLC Credit Facility
On February 29, 2008, MEP, our joint venture with KMP,
entered into a credit agreement that provides for a
$1.4 billion senior revolving credit facility, which we
refer to as the MEP Facility. We have guaranteed 50% of the
S-22
obligations of MEP under the MEP Facility, with the remaining
50% of MEP Facility obligations guaranteed by KMP. Subject to
certain exceptions, our guarantee may be proportionately
increased or decreased if our ownership percentage increases or
decreases. The MEP Facility is available through
February 28, 2011. Amounts borrowed under the MEP Facility
bear interest at a rate based on either a Eurodollar rate or a
prime rate. The commitment fee payable on the unused portion of
the MEP Facility varies based on both our debt rating and that
of KMP, with a maximum fee of 0.15%. The MEP Facility also has a
swingline loan option with a maximum borrowing of
$25.0 million at a prime rate. The sum of the loans,
swingline loans and letters of credit may not exceed the maximum
amount of revolving credit available under the MEP Facility. The
indebtedness under the MEP Facility is prepayable at any time at
the option of MEP without penalty. The MEP Facility contains
covenants that limit (subject to certain exceptions) MEPs
ability to grant liens, incur indebtedness, engage in
transactions with affiliates, enter into restrictive agreements,
enter into mergers or dispose of substantially all of its
assets. As of September 30, 2008, there were
$525.0 million of outstanding borrowings and
$33.3 million of letters of credit issued under the MEP
Facility. The weighted average interest rate on the total amount
outstanding at September 30, 2008, was 3.25%. The total
amount available under the MEP Facility was $841.7 million
as of September 30, 2008. If our joint venture transaction
with OGE is completed, our guarantee of MEPs obligations
will be reduced to 25% and OGE will guarantee 25% of the
obligations of MEP. Please see Prospectus Supplement
Summary The Company Recent
Developments ETP Enogex Partners LLC.
S-23
DESCRIPTION
OF NOTES
Energy Transfer will issue the notes under an indenture dated as
of January 18, 2005 among itself, the subsidiaries of
Energy Transfer named therein and U.S. Bank National
Association (as
successor-by-merger
to Wachovia Bank, National Association), as trustee, as
supplemented by a supplemental indenture creating the notes (as
so supplemented, the indenture). This description is
a summary of the material provisions of the notes and the
indenture. This description does not restate those agreements
and instruments in their entirety. You should refer to the notes
and the indenture, forms of which are available as set forth
below under Where You Can Find More Information, for
a complete description of our obligations and your rights.
You can find the definitions of various terms used in this
description under Certain Definitions
below. In this description, the terms Energy
Transfer, we, us and
our refer only to Energy Transfer Partners, L.P. and
not to any of its Subsidiaries.
General
The notes:
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|
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|
|
will be general unsecured, senior obligations of Energy
Transfer, ranking equally with all other existing and future
unsecured and unsubordinated indebtedness of Energy Transfer;
|
|
|
|
will initially be issued in an aggregate principal amount of
$ ;
|
|
|
|
will mature
on ,
2019;
|
|
|
|
will be issued in denominations of $1,000 and integral multiples
of $1,000;
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|
will bear interest
from ,
2008 at an annual rate
of %; and
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will be redeemable at any time at our option at the redemption
price described below under Optional
Redemption.
|
The notes constitute a separate series of debt securities under
the indenture. The indenture does not limit the amount of debt
securities we may issue under the indenture from time to time in
one or more series. Currently, we have outstanding under the
indenture $400 million aggregate principal amount of our
5.65% Senior Notes due 2012, $350 million aggregate
principal amount of our 6.00% Senior Notes due 2013,
$750 million aggregate principal amount of our
5.95% Senior Notes due 2015, $400 million aggregate
principal amount of our 6.125% Senior Notes due 2017,
$600 million aggregate principal amount of our
6.70% Senior Notes due 2018, $400 million aggregate
principal amount of our 6.625% Senior Notes due 2036 and
$550 million aggregate principal amount of our
7.50% Senior Notes due 2038. We may in the future issue
additional debt securities under the indenture in addition to
the notes.
Interest
Interest on the notes will accrue
from ,
2008 or from the most recent interest payment date to which
interest has been paid or provided for. We will pay interest in
cash semiannually in arrears
on
and of
each year,
beginning ,
2009. We will make interest payments to the persons in whose
names the notes are registered at the close of business
on
or ,
as applicable, in each case before the next interest payment
date. Interest will be computed on the basis of a
360-day year
consisting of twelve
30-day
months. If any interest payment date falls on a day that is not
a business day, the payment will be made on the next business
day, and no interest will accrue on the amount of interest due
on that interest payment date for the period from and after the
interest payment date to the date of payment.
Further
Issuances
We may from time to time, without notice to or the consent of
the holders of the notes, create and issue additional notes
having the same terms as the notes offered by this prospectus
supplement and accompanying prospectus, except for the issue
price and in some cases, the first interest payment date.
Additional notes issued in this manner will form a single series
with the previously issued and outstanding notes.
S-24
Optional
Redemption
The notes will be redeemable, at our option, at any time in
whole, or from time to time in part, at a price equal to the
greater of:
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100% of the principal amount of the notes to be redeemed; or
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the sum of the present values of the remaining scheduled
payments of principal and interest (at the interest rate in
effect on the date of calculation of the redemption price) on
the notes to be redeemed that would be due after the related
redemption date but for such redemption (exclusive of interest
accrued to the redemption date) discounted to the redemption
date on a semi-annual basis (assuming a
360-day year
consisting of twelve
30-day
months) at the applicable Treasury Yield
plus
basis points;
|
plus, in either case, accrued interest to the redemption date.
The actual redemption price, calculated as provided below, will
be calculated and certified to the trustee and us by the
Independent Investment Banker.
Notes called for redemption become due on the redemption date.
Notices of redemption will be mailed at least 30 but not more
than 60 days before the redemption date to each holder of
the notes to be redeemed at its registered address. The notice
of redemption for the notes will state, among other things, the
amount of notes to be redeemed, the redemption date, the method
of calculating the redemption price and each place that payment
will be made upon presentation and surrender of notes to be
redeemed. Unless we default in payment of the redemption price,
interest will cease to accrue on any notes that have been called
for redemption on the redemption date. If less than all of the
notes are redeemed at any time, the trustee will select the
notes to be redeemed on a pro rata basis, by lot or by any other
method the trustee deems fair and appropriate.
For purposes of determining the redemption price, the following
definitions are applicable:
Treasury Yield means, with respect to any
redemption date applicable to the notes, (a) the yield,
under the heading which represents the average for the
immediately preceding week, appearing in the most recently
published statistical release designated H.15(519)
or any successor publication which is published weekly by the
Board of Governors of the Federal Reserve System and which
establishes yields on actively traded United States Treasury
securities adjusted to constant maturity under the caption
Treasury Constant Maturities, for the maturity
corresponding to the Comparable Treasury Issue; or (b) if
the release (or any successor release) is not published during
the week preceding the calculation date or does not contain
these yields, the rate per annum equal to the semi-annual
equivalent yield to maturity (computed as of the third business
day immediately preceding such redemption date) of the
Comparable Treasury Issue, assuming a price for the Comparable
Treasury Issue (expressed as a percentage of its principal
amount) equal to the applicable Comparable Treasury Price for
such redemption date.
Comparable Treasury Issue means the United
States Treasury security selected by the Independent Investment
Banker as having a maturity comparable to the remaining term of
the notes to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice,
in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of the notes to be redeemed;
provided, however, that if no maturity is within three months
before or after the maturity date for such notes, yields for the
two published maturities most closely corresponding to such
United States Treasury security will be determined and the
treasury rate will be interpolated or extrapolated from those
yields on a straight line basis rounding to the nearest month.
Comparable Treasury Price means, with respect
to any redemption date, (a) the average of the Reference
Treasury Dealer Quotations for the redemption date after
excluding the highest and lowest Reference Treasury Dealer
Quotations, or (b) if the Independent Investment Banker
obtains fewer than four Reference Treasury Dealer Quotations,
the average of all such quotations.
Independent Investment Banker means Morgan
Stanley & Co. Incorporated, Credit Suisse Securities
(USA) LLC, J.P. Morgan Securities Inc. and Wachovia Capital
Markets, LLC (and their respective successors) or, if any
S-25
such firm is not willing and able to select the applicable
Comparable Treasury Issue, an independent investment banking
institution of national standing appointed by the trustee and
reasonably acceptable to Energy Transfer.
Reference Treasury Dealer means (a) each
of Morgan Stanley & Co. Incorporated, Credit Suisse
Securities (USA) LLC, J.P. Morgan Securities Inc. and
Wachovia Capital Markets, LLC (or its relevant affiliate) and
their respective successors, and (b) one other primary
U.S. government securities dealer in the United States
selected by Energy Transfer (each, a Primary Treasury
Dealer); provided, however, that if any of the foregoing
shall resign as a Reference Treasury Dealer or cease to be a
U.S. government securities dealer, Energy Transfer will
substitute therefor another Primary Treasury Dealer.
Reference Treasury Dealer Quotations means,
with respect to each Reference Treasury Dealer and any
redemption date for the notes, an average, as determined by the
Independent Investment Banker, of the bid and asked prices for
the Comparable Treasury Issue for the notes to be redeemed
(expressed in each case as a percentage of its principal amount)
quoted in writing to the trustee by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third
business day preceding such redemption date.
Repurchase
at the Option of Holder
Each holder of the notes will have the right to require us to
repurchase all or a portion of the notes owned by the holder
on ,
2012 at a purchase price equal to 100% of the principal amount
of the notes tendered by the holder plus accrued and unpaid
interest to, but excluding, the repurchase date. On and
after ,
2012, interest will cease to accrue on the notes tendered for
repayment. On or
before ,
2012, we will deposit with the trustee (or a separate paying
agent) money sufficient to pay the principal of the notes
tendered for repurchase. A holders exercise of the
repurchase option will be irrevocable.
For any note to be repurchased, the trustee (or separate paying
agent, if one has been appointed) must receive, at its corporate
trust office, not more than 60 nor less than 45 calendar days
prior to the date of repurchase, the particular notes to be
tendered and:
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in the case of a certificated note, a duly completed
Option to Elect Repurchase; or
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in the case of notes represented by a global certificate,
repurchase instructions from the applicable beneficial owner to
the depositary and forwarded by the depositary.
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Only the depositary may exercise the repurchase option in
respect of global securities representing global notes.
Accordingly, beneficial owners of global securities who want to
have all or any portion of the global notes represented thereby
repurchased must instruct the participant through which they own
their interests, as described below, to direct the depositary to
exercise the repurchase option on their behalf by forwarding the
repurchase instructions to the trustee (or paying agent, if
applicable) as specified above. In order to ensure that these
instructions are received by the trustee (or paying agent, if
applicable) on a particular day, the applicable beneficial owner
must so instruct the participant through which it owns its
interest before that participants deadline for accepting
instructions for that day. Different firms may have different
deadlines for accepting instructions from their customers.
Accordingly, beneficial owners should consult their participants
for the respective deadlines. All instructions given to
participants from beneficial owners of notes represented by
global certificates relating to the option to elect repurchase
shall be irrevocable. In addition, at the time repurchase
instructions are given, each beneficial owner shall cause the
participant through which it owns its interest to transfer the
beneficial owners interest in the global certificate
representing the related notes, on the depositarys
records, to the paying agent. See Description of the Debt
Securities Book-Entry Debt Securities.
If applicable, we will comply with the requirements of
Section 14(e) of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and the rules promulgated
thereunder and any other securities laws or regulations in
connection with any repurchase of notes at the option of the
holders.
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Subsidiary
Guarantees
The notes initially will not be guaranteed by any of the
Subsidiaries of Energy Transfer. However, if at any time
following the issuance of the notes, any Subsidiary of Energy
Transfer guarantees, becomes a co-obligor with respect to or
otherwise provides direct credit support for any obligations of
Energy Transfer or any of its other Subsidiaries under the
Credit Agreement, then Energy Transfer will cause such
Subsidiary to promptly execute and deliver to the trustee a
supplemental indenture in a form satisfactory to the trustee
pursuant to which such Subsidiary guarantees our obligations
with respect to the notes on the terms provided for in the
indenture.
The guarantee of any Subsidiary Guarantor may be released under
certain circumstances. If we exercise our legal or covenant
defeasance option with respect to the notes as described below
under Defeasance and Discharge, then any
Subsidiary Guarantor will be released. Further, if no default
has occurred and is continuing under the indenture, and to the
extent not otherwise prohibited by the indenture, a Subsidiary
Guarantor will be unconditionally released and discharged from
its guarantee:
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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 or other obligations of the
Subsidiary Guarantor with respect to the obligations of Energy
Transfer or any of its Subsidiaries under the Credit Agreement.
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If at any time following any release of a Subsidiary Guarantor
from its guarantee of the notes pursuant to the third bullet
point in the preceding paragraph, the Subsidiary Guarantor again
guarantees, becomes a co-obligor with respect to or otherwise
provides direct credit support for any obligations of Energy
Transfer or any of its Subsidiaries under the Credit Agreement,
then Energy Transfer will cause the Subsidiary Guarantor to
again guarantee the notes in accordance with the indenture.
Ranking
The notes will be unsecured, unless we are required to secure
them pursuant to the limitations on liens covenant described
below under Certain Covenants
Limitations on Liens. The notes will also be the
unsubordinated obligations of Energy Transfer and will rank
equally with all of its other existing and future unsubordinated
indebtedness. Each guarantee, if any, of the notes will be an
unsecured and unsubordinated obligation of the Subsidiary
Guarantor and will rank equally with all other existing and
future unsubordinated indebtedness of the Subsidiary Guarantor.
The notes and each guarantee, if any, will effectively rank
junior to any future indebtedness of Energy Transfer and any
Subsidiary Guarantor that is both secured and unsubordinated to
the extent of the value of the assets securing such
indebtedness, and the notes will effectively rank junior to all
indebtedness and other liabilities of our existing and future
Subsidiaries that are not Subsidiary Guarantors.
As of September 30, 2008, after giving effect to this
offering and the use of net proceeds therefrom, Energy Transfer
would have had $ billion of
indebtedness, all of which would have been unsecured,
unsubordinated indebtedness, consisting of the notes, Energy
Transfers 5.65% Senior Notes due 2012,
6.00% Senior Notes due 2013, 5.95% Senior Notes due
2015, 6.125% Senior Notes due 2017, 6.70% Senior Notes
due 2018, 6.625% Senior Notes due 2036 and
7.50% Senior Notes due 2038, and Energy Transfers
obligations under the ETP Credit Facility. Initially, none of
Energy Transfers Subsidiaries will guarantee the notes.
Substantially all the assets of HOLP and its Subsidiaries are
pledged to secure indebtedness of HOLP and its Subsidiaries.
Additionally, our subsidiary Transwestern has outstanding debt
securities. As of September 30, 2008, the notes would have
been effectively subordinated to approximately $730 million
of indebtedness of our Subsidiaries. In addition, we guarantee
50% of the obligations of MEP, our unconsolidated joint venture
with KMP, under MEPs $1.4 billion senior revolving
credit facility. As of September 30, 2008, there were
$525.0 million of outstanding borrowings and
$33.3 million of letters of credit issued under the MEP
facility. Upon the completion of our joint venture transaction
with OGE, our guarantee of MEPs obligations will be
reduced to 25% and OGE will guarantee 25% of the obligations of
MEP.
S-27
Please see Prospectus Supplement Summary The
Company Recent Developments ETP Enogex
Partners LLC.
No
Sinking Fund
We are not required to make any mandatory redemption, except as
provided above under Repurchase at the Option
of Holder, or sinking fund payments with respect to the
notes.
Certain
Covenants
Except as set forth below, neither Energy Transfer nor any of
its Subsidiaries is restricted by the indenture from incurring
any type of Indebtedness or other obligation, from paying
dividends or making distributions on its partnership or other
equity interests or from purchasing or redeeming its partnership
or other equity interests. The indenture does not require the
maintenance of any financial ratios or specified levels of net
worth or liquidity. In addition, the indenture does not contain
any provisions that would require Energy Transfer to repurchase
or redeem or otherwise modify the terms of the notes upon a
change in control or other events involving Energy Transfer that
could adversely affect the creditworthiness of Energy Transfer.
Limitations on Liens. Energy Transfer will
not, nor will it permit any of its Subsidiaries to, create,
assume, incur or suffer to exist any mortgage, lien, security
interest, pledge, charge or other encumbrance
(liens) upon any Principal Property or upon any
capital stock of any Restricted Subsidiary, whether owned on the
date of the supplemental indenture creating the notes or
thereafter acquired, to secure any Indebtedness of Energy
Transfer or any other Person (other than the notes), without in
any such case making effective provisions whereby all of the
outstanding notes are secured equally and ratably with, or prior
to, such Indebtedness so long as such Indebtedness is so secured.
Notwithstanding the foregoing, under the indenture, Energy
Transfer may, and may permit any of its Subsidiaries to, create,
assume, incur, or suffer to exist without securing the notes
(a) any Permitted Lien, (b) any lien upon any
Principal Property or capital stock of a Restricted Subsidiary
to secure Indebtedness of Energy Transfer or any other Person,
provided that the aggregate principal amount of all Indebtedness
then outstanding secured by such lien and all similar liens
under this clause (b), together with all Attributable
Indebtedness from Sale-Leaseback Transactions (excluding
Sale-Leaseback Transactions permitted by clauses (1)
through (4), inclusive, of the first paragraph of the
restriction on sale-leasebacks covenant described below), does
not exceed 10% of Consolidated Net Tangible Assets or
(c) any lien upon (i) any Principal Property that was
not owned by Energy Transfer or any of its Subsidiaries on the
date of the supplemental indenture creating the notes or
(ii) the capital stock of any Restricted Subsidiary that
owns no Principal Property that was owned by Energy Transfer or
any of its Subsidiaries on the date of the supplemental
indenture creating the notes, in each case owned by a Subsidiary
of Energy Transfer (an Excluded Subsidiary) that
(A) is not, and is not required to be, a Subsidiary
Guarantor and (B) has not granted any liens on any of its
property securing Indebtedness with recourse to Energy Transfer
or any Subsidiary of Energy Transfer other than such Excluded
Subsidiary or any other Excluded Subsidiary.
Restriction on Sale-Leasebacks. Energy
Transfer will not, and will not permit any Subsidiary to, engage
in the sale or transfer by Energy Transfer or any of its
Subsidiaries of any Principal Property to a Person (other than
Energy Transfer or a Subsidiary) and the taking back by Energy
Transfer or its Subsidiary, as the case may be, of a lease of
such Principal Property (a Sale-Leaseback
Transaction), unless:
(1) such Sale-Leaseback Transaction occurs within one year
from the date of completion of the acquisition of the Principal
Property subject thereto or the date of the completion of
construction, development or substantial repair or improvement,
or commencement of full operations on such Principal Property,
whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a
period, including renewals, of not more than three years;
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(3) Energy Transfer or such Subsidiary would be entitled to
incur Indebtedness secured by a lien on the Principal Property
subject thereto in a principal amount equal to or exceeding the
Attributable Indebtedness from such Sale-Leaseback Transaction
without equally and ratably securing the notes; or
(4) Energy Transfer or such Subsidiary, within a one-year
period after such Sale-Leaseback Transaction, applies or causes
to be applied an amount not less than the Attributable
Indebtedness from such Sale-Leaseback Transaction to
(a) the prepayment, repayment, redemption, reduction or
retirement of any Indebtedness of Energy Transfer or any of its
Subsidiaries that is not subordinated to the notes or any
guarantee, or (b) the expenditure or expenditures for
Principal Property used or to be used in the ordinary course of
business of Energy Transfer or its Subsidiaries.
Notwithstanding the foregoing, Energy Transfer may, and may
permit any Subsidiary to, effect any Sale-Leaseback Transaction
that is not excepted by clauses (1) through (4), inclusive,
of the preceding paragraph provided that the Attributable
Indebtedness from such Sale-Leaseback Transaction, together with
the aggregate principal amount of outstanding Indebtedness
(other than the notes) secured by liens other than Permitted
Liens upon Principal Properties, does not exceed 10% of
Consolidated Net Tangible Assets.
Reports. So long as any notes are outstanding,
Energy Transfer will:
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for as long as it is required to file information with the SEC
pursuant to the Exchange Act, file with the trustee, within
15 days after it is required to file the same with the SEC,
copies of the annual reports and of the information, documents
and other reports which it is required to file with the SEC
pursuant to the Exchange Act;
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if it is not required to file reports with the SEC pursuant to
the Exchange Act, file with the trustee, within 15 days
after it would have been required to file with the SEC,
financial statements (and with respect to annual reports, an
auditors report by a firm of established national
reputation) and a Managements Discussion and Analysis of
Financial Condition and Results of Operations, both comparable
to what it would have been required to file with the SEC had it
been subject to the reporting requirements of the Exchange
Act; and
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if it is required to furnish annual or quarterly reports to its
equity holders pursuant to the Exchange Act, it will file these
reports with the trustee.
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Merger, Consolidation or Sale of
Assets. Energy Transfer shall not consolidate
with or merge into any Person or sell, lease, convey, transfer
or otherwise dispose of all or substantially all of its assets
to any Person unless:
(1) the Person formed by or resulting from any such
consolidation or merger or to which such assets have been
transferred (the successor) is Energy Transfer or
expressly assumes by supplemental indenture all of Energy
Transfers obligations and liabilities under the indenture
and the notes;
(2) the successor is organized under the laws of the United
States, any state or the District of Columbia;
(3) immediately after giving effect to the transaction no
Default or Event of Default has occurred and is
continuing; and
(4) Energy Transfer has delivered to the trustee an
officers certificate and an opinion of counsel, each
stating that such consolidation, merger or transfer complies
with the indenture.
The successor will be substituted for Energy Transfer in the
indenture with the same effect as if it had been an original
party to the indenture. Thereafter, the successor may exercise
the rights and powers of Energy Transfer under the indenture. If
Energy Transfer conveys or transfers all or substantially all of
its assets, it will be released from all liabilities and
obligations under the indenture and under the notes except that
no such release will occur in the case of a lease of all or
substantially all of its assets.
Events of
Default
Each of the following is an Event of Default under the indenture
with respect to the notes: (1) a default in any payment of
interest on such notes when due that continues for 30 days;
S-29
(2) a default in the payment of principal of or premium, if
any, on such notes when due at their stated maturity, upon
redemption, upon declaration or otherwise;
(3) a failure by Energy Transfer or any Subsidiary
Guarantor to comply with its other covenants or agreements in
the indenture for 60 days after written notice of default
given by the trustee or the holders of at least 25% in aggregate
principal amount of the outstanding notes;
(4) certain events of bankruptcy, insolvency or
reorganization of Energy Transfer or any Subsidiary Guarantor
(the bankruptcy provisions);
(5) any guarantee of a Subsidiary Guarantor ceases to be in
full force and effect, is declared null and void or is found to
be invalid in a judicial proceeding or any Subsidiary Guarantor
denies or disaffirms its obligations under the indenture or its
guarantee; or
(6) any Indebtedness of Energy Transfer or any Subsidiary
Guarantor is not paid within any applicable grace period after
final maturity or is accelerated by the holders thereof because
of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $25,000,000.
An Event of Default for the notes will not necessarily
constitute an Event of Default for any other series of debt
securities issued under the indenture, and an Event of Default
for any such other series of debt securities will not
necessarily constitute an Event of Default for the notes.
Further, an event of default under other indebtedness of Energy
Transfer or its Subsidiaries will not necessarily constitute a
Default or an Event of Default for the notes. If an Event of
Default (other than an Event of Default described in
clause (4) above) with respect to the notes occurs and is
continuing, the trustee by notice to Energy Transfer, or the
holders of at least 25% in principal amount of the outstanding
notes by notice to Energy Transfer and the trustee, may, and the
trustee at the request of such holders shall, declare the
principal of, premium, if any, and accrued and unpaid interest,
if any, on all the notes to be due and payable. Upon such a
declaration, such principal, premium and accrued and unpaid
interest will be due and payable immediately. The indenture
provides that if an Event of Default described in
clause (4) above occurs, the principal of, premium, if any,
and accrued and unpaid interest on the notes will become and be
immediately due and payable without any declaration of
acceleration, notice or other act on the part of the trustee or
any holders. However, the effect of such provision may be
limited by applicable law.
The holders of a majority in principal amount of the outstanding
notes may, by written notice to the trustee, rescind any
acceleration with respect to the notes and annul its
consequences if rescission would not conflict with any judgment
or decree of a court of competent jurisdiction and all existing
Events of Default with respect to the notes, other than the
nonpayment of the principal of, premium, if any, and interest on
the notes that have become due solely by such acceleration, have
been cured or waived.
Subject to the provisions of the indenture relating to the
duties of the trustee, if an Event of Default occurs and is
continuing, the trustee will be under no obligation to exercise
any of the rights or powers under the indenture at the request
or direction of any of the holders of notes, unless such holders
have offered to the trustee reasonable indemnity or security
against any cost, liability or expense. Except to enforce the
right to receive payment of principal, premium, if any, or
interest when due, no holder of notes may pursue any remedy with
respect to the indenture or the notes, unless:
(1) such holder has previously given the trustee notice
that an Event of Default with respect to the notes is continuing;
(2) holders of at least 25% in principal amount of the
outstanding notes have requested in writing that the trustee
pursue the remedy;
(3) such holders have offered the trustee reasonable
security or indemnity against any cost, liability or expense;
(4) the trustee has not complied with such request within
60 days after the receipt of the request and the offer of
security or indemnity; and
(5) the holders of a majority in principal amount of the
outstanding notes have not given the trustee a direction that,
in the opinion of the trustee, is inconsistent with such request
within such
60-day
period.
S-30
Subject to certain restrictions, the holders of a majority in
principal amount of the outstanding notes have the right to
direct the time, method and place of conducting any proceeding
for any remedy available to the trustee or of exercising any
trust or power conferred on the trustee with respect to the
notes. The trustee, however, may refuse to follow any direction
that conflicts with law or the indenture or that the trustee
determines is unduly prejudicial to the rights of any other
holder of notes or that would involve the trustee in personal
liability.
The indenture provides that if a Default (that is, an event that
is, or after notice or the passage of time would be, an Event of
Default) with respect to the notes occurs and is continuing and
is known to the trustee, the trustee must mail to each holder of
notes notice of the Default within 90 days after it occurs.
Except in the case of a Default in the payment of principal of
and premium, if any, or interest on the notes, the trustee may
withhold such notice, but only if and so long as the trustee in
good faith determines that withholding notice is in the
interests of the holders of notes. In addition, Energy Transfer
is required to deliver to the trustee, within 120 days
after the end of each fiscal year, an officers certificate
as to compliance with all covenants under the indenture and
indicating whether the signers thereof know of any Default or
Event of Default that occurred during the previous year. Energy
Transfer also is required to deliver to the trustee, within
30 days after the occurrence thereof, an officers
certificate specifying any Default or Event of Default, its
status and what action Energy Transfer is taking or proposes to
take in respect thereof.
Amendments
and Waivers
Amendments of the indenture may be made by Energy Transfer, the
Subsidiary Guarantors, if any, and the trustee with the written
consent of the holders of a majority in principal amount of the
debt securities of each affected series then outstanding under
the indenture (including consents obtained in connection with a
tender offer or exchange offer for debt securities). However,
without the consent of each holder of an affected note, no
amendment may, among other things:
(1) reduce the percentage in principal amount of notes
whose holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any note;
(3) reduce the principal of or extend the stated maturity
of any note;
(4) reduce the premium payable upon the redemption of any
note as described above under Optional
Redemption;
(5) make any notes payable in money other than
U.S. dollars;
(6) impair the right of any holder to receive payment of
the principal of and premium, if any, and interest on such
holders note or to institute suit for the enforcement of
any payment on or with respect to such holders note;
(7) make any change in the amendment provisions which
require each holders consent or in the waiver provisions;
(8) release any security that may have been granted in
respect of the notes other than in accordance with the
indenture; or
(9) release the guarantee of any Subsidiary Guarantor other
than in accordance with the indenture or modify its guarantee in
any manner adverse to the holders.
The holders of a majority in principal amount of the outstanding
notes may waive compliance by Energy Transfer with certain
restrictive covenants on behalf of all holders of notes,
including those described under Certain
Covenants Limitations on Liens and
Certain Covenants Restriction on
Sale-Leasebacks. The holders of a majority in principal
amount of the outstanding notes, on behalf of all such holders,
may waive any past or existing Default or Event of Default with
respect to the notes (including any such waiver obtained in
connection with a tender offer or exchange offer for the notes),
except a Default or Event of Default in the payment of
principal, premium or interest or in respect of a provision that
under the indenture cannot be modified or amended without the
consent of the holder of each outstanding note affected. A
waiver by the holders of notes of compliance with a covenant, a
Default or an Event of Default will not constitute a waiver of
compliance with such covenant or
S-31
such Default or Event of Default with respect to any other
series of debt securities issued under the indenture to which
such covenant, Default or Event of Default applies.
Without the consent of any holder, Energy Transfer, the
Subsidiary Guarantors, if any, and the trustee may amend the
indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor of the
obligations of Energy Transfer under the indenture;
(3) provide for uncertificated notes in addition to or in
place of certificated notes;
(4) provide for the addition of any Subsidiary as a
Subsidiary Guarantor, or to reflect the release of any
Subsidiary Guarantor, in either case as provided in the
indenture;
(5) secure the notes or a guarantee;
(6) add to the covenants of Energy Transfer or any
Subsidiary Guarantor for the benefit of the holders or surrender
any right or power conferred upon Energy Transfer or any
Subsidiary Guarantor;
(7) make any change that does not adversely affect the
rights under the indenture of any holder;
(8) comply with any requirement of the SEC in connection
with the qualification of the indenture under the
Trust Indenture Act; and
(9) provide for a successor trustee.
The consent of the holders is not necessary under the indenture
to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the
proposed amendment. After an amendment with the consent of the
holders under the indenture becomes effective, Energy Transfer
is required to mail to all holders of notes a notice briefly
describing such amendment. However, the failure to give such
notice to all such holders, or any defect therein, will not
impair or affect the validity of the amendment.
Defeasance
and Discharge
Energy Transfer at any time may terminate all its obligations
under the indenture as they relate to the notes (legal
defeasance), except for certain obligations, including
those respecting the defeasance trust and obligations to
register the transfer of or exchange the notes, to replace
mutilated, destroyed, lost or stolen notes and to maintain a
registrar and paying agent in respect of the notes.
Energy Transfer at any time may terminate its obligations under
the covenants described under Certain
Covenants (other than Merger, Consolidation or Sale
of Assets) and the bankruptcy provisions with respect to
each Subsidiary Guarantor, the guarantee provision and the
cross-acceleration provision described under
Events of Default above with respect to
the notes (covenant defeasance).
Energy Transfer may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance
option. If Energy Transfer exercises its legal defeasance
option, payment of the notes may not be accelerated because of
an Event of Default. If Energy Transfer exercises its covenant
defeasance option for the notes, payment of the notes may not be
accelerated because of an Event of Default specified in clause
(3), (4) (with respect only to a Subsidiary Guarantor),
(5) or (6) under Events of
Default above. If Energy Transfer exercises either its
legal defeasance option or its covenant defeasance option, each
guarantee will terminate with respect to the notes and any
security that may have been granted with respect to the notes
will be released.
In order to exercise either defeasance option, Energy Transfer
must irrevocably deposit in trust (the defeasance
trust) with the trustee money, U.S. Government
Obligations (as defined in the indenture) or a combination
thereof for the payment of principal, premium, if any, and
interest on the notes to redemption or stated maturity, as the
case may be, and must comply with certain other conditions,
including delivery to the trustee of an opinion of counsel
(subject to customary exceptions and exclusions) to the effect
that holders of the notes will not recognize income, gain or
loss for federal income tax purposes as a result of such
defeasance and will be subject to federal income tax on the same
amounts and in the same manner and at the same times as would
have been the case
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if such defeasance had not occurred. In the case of legal
defeasance only, such opinion of counsel must be based on a
ruling of the Internal Revenue Service or other change in
applicable federal income tax law.
In the event of any legal defeasance, holders of the notes would
be entitled to look only to the trust fund for payment of
principal of and any premium and interest on their notes until
maturity.
Although the amount of money and U.S. Government
Obligations on deposit with the trustee would be intended to be
sufficient to pay amounts due on the notes at the time of their
stated maturity, if Energy Transfer exercises its covenant
defeasance option for the notes and the notes are declared due
and payable because of the occurrence of an Event of Default,
such amount may not be sufficient to pay amounts due on the
notes at the time of the acceleration resulting from such Event
of Default. Energy Transfer would remain liable for such
payments, however.
In addition, Energy Transfer may discharge all its obligations
under the indenture with respect to the notes, other than its
obligation to register the transfer of and exchange notes,
provided that either:
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it delivers all outstanding notes to the trustee for
cancellation; or
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all such notes not so delivered for cancellation have either
become due and payable or will become due and payable at their
stated maturity within one year or are called for redemption
within one year, and in the case of this bullet point, it has
deposited with the trustee in trust an amount of cash sufficient
to pay the entire indebtedness of such notes, including interest
to the stated maturity or applicable redemption date.
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Book-Entry
System
We have obtained the information in this section concerning The
Depository Trust Company, or DTC, and its book-entry
systems and procedures from DTC, but we take no responsibility
for the accuracy of this information. In addition, the
description in this section reflects our understanding of the
rules and procedures of DTC as they are currently in effect. DTC
could change its rules and procedures at any time.
The notes will initially be represented by one or more fully
registered global notes. Each such global note will be deposited
with, or on behalf of, DTC or any successor thereto and
registered in the name of Cede & Co. (DTCs
nominee). You may hold your interests in the global notes
through DTC either as a participant in DTC or indirectly through
organizations which are participants in DTC.
So long as DTC or its nominee is the registered owner of the
global securities representing the notes, DTC or such nominee
will be considered the sole owner and holder of the notes for
all purposes of the notes and the indenture. Except as provided
below, owners of beneficial interests in the notes will not be
entitled to have the notes registered in their names, will not
receive or be entitled to receive physical delivery of the notes
in definitive form and will not be considered the owners or
holders of the notes under the indenture, including for purposes
of receiving any reports delivered by us or the trustee pursuant
to the indenture. Accordingly, each person owning a beneficial
interest in a note must rely on the procedures of DTC or its
nominee and, if such person is not a participant, on the
procedures of the participant through which such person owns its
interest, in order to exercise any rights of a holder of notes.
The Depository Trust Company. DTC will
act as securities depositary for the notes. The notes will be
issued as fully registered notes registered in the name of
Cede & Co. DTC has advised us as follows: DTC is
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a limited-purpose trust company organized under the New York
Banking Law;
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a banking organization under the New York Banking
Law;
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a member of the Federal Reserve System;
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a clearing corporation under the New York Uniform
Commercial Code; and
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a clearing agency registered under the provisions of
Section 17A of the Securities Exchange Act of 1934.
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DTC holds securities that its direct participants deposit with
DTC. DTC facilitates the settlement among direct participants of
securities transactions, such as transfers and pledges, in
deposited securities through electronic
S-33
computerized book-entry changes in direct participants
accounts, thereby eliminating the need for physical movement of
securities certificates.
Direct participants of DTC include securities brokers and
dealers (including the underwriters), banks, trust companies,
clearing corporations, and certain other organizations. DTC is
owned by a number of its direct participants. Indirect access to
the DTC system is also available to securities brokers and
dealers, banks and trust companies that maintain a custodial
relationship with a direct participant.
If you are not a direct participant or an indirect participant
and you wish to purchase, sell or otherwise transfer ownership
of, or other interests in, notes, you must do so through a
direct participant or an indirect participant. DTC agrees with
and represents to DTC participants that it will administer its
book-entry system in accordance with its rules and by-laws and
requirements of law. The SEC has on file a set of the rules
applicable to DTC and its direct participants.
Purchases of notes under DTCs system must be made by or
through direct participants, which will receive a credit for the
notes on DTCs records. The ownership interest of each
beneficial owner is in turn to be recorded on the records of
direct participants and indirect participants. Beneficial owners
will not receive written confirmation from DTC of their
purchase, but beneficial owners are expected to receive written
confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the direct
participants or indirect participants through which such
beneficial owners entered into the transaction. Transfers of
ownership interests in the notes are to be accomplished by
entries made on the books of participants acting on behalf of
beneficial owners.
To facilitate subsequent transfers, all notes deposited with DTC
are registered in the name of DTCs nominee,
Cede & Co. The deposit of notes with DTC and their
registration in the name of Cede & Co. effect no
change in beneficial ownership. DTC has no knowledge of the
actual beneficial owners of the notes. DTCs records
reflect only the identity of the direct participants to whose
accounts such notes are credited, which may or may not be the
beneficial owners. The participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants
and by direct participants and indirect participants to
beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in
effect from time to time.
Book-Entry Format. Under the book-entry
format, the trustee will pay interest or principal payments to
Cede & Co., as nominee of DTC. DTC will forward the
payment to the direct participants, who will then forward the
payment to the indirect participants or to you as the beneficial
owner. You may experience some delay in receiving your payments
under this system. Neither we, the trustee under the indenture
nor any paying agent has any direct responsibility or liability
for the payment of principal or interest on the notes to owners
of beneficial interests in the notes.
DTC is required to make book-entry transfers on behalf of its
direct participants and is required to receive and transmit
payments of principal, premium, if any, and interest on the
notes. Any direct participant or indirect participant with which
you have an account is similarly required to make book-entry
transfers and to receive and transmit payments with respect to
the notes on your behalf. We, the underwriters and the trustee
under the indenture have no responsibility for any aspect of the
actions of DTC or any of its direct or indirect participants.
We, the underwriters and the trustee under the indenture have no
responsibility or liability for any aspect of the records kept
by DTC or any of its direct or indirect participants relating to
or payments made on account of beneficial ownership interests in
the notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. We also
do not supervise these systems in any way.
The trustee will not recognize you as a holder under the
indenture, and you can only exercise the rights of a holder
indirectly through DTC and its direct participants. DTC has
advised us that it will only take action regarding a note if one
or more of the direct participants to whom the note is credited
directs DTC to take such action and only in respect of the
portion of the aggregate principal amount of the notes as to
which that participant or participants has or have given that
direction. DTC can only act on behalf of its direct
participants. Your ability to pledge notes to non-direct
participants, and to take other actions, may be limited because
you will not possess a physical certificate that represents your
notes.
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Neither DTC nor Cede & Co. (nor such other DTC
nominee) will consent or vote with respect to the notes unless
authorized by a direct participant in accordance with DTCs
procedures. Under its usual procedures, DTC will mail an omnibus
proxy to us as soon as possible after the record date. The
omnibus proxy assigns Cede & Co.s consenting or
voting rights to those direct participants to whose accounts the
notes are credited on the record date (identified in a listing
attached to the omnibus proxy).
DTC has agreed to the foregoing procedures in order to
facilitate transfers of the notes among its participants.
However, DTC is under no obligation to perform or continue to
perform those procedures, and may discontinue those procedures
at any time.
Concerning
the Trustee
The indenture contains certain limitations on the right of the
trustee, should it become our creditor, to obtain payment of
claims in certain cases, or to realize for its own account on
certain property received in respect of any such claim as
security or otherwise. The trustee is permitted to engage in
certain other transactions. However, if it acquires any
conflicting interest within the meaning of the
Trust Indenture Act after a Default has occurred and is
continuing, it must eliminate the conflict within 90 days,
apply to the SEC for permission to continue as trustee or resign.
If an Event of Default occurs and is not cured or waived, the
trustee is required to exercise such of the rights and powers
vested in it by the indenture and use the same degree of care
and skill in their exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
Subject to such provisions, the trustee will not be under any
obligation to exercise any of its rights or powers under the
indenture at the request of any of the holders of notes unless
they have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities it may
incur.
U.S. Bank National Association is the trustee under the
indenture and has been appointed by Energy Transfer as registrar
and paying agent with regard to the notes. The trustees
address is 5555 San Felipe, Suite 1150, Houston, Texas
77056. The trustee and its affiliates maintain commercial
banking and other relationships with Energy Transfer. See
Plan of Distribution for more information regarding
these relationships.
No
Personal Liability of Directors, Officers, Employees, Limited
Partners and Shareholders
The directors, officers, employees, limited partners and
shareholders of Energy Transfer and the General Partner will not
have any personal liability for our obligations under the
indenture or the notes. Each holder of notes, by accepting a
note, waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of the
notes.
Governing
Law
The indenture and the notes are governed by, and will be
construed in accordance with, the laws of the State of New York.
Certain
Definitions
Attributable Indebtedness, when used with
respect to any Sale-Leaseback Transaction, means, as at the time
of determination, the present value (discounted at the rate set
forth or implicit in the terms of the lease included in such
transaction) of the total obligations of the lessee for rental
payments (other than amounts required to be paid on account of
property taxes, maintenance, repairs, insurance, assessments,
utilities, operating and labor costs and other items that do not
constitute payments for property rights) during the remaining
term of the lease included in such Sale-Leaseback Transaction
(including any period for which such lease has been extended).
In the case of any lease that is terminable by the lessee upon
the payment of a penalty or other termination payment, such
amount shall be the lesser of the amount determined assuming
termination upon the first date such lease may be terminated (in
which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered
as required to be paid under such lease subsequent to the first
date upon which it may be so terminated) or the amount
determined assuming no such termination.
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Consolidated Net Tangible Assets means, at
any date of determination, the total amount of assets of Energy
Transfer and its consolidated Subsidiaries after deducting
therefrom:
(1) all current liabilities (excluding (A) any current
liabilities that by their terms are extendable or renewable at
the option of the obligor thereon to a time more than twelve
months after the time as of which the amount thereof is being
computed, and (B) current maturities of long-term
debt); and
(2) the value (net of any applicable reserves) of all
goodwill, trade names, trademarks, patents and other like
intangible assets, all as set forth, or on a pro forma basis
would be set forth, on the consolidated balance sheet of Energy
Transfer and its consolidated Subsidiaries for Energy
Transfers most recently completed fiscal quarter for which
financial statements have been filed with the SEC, prepared in
accordance with generally accepted accounting principles.
Credit Agreement means the Amended and
Restated Credit Agreement, dated as of July 20, 2007, among
Energy Transfer, Wachovia Bank, National Association, as
Administrative Agent, and the other agents and lenders party
thereto, and as further amended, restated, refinanced, replaced
or refunded from time to time.
General Partner means Energy Transfer
Partners GP, L.P., a Delaware limited partnership, and its
successors as general partner of Energy Transfer.
Indebtedness of any Person at any date means
any obligation created or assumed by such Person for the
repayment of borrowed money or any guaranty thereof.
Permitted Liens means:
(1) liens upon rights-of-way for pipeline purposes;
(2) easements, rights-of-way, restrictions and other
similar encumbrances incurred in the ordinary course of business
and encumbrances consisting of zoning restrictions, easements,
licenses, restrictions on the use of real property or minor
imperfections in title thereto and which do not in the aggregate
materially adversely affect the value of the properties
encumbered thereby or materially impair their use in the
operation of the business of Energy Transfer and its
Subsidiaries;
(3) rights reserved to or vested by any provision of law in
any municipality or public authority to control or regulate any
of the properties of Energy Transfer or any Subsidiary or the
use thereof or the rights and interests of Energy Transfer or
any Subsidiary therein, in any manner under any and all laws;
(4) rights reserved to the grantors of any properties of
Energy Transfer or any Subsidiary, and the restrictions,
conditions, restrictive covenants and limitations, in respect
thereto, pursuant to the terms, conditions and provisions of any
rights-of-way agreements, contracts or other agreements
therewith;
(5) any statutory or governmental lien or lien arising by
operation of law, or any mechanics, repairmens,
materialmens, suppliers, carriers,
landlords, warehousemens or similar lien incurred in
the ordinary course of business which is not more than sixty
(60) days past due or which is being contested in good
faith by appropriate proceedings and any undetermined lien which
is incidental to construction, development, improvement or
repair;
(6) any right reserved to, or vested in, any municipality
or public authority by the terms of any right, power, franchise,
grant, license, permit or by any provision of law, to purchase
or recapture or to designate a purchaser of, any property;
(7) liens for taxes and assessments which are (a) for
the then current year, (b) not at the time delinquent, or
(c) delinquent but the validity or amount of which is being
contested at the time by Energy Transfer or any of its
Subsidiaries in good faith by appropriate proceedings;
(8) liens of, or to secure performance of, leases, other
than capital leases;
(9) any lien in favor of Energy Transfer or any Subsidiary;
(10) any lien upon any property or assets of Energy
Transfer or any Subsidiary in existence on the date of the
initial issuance of the notes;
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(11) any lien incurred in the ordinary course of business
in connection with workmens compensation, unemployment
insurance, temporary disability, social security, retiree health
or similar laws or regulations or to secure obligations imposed
by statute or governmental regulations;
(12) liens in favor of any person to secure obligations
under provisions of any letters of credit, bank guarantees,
bonds or surety obligations required or requested by any
governmental authority in connection with any contract or
statute, provided that such obligations do not constitute
Indebtedness; or any lien upon or deposits of any assets to
secure performance of bids, trade contracts, leases or statutory
obligations, and other obligations of a like nature incurred in
the ordinary course of business;
(13) any lien upon any property or assets created at the
time of acquisition of such property or assets by Energy
Transfer or any of its Subsidiaries or within one year after
such time to secure all or a portion of the purchase price for
such property or assets or debt incurred to finance such
purchase price, whether such debt was incurred prior to, at the
time of or within one year after the date of such acquisition;
(14) any lien upon any property or assets to secure all or
part of the cost of construction, development, repair or
improvements thereon or to secure Indebtedness incurred prior
to, at the time of, or within one year after completion of such
construction, development, repair or improvements or the
commencement of full operations thereof (whichever is later), to
provide funds for any such purpose;
(15) any lien upon any property or assets existing thereon
at the time of the acquisition thereof by Energy Transfer or any
of its Subsidiaries and any lien upon any property or assets of
a Person existing thereon at the time such Person becomes a
Subsidiary of Energy Transfer by acquisition, merger or
otherwise; provided that, in each case, such lien only encumbers
the property or assets so acquired or owned by such Person at
the time such Person becomes a Subsidiary;
(16) liens imposed by law or order as a result of any
proceeding before any court or regulatory body that is being
contested in good faith, and liens which secure a judgment or
other court-ordered award or settlement as to which Energy
Transfer or the applicable Subsidiary has not exhausted its
appellate rights;
(17) any extension, renewal, refinancing, refunding or
replacement (or successive extensions, renewals, refinancing,
refunding or replacements) of liens, in whole or in part,
referred to in clauses (1) through (16) above;
provided, however, that any such extension, renewal,
refinancing, refunding or replacement lien shall be limited to
the property or assets covered by the lien extended, renewed,
refinanced, refunded or replaced and that the obligations
secured by any such extension, renewal, refinancing, refunding
or replacement lien shall be in an amount not greater than the
amount of the obligations secured by the lien extended, renewed,
refinanced, refunded or replaced and any expenses of Energy
Transfer or its Subsidiaries (including any premium) incurred in
connection with such extension, renewal, refinancing, refunding
or replacement; or
(18) any lien resulting from the deposit of moneys or
evidence of indebtedness in trust for the purpose of defeasing
Indebtedness of Energy Transfer or any of its Subsidiaries.
Person means any individual, corporation,
partnership, limited liability company, joint venture,
incorporated or unincorporated association, joint-stock company,
trust, unincorporated organization, government or any agency or
political subdivision thereof or any other entity.
Principal Property means, whether owned or
leased on the date of the initial issuance of the notes or
thereafter acquired:
(1) any pipeline assets of Energy Transfer or any of its
Subsidiaries, including any related facilities employed in the
gathering, transportation, distribution, storage or marketing of
natural gas, refined petroleum products, natural gas liquids and
petrochemicals, that are located in the United States of America
or any territory or political subdivision thereof; and
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(2) any processing, compression, treating, blending or
manufacturing plant or terminal owned or leased by Energy
Transfer or any of its Subsidiaries that is located in the
United States or any territory or political subdivision thereof,
except in the case of either of the preceding clauses (1)
or (2):
(a) any such assets consisting of inventories, furniture,
office fixtures and equipment (including data processing
equipment), vehicles and equipment used on, or useful with,
vehicles;
(b) any such assets which, in the opinion of the board of
directors of the General Partner are not material in relation to
the activities of Energy Transfer and its Subsidiaries taken as
a whole; and
(c) any assets used primarily in the conduct of the retail
propane marketing business conducted by Heritage Operating, L.P.
and its Subsidiaries.
Restricted Subsidiary means any Subsidiary
owning or leasing, directly or indirectly through ownership in
another Subsidiary, any Principal Property.
Subsidiary means, with respect to any Person,
any corporation, association or business entity of which more
than 50% of the total voting power of the equity interests
entitled (without regard to the occurrence of any contingency)
to vote in the election of directors, managers or trustees
thereof or any partnership of which more than 50% of the
partners equity interests (considering all partners
equity interests as a single class) is, in each case, at the
time owned or controlled, directly or indirectly, by such Person
or one or more Subsidiaries of such Person or a combination
thereof.
Subsidiary Guarantor means each Subsidiary of
Energy Transfer that guarantees the notes pursuant to the terms
of the indenture but only so long as such Subsidiary is a
guarantor with respect to the notes on the terms provided for in
the indenture.
S-38
CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal
income tax considerations and, in the case of a holder that is a
non-U.S. holder
(as defined below), the U.S. federal estate tax
considerations, that may be relevant to the acquisition,
ownership and disposition of the notes by an initial beneficial
owner of the notes. This discussion is based upon the provisions
of the Internal Revenue Code of 1986, as amended (the
Code), applicable Treasury Regulations promulgated
and proposed thereunder, judicial authority and administrative
interpretations as of the date hereof, all of which are subject
to change, possibly with retroactive effect, or are subject to
different interpretations. We cannot assure you that the
Internal Revenue Service will not challenge one or more of the
tax consequences described herein, and we have not obtained, nor
do we intend to obtain, a ruling from the Internal Revenue
Service or an opinion of counsel with respect to the U.S.
federal tax consequences of acquiring, holding or disposing of
the notes.
This discussion applies only to the initial holders of the notes
who acquire the notes for cash at a price equal to the issue
price of the notes and who hold the notes as capital assets
(i.e., generally held for investment). The issue price of the
notes is the first price at which a substantial amount of the
notes is sold other than to bond houses, brokers or similar
persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers. This summary does not address
the tax considerations arising under the laws of any foreign,
state or local jurisdiction. In addition, this discussion does
not address all tax considerations that may be important to a
particular holder in light of the holders circumstances,
or to certain categories of holders that may be subject to
special rules, such as:
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dealers in securities or currencies;
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traders in securities;
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U.S. holders (as defined below) whose functional currency
is not the U.S. dollar;
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persons holding notes as part of a hedge, straddle, conversion
or other synthetic security or integrated
transaction;
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certain U.S. expatriates;
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financial institutions;
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insurance companies;
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regulated investment companies;
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entities that are tax-exempt for U.S. federal income tax
purposes; and
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persons holding notes through partnerships and other
pass-through entities.
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Investors considering the purchase of notes should consult
their own tax advisors regarding the application of the
U.S. federal income tax laws to their particular situations
and the applicability and effect of state, local or foreign tax
laws and tax treaties.
Consequences
to U.S. Holders
The following summary applies to you if you are a
U.S. holder of the notes. The term
U.S. holder means a beneficial owner of a note
who or which is for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation (or an entity that is treated as a corporation for
United States federal tax purposes) created or organized in or
under the laws of the United States or any political subdivision
of the United States, including any state thereof or the
District of Columbia;
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an estate the income of which is subject to United States
federal income taxation regardless of the source; or
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a trust, if in general, a U.S. court is able to exercise
primary supervision over the trusts administration and one
or more United States persons (within the meaning of the Code)
have the authority to control all of the trusts
substantial decisions, or the trust has a valid election in
effect under applicable Treasury Regulations to be treated as a
United States person.
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S-39
Payments
of Interest
You will generally be required to recognize as ordinary income
any interest paid or accrued on the notes, in accordance with
your regular method of accounting for federal income tax
purposes. We expect that the notes will not be issued with more
than a de minimis amount of original issue discount within the
meaning of the Code.
Sale,
Exchange or Disposition of Notes
When you sell or otherwise dispose of your notes in a taxable
transaction, you generally will recognize taxable gain or loss
equal to the difference, if any, between:
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the amount realized on the sale or other disposition, less any
amount attributable to accrued interest, which will be taxable
in the manner described under Consequences to
U.S. Holders Payments of Interest
above; and
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your adjusted tax basis in the notes.
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Your initial tax basis in your notes generally will equal the
amount you paid for the notes. Your gain or loss generally will
be capital gain or loss. This capital gain or loss will be
long-term capital gain or loss if at the time of the sale or
other taxable disposition you have held the notes for more than
one year. Subject to limited exceptions, your capital losses
cannot be used to offset your ordinary income. If you are a
non-corporate U.S. holder, your long-term capital gain
generally will be taxed at lower rates than ordinary income
under current law.
Information
Reporting and Backup Withholding
Information reporting will apply to payments of interest on, or
the proceeds of the sale or other disposition of, notes held by
you unless you are an exempt recipient. Backup withholding
(currently at a rate of 28%) may apply unless you provide the
appropriate intermediary with a taxpayer identification number,
certified under penalties of perjury, as well as certain other
information or otherwise establish an exemption from backup
withholding. Any amount withheld under the backup withholding
rules is allowable as a credit against your U.S. federal income
tax liability, if any, and a refund may be obtained if the
amounts withheld exceed your actual U.S. federal income tax
liability and you timely provide the required information or
appropriate claim form to the Internal Revenue Service.
Consequences
to Non-U.S.
Holders
The following summary applies to you if you are not a
U.S. holder (as defined above) or a partnership (including
an entity or arrangement treated as a partnership for
U.S. federal income tax purposes).
Payments
of Interest
Payments of interest on the notes generally will not be subject
to United States federal withholding tax under the
portfolio interest exemption provided that you
properly certify to your foreign status as described below and
the interest is not effectively connected with a trade or
business conducted by you in the United States, and:
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you do not directly or indirectly, actually or constructively,
own 10% or more of our capital or profits interests;
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you are not a controlled foreign corporation for
U.S. federal income tax purposes that is related, directly
or indirectly, to us through stock ownership (as defined in the
Code); and
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you are not a bank whose receipt of interest on the notes is in
connection with an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of your trade or
business.
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The portfolio interest exemption and several of the special
rules for
non-U.S. holders
described below generally apply only if you appropriately
certify as to your foreign status. You can generally meet this
certification requirement by providing a properly executed IRS
Form W-8BEN
or appropriate substitute form to us, or our paying agent. If
you hold the notes through a financial institution or other
agent acting on your behalf, you may be required to provide
appropriate certifications to the agent. Your agent will then
generally be required to provide appropriate certifications to
us or our paying agent, either directly or through other
intermediaries. Special rules apply to foreign partnerships,
estates and trusts, and in certain circumstances certifications
as to foreign status of partners, trust owners or beneficiaries
may have to be provided to us or our paying agent. In addition,
special rules apply to qualified intermediaries that enter into
withholding agreements with the IRS.
S-40
If you cannot satisfy the requirements described above, payments
of interest made to you will be subject to the 30% U.S. federal
withholding tax, unless you provide us with a properly executed
IRS
Form W-8BEN
(or successor form) claiming an exemption from (or a reduction
of) withholding under the benefit of a tax treaty, or the
payments of interest are effectively connected with your conduct
of a trade or business in the United States and you meet the
certification requirements described below. See
Consequences to Non-U.S. Holders Income
or Gain Effectively Connected With a U.S. Trade or
Business. In addition, you may, under certain
circumstances, be required to obtain a United States
taxpayer identification number, or TIN.
Sale,
Exchange, or Disposition of the Notes
You generally will not be subject to U.S. federal income tax on
any gain realized on the sale, exchange, redemption or other
disposition of a note unless:
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the gain is effectively connected with the conduct by you of a
U.S. trade or business (and in the case of an applicable
tax treaty, attributable to your permanent establishment in the
United States);
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you are an individual who has been present in the U.S. for
183 days or more in the taxable year of disposition and
certain other requirements are met; or
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you were a citizen or resident of the United States and are
subject to special rules that apply to certain expatriates.
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Income
or Gain Effectively Connected With a U.S. Trade or
Business
The preceding discussion of the tax consequences of the
purchase, ownership and disposition of notes by you generally
assumes that you are not engaged in a U.S. trade or
business. If any interest on the notes or gain from the sale,
exchange or other disposition of the notes is effectively
connected with a U.S. trade or business conducted by you,
then the income or gain will be subject to U.S. federal
income tax at regular graduated income tax rates, but will not
be subject to withholding tax if certain certification
requirements are satisfied. You can generally meet the
certification requirements by providing a properly executed IRS
Form W-8ECI
or appropriate substitute form to us, or our paying agent. If
you are eligible for the benefits of a tax treaty between the
United States and your country of residence, any
effectively connected income or gain will generally
be subject to U.S. federal income tax only if it is also
attributable to a permanent establishment maintained by you in
the United States. If you are a corporation, that portion of
your earnings and profits that is effectively connected with
your U.S. trade or business (and, in the case of an
applicable tax treaty, attributable to your permanent
establishment in the United States) also may be subject to a
branch profits tax at a 30% rate, although an
applicable tax treaty may provide for a lower rate.
U.S.
Federal Estate Tax
If you are an individual and qualify for the portfolio interest
exemption under the rules described above, the notes will not be
included in your estate for U.S. federal estate tax
purposes, unless the income on the notes is, at the time of your
death, effectively connected with your conduct of a trade or
business in the United States.
Information
Reporting and Backup Withholding
Payments to non-U.S. holders of interest on a note, and
amounts withheld from such payments, if any, generally will be
required to be reported to the IRS and to you.
United States backup withholding tax generally will not apply to
payments of interest and principal on a note to a non-U.S.
holder if the statement described in Consequences to
Non-U.S. Holders
Payments of Interest is duly provided by the holder or the
holder otherwise establishes an exemption, provided that we do
not have actual knowledge or reason to know that the holder is a
United States person.
Payment of the proceeds of a sale of a note effected by the
U.S. office of a United States or foreign broker will be
subject to information reporting requirements and backup
withholding unless you properly certify under penalties of
perjury as to your foreign status and certain other conditions
are met or you otherwise establish an exemption. Information
reporting requirements and backup withholding generally will not
apply to any payment of the proceeds of the sale of a note
effected outside the United States by a foreign office of a
broker. However, unless such a broker has documentary evidence
in its records that you are a
non-U.S. holder
and certain other conditions
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are met, or you otherwise establish an exemption, information
reporting will apply to a payment of the proceeds of the sale of
a note effected outside the United States by such a broker if it:
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is a United States person;
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derives 50% or more of its gross income for certain periods from
the conduct of a trade or business in the United States;
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is a controlled foreign corporation for U.S. federal income tax
purposes; or
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is a foreign partnership that, at any time during its taxable
year, has more than 50% of its income or capital interests owned
by United States persons or is engaged in the conduct of a U.S.
trade or business.
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Any amount withheld under the backup withholding rules may be
credited against your U.S. federal income tax liability and any
excess may be refundable if the proper information is timely
provided to the IRS.
The preceding discussion of certain U.S. federal income
tax considerations is for general information only and is not
tax advice. Each prospective investor should consult its own tax
advisor regarding the particular federal, state, local and
foreign tax consequences of purchasing, holding, and disposing
of our notes, including the consequences of any proposed change
in applicable laws.
S-42
UNDERWRITING
Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus supplement by and
among us and the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Credit Suisse Securities
(USA) LLC, J.P. Morgan Securities Inc. and Wachovia Capital
Markets, LLC are acting as representatives, we have agreed to
sell to each of the underwriters, and each of the underwriters
has agreed to purchase from us, the principal amount of the
notes indicated in the following table.
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Principal
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Underwriters
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Amount of Notes
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Morgan Stanley & Co. Incorporated
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$
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Credit Suisse Securities (USA) LLC
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J.P. Morgan Securities Inc.
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Wachovia Capital Markets, LLC
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Banc of America Securities LLC
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SunTrust Robinson Humphrey, Inc.
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Total
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$
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Under the terms and conditions of the underwriting agreement, if
the underwriters take any of the notes, then they are obligated
to take and pay for all the notes.
The notes are new issues of securities with no established
trading market and will not be listed on any national securities
exchange. The underwriters have advised us that they intend to
make a market for the notes, but they have no obligation to do
so and may discontinue market-making at any time without
providing any notice. No assurance can be given as to the
liquidity of any trading market for the notes.
Notes sold by the underwriters to the public will initially be
offered at the public offering price set forth on the cover page
of this prospectus supplement. Any notes sold by the
underwriters to securities dealers may be sold at a discount
from the public offering price of up
to % of the principal amount of the
notes. The underwriters may allow, and any such dealer may
reallow, a concession not in excess
of % of the principal amount of the
notes to certain other dealers. After the initial offering of
the notes to the public, the underwriters may change the
offering price and other selling terms.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933, as amended, or to contribute to payments that the
underwriters may be required to make in respect of any such
liabilities.
In connection with the offering, the underwriters may purchase
and sell notes in the open market. These transactions may
include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of notes than it is
required to purchase in the offering. Stabilizing transactions
consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market prices of the
notes while the offering is in progress. These activities by the
underwriters may stabilize, maintain or otherwise affect the
market prices of the notes. As a result, the prices of the notes
may be higher than the prices that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions
may be effected in the over-the-counter market or otherwise.
We estimate that the total expenses of this offering to be paid
by us, excluding underwriting discounts, will be approximately
$300,000.
In the ordinary course of its business, the underwriters and
their affiliates have engaged, and may in the future engage, in
commercial banking
and/or
investment banking transactions with us and our affiliates for
which they received or will receive customary fees and expenses.
Affiliates of each of the underwriters are agents and lenders
under our revolving credit facility. An affiliate of Credit
Suisse Securities (USA) LLC acted as our financial advisor in
connection with our pending joint venture with OGE, for which
the affiliate was paid a customary financial advisor fee. We
will use the net proceeds of the offering of the notes to repay
outstanding loans and accrued interest under our revolving
credit facility. As a result, this offering is subject to the
provisions of Rule 5110(h) of the Financial Industry
Regulatory Authority. The underwriters have relied upon the
ratings assigned to the notes by Moodys rating services to
satisfy the requirements of Rule 5110(h).
S-43
LEGAL
MATTERS
The validity of the notes offered in this prospectus supplement
will be passed upon for us by Vinson & Elkins L.L.P.,
Houston, Texas. Certain legal matters will be passed upon for
the underwriters by Andrews Kurth LLP, Houston, Texas.
EXPERTS
The consolidated financial statements and the effectiveness of
internal control over financial reporting of Energy Transfer
Partners, L.P. and the consolidated balance sheets of Energy
Transfer Partners GP, L.P. and Energy Transfer Partners, L.L.C.
all incorporated in this prospectus supplement by reference from
Energy Transfer Partners, L.P.s Annual Report on
Form 10-K
for the year ended August 31, 2007 and the consolidated
financial statements of Energy Transfer Partners, L.P. and the
consolidated balance sheets of Energy Transfer Partners GP, L.P.
and Energy Transfer Partners, L.L.C. all incorporated in this
prospectus supplement by reference from Energy Transfer
Partners, L.P.s Current Report on
Form 8-K
filed on March 19, 2008 have been audited by Grant Thornton
LLP, independent registered public accountants, as indicated in
their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving
said reports.
WHERE YOU
CAN FIND MORE INFORMATION
We file annual, quarterly and other reports and other
information with the SEC. You may read and copy any document we
file at the 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 supplement 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 supplement and the accompanying prospectus.
Information that we file later with the SEC will automatically
update and may replace information in this prospectus supplement
and information previously filed with the SEC.
We incorporate by reference in this prospectus supplement the
documents listed below:
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our annual report on
Form 10-K
for the year ended August 31, 2007;
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our transition report on
Form 10-Q
for the four months ended December 31, 2007;
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our quarterly reports on
Form 10-Q
for the quarters ended November 30, 2007, March 31,
2008, June 30, 2008 and September 30, 2008;
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our current reports on
Form 8-K
or 8-K/A
filed September 26, 2007 (two reports), October 9,
2007 (three reports), October 15, 2007, October 30,
2007, November 2, 2007, November 13, 2007,
December 10, 2007, December 11, 2007,
December 13, 2007, January 18, 2008, February 7,
2008, February 20, 2008, March 3, 2008, March 4,
2008, March 18, 2008, March 19, 2008, March 28,
2008, March 31, 2008, April 24, 2008, June 17,
2008, July 17, 2008, July 23, 2008, September 23,
2008, September 26, 2008, October 31, 2008 and
December 18, 2008;
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S-44
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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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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 supplement and before the termination of this
offering.
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You may obtain any of the documents incorporated by reference in
this prospectus supplement or the accompanying 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 supplement and the accompanying
prospectus (including exhibits to those documents specifically
incorporated by reference in this document), at no cost, by
visiting our internet website at
http://www.energytransfer.com,
or by writing or calling us at the address set forth below.
Information on our website is not incorporated into this
prospectus supplement, the accompanying prospectus or our other
securities filings and is not a part of this prospectus
supplement or the accompanying prospectus.
Energy
Transfer Partners, L.P.
3738 Oak Lawn Avenue
Dallas, TX 75219
Attention: Thomas P. Mason
Telephone:
(214) 981-0700
S-45
Prospectus
ENERGY TRANSFER PARTNERS,
L.P.
Common Units
Debt Securities
We may offer and sell the common units, representing limited
partner interests of Energy Transfer Partners, L.P., and debt
securities 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 December 11, 2007.
TABLE OF
CONTENTS
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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 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, an interstate pipeline, natural gas
treating and processing assets located in Texas, New Mexico,
Arizona, Louisiana, Utah and Colorado, and three natural gas
storage facilities located in Texas. These assets include
approximately 14,000 miles of intrastate pipeline in
service, with an additional 500 miles of intrastate
pipeline under construction, and 2,400 miles of interstate
pipelines. 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.
1
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;
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the availability and cost of capital and our ability to access
certain capital sources;
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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.
3
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 report 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 on 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 hedging 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 the 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, you 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 the
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
trading market could reduce the market price of
unitholders limited partner interests.
As of August 31, 2007, Energy Transfer Equity, L.P., or
ETE, and its affiliates owned 62,500,797 common units. ETE 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.
Our
increased debt level and debt agreements may limit our ability
to make distributions to unitholders and our future financial
and operating flexibility.
As of August 31, 2007, we had approximately
$3.7 billion of consolidated debt outstanding. 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 arrangements 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 and affirmative
covenants of the credit agreements could negatively impact our
ability and the ability of our subsidiaries to incur additional
debt and our ability to pay our distributions. We are required
to measure these financial tests and covenants quarterly and,
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as of August 31, 2007, we were in compliance with all
financial requirements, tests, limitations, and covenants
related to financial ratios under our existing credit agreements.
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Increases
in interest rates could materially adversely affect our
business, results of operations, cash flows and financial
condition.
In addition to our exposure to commodity prices, we have
significant exposure to increases in interest rates. As of
August 31, 2007, we had approximately $3.7 billion of
consolidated debt, of which approximately $2.7 billion was
at fixed interest rates and approximately $1.0 billion was
at variable interest rates. We have entered interest rate swaps
for a total notional amount of $125.0 million, resulting in
a net amount of $875.01 million of variable-rate debt at
August 31, 2007. We manage a portion of our interest rate
exposures by utilizing interest rate swaps and similar
arrangements. To the extent that we have debt with variable
interest rates that is not hedged, our results of operations,
cash flows and financial condition, could be materially
adversely affected by significant 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 or
owners of our general partner may be factors in credit
evaluations of us as a master limited partnership. This is
because the general partner can exercise significant influence
over our business activities, including our cash distribution
and 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 the
partnership to service their indebtedness.
Entities controlling the owner of our general partner have
significant indebtedness outstanding and are dependent
principally on the cash distributions from their general and
limited partner equity interests in us to service such
indebtedness. Any distributions by us to such entities 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, ETP GP and ETP
LLC from the entities that control ETP GP, 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 more risky than ours.
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. We are
managed by our general partner, Energy Transfer Partners GP,
L.P., or ETP GP, which in turn is managed by its general
partner, Energy Transfer Partners, L.L.C., or ETP LLC. Our
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 us and our
unitholders, the directors of our general partner, ETP GP, and
its general partner, ETP LLC, 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 August 31, 2007, ETE and its affiliates held
approximately 46% of our outstanding units, with an
approximately 1% of units held by our officers and directors.
Consequently, it could be difficult to remove the general
partner without the consent of the general partner and our
affiliates.
6
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.
The general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of the unitholders.
Furthermore, there is no restriction in the partnership
agreement on the ability of the general partner of our general
partner from transferring its general partner interest in our
general partner to a third party. Any new owner 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. 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 our general partner may be substantial and
reduce our ability to pay the distributions to
unitholders.
Prior to making any distributions on the units, 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.
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.
7
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
common 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 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, which may permit our general partner to favor
its own interests to the detriment of unitholders.
As of August 31, 2007, ETE and its affiliates directly and
indirectly owned an aggregate limited partner interest in us of
approximately 46% and our officers and directors owned
approximately 1% of the limited partner interests in us.
Conflicts of interest could arise in the future as a result of
relationships between our general partner and its affiliates, on
the one hand, and us, on the other hand. As a result of these
conflicts our
8
general partner may favor its own interests and those of its
affiliates over the interests of the unitholders. The nature of
these conflicts includes the following considerations:
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Remedies available to unitholders for actions that might,
without the limitations, 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 in resolving conflicts of
interest, thereby limiting its fiduciary duties to the
unitholders.
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Our general partners 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 and
reserves, each of which can affect the amount of cash that is
distributed to unitholders.
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Our general partner determines whether to issue additional units
or other equity securities of us.
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Our general partner determines which costs are reimbursable by
us.
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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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In some instances our general partner may 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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The
risk of competition with affiliates of our general partner has
increased.
Except as provided in our partnership agreement, affiliates 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 7, 2007, Enterprise GP
Holdings, L.P. acquired a 34.9% non-controlling equity interest
in LE GP, LLC, ETEs general partner. Enterprise GP
Holdings, L.P. and its subsidiaries are a North American
midstream energy business. As a result, there is greater risk
that competition with affiliates of our general partner could
occur, which could adversely impact our results of operations
and cash available for distributions.
Risks
Related to our Business
The
profitability of 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 are 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 at our
Houston Pipe Line System, or the HPL System, we purchase natural
gas from producers at the wellhead at a price that is at a
discount to a specified index price and then gather and deliver
the natural gas to pipelines where we typically resell the
natural gas at the index price or gas daily average. Generally,
the gross margins we realize under these discount-to-index
arrangements decrease in periods of low natural gas prices
because these gross margins are based on a percentage of the
index price.
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
9
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 fiscal year ended August 31, 2007,
the NYMEX settlement price for the prompt month contract ranged
from a high of $8.87 per MMBtu to a low of $4.20 per MMBtu. A
composite of the Mt. Belvieu average NGLs price based upon our
average NGLs composition during our fiscal year ended
August 31, 2007 ranged from a high of approximately $1.15
per gallon to a low of approximately $0.83 per gallon. Natural
gas prices are subject to significant fluctuations, and we
cannot assure you that natural gas prices will remain at the
high levels recently experienced.
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 and NGLs, which
factors may result in decisions by natural gas producers to
reduce production of natural gas during periods of lower prices
for natural gas and NGLs or may result in decisions by end users
of natural gas and NGLs 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 hedging mechanisms and by the
activities we conduct in our trading operations. 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 hedging
and trading activities can result in losses. Such losses could
occur under various circumstances, including if a counterparty
does not perform its obligations under the hedge 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.
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.
Transwestern derives a significant portion of its revenue from
charges to its customers for reservation of capacity, which
charges 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. As the reserves available
through the supply basins connected to Transwesterns
systems naturally 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
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Transwestern system in the long run. Investments by third
parties in the development of new natural gas reserves connected
to Transwesterns facilities depend on many factors beyond
Transwesterns control.
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
illiquid capital markets or 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 assure you 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. Either occurrence would limit our ability to fully
execute our growth strategy. Inability to execute our growth
strategy may materially adversely impact the market price of our
securities.
An
impairment of goodwill and intangible assets could reduce our
earnings.
At August 31, 2007, our consolidated balance sheet
reflected $718.4 million of goodwill and
$211.7 million of intangible assets. Goodwill is recorded
when the purchase price of a business exceeds the fair market
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 equity and balance sheet
leverage as measured by debt to total capitalization.
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 have depended principally
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 no increase or
even 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;
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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, you 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 we are currently involved in constructing several
new pipelines. Our results of operations and our 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 our 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 or at all or at the budgeted cost. Moreover, our
revenues may not increase immediately following the completion
of particular projects. 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. Moreover, we may construct
facilities to capture anticipated future growth in 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. As a result, 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.
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 fiscal year ended August 31, 2007, ConocoPhillips
Company, Enervest Operating, L.L.C., Encana Oil and Gas (USA)
Inc., and Lear Energy, LP supplied us with approximately 90% of
the Southeast Texas Systems natural gas supply. For our
fiscal year ended August 31, 2007, Encana Oil and Gas
(USA), Inc., EOG Resources, Inc., XTO Energy Inc., and
Chesapeake Energy Marketing, Inc. supplied us with approximately
80% 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 on our East
Texas pipeline, ET Fuel System and HPL System.
We have nine- and ten-year fee-based transportation contracts
with XTO Energy, Inc. pursuant to which XTO Energy has committed
to transport certain minimum volumes of natural gas on our
pipelines. We also have an eight-year fee-based transportation
contract with TXU Portfolio Management Company, L.P., a
subsidiary of TXU Corp., which we refer to as 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 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.
We completed our Cleburne to Carthage pipeline in April 2007.
The major shippers through the Cleburne to Carthage pipeline
expansion to interstate and intrastate markets are XTO Energy,
Inc., EOG Resources, Inc., Chesapeake Energy Marketing, Inc.,
Encana Marketing (USA), Inc., Quicksilver Resources, Inc., and
Leor Energy, L.P. These shippers have long-term contracts
ranging from five to 10 years. The failure of these
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 these
existing contracts.
Federal,
state or local regulatory measures could adversely affect our
business.
Transwestern is subject to regulation by the Federal Energy
Regulatory Commission, or FERC, under the Natural Gas Act of
1938, or NGA. Our midstream intrastate transportation and
storage operations are generally exempt from such regulation,
but FERC regulation still significantly affects our business and
the market for our
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products. The rates, terms and conditions of some of the
transportation and storage services we provide on the HPL
System, the Oasis pipeline and the ET Fuel System are subject to
FERC regulation under Section 311 of the Natural Gas Policy
Act, or NGPA. Under Section 311, rates charged for
transportation and storage must be fair and equitable. 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 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, failure to
comply with the rates approved by FERC for Section 311
service, or 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.
Our pipelines and storage facilities are subject to state
regulation in Texas, New Mexico, Arizona, Louisiana, Utah and
Colorado, the states in which we operate these types of
pipelines. Our intrastate transportation facilities located in
Texas are subject to regulation as common purchasers and as gas
utilities by the Texas Railroad Commission, or 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 gathering operations are 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. The rates we
charge for storage services are deemed just and reasonable under
Texas law unless challenged by complaint. Because the natural
gas storage facilities of the ET Fuel System and the 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
TRCC-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 Department of Transportation have
passed or are considering heightened pipeline safety
requirements.
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Failure to comply with applicable regulations under the NGA,
NGPA, Pipeline Safety Act and certain state laws could result in
the imposition of administrative, civil and criminal remedies.
The
FERC and CFTC are pursuing legal actions against us relating to
certain natural gas trading and transportation activities, and
related third party claims have been filed against us and
ETE.
On July 26, 2007, the FERC issued to us an Order to Show
Cause and Notice of Proposed Penalties (the Order and
Notice) that contains allegations that we violated FERC
rules and regulations. The FERC has alleged that we engaged in
manipulative or improper trading activities in the Houston Ship
Channel, primarily on two dates during the fall of 2005
following the occurrence of Hurricanes Katrina and Rita, as well
as on eight additional times from December 2003 though August
2005, in order to benefit financially from ETPs
commodities derivatives positions and from certain of our
index-priced physical gas purchases in the Houston Ship Channel.
The FERC has alleged that during these periods we violated the
FERCs then effective Market Behavior Rule 2, an
anti-market manipulation rule promulgated by FERC under
authority of the NGA. We allegedly violated this rule by
artificially suppressing prices that were included in the Platts
Inside FERC Houston Ship Channel index, published by the
McGraw Hill Companies, on which the pricing of many
physical natural gas contracts and financial derivatives are
based. Additionally, the FERC has alleged that we manipulated
daily prices at the Waha Hub in west Texas on certain dates in
December 2005. The FERCs action against us also includes
allegations related to our Oasis pipeline, an intrastate
pipeline that transports natural gas between the Waha Hub and
the Katy Hub near Houston, Texas. The Oasis pipeline also
transports interstate natural gas pursuant to NGPA
Section 311 authority, and subject to FERC-approved rates,
terms and conditions of service. The allegations related to the
Oasis pipeline include claims that the Oasis pipeline violated
NGPA regulations from January 26, 2004 through
June 30, 2006 by granting undue preference to its
affiliates for interstate NGPA Section 311 pipeline service
to the detriment of similarly situated non-affiliated shippers
and by charging in excess of the FERC-approved maximum lawful
rate for interstate NGPA Section 311 transportation. The
FERC also seeks to revoke, for a period of 12 months, our
blanket marketing authority for sales of natural gas in
interstate commerce at negotiated rates, which activity we
estimate accounted for approximately 1.0% of our operating
income for our 2007 fiscal year. If the FERC is successful in
revoking our blanket marketing authority, our sales of natural
gas at market-based rates would be limited to sales of natural
gas to retail customers (such as utilities and other end-users)
and sales from our own production, and any other sales of
natural gas by us would be required to be made at prices that
would be subject to FERC approval. Also on July 26, 2007,
the United States Commodity Futures Trading Commission (the
CFTC) filed suit in United States District Court for
the Northern District of Texas alleging that we violated
provisions of the Commodity Exchange Act by attempting to
manipulate natural gas prices in the Houston Ship Channel. It is
alleged that such manipulation was attempted during the period
from late September through early December 2005 to allow us to
benefit financially from our commodities derivatives positions.
In its Order and Notice, the FERC is seeking $70.1 million
in disgorgement of profits, plus interest, and
$97.5 million in civil penalties relating to these matters.
The FERC ordered ETP to show cause why the allegations against
ETP made in the Order and Notice are not true. ETP filed its
response to the Order and Notice with the FERC on
October 9, 2007, which response refuted the FERCs
claims and requested a dismissal of the FERC proceeding. The
FERC has taken the position that, once it receives our response,
it has several options as to how to proceed, including issuing
an order on the merits, requesting briefs, or setting specified
issues for a trial-type hearing before an administrative law
judge. In its lawsuit, the CFTC is seeking civil penalties of
$130,000 per violation, or three times the profit gained from
each violation, and other ancillary relief. The CFTC has not
specified the number of alleged violations or the amount of
alleged profit related to the matters specified in its
complaint. On October 15, 2007, ETP filed a motion to
dismiss in the United States District Court for the Northern
District of Texas on the basis that the CFTC has not stated a
valid cause of action under the Commodity Exchange Act.
It is our position that our trading and transportation
activities during the periods at issue complied in all material
respects with applicable laws and regulations, and we intend to
contest these cases, and any third party actions, vigorously.
However, the laws and regulations related to alleged market
manipulation are vague,
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subject to broad interpretation, and offer little guiding
precedent, while at the same time the FERC and CFTC hold
substantial enforcement authority. At this time, neither we nor
ETE is able to predict the final outcome of these matters.
In addition to the FERC and CFTC legal actions, third parties
have asserted claims and may assert additional claims against us
and ETE for damages related to these matters. In this regard,
two natural gas producers have initiated legal proceedings
against us and ETE for claims related to the FERC and CFTC
claims. One of the producers has brought two separate suits in
Texas state court, one of which names us and ETE and the other
of which names two of our subsidiaries as the only defendants.
Both suits are based on contractual and tort claims relating to
alleged manipulation of natural gas prices at the Waha Hub in
West Texas and the Houston Ship Channel and seek unspecified
direct, indirect, consequential and exemplary damages. The suit
against us and ETE contains an additional allegation that the
defendants transported gas in a manner that favored their
affiliates and discriminated against the plaintiff, and
otherwise artificially affected the market price of gas to other
parties in the market. The second producer, acting as agent for
a group of producers, has brought suit in Texas state court
against us and ETE based on contract and tort claims relating to
a natural gas purchase contract to which we and this producer
are parties. This producer seeks unspecified damages and
requests pre-arbitration discovery of information related to our
activities prior to further pursuing a claim for manipulation of
natural gas prices in the Houston Ship Channel. This producer
also seeks to intervene in the FERC proceeding, alleging that it
is entitled to a FERC-ordered refund of $5.9 million, plus
interest and costs. This producer has also filed a complaint at
FERC against us and ETE requesting an agency hearing and
claiming that we and ETE violated the NGA by failing to make
sales for resale at negotiated rates; intentionally engaged in
market manipulation; knowingly submitted misleading information
to Platts; and caused damages to the producer group in the
amount of $5.9 million. This producer has requested refunds
and other remedies. In addition to these producer lawsuits, a
natural gas marketing company has brought suit against us and
ETE in Texas state court seeking a declaratory judgment that we
manipulated the Houston Ship Channel, the Waha Hub and
El Paso Permian natural gas price indices during an
unspecified time period. The marketer seeks unspecified monetary
damages from us and ETE, including direct, indirect and
consequential damages for tort claims related to this alleged
manipulation. The marketer also seeks judgment against us for
exemplary damages on this basis.
In addition, a consolidated class action complaint has been
filed against us in the United States District Court for the
Southern District of Texas. This action alleges that we engaged
in intentional and unlawful manipulation of the price of natural
gas futures and options contracts on the New York Mercantile
Exchange, or NYMEX, in violation of the Commodity Exchange Act.
It is further alleged that during the class period
December 29, 2003 to December 31, 2005, we had the
market power to manipulate index prices, and that we used this
market power to artificially depress the index prices at major
natural gas trading hubs, including the Houston Ship Channel,
Waha, and Permian hubs, in order to benefit our natural gas
physical and financial trading positions and intentionally
submitted price and volume trade information to trade
publications. This complaint also alleges that we also violated
the CEA because we knowingly aided and abetted violations of the
CEA. This action alleges that this unlawful depression of index
prices by us manipulated the NYMEX prices for natural gas
futures and options contracts to artificial levels during the
class period, causing unspecified damages to plaintiff and all
other members of the putative class who purchased
and/or sold
natural gas futures and options contracts on NYMEX during the
class period. The class action complaint consolidated two class
actions which were pending against us. Following the
consolidation order, the plaintiffs who had filed these two
earlier class actions filed the consolidated complaint. They
have requested certification of their suit as a class action,
unspecified damages, court costs and other appropriate relief.
We are expensing the legal fees, consultants fees and
related expenses relating to the FERC and CFTC legal actions,
and third party actions in the periods in which such expenses
are incurred. In addition, our existing accruals for litigation
and contingencies include an accrual related to these matters.
At this time, we are unable to predict the outcome of these
matters; however, it is possible that the amount we become
obligated to pay as a result of the final resolution of these
matters, whether on a negotiated settlement basis or otherwise,
will exceed the amount of our existing accrual related to these
matters. In accordance with applicable accounting standards, we
will review the amount of our accrual related to these matters
as
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developments related to these matters occur and we will adjust
our accrual if we determine that it is probable that the amount
we may ultimately become obligated to pay as a result of the
final resolution of these matters is greater than the amount of
our existing accrual for these matters. As our accrual amounts
are non-cash, any cash payment of an amount in resolution of
these matters would likely be made from cash from operations or
borrowings, which payments would reduce our cash available for
distributions either directly or as a result of increased
principal and interest payments necessary to service any
borrowings incurred to finance such payments. If these payments
are substantial, we may experience a material adverse impact on
our results of operations, cash available for distribution and
our liquidity.
Transwestern
is subject to laws, regulations and policies governing the rates
it is allowed to charge for its services.
Laws, regulations and policies governing interstate natural gas
pipeline rates could affect Transwesterns ability to
establish rates, to charge rates that would cover future
increases in its costs, or to continue to collect rates that
cover current costs. Natural gas companies must charge rates
that are deemed to be just and reasonable by FERC. The rates,
terms and conditions of service provided by natural gas
companies are required to be on file with FERC in FERC-approved
tariffs. Pursuant to the NGA, existing rates may be challenged
by complaint and rate increases proposed by the natural gas
company may be challenged by protest. Further, other than for
rates set under market-based rate authority, rates must be
cost-based and the FERC may order refunds of amounts collected
under rates that were in excess of a just and reasonable level.
Transwestern filed a general rate case 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
new cost-based rates until October 2011. In addition, shippers
(other than shippers who have agreed not to challenge our tariff
rates through 2010 pursuant to our recent settlement agreement
with these shippers) may challenge the lawfulness of tariff
rates that have become final and effective. The FERC may also
investigate such rates absent shipper complaint. Any successful
complaint or protest against Transwesterns rates could
reduce our revenues associated with providing transmission
services on a prospective basis. We cannot assure you that we
will be able to recover all of Transwesterns 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 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 FERC and the courts for a
number of years. In July 2004, the D.C. Circuit issued its
opinion in BP West Coast Products, LLC v. FERC,
which upheld, among other things, the FERCs determination
that certain rates of an interstate petroleum products pipeline,
Santa Fe Pacific Pipeline, or SFPP, were grandfathered
rates under the Energy Policy Act of 1992 and that SFPPs
shippers had not demonstrated substantially changed
circumstances that would justify modification to those rates.
The Court also vacated the portion of the FERCs decision
applying the Lakehead policy. In the Lakehead
decision, the FERC allowed an oil pipeline publicly traded
partnership to include in its cost-of-service an income tax
allowance to the extent that its unitholders were corporations
subject to income tax. In May and June 2005, the FERC issued a
statement of general policy, as well as an order on remand of
BP West Coast, respectively, in which the FERC stated it
will 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. Although the new policy is generally favorable for
pipelines that are organized as, or owned by, tax-pass-through
entities, it still entails rate risk due to the
case-by-case
review requirement. In December 2005, the FERC issued its first
case-specific oil pipeline review of the income tax allowance
issues in the SFPP proceeding, reaffirming its new income tax
allowance policy and directing SFPP to provide certain evidence
necessary for the pipeline to determine its income allowance.
Further, in the December 2005 order, the FERC concluded that for
tax allowance purposes, the FERC would apply a rebuttable
presumption that corporate partners of pass-through
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entities pay the maximum marginal tax rate of 35% and that
noncorporate partners of pass-through entities pay a marginal
rate of 28%. The FERC indicated that it would address the income
tax allowance issues further in the context of SFPPs
compliance filing submitted in March 2006. In December 2006, the
FERC ruled on some of the issues raised as to the March 2006
SFPP compliance filing, upholding most of its determinations in
the December 2005 order. FERC did revise its rebuttable
presumption as to corporate partners marginal tax rate
from 35% to 34%. The FERCs BP West Coast remand
decision and the new income tax allowance policy were appealed
to the D.C. Circuit. In May 2007, the D.C. Circuit affirmed
FERCs favorable income tax allowance policy. As a result,
we remain eligible to include an allowance in the tariff rates
we charge for natural gas transportation on our Transwestern
interstate pipeline system, subject to our ability to
demonstrate compliance with FERCs policy. The specific
terms and application of that policy remain subject to future
refinement or change by FERC and the courts. As FERC has
recently approved our tariff rates specified in a settlement
agreement with shippers, the allowance for income taxes as a
cost-of-service element in our tariff rates is not subject to
challenge by parties to our settlement agreement prior to its
expiration.
Transwestern
is subject to laws, regulations and policies governing terms and
conditions of service, which control many aspects of its
business.
In addition to rate oversight, FERCs regulatory authority
extends to many other aspects of Transwesterns business
and operations, including:
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operating terms and conditions of service;
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the types of services Transwestern may offer to its 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 Transwesterns ability to compete for business
or increase the cost and burden of operation.
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, 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.
Finally, we cannot give any assurance regarding the likely
future regulations under which we will operate Transwestern 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 as well as our propane operations are subject to
stringent federal, state, and local environmental laws and
regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection.
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, 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 administrative, civil, and criminal penalties, the
imposition of remedial obligations, and the issuance of
injunctive relief.
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We may incur substantial environmental costs and liabilities
because the underlying risk are inherent to our operations.
Joint and several, strict liability may be incurred under
environmental laws and regulations in connection with discharges
or releases of petroleum hydrocarbons or wastes on, under, or
from our properties and facilities, many of which have been used
for industrial activities for a number of years. 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 or for personal injury or
property damage. At August 31, 2007, the total accrued
future estimated cost of remediation activities relating to our
Transwestern pipeline operations is approximately
$12.3 million, which activities are expected to continue
for several years.
Changes in environmental laws and regulations occur frequently,
and any such changes that result in more stringent and costly
waste handling, storage, transport disposal or remediation
requirements could have a material adverse effect on our
operations or financial position. For instance, the Texas
Commission on Environmental Quality, or TCEQ, recently adopted a
rule further restricting the level of nitrogen oxides, or NOx,
that may be emitted from stationary gas-fired reciprocating
internal combustion engines located in counties comprising the
Dallas-Fort Worth eight hour ozone non-attainment area. As
a result of the adoption of this rule, by March 1, 2009, we
must either modify or replace seven owned and 21 leased
compressor units currently located in the Dallas-Fort Worth
nonattainment area that do not satisfy the TCEQs new, more
stringent NOx emission limitations. We are evaluating our
options to comply with this rule and thus the costs to comply
currently are not reasonably estimable but such costs ultimately
could be material to our operations. Also, the
U.S. Congress is actively considering legislation and more
than a dozen states have already taken legal measures to reduce
emissions of certain gases, commonly referred to as greenhouse
gases and including carbon dioxide and methane, that may be
contributing to warming of the Earths atmosphere.
Moreover, the U.S. Supreme Court recently decided, in
Massachusetts, et al. v. EPA, that greenhouse gases
fall within the federal Clean Air Acts definition of
air pollutant, which could result in the regulation
of greenhouse gas emissions from stationary sources under
certain Clean Air Act programs. New legislation or regulatory
programs that restrict emissions of greenhouse gases in areas in
which we conduct business could have an adverse affect on our
operations and demand for our services.
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.
We
encounter 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
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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 interstate pipeline business of Transwestern competes with
those of 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 and the flexibility and reliability of service. Natural
gas competes with other forms of energy available to our
customers and end-users, including 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 demand for natural gas 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
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.
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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.
Any substantial increase in the nonpayment and nonperformance by
our customers could reduce our ability to make distributions to
our unitholders.
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 the processing plant
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 our fiscal year ended August 31, 2007, approximately
22.4% of our sales of natural gas were 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 depends 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.
Our
pipeline integrity program may cause us to incur significant
costs and liabilities.
Our operations are subject to regulation by the
U.S. Department of Transportation, or DOT, under the
Pipeline Hazardous Materials Safety Administration, or PHMSA,
pursuant to which the PHMSA has established regulations 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
22
high consequence areas. 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 for our existing transportation
assets other than the Transwestern pipeline will result in
capital costs of $7.9 million during the period between the
remainder of calendar year 2007 through 2008, as well as
operating and maintenance costs of $13.1 million during
that period. During this same time period, we estimate that we
will incur pipeline integrity operating and on-going annual
maintenance capital costs of $18.7 million with respect to
our Transwestern Pipeline. Through August 31, 2007,
Transwestern did not incur any costs associated with the IMP
Rule and has satisfied all of the requirements until 2010.
Through August 31, 2007, a total of $13.4 million of
capital costs and $11.8 million of operating and
maintenance costs have been incurred for pipeline integrity
testing for transportation assets other than Transwestern.
Through August 31, 2007, a total of $2.9 million of
capital costs and $0.1 million of operating and maintenance
costs have been incurred for pipeline integrity testing for
Transwestern. 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.
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 periods of unseasonably
cold or hot periods or dry weather conditions which may 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.
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.
We believe that we maintain adequate insurance coverage,
although insurance will not cover many types of interruptions
that might occur. 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
23
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 and our ability to make distributions or
pay interest or principal on debt securities 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, 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.
24
We are
dependent on our principal propane suppliers, which increases
the risk of an interruption in supply.
During fiscal 2007, we purchased approximately 23% and 22% of
our propane from Targa Liquids and Enterprise Products Operating
L.P., respectively. In addition, we purchased approximately 21%
of our propane from M-P Energy Partnership, a Canadian
partnership in which we owned through August 31, 2007 a 60%
interest. Enterprise is a subsidiary of Enterprise GP, an
entity that owns approximately 17.6% of ETEs outstanding
common units and a 34.9% non-controlling interest in the General
Partner of ETE, and is therefore considered to be an affiliate
of us. Titan purchases substantially all of its propane from
Enterprise pursuant to an agreement that expires in 2010. 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.
Tax Risks
to Common Unitholders
In addition to reading the following risk factors, you should
read Material 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 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 on
this or any other matter affecting us.
Despite the fact that we are a limited partnership under
Delaware law, Section 7704 of the Internal Revenue Code
provides that publicly traded partnerships such as ours may be
treated as a corporation for
25
federal income tax purposes unless 90% or more of the gross
income for every taxable year consists of qualifying
income. As a result of our tax termination on May 7,
2007, we will have two tax years in 2007, and each of our tax
years must independently meet the qualifying income exception.
For our tax year beginning January 1, 2007 and ending
May 7, 2007, we estimate that less than 5% of our gross
income was not qualifying income. For our tax year beginning
May 8, 2007 and ending December 31, 2007, we estimate
that less than 9% of our gross income for that period will not
be qualifying income. Our estimate of income that is not
qualifying income is higher in the tax period beginning
May 8, 2007 and ending December 31, 2007 due to one or
more non-reoccurring income items that we have earned or will
earn during such period. 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,
Vinson & Elkins L.L.P. is of the opinion that at least
90% of our current gross income constitutes qualifying income.
For a discussion related to the opinion of Vinson &
Elkins L.L.P. and the importance of our status as a partnership,
please read Material Income Tax Considerations
Partnership Status.
If we were treated as a corporation for federal income tax
purposes, 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. In addition, because of
widespread state budget deficits and other reasons, several
states are evaluating ways to subject partnerships to
entity-level taxation through the imposition of state income,
franchise or other forms of taxation. For example, beginning in
2008, we will be required to pay Texas franchise tax at a
minimum effective rate of 0.7% of our gross income apportioned
to Texas in the prior year. If any state were to impose a tax
upon us as an entity, the cash available for distribution to our
unitholders would be reduced.
The
tax treatment of publicly traded partnerships or an investment
in our common units could be subject to potential legislative,
judicial or administrative changes and differing
interpretations, possibly on a retroactive basis.
The present federal income tax treatment of publicly traded
partnerships, including us, or an investment in our common units
may be modified by administrative, legislative or judicial
interpretation at any time. For example, members of Congress are
considering substantive changes to the existing federal income
tax laws that affect certain publicly traded partnerships. Any
modification to the federal income tax laws and interpretations
thereof may or may not be applied retroactively. Specifically,
federal income tax legislation has been proposed that would
eliminate partnership tax treatment for certain publicly traded
partnerships and recharacterize certain types of income received
from partnerships. Although the currently proposed legislation
would not appear to affect our tax treatment as a partnership,
we are unable to predict whether any of these changes, or other
proposals, will ultimately be enacted. Any such changes could
negatively impact the value of an investment in our common units.
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.
The IRS may adopt positions that differ from the conclusions of
our counsel or from the positions we take. It may be necessary
to resort to administrative or court proceedings to sustain some
or all of our counsels conclusions or the positions we
take. A court may not agree with some or all of our
counsels conclusions or the positions we take. Any contest
with the IRS may materially and adversely impact the
26
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.
Unitholders
will 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.
In such case, unitholders would still be required to pay federal
income taxes and, in some cases, state and local income taxes on
their share of our taxable income regardless of the amount, if
any, of any cash distributions they receive from us.
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. Please
read Material Income Tax Considerations
Disposition of Common Units Recognition of Gain or
Loss for a further discussion of the foregoing.
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, or
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, at the highest applicable
effective tax rate, and
non-U.S. persons
will be required to file federal income tax returns and
generally pay tax on their share of our taxable income. 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.
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.
To maintain the uniformity of the economic and tax
characteristics of our common units, we have adopted certain
depreciation and amortization positions that are inconsistent
with existing Treasury Regulations. These positions may result
in an understatement of deductions and losses and an
overstatement of income and gain to our unitholders. For
example, we do not amortize certain goodwill assets, the value
of which has been attributed to certain of our outstanding
units. A subsequent holder of those units is entitled to an
amortization deduction attributable to that goodwill under
Internal Revenue Code Section 743(b). But, because we
cannot identify these units once they are traded by the initial
holder, we do not give any subsequent holder of a unit any such
amortization deduction. This approach understates deductions
available to those unitholders who own those units and may
result in those unitholders believing that they have a higher
tax basis in their units than is actually the case. This, in
turn, may result in those unitholders reporting less gain or
more loss on a sale of their units than is actually the case.
27
The IRS may challenge the manner in which we calculate our
unitholders basis adjustment under Section 743(b). 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.
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, and, accordingly,
our counsel is unable to opine as to the validity of this
method. If the IRS were to challenge this method or new Treasury
regulations were issued, we may be required to change the
allocation of items of income, gain, loss and deduction among
our unitholders. Please read Material Income Tax
Considerations Disposition of Common
Units Allocations Between Transferors and
Transferees.
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.
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, he 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. Vinson & Elkins L.L.P. has
not rendered an opinion regarding the treatment of a unitholder
where 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
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
28
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.
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.
Our partnership will be considered to have terminated and
immediately reconstituted as a new partnership for federal
income tax purposes if transfers of units within a twelve month
period constitute the sale or exchange of 50% or more of our
capital and profit interests. In order to determine whether a
sale or exchange of 50% or more of capital and profits interests
has occurred, we review information available to us regarding
transactions involving transfers of our units, including
reported transfers of units by our affiliates and sales of units
pursuant to trading activity in the public markets; however, the
information we are able to obtain is generally not sufficient to
make a definitive determination, on a current basis, of whether
there have been sales and exchanges of 50% or more of our
capital and profits interests within the prior twelve month
period, and we may not have all of the information necessary to
make this determination until several months following the time
of the transfers that would cause the 50% threshold to be
exceeded.
Based on the information currently available to us, we believe
that we exceeded the 50% threshold on May 7, 2007, and, as
a result, we have determined that our partnership has terminated
and immediately reconstituted as a new partnership for federal
tax income purposes on that date. This tax termination does not
affect our classification as a partnership for federal income
tax purposes or otherwise affect the nature of our
qualifying income for federal income tax purposes.
However, this tax termination will require us to close our
taxable year, and as a result, we will have two tax years in
2007, and each of our tax years must independently meet the
qualifying income exception. Moreover, the closing of our
taxable year will result in us filing two tax returns (and
unitholders receiving two Schedule K-1s) for one fiscal
year and will require us to make new elections as to various tax
matters and reset the depreciation schedule for our depreciable
assets for federal income tax purposes. The resetting of our
depreciation schedule will result in a deferral of the
depreciation deductions allowable in computing the taxable
income allocated to our unitholders. However, certain elections
we will make in connection with this tax termination will allow
us to utilize deductions for the amortization of certain
intangible assets for purposes of computing the taxable income
allocable to certain of our unitholders, which deductions had
not previously been utilized in computing taxable income
allocable to our 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 income or loss being includable
in their taxable income for the year of termination.
You
will likely be subject to state and local taxes and return
filing requirements in states where you 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 do 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. 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 us.
29
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 specific 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.
30
RATIO OF
EARNINGS TO FIXED CHARGES
On January 20, 2004, we completed a series of transactions
whereby, among other things, (1) Energy Transfer Equity,
L.P. (formerly La Grange Energy, L.P., or La Grange
Energy), contributed La Grange Acquisition, L.P., or ETC
OLP, to us, (2) Energy Transfer Equity, L.P. obtained
control of us by acquiring all of the interests in our general
partner and the general partner of our general partner,
(3) our general partner contributed its general partner
interest in Heritage Operating, L.P., or HOLP, to us, and
(4) we purchased the outstanding capital stock of Heritage
Holdings, Inc. We refer to these transactions collectively as
the Energy Transfer Transactions. Although Heritage Propane
Partners, L.P. was the surviving parent entity for legal
purposes in the Energy Transfer Transactions, ETC OLP was the
acquirer for accounting purposes. As a result, following the
Energy Transfer Transactions, the historical financial
statements of ETC OLP for periods prior to the closing of the
Energy Transfer Transactions became our historical financial
statements. ETC OLP was formed on October 1, 2002 and has
an August 31 year-end. ETC OLPs predecessor entities
had a December 31 year-end. Accordingly, ETC OLPs
11-month
period ended August 31, 2003 is treated as a transition
period.
The ratio of earnings to fixed charges for the period from
October 1, 2002 to August 31, 2003 has been derived
from the historical financial statements of ETC OLP, which are
not included or incorporated by reference in this prospectus
supplement. During this time period, ETC OLP owned the Southeast
Texas System and the Elk City System. From October 1, 2002
through December 27, 2002, ETC OLP also owned a 50% equity
interest in Oasis Pipe Line Company, which owns the Oasis
pipeline. After December 27, 2002, ETC OLP owned a 100%
interest in Oasis Pipe Line.
The following table sets forth our historical consolidated ratio
of earnings to fixed charges for the periods indicated therein:
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Eleven Months
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Ended
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August 31,
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Year Ended August 31,
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2003
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2004
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2005
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2006
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2007
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Ratio of earnings to fixed charges
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4.57
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3.28
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3.02
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5.14
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4.28
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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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31
DESCRIPTION
OF UNITS
As of September 1, 2007, there were approximately
77,443 individual 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 our Amended and Restated Agreement of
Limited Partnership, as amended to date.
Common
Units
As of August 31, 2007, we had 136,981,221 common units
outstanding, of which 73,383,908 were held by the public,
62,500,797 were held by ETE, and 1,095,208 were held by our
officers and directors. As of such date, the common units
represent an aggregate 98.0% limited partner interest in us. Our
general partner owns an aggregate 2.0% general partner interest
in us. Our common units are registered under the Securities
Exchange Act of 1934, as amended and are listed for trading on
the NYSE. The common units are entitled to distributions of
Available Cash as described below under Cash Distribution
Policy.
Class E
Units
In conjunction with our purchase of the capital stock of
Heritage Holdings in January 2004, the 4,426,916 common
units held by Heritage Holdings were converted into 4,426,916
Class E Units. Pursuant to our two-for-one unit split
completed on March 15, 2005, there are currently 8,853,832
Class E Units outstanding, all of which are owned by
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 indefinitely.
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 will be required to make additional capital
contributions to the extent necessary to maintain its 2.0%
general partner interest in us. 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.
32
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;
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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; and
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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.
Amendments
to Our Partnership Agreement
Amendments to our partnership agreement may be proposed only by
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 affect our unitholders in any material
respect;
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a change to (i) 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,
(ii) 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, (iii) that is necessary or advisable in
connection with action taken by our general partner with respect
to subdivision and combination of our securities or
(iv) 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 without
first obtaining approval of any unitholder by giving
90 days written notice, and that withdrawal will not
constitute a violation of our partnership agreement. In
addition, our general partner may withdraw without unitholder
approval upon 90 days notice to our limited partners
if at least 50% of our outstanding common units are held or
controlled by one person and its affiliates other than our
general partner and its affiliates.
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 two-thirds
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 to an affiliate or to a third party
in conjunction with a merger or sale of all or substantially all
of the assets of our general partner. 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.
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 outstanding common units 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. 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.
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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 Inherent in an Investment in
Us 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 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 (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:
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to remove or replace the general partner;
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to approve some amendments to our partnership agreement; or
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to take other action under our partnership agreement;
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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
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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.
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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 41 states:
Alabama, Alaska, Arizona, California, Colorado, Delaware,
Florida, Georgia, Idaho, Illinois, Indiana, 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, South Carolina, South Dakota, Tennessee, Texas,
Utah, Vermont, Virginia, 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. 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 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
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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 75 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
45 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.
38
CASH
DISTRIBUTION POLICY
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
39
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 as been paid. Please read
Distributions of Available Cash from Operating
Surplus below. The general partner owns all of the
incentive distribution rights, except that in conjunction with
the August 2000 transaction with U.S. Propane, L.P., we
issued 1,000,000 class C units to Heritage Holdings, Inc.,
our general partner at that time, in conversion of that portion
of Heritage Holdings, Inc.s incentive distribution rights
that entitled it to receive any distribution made by us of funds
attributable to the net amount received by us in connection with
the settlement, judgment, award or other final nonappealable
resolution of the SCANA litigation. In January 2004, the
class C units were distributed by Heritage Holdings, Inc.
to the owners of its equity interests. On July 14, 2006,
all 1,000,000 outstanding class C units were retired and
cancelled.
Distributions
of Available Cash from Operating Surplus
We are required to make distributions of available cash from
operating surplus for any quarter in the following manner:
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First, 98% to all common and class E unitholders, in
accordance with their percentage interests, and 2% to the
general partner, until each common unit has received $0.25 per
unit for such quarter (the minimum quarterly
distribution);
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Second, 98% to all common and class E unitholders, in
accordance with their percentage interests, and 2% to the
general partner, until each common unit has received $0.275 per
unit for such quarter (the first target
distribution);
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Third, 85% to all common and class E unitholders, in
accordance with their percentage interests, 13% to the holders
of incentive distribution rights, pro rata, and 2% to the
general partner, until each common unit has received $0.3175 per
unit for such quarter (the second target
distribution);
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Fourth, 75% to all common and class E unitholders, in
accordance with their percentage interests, 23% to the holders
of incentive distribution rights, pro rata, and 2% to the
general partner, until each common unit has received $0.4125 per
unit for such quarter (the third target
distribution); and
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Fifth, thereafter, 50% to all common and class E
unitholders, in accordance with their percentage interests, 48%
to the holders of incentive distribution rights, pro rata, and
2% to the general partner.
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Notwithstanding the foregoing, the distributions on each
class E unit may not exceed $1.41 per year.
On November 7, 2007, our general partner approved an
amendment to the Amended and Restated Agreement of Limited
Partnership of ETP, and this amendment became effective on
November 9, 2007. This amendment changes the fiscal year of
ETP from a year ending on August 31 to a year ending on
December 31. In order to transition to the new fiscal year,
the amendment also provides that, in lieu of making a cash
distribution to ETPs unitholders, general partner and
holder of the incentive distribution rights with respect to the
three-month period ending November 30, 2007, ETP will make
a cash distribution for the four-month period ending
December 31, 2007, which distribution will be made within
45 days following the end of such four-month period. The
amendment also specifies proportional adjustments to the cash
distribution target levels
40
relating to the incentive distribution rights for this
four-month period in order to reflect the longer period upon
which the distribution will be made (essentially multiplying
each cash distribution target level by 4/3). Finally, the
amendment provides that, following this one-time four-month
distribution period, ETP will make cash distributions with
respect to each calendar quarter within 45 days following
the end of each calendar quarter.
Distributions
of Available Cash from Capital Surplus
We will make distributions of available cash from capital
surplus, if any, in the following manner:
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First, 98% to all unitholders, pro rata, and 2% to the general
partner, 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 each 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, 98% to the common unitholders, pro rata, and 2% to the
general partner, 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, 98% to all unitholders, pro rata, and 2% to the general
partner, 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 98% to the
unitholders, pro rata, and 2% to the general partner, for each
quarter of our existence;
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Fourth, 85% to all unitholders, pro rata, 13% to the holders of
the incentive distribution rights, pro rata, and 2% to the
general partner, 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 85% to the
unitholders, pro rata, 13% to the holders of the incentive
distribution rights, pro rata, and 2% to the general partner for
each quarter of our existence;
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Fifth, 75% to all unitholders, pro rata, 23% to the holders of
the incentive distribution rights, pro rata, and 2% to the
general partner, 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 75% to the
unitholders, pro rata, 23% to the holders of the incentive
distribution rights, pro rata, and 2% to the general partner for
each quarter of our existence; and
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Sixth, thereafter, 50% to all unitholders, pro rata, 48% to the
holders of the incentive distribution rights, pro rata, and 2%
to the general partner.
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Manner of Adjustments 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, 98% to the holders of common units in proportion to the
positive balances in their capital accounts and 2% to the
general partner, 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.
42
DESCRIPTION
OF THE DEBT SECURITIES
Energy Transfer Partners, L.P. may issue senior debt securities
on a senior unsecured basis under an indenture among Energy
Transfer Partners, L.P., as issuer, the Subsidiary Guarantors,
if any, and a trustee that we will name in the related
prospectus supplement. We refer to this senior indenture as the
indenture. 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.
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
general obligations of the issuer.
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 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, a Subsidiary Guarantor will be unconditionally
released and discharged from the guarantee:
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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.
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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 of 1939;
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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 will govern the
indenture and 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.
48
MATERIAL
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 Vinson & Elkins L.L.P., counsel to our
general partner and us, insofar as it relates to legal
conclusions with respect to matters of United States federal
income tax law. This section is based upon current provisions of
the Internal Revenue Code, existing and proposed regulations and
current administrative rulings and court decisions, all of which
are subject to change. Later changes in these authorities may
cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise
requires, references in this section to us or
we are references to Energy Transfer Partners, L.P.
and our operating company.
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. 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.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Vinson & Elkins
L.L.P. and are based on the accuracy of the representations made
by us.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. Instead, we
will rely on opinions of Vinson & Elkins L.L.P. 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.
For the reasons described below, Vinson & Elkins
L.L.P. 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).
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.
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
49
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. As a result of our tax termination on May 7, 2007,
we will have two tax years in 2007, and each of our tax years
must independently meet the qualifying income exception. For our
tax year beginning January 1, 2007 and ending May 7,
2007, we estimate that less than 5% of our gross income was not
qualifying income. For our tax year beginning May 8, 2007
and ending December 31, 2007, we estimate that less than 9%
of our gross income for that period will not be qualifying
income. Our estimate of income that is not qualifying income is
higher in the tax period beginning May 8, 2007 and ending
December 31, 2007 due to one or more non-reoccurring income
items that we have earned or will earn during such period. For
the calendar year 2008, we anticipate that the percentage of our
gross income that will not be qualifying income will decrease;
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, Vinson & Elkins L.L.P.
is of the opinion that at least 90% of our current gross income
constitutes qualifying income.
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 the
operating partnership for federal income tax purposes or whether
our operations generate qualifying income under
Section 7704 of the Internal Revenue Code. Instead, we will
rely on the opinion of Vinson & Elkins L.L.P. on such
matters. It is the opinion of Vinson & Elkins L.L.P.
that, based upon the Internal Revenue Code, its regulations,
published revenue rulings and court decisions and the
representations described below, we will be classified as a
partnership and our operating company will be disregarded as an
entity separate from us for federal income tax purposes.
In rendering its opinion, Vinson & Elkins L.L.P. has
relied on factual representations made by us and our general
partner. The representations made by us and our general partner
upon which Vinson & Elkins L.L.P. has relied are:
(a) Except for Oasis Pipeline Company, we nor our operating
entities 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 that Vinson &
Elkins L.L.P. 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 that Vinson & Elkins L.L.P. has opined or
will opine result in qualifying income.
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 income would be taxed to us at corporate rates. In
addition, any distribution made to a unitholder would be
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treated as either taxable dividend income, to the extent of our
current or accumulated earnings and profits, or, in the absence
of earnings and profits, a nontaxable return of capital, to the
extent of the 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 Vinson & Elkins
L.L.P.s 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, Vinson & Elkins L.L.P.s
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.
Tax
Consequences of Unit Ownership
Flow-Through of Taxable Income. 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 unitholder. To the extent our
distributions cause a unitholders at risk
amount to be less than zero at the end
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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. 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 allowances 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 investments or
investments in other publicly traded partnerships, or salary or
active business income. Passive
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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 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 in excess of
distributions to the subordinated 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 an 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 such other
transactions, including purchasers of common units in this
offering, to account
53
for the difference between the book basis for
purposes of maintaining capital accounts and the fair market
value of all property held by us at the time of the 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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Vinson & Elkins L.L.P. 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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Vinson & Elkins L.L.P. has not rendered an opinion
regarding the treatment of a unitholder where 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 announced that it is actively 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. In general, the highest
effective United States federal income tax rate for individuals
is currently 35.0% and the maximum United States federal income
tax rate for net capital gains of an individual
54
where the asset disposed of was held for more than twelve months
at the time of disposition is scheduled to remain at 15.0% for
years 2008 through 2010 and then increase to 20.0% beginning
January 1, 2011.
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. 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, a unitholders inside basis in our assets will
be considered to have two components: (1) his share of our
tax basis in our assets (common basis) and
(2) his Section 743(b) adjustment to that basis.
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. If we elect a
method other than the remedial method with respect to a goodwill
property, Treasury
Regulation Section 1.197-2(g)(3)
generally requires that the Section 743(b) adjustment
attributable to an amortizable Section 197 intangible,
which includes goodwill properties, should be treated as a
newly-acquired asset placed in service in the month when the
purchaser acquires the common unit. 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 straight-line 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 Vinson & Elkins L.L.P. 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 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.
55
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 and depletion deductions and his
share of any gain or loss on a sale of our assets would be less.
Conversely, a Section 754 election is disadvantageous if
the 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 one year 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 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 that will result in the largest
deductions being taken in the early years after assets subject
to these allowances are placed in service. Because our general
partner may determine not to adopt the remedial method of
allocation with respect to any difference between the tax basis
and the fair market value of goodwill immediately prior to this
or any future offering, we may not be entitled to any
amortization deductions with respect to any goodwill properties
conveyed to us on formation or held by us at the time of any
future offering. Please read Uniformity of
Units. Property we subsequently acquire or construct may
be depreciated using accelerated methods permitted by the
Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely
56
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 in excess of cumulative net taxable
income for a common unit that 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 held for more than one year will generally be
taxable as long term capital gain or loss. Capital gain
recognized by an individual on the sale of units held more than
twelve months will generally be taxed at a maximum rate of 15%
through December 31, 2010. However, a portion, which will
likely be substantial, of this gain or loss will be separately
computed and taxed as ordinary income or loss under
Section 751 of the Internal Revenue Code to the extent
attributable to assets giving rise to depreciation recapture or
other unrealized receivables or to inventory
items we own. The term unrealized receivables
includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may
exceed net taxable gain realized upon the sale of a unit and may
be recognized even if there is a net taxable loss realized on
the sale of a unit. Thus, a unitholder may recognize both
ordinary income and a capital loss upon a sale of units. Net
capital 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.
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
57
period of the common units transferred. Thus, according to the
ruling, 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 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
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 with respect to the partnership
interest or substantially identical property.
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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. Accordingly,
Vinson & Elkins L.L.P. is unable to opine on the
validity of this method of allocating income and deductions
between transferor and transferee unitholders. If this method is
not allowed under the Treasury Regulations, or only applies to
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.
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Constructive Termination. We will be
considered to have been terminated for tax purposes if there is
a sale or exchange of 50% or more of the total interests in our
capital and profits within a twelve-month period. A constructive
termination results in the closing of our taxable year for all
unitholders. In the case of a unitholder reporting on a taxable
year other than a fiscal year ending December 31, the
closing of our taxable year may result in more than twelve
months of our taxable income or loss being includable in his
taxable income for the year of termination. A constructive
termination occurring on a date other than December 31 will
result in us filing two tax returns (and unitholders receiving
two
Schedule K-1s)
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 termination,
including a new election under Section 754 of the Internal
Revenue Code, and a termination would result in a deferral of
our deductions for depreciation. A termination could also result
in penalties if we were unable to determine that the termination
had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation
enacted before the termination.
Uniformity
of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from 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 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 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. 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.
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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 below, may have substantially adverse tax
consequences to them.
Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and
other retirement plans, are subject to federal income tax on
unrelated business taxable income. Virtually all of our income
allocated to a unitholder that is a tax-exempt organization will
be unrelated business taxable income and will be taxable to them.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence, they will be required to file federal tax returns
to report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. 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 income and gain, as adjusted for changes in
the foreign corporations U.S. net equity,
which 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.
Under a ruling of the IRS, a foreign unitholder who sells or
otherwise disposes of a unit will be subject to federal income
tax on gain realized on the sale or disposition of that unit to
the extent that this gain is effectively connected with a United
States trade or business of the foreign unitholder. Because a
foreign unitholder is considered to be engaged in business in
the United States by virtue of the ownership of units, under
this ruling a foreign unitholder who sells or otherwise disposes
of a unit generally will be subject to federal income tax on
gain realized on the sale or disposition of units. Apart from
the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has
owned less than 5% in value of the units during the five-year
period ending on the date of the disposition and if the units
are regularly traded on an established securities market at the
time of the sale or disposition.
Administrative
Matters
Information Returns and Audit
Procedures. We intend to furnish to each
unitholder, within 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
Vinson & Elkins L.L.P. 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.
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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;
2. a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing; or
3. a tax-exempt entity;
(c) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(d) specific information including the dates of
acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net
proceeds from sales.
Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on units they acquire, hold or
transfer for their own account. A penalty of $50 per failure, up
to a maximum of $100,000 per calendar year, is imposed by the
Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of
the units with the information furnished to us.
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.
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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.
A substantial valuation misstatement exists if the value of any
property, or the adjusted 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 basis. No penalty is
imposed unless the portion of the underpayment attributable to a
substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 200%
or more than the correct valuation, the penalty imposed
increases to 40%.
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 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 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
provisions of the American Jobs Creation Act of 2004:
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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 will
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.
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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. Vinson & Elkins
L.L.P. has not rendered an opinion on the state, local or
foreign tax consequences of an investment in us.
Tax
Consequences of Ownership of Debt Securities
A description of the material federal income tax consequences of
the acquisition, ownership and disposition of debt securities
will be set forth on the prospectus supplement relating to the
offering of debt securities.
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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 a
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. 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 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 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 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.
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Because of the foregoing, the 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 debt securities, each
purchaser and subsequent transferee of the 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 notes constitutes assets of
any employee benefit plan or (ii) the purchase and holding
(and any conversion, if applicable) of the notes 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 referred to above, 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. 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 issued with a feature
that allows their conversion to equity securities, the
securities into which they will be convertible will satisfy the
requirements in (a) and (b) above.
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.
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LEGAL
MATTERS
The validity of the securities offered in this prospectus will
be passed upon for us by Vinson & Elkins L.L.P.,
Houston, Texas. Vinson & Elkins L.L.P. 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 consolidated financial statements and the effectiveness of
internal control over financial reporting of Energy Transfer
Partners, L.P. and the consolidated balance sheets of Energy
Transfer Partners GP, L.P. and Energy Transfer Partners, L.L.C.
all incorporated in this prospectus by reference from Energy
Transfer Partners, L.P.s Annual Report on
Form 10-K
for the year ended August 31, 2007 have been audited by
Grant Thornton LLP, independent registered public accountants,
as indicated in their reports with respect thereto, and are
included herein in reliance 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 August 31, 2007;
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our current reports on
Forms 8-K
or 8-K/A
filed September 26, 2007 (two reports), October 9,
2007 (three reports), October 15, 2007, October 30,
2007, November 2, 2007, November 13, 2007,
December 10, 2007 and December 11, 2007;
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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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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
67
$
Energy Transfer Partners,
L.P.
% SENIOR NOTES DUE
2019
PROSPECTUS SUPPLEMENT
Joint Book-Running Managers
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MORGAN
STANLEY |
CREDIT SUISSE |
J.P. MORGAN |
WACHOVIA SECURITIES |
Co-Managers
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BANC
OF AMERICA SECURITIES LLC |
SUN TRUST ROBINSON HUMPHREY |
December , 2008