e424b2
Filed
Pursuant to Rule 424(b)2
File
No. 333-174590
PROSPECTUS
PAA Natural Gas Storage,
L.P.
PNG Finance Corp.
Common Units Representing Limited
Partner Interests
Debt Securities
We may from time to time, in one or more offerings, offer and
sell the common units representing limited partner interests in
PAA Natural Gas Storage, L.P. and the debt securities described
in this prospectus. PNG Finance Corp. may act as co-issuer of
the debt securities. We refer to the common units and the debt
securities collectively as the securities. The
aggregate initial offering price of all securities sold by us
under this prospectus will not exceed $1,000,000,000.
The selling unitholder named in this prospectus may from time to
time, in one or more offerings, offer and sell up to 28,214,198
common units. These common units were issued to the selling
unitholder in connection with our initial public offering and a
subsequent private placement. We will not receive any proceeds
from the sale of these common units by the selling unitholder.
For a more detailed discussion of the selling unitholder, please
read Selling Unitholder.
We or the selling unitholder may offer and sell these securities
in amounts, at prices and on terms to be determined by market
conditions and other factors at the time of the offering. This
prospectus describes only the general terms of these securities
and the general manner in which we or the selling unitholder
will offer the securities. The specific terms of any securities
we or the selling unitholder offer will be included in a
supplement to this prospectus. The prospectus supplement will
describe the specific manner in which we or the selling
unitholder will offer the securities and also may add, update or
change information contained in this prospectus. Because the
selling unitholder owns a substantial amount of our limited
partner interests and controls our general partner, it will be
deemed to be an underwriter within the meaning of
the Securities Act of 1933, as amended (the Securities
Act), with respect to any common units offered by it
pursuant to this prospectus, and any such offer would be deemed
to be a primary offering by us.
Our common units are traded on the New York Stock Exchange
(NYSE) under the symbol PNG. We will
provide information in the related prospectus supplement for the
trading market, if any, for any debt securities that may be
offered.
Investing in our securities involves a high degree of risk.
Limited partnerships are inherently different from corporations.
You should carefully consider the risks relating to investing in
our securities and each of the other risk factors described
under Risk Factors on page 2 of this prospectus
before you make an investment in our securities.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is August 4, 2011
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
ii
|
|
|
|
|
ii
|
|
|
|
|
iii
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
12
|
|
|
|
|
13
|
|
|
|
|
19
|
|
|
|
|
27
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
42
|
|
|
|
|
44
|
|
|
|
|
44
|
|
In making your investment decision, you should rely only on
the information contained or incorporated by reference in this
prospectus and in any prospectus supplement. Neither we nor the
selling unitholder has authorized any other person 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 or in any prospectus supplement is accurate as of any
date other than the date on the front cover of those documents.
You should not assume that the information contained in the
documents incorporated by reference in this prospectus or in any
prospectus supplement 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. We will disclose any material changes in our
affairs in an amendment to this prospectus, a prospectus
supplement or a future filing with the Securities and Exchange
Commission (the SEC) incorporated by reference in
this prospectus.
i
ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the SEC using a shelf registration
process. Under this shelf registration process, we may over
time, in one or more offerings, offer and sell up to
$1,000,000,000 in total aggregate offering price of any
combination of the securities described in this prospectus. In
addition, the selling unitholder may over time, in one or more
offerings, offer and sell up to 28,214,198 of our common units.
This prospectus provides you with a general description of PAA
Natural Gas Storage, L.P. and the securities that are registered
hereunder that may be offered by us or the selling unitholder.
Each time we sell any securities offered by this prospectus, we
will provide a prospectus supplement that will contain specific
information about the terms of that offering and the securities
being offered. Each time the selling unitholder sells any common
units offered by this prospectus, the selling unitholder is
required to provide you with this prospectus and the related
prospectus supplement containing specific information about the
selling unitholder and the terms of the common units being
offered in the manner required by the Securities Act. Any
prospectus supplement may also add to, update or change
information contained in this prospectus. To the extent
information in this prospectus is inconsistent with the
information contained in a prospectus supplement, you should
rely on the information in the prospectus supplement.
Additional information, including our financial statements and
the notes thereto, is incorporated in this prospectus by
reference to our reports filed with the SEC. Before you invest
in our securities, you should carefully read this prospectus,
including the Risk Factors, any prospectus
supplement, the information incorporated by reference in this
prospectus and any prospectus supplement (including the
documents described under the heading Where You Can Find
More Information in both this prospectus and any
prospectus supplement), and any additional information you may
need to make your investment decision.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC under the
Securities Act that registers the securities offered by this
prospectus. This prospectus does not contain all of the
information found in the registration statement. 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. The
registration statement, of which this prospectus forms a part,
including its exhibits and schedules, may be inspected and
copied at the public reference room maintained by the SEC at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of the materials may also be
obtained from the SEC at prescribed rates by writing to the
SECs public reference room at 100 F Street,
N.E., Room 1580, Washington D.C. 20549. You may obtain
information on the operation of the public reference room by
calling the SEC at
1-800-SEC-0330.
The SEC maintains a website at
http://www.sec.gov.
The registration statement, of which this prospectus constitutes
a part, can be obtained free of charge from the SECs
website. In addition, we file annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and other information with the SEC, which is also available to
you at the SECs public reference room and on the
SECs website. We also make available free of charge on our
website at www.pnglp.com all materials that we electronically
file with or furnish to the SEC as soon as reasonably
practicable after such materials are electronically filed with,
or furnished to, the SEC.
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 in this prospectus 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 the documents listed below and any
future filings made by PAA Natural Gas Storage, L.P. with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange
Act), (excluding any information furnished and not filed
with the SEC) until all offerings under the
ii
registration statement to which this prospectus relates are
completed or after the date on which such registration statement
was initially filed with the SEC and before the effectiveness of
such registration statement:
|
|
|
|
|
Annual Report on
Form 10-K
for the year ended December 31, 2010 (File
No. 001-34722);
|
|
|
|
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2011 (File
No. 001-34722);
|
|
|
|
Current Report on
Form 8-K
filed with the SEC on January 20, 2011 (File
No. 001-34722)
(documentation relating to private placement of common units);
|
|
|
|
Current Report on
Form 8-K
filed (other than Items 7.01 and 9.01, which were
furnished) with the SEC on February 14, 2011 (File
No. 001-34722)
(completion of Southern Pines Acquisition, entry into promissory
note, completion of private placement of common units);
|
|
|
|
Current Report on
Form 8-K
filed with the SEC on March 15, 2011 (File
No. 001-34722)
(amendment to credit agreement);
|
|
|
|
Amendment No. 1 to Current Report on
Form 8-K/A
filed with the SEC on April 15, 2011 (File
No. 001-34722)
(financial statements and pro forma financial information
regarding the Southern Pines Acquisition);
|
|
|
|
Current Report on
Form 8-K
filed with the SEC on May 25, 2011 (File
No. 001-34722)
(pro forma financial statements); and
|
|
|
|
The description of our common units contained in our
Form 8-A
filed with the SEC on April 27, 2010 and any subsequent
amendment thereto filed for the purpose of updating such
description (File
No. 001-34722).
|
You may obtain any of the documents incorporated by reference in
this prospectus from the SEC free of charge 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 prospectus), free of charge on
our website at www.pnglp.com, or by writing or calling us at the
following:
PAA Natural Gas Storage, L.P.
333 Clay Street, Suite 1500
Houston, Texas 77002
Telephone:
(713) 646-4100
Attention: Richard McGee
FORWARD-LOOKING
STATEMENTS
All statements included or incorporated by reference in this
prospectus or in any accompanying prospectus supplement, other
than statements of historical fact, are forward-looking
statements, including but not limited to statements identified
by the words anticipate, believe,
estimate, expect, plan,
intend and forecast, as well as similar
expressions and statements regarding our business strategy,
plans and objectives of our management for future operations.
The absence of these words, however, does not mean that the
statements are not forward-looking. These statements reflect our
current views with respect to future events, based on what we
believe are reasonable assumptions. Certain factors could cause
actual results to differ materially from results anticipated in
the forward-looking statements. These factors include, but are
not limited to:
|
|
|
|
|
the impact of operational and commercial factors that could
result in an inability on our part to satisfy our contractual
commitments and obligations, including the impact of equipment
performance, cavern operating pressures and cavern temperature
variances;
|
|
|
|
risks related to the development and operation of natural gas
storage facilities;
|
|
|
|
failure to implement or execute planned internal growth projects
on a timely basis and within targeted cost projections;
|
|
|
|
interruptions in service and fluctuations in tariffs or volumes
on third party pipelines;
|
iii
|
|
|
|
|
general economic, market or business conditions and the
amplification of other risks caused by volatile financial
markets, capital constraints and pervasive liquidity concerns;
|
|
|
|
the successful integration and future performance of acquired
assets or businesses;
|
|
|
|
our ability to obtain debt or equity financing on satisfactory
terms to fund additional acquisitions, expansion projects,
working capital requirements and the repayment or refinancing of
indebtedness;
|
|
|
|
the impact of current and future laws, rulings, governmental
regulations, accounting standards and statements and related
interpretations;
|
|
|
|
significantly reduced volatility in natural gas markets for an
extended period of time;
|
|
|
|
factors affecting demand for natural gas and natural gas storage
services and the rates we are able to charge for such services;
|
|
|
|
our ability to maintain or replace expiring storage contracts at
attractive rates and on other favorable terms;
|
|
|
|
the effects of competition;
|
|
|
|
shortages or cost increases of supplies, materials or labor;
|
|
|
|
weather interference with business operations or project
construction;
|
|
|
|
our ability to receive open credit from our suppliers and trade
counterparties;
|
|
|
|
continued creditworthiness of, and performance by, our
counterparties, including financial institutions and trading
companies with which we do business;
|
|
|
|
the effectiveness of our risk management activities;
|
|
|
|
the availability of, and our ability to consummate, acquisition
or combination opportunities;
|
|
|
|
environmental liabilities or events that are not covered by an
indemnity, insurance or existing reserves;
|
|
|
|
increased costs or unavailability of insurance;
|
|
|
|
fluctuations in the debt and equity markets, including the price
of our units at the time of vesting under our long-term
incentive plan;
|
|
|
|
future developments and circumstances at the time distributions
are declared; and
|
|
|
|
other factors and uncertainties inherent in the development and
operation of natural gas storage facilities.
|
Other factors described herein or incorporated by reference, or
factors that are unknown or unpredictable, could also have a
material adverse effect on future results. Please read
Risk Factors on page 2 of this prospectus and
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2010 (File
No. 001-34722),
which is incorporated into this prospectus by reference. Except
as required by applicable securities laws, we do not intend to
update these forward-looking statements and information.
iv
WHO WE
ARE
As used in this prospectus and unless the context indicates
otherwise, the terms the Partnership,
PNG, we, us, and
our and similar terms refer to PAA Natural Gas
Storage, L.P. and its subsidiaries. References to PNG
Finance are to PNG Finance Corp., a wholly owned
subsidiary of PNG that may act as co-issuer of any debt
securities offered by this prospectus. References to our
general partner, as the context requires, include
only PNGS GP LLC. As used in this prospectus and unless the
context indicates otherwise, the term selling
unitholder refers to Plains All American Pipeline, L.P.,
the sole member of our general partner.
General
PAA Natural Gas Storage, L.P. is a Delaware limited partnership
formed by Plains All American Pipeline, L.P. (PAA)
on January 15, 2010 to own, operate and grow PAAs
natural gas storage business, in which it acquired its initial
interest in 2005. Our operations are conducted directly and
indirectly through our primary operating subsidiaries. We
provide natural gas storage services to a broad mix of
customers, including local gas distribution companies, electric
utilities, pipelines, direct industrial users, electric power
generators, marketers, producers, liquefied natural gas
importers and affiliates of such entities. Our storage rates are
regulated under Federal Energy Regulatory Commission rate-making
policies, which currently permit our facilities to charge
market-based rates for our services.
Our business consists of the acquisition, development, operation
and commercial management of natural gas storage facilities. As
of December 31, 2010, we owned and operated two natural gas
storage facilities located in Louisiana and Michigan and on
February 9, 2011, we closed the acquisition of a third
natural gas storage facility in Mississippi. We also lease
storage capacity and pipeline transportation capacity from third
parties from time to time in order to increase our operational
flexibility and enhance the services we offer our customers. For
additional information as to our business, operations,
properties and financial condition please refer to the documents
cited in Where You Can Find More Information.
PNG Finance Corp. was incorporated under the laws of the State
of Delaware in May 2011, is wholly owned by PNG, and has no
material assets or any liabilities other than as a co-issuer of
debt securities. Its activities are limited to co-issuing debt
securities and engaging in other activities incidental thereto.
Organizational
History, Partnership Structure and Management
Our 2.0% general partner interest is held by PNGS GP LLC, a
Delaware limited liability company, whose sole member is PAA.
On May 5, 2010, we completed our initial public offering
pursuant to an effective registration statement on
Form S-1
(SEC File
No. 333-164492).
As a result of this transaction, we issued 13.5 million
common units to the public, representing an approximate 23.0%
ownership interest in the Partnership. In exchange for
contributing its natural gas storage business and
$16.4 million of intercompany indebtedness, PAA received a
2.0% general partner interest, 18.1 million common units,
13.9 million Series A subordinated units and
11.5 million Series B subordinated units, as well as
incentive distribution rights. In August 2010, our partnership
agreement was amended to reflect the exchange by PAA of
2.0 million Series A subordinated units for
2.0 million newly issued Series B subordinated units.
As a result, at December 31, 2010, PAA owned an aggregate
direct and indirect 77.0% ownership interest in the Partnership
consisting of our general partners 2.0% interest,
18.1 million common units, 11.9 million Series A
subordinated units and 13.5 million Series B
subordinated units, as well as incentive distribution rights.
On February 8, 2011 we issued 27.6 million common
units in a private placement transaction exempt from the
registration requirements of the Securities Act under
Section 4(2) thereof, of which approximately
10.2 million units were issued to PAA. As a result of this
transaction, as of July 7, 2011, PAA owned an aggregate
direct and indirect 64.1% interest in us consisting of our
general partners 2.0% interest, 28.2 million common
units, 11.9 million Series A subordinated units and
13.5 million Series B subordinated units, as well as
incentive distribution rights.
Our executive offices are located at 333 Clay Street,
Suite 1500, Houston, Texas 77002 and our telephone number
at this address is
(713) 646-4100.
1
RISK
FACTORS
An investment in our securities involves a high degree of risk.
We hereby incorporate by reference the risk factors included in
Item 1A. Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2010 (File
No. 001-34722)
into this prospectus. You should carefully consider such risk
factors and all other information included or incorporated by
reference into this prospectus and any prospectus supplement in
evaluating an investment in our securities. In the event that we
or the selling unitholder offers and sells any securities
pursuant to a prospectus supplement, such prospectus supplement
may include additional risk factors relevant to an investment in
the 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 value of our debt securities could decline and
you could lose all or part of your investment.
2
USE OF
PROCEEDS
Unless we specify otherwise in a prospectus supplement, we will
use the net proceeds from the sale of securities offered by this
prospectus for general partnership purposes, which may include,
among other things, repayment of indebtedness, acquisitions,
capital expenditures and additions to working capital. The
actual application of proceeds from the sale of any particular
offering of securities by us using this prospectus will be
described in the applicable prospectus supplement relating to
such offering. The precise amount and timing of the application
of these proceeds will depend upon, among other factors, our
funding requirements and the availability and cost of other
funds.
We will not receive any proceeds from the sale of common units
by the selling unitholder.
3
RATIO OF
EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed
charges for the periods indicated on a consolidated historical
basis. For purposes of computing the ratio of earnings to fixed
charges, earnings consists of pre-tax income from
continuing operations before income from equity investees plus
fixed charges (excluding capitalized interest), distributed
income of equity investees and amortization of capitalized
interest. Fixed charges represents interest incurred
(whether expensed or capitalized), amortization of debt expense
(including discounts and premiums relating to indebtedness) and
the portion of rental expense on operating leases deemed to be
the equivalent of interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
(1)
|
|
|
|
|
|
|
Period from
|
|
Period from
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
September 3,
|
|
January 1,
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
2009
|
|
2009
|
|
|
|
|
|
|
|
|
Ended
|
|
Year Ended
|
|
through
|
|
through
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
March 31,
|
|
December 31,
|
|
December 31,
|
|
September 2,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Ratio of Earnings to Fixed Charges
|
|
2.02x
|
|
2.46x
|
|
(2)
|
|
1.28x
|
|
1.01x
|
|
(2)
|
|
1.36x
|
|
|
|
(1) |
|
Represents data from our predecessor, PAA Natural Gas Storage,
LLC, prior to PAAs acquisition of a controlling interest
in us on September 3, 2009. For further discussion, please
see Note 1 to the consolidated financial statements
included in PNGs Annual Report on
Form 10-K
for the year ended December 31, 2010. |
|
(2) |
|
During the period noted, our ratio coverage was less than 1:1.
We would have needed to generate additional earnings of
approximately $2.8 million and $1.9 million during the
period from September 3, 2009 to December 31, 2009 and
the year ended December 31, 2007, respectively, to achieve
a coverage of 1:1. |
4
DESCRIPTION
OF OUR DEBT SECURITIES
General
The debt securities will be:
|
|
|
|
|
our direct general obligations;
|
|
|
|
either senior debt securities or subordinated debt
securities; and
|
|
|
|
|
|
issued under separate indentures (which may be existing
indentures) between us and U.S. Bank National Association,
as Trustee.
|
PNG may issue debt securities in one or more series, and PNG
Finance may be a co-issuer of one or more series of debt
securities. PNG Finance was incorporated under the laws of the
State of Delaware in May 2011, is wholly-owned by PNG, and has
no material assets or any liabilities other than as a co-issuer
of debt securities. Its activities are limited to co-issuing
debt securities and engaging in other activities incidental
thereto. When used in this section Description of the Debt
Securities, the terms we, us,
our and issuers refer jointly to PNG and
PNG Finance, and the terms PNG and PNG
Finance refer strictly to PAA Natural Gas Storage, L.P.
and PNG Finance Corp., respectively.
If we offer senior debt securities, we will issue them under a
senior indenture. If we issue subordinated debt securities, we
will issue them under a subordinated indenture. A form of each
indenture is filed as an exhibit to the latest registration
statement of which this prospectus is a part. We have not
restated either indenture in its entirety in this description.
You should read the relevant indenture because it, and not this
description, controls your rights as holders of the debt
securities. Capitalized terms used in the summary have the
meanings specified in the indentures.
Specific
Terms of Each Series of Debt Securities in the Prospectus
Supplement
A prospectus supplement and a supplemental indenture or
authorizing resolutions relating to any series of debt
securities being offered will include specific terms relating to
the offering. These terms will include some or all of the
following:
|
|
|
|
|
whether PNG Finance will be a co-issuer of the debt securities;
|
|
|
|
|
|
whether the debt securities are senior or subordinated debt
securities;
|
|
|
|
|
|
the title of the debt securities;
|
|
|
|
the total principal amount of the debt securities;
|
|
|
|
the assets, if any, that are pledged as security for the payment
of the debt securities;
|
|
|
|
whether we will issue the debt securities in individual
certificates to each holder in registered form, or in the form
of temporary or permanent global securities held by a depositary
on behalf of holders;
|
|
|
|
the prices at which we will issue the debt securities;
|
|
|
|
the portion of the principal amount that will be payable if the
maturity of the debt securities is accelerated;
|
|
|
|
the currency or currency unit in which the debt securities will
be payable, if not U.S. dollars;
|
|
|
|
the dates on which the principal of the debt securities will be
payable;
|
|
|
|
the interest rate that the debt securities will bear and the
interest payment dates for the debt securities;
|
|
|
|
any conversion or exchange provisions;
|
|
|
|
any optional redemption provisions;
|
|
|
|
any sinking fund or other provisions that would obligate us to
repurchase or otherwise redeem the debt securities;
|
|
|
|
any changes to or additional events of default or
covenants; and
|
|
|
|
any other terms of the debt securities.
|
5
We may offer and sell debt securities, including original issue
discount debt securities, at a substantial discount below their
principal amount. The prospectus supplement will describe
special U.S. federal income tax and any other
considerations applicable to those securities. In addition, the
prospectus supplement may describe certain special
U.S. federal income tax or other considerations applicable
to any debt securities that are denominated in a currency other
than U.S. dollars.
Consolidation,
Merger or Asset Sale
Each indenture will, in general, allow us to consolidate or
merge with or into another domestic entity. It will also allow
each issuer to sell, lease, transfer or otherwise dispose of all
or substantially all of its assets to another domestic entity.
If this happens, the remaining or acquiring entity must assume
all of the issuers responsibilities and liabilities under
the indenture including the payment of all amounts due on the
debt securities and performance of the issuers covenants
in the indenture.
However, each indenture will impose certain requirements with
respect to any consolidation or merger with or into an entity,
or any sale, lease, transfer or other disposition of all or
substantially all of an issuers assets, including:
|
|
|
|
|
the remaining or acquiring entity must be organized under the
laws of the United States, any state or the District of
Columbia; provided that PNG Finance may not merge or consolidate
with or into another entity other than a corporation satisfying
such requirement for so long as PNG is not a corporation;
|
|
|
|
the remaining or acquiring entity must assume the issuers
obligations under the indenture; and
|
|
|
|
immediately after giving effect to the transaction, no Default
or Event of Default (as defined under Events
of Default and Remedies below) may exist.
|
The remaining or acquiring entity will be substituted for the
issuer in the indenture with the same effect as if it had been
an original party to the indenture, and the issuer will be
relieved from any further obligations under the indenture.
No
Protection in the Event of a Change of Control
Unless otherwise set forth in the prospectus supplement, the
debt securities will not contain any provisions that protect the
holders of the debt securities in the event of a change of
control of us or in the event of a highly leveraged transaction,
whether or not such transaction results in a change of control
of us.
Modification
of Indentures
We may supplement or amend an indenture if the holders of a
majority in aggregate principal amount of the outstanding debt
securities of each series issued under the indenture affected by
the supplement or amendment consent to it. Further, the holders
of a majority in aggregate principal amount of the outstanding
debt securities of any series may waive past defaults under the
indenture and compliance by us with our covenants with respect
to the debt securities of that series only. Those holders may
not, however, waive any default in any payment on any debt
security of that series or compliance with a provision that
cannot be supplemented or amended without the consent of each
holder affected. Without the consent of each outstanding debt
security affected, no modification of the indenture or waiver
may:
|
|
|
|
|
reduce the percentage in principal amount of debt securities of
any series whose holders must consent to an amendment,
supplement or waiver;
|
|
|
|
reduce the principal of or change the fixed maturity of any debt
security;
|
|
|
|
reduce or waive the premium payable upon redemption or alter or
waive the provisions with respect to the redemption of the debt
securities (except as may be permitted in the case of a
particular series of debt securities);
|
|
|
|
reduce the rate of or change the time for payment of interest on
any debt security;
|
|
|
|
waive a Default or an Event of Default in the payment of
principal of or premium, if any, or interest on the debt
securities (except a rescission of acceleration of the debt
securities by the holders of a majority in aggregate principal
amount of the debt securities and a waiver of the payment
default that resulted from such acceleration);
|
|
|
|
except as otherwise permitted under the indenture, release any
security that may have been granted with respect to the debt
securities;
|
6
|
|
|
|
|
make any debt security payable in currency other than that
stated in the debt securities;
|
|
|
|
in the case of any subordinated debt security, make any change
in the subordination provisions that adversely affects the
rights of any holder under those provisions;
|
|
|
|
make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of debt
securities to receive payments of principal of or premium, if
any, or interest on the debt securities;
|
|
|
|
|
|
waive a redemption payment with respect to any debt security
(except as may be permitted in the case of a particular series
of debt securities); or
|
|
|
|
|
|
make any change in the preceding amendment, supplement and
waiver provisions (except to increase any percentage set forth
therein).
|
We may supplement or amend an indenture without the consent of
any holders of the debt securities in certain circumstances,
including:
|
|
|
|
|
to establish the form of terms of any series of debt securities;
|
|
|
|
to cure any ambiguity, defect or inconsistency;
|
|
|
|
to provide for uncertificated notes in addition to or in place
of certificated notes;
|
|
|
|
|
|
to provide for the assumption of an issuers obligations to
holders of debt securities in the case of a merger or
consolidation or disposition of all or substantially all of such
issuers assets;
|
|
|
|
|
|
in the case of any subordinated debt security, to make any
change in the subordination provisions that limits or terminates
the benefits applicable to any holder of Senior Indebtedness of
PNG;
|
|
|
|
|
|
to make any changes that would provide any additional rights or
benefits to the holders of debt securities or that do not, taken
as a whole, adversely affect the rights under the indenture of
any holder of debt securities;
|
|
|
|
|
|
to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act;
|
|
|
|
to evidence or provide for the acceptance of appointment under
the indenture of a successor Trustee;
|
|
|
|
to add any additional Events of Default; or
|
|
|
|
|
|
to secure the debt securities.
|
Events of
Default and Remedies
Event of Default, when used in an indenture, will
mean any of the following with respect to the debt securities of
any series:
|
|
|
|
|
failure to pay when due the principal of or any premium on any
debt security of that series;
|
|
|
|
failure to pay, within 60 days of the due date, interest on
any debt security of that series;
|
|
|
|
failure to pay when due any sinking fund payment with respect to
any debt securities of that series;
|
|
|
|
failure on the part of the issuers to comply with the covenant
described under Consolidation, Merger or Asset
Sale;
|
|
|
|
failure to perform any other covenant in the indenture that
continues for 30 days after written notice is given to the
issuers;
|
|
|
|
certain events of bankruptcy, insolvency or reorganization of an
issuer; or
|
|
|
|
any other Event of Default provided under the terms of the debt
securities of that series.
|
An Event of Default for a particular series of debt securities
will not necessarily constitute an Event of Default for any
other series of debt securities issued under an indenture. The
Trustee may withhold notice to the holders of debt securities of
any default (except in the payment of principal, premium, if
any, or interest) if it considers such withholding of notice to
be in the interests of the holders.
7
If an Event of Default for any series of debt securities occurs
and continues, the Trustee or the holders of at least 25% in
aggregate principal amount of the debt securities of the series
may declare the entire principal of and premiums, if any, and
accrued interest on, all the debt securities of that series to
be due and payable immediately. If this happens, subject to
certain conditions, the holders of a majority in the aggregate
principal amount of the debt securities of that series can
rescind the declaration.
Other than its duties in case of a default, a Trustee is not
obligated to exercise any of its rights or powers under either
indenture at the request, order or direction of any holders,
unless the holders offer the Trustee reasonable security or
indemnity. If they provide this reasonable security or
indemnification, the holders of a majority in aggregate
principal amount of any series of debt securities may direct the
time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any power
conferred upon the Trustee, for that series of debt securities.
No Limit
on Amount of Debt Securities
Neither indenture will limit the amount of debt securities that
we may issue, unless we indicate otherwise in a prospectus
supplement. Each indenture will allow us to issue debt
securities of any series up to the aggregate principal amount
that we authorize.
Registration
of Notes
We will issue debt securities of a series only in registered
form, without coupons, unless otherwise indicated in the
prospectus supplement.
Minimum
Denominations
Unless the prospectus supplement states otherwise, the debt
securities will be issued only in principal amounts of $1,000
each or integral multiples of $1,000.
No
Personal Liability
None of the past, present or future partners, incorporators,
managers, members, directors, officers, employees, unitholders
or stockholders of either issuer or the general partner of PNG
will have any liability for the obligations of the issuers under
either indenture or the debt securities or for any claim based
on such obligations or their creation. Each holder of debt
securities by accepting a debt security waives and releases all
such liability. The waiver and release are part of the
consideration for the issuance of the debt securities. The
waiver may not be effective under federal securities laws,
however, and it is the view of the SEC that such a waiver is
against public policy.
Payment
and Transfer
The Trustee will initially act as paying agent and registrar
under each indenture. The issuers may change the paying agent or
registrar without prior notice to the holders of debt
securities, and the issuers or any of their subsidiaries may act
as paying agent or registrar.
If a holder of debt securities has given wire transfer
instructions to the issuers, the issuers will make all payments
on the debt securities in accordance with those instructions.
All other payments on the debt securities will be made at the
corporate trust office of the Trustee, unless the issuers elect
to make interest payments by check mailed to the holders at
their addresses set forth in the debt security register.
The Trustee and any paying agent will repay to us upon request
any funds held by them for payments on the debt securities that
remain 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 as general creditors.
8
Exchange,
Registration and Transfer
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 exchange or registration of transfer
at the office of the registrar. The registrar will effect the
transfer or exchange when it is satisfied with the documents of
title and identity of the person making the request. We will not
charge a service charge for any registration of transfer or
exchange of the debt securities. We may, however, require the
payment of any tax or other governmental charge payable for that
registration.
We will not be required to:
|
|
|
|
|
issue, register the transfer of, or exchange debt securities of
a series either during a period beginning 15 business days prior
to the selection of debt securities of that series for
redemption and ending on the close of business on the day of
mailing of the relevant notice of redemption or repurchase, or
between a record date and the next succeeding interest payment
date; or
|
|
|
|
register the transfer of or exchange any debt security called
for redemption, except the unredeemed portion of any debt
security we are redeeming in part.
|
Provisions
Relating only to the Senior Debt Securities
The senior debt securities will rank equally in right of payment
with all of our other senior and unsubordinated debt. The senior
debt securities will be effectively subordinated, however, to
all of our secured debt to the extent of the value of the
collateral for that debt. We will disclose the amount of our
secured debt in the prospectus supplement.
Provisions
Relating only to the Subordinated Debt Securities
Subordinated
Debt Securities Subordinated to Senior Indebtedness
The subordinated debt securities will rank junior in right of
payment to all of the Senior Indebtedness of PNG. Senior
Indebtedness will be defined in a supplemental indenture
or authorizing resolutions respecting any issuance of a series
of subordinated debt securities, and the definition will be set
forth in the prospectus supplement.
Payment
Blockages
The subordinated indenture will provide that no payment of
principal, interest and any premium on the subordinated debt
securities may be made in the event:
|
|
|
|
|
we or our property is involved in any voluntary or involuntary
liquidation or bankruptcy;
|
|
|
|
we fail to pay the principal, interest, any premium or any other
amounts on any Senior Indebtedness of PNG within any applicable
grace period or the maturity of such Senior Indebtedness is
accelerated following any other default, subject to certain
limited exceptions set forth in the subordinated
indenture; or
|
|
|
|
any other default on any Senior Indebtedness of PNG occurs that
permits immediate acceleration of its maturity, in which case a
payment blockage on the subordinated debt securities will be
imposed for a maximum of 179 days at any one time.
|
No
Limitation on Amount of Senior Debt
The subordinated indenture will not limit the amount of Senior
Indebtedness that PNG may incur, unless otherwise indicated in
the prospectus supplement.
Book
Entry, Delivery and Form
The debt securities of a particular series may be issued in
whole or in part in the form of one or more global certificates
that will be deposited with the Trustee as custodian for The
Depository Trust Company, New York, New York (DTC).
This means that we will not issue certificates to each holder.
Instead, one or more global debt securities will be issued to
DTC, who will keep a computerized record of its participants
(for example, your broker) whose clients have
9
purchased the debt securities. The participant will then keep a
record of its clients who purchased the debt securities. Unless
it is exchanged in whole or in part for a certificated debt
security, a global debt security may not be transferred, except
that DTC, its nominees and their successors may transfer a
global debt security as a whole to one another.
Beneficial interests in global debt securities will be shown on,
and transfers of global debt securities will be made only
through, records maintained by DTC and its participants.
DTC has provided us the following information: DTC is a
limited-purpose trust company organized under the New York
Banking Law, a banking organization within the
meaning of the New York Banking Law, a member of the United
States Federal Reserve System, a clearing
corporation within the meaning of the New York Uniform
Commercial Code and a clearing agency registered
under the provisions of Section 17A of the Securities
Exchange Act of 1934. DTC holds securities that its participants
(Direct Participants) deposit with DTC. DTC also
records the settlement among Direct Participants of securities
transactions, such as transfers and pledges, in deposited
securities through computerized records for Direct
Participants accounts. This eliminates the need to
exchange certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations.
DTCs book-entry system is also used by other organizations
such as securities brokers and dealers, banks and trust
companies that work through a Direct Participant. The rules that
apply to DTC and its participants are on file with the SEC.
DTC is a wholly-owned subsidiary of The Depository
Trust & Clearing Corporation, which, in turn, is owned
by a number of Direct Participants and by, among other
institutions, the Financial Industry Regulatory Authority, Inc.
We will wire all payments on the global debt securities to
DTCs nominee. We and the Trustee will treat DTCs
nominee as the owner of the global debt securities for all
purposes. Accordingly, we, the Trustee and any paying agent will
have no direct responsibility or liability to pay amounts due on
the global debt securities to owners of beneficial interests in
the global debt securities.
It is DTCs current practice, upon receipt of any payment
on the global debt securities, to credit Direct
Participants accounts on the payment date according to
their respective holdings of beneficial interests in the global
debt securities as shown on DTCs records. In addition, it
is DTCs current practice to assign any consenting or
voting rights to Direct Participants whose accounts are credited
with debt securities on a record date, by using an omnibus
proxy. Payments by participants to owners of beneficial
interests in the global debt securities, and voting by
participants, will be governed by the customary practices
between the participants and owners of beneficial interests, as
is the case with debt securities held for the account of
customers registered in street name. However,
payments will be the responsibility of the participants and not
of DTC, the Trustee or us.
Debt securities represented by a global debt security will be
exchangeable for certificated debt securities with the same
terms in authorized denominations only if:
|
|
|
|
|
DTC notifies us that it is unwilling or unable to continue as
depositary or if DTC ceases to be a clearing agency registered
under applicable law and in either event a successor depositary
is not appointed by us within 90 days; or
|
|
|
|
|
|
we determine not to require all of the debt securities of a
series to be represented by a global debt security.
|
Satisfaction
and Discharge; Defeasance
Each indenture will be discharged and will cease to be of
further effect as to all outstanding debt securities of any
series issued thereunder (except as to surviving rights of
registration, transfer or exchange of such debt securities and
as otherwise provided in such indenture), when:
(a) either:
(1) all outstanding debt securities of that series that
have been authenticated (except lost, stolen or destroyed debt
securities that have been replaced or paid and debt securities
for whose payment money has theretofore been deposited in trust
and thereafter repaid to us) have been delivered to the Trustee
for cancellation; or
10
(2) all outstanding debt securities of that series that
have not been delivered to the Trustee for cancellation have
become due and payable by reason of the giving of a notice of
redemption or otherwise or will become due and payable at their
stated maturity within one year or are to be called for
redemption within one year under arrangements satisfactory to
the Trustee and in any case we have irrevocably deposited or
caused to be irrevocably deposited with the Trustee as trust
funds in trust cash in U.S. dollars, non-callable
U.S. Government Obligations or a combination thereof, in
such amounts as will be sufficient, without consideration of any
reinvestment of interest and as certified by an independent
public accountant, to pay and discharge the entire indebtedness
of such debt securities not delivered to the Trustee for
cancellation, for principal, premium, if any, and accrued
interest to the date of such deposit (in the case of debt
securities that have been due and payable) or the stated
maturity or redemption date;
(b) we have paid or caused to be paid all other sums
payable by us under the indenture; and
(c) we have delivered an officers certificate and an
opinion of counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
The debt securities of a particular series will be subject to
legal or covenant defeasance to the extent, and upon the terms
and conditions, set forth in the prospectus supplement.
The
Trustee
U.S. Bank National Association will be the initial Trustee
under both the senior indenture and the subordinated indenture.
We maintain a banking relationship in the ordinary course of
business with U.S. Bank National Association and some of
its affiliates.
Resignation
or Removal of Trustee
If the Trustee has or acquires a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee must
eliminate its conflicting interest, obtain the consent of the
Commission to continue or resign, to the extent and in the
manner provided by, and subject to the provisions of, the
Trust Indenture Act and the applicable indenture. Any
resignation will require the appointment of a successor trustee
under the applicable indenture in accordance with the terms and
conditions of such indenture.
The Trustee may resign or be removed by us with respect to one
or more series of debt securities, and a successor Trustee may
be appointed to act with respect to any such series. The holders
of a majority in aggregate principal amount of the debt
securities of any series may remove the Trustee with respect to
the debt securities of such series.
Limitations
on Trustee if it is a Creditor
Each indenture will limit the right of the Trustee thereunder,
in the event that it becomes a creditor of an issuer, to obtain
payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or
otherwise.
Certificates
and Opinions to be Furnished to Trustee
Each indenture will provide that, in addition to other
certificates or opinions that may be specifically required by
other provisions of the indenture, every application by us for
action by the Trustee must be accompanied by a certificate of
certain of our officers and an opinion of counsel (who may be
our counsel) stating that, in the opinion of the signers, all
conditions precedent to such action have been complied with by
us.
Governing
Law
Each indenture and all of the debt securities will be governed
by the laws of the State of New York.
11
DESCRIPTION
OF OUR COMMON UNITS
Our common units represent limited partner interests that
entitle the holders to participate in our cash distributions and
to exercise the rights and privileges available to limited
partners under our partnership agreement. We also have
outstanding Series A subordinated units and Series B
subordinated units, which represent separate classes of limited
partner interests in us (see Who We Are
Organizational History, Partnership Structure and
Management). The Series A subordinated units also
entitle the holders to participate in cash distributions and to
exercise the rights and privileges available to limited partners
under our partnership agreement. The Series B subordinated
units are not entitled to participate in our quarterly
distributions unless and until they convert into Series A
subordinated units or common units. They are, however, entitled
to vote on matters submitted to a vote by our unitholders. For a
description of the relative rights and preferences of holders of
common units, Series A subordinated units and Series B
subordinated units in and to partnership distributions, please
read this section and Description of Our Cash Distribution
Policy. For a description of the rights and privileges of
limited partners under our partnership agreement, including
voting rights, please read this section and Description of
Our Partnership Agreement.
Our outstanding common units are listed on the NYSE under the
symbol PNG and any additional common units we issue
will also be listed on the NYSE. As of July 7, 2011, there
were 59,184,450 common units outstanding. On July 7, 2011,
the last reported sales price of our common units on the NYSE
was $23.00 per common unit.
Transfer
Agent and Registrar
The transfer agent and registrar for our common units is
American Stock Transfer & Trust Company.
Voting
Each holder of common units is entitled to one vote for each
common unit on all matters submitted to a vote of our
unitholders. Please read Description of Our Partnership
Agreement Meetings; Voting for additional
information regarding unitholder meetings and voting rights.
Transfer
of Common Units, Status as Limited Partner or Assignee
Except as described below under Description of Our
Partnership Agreement Limited Liability, the
common units will be fully paid, and holders of the common units
will not be required to make additional capital contributions to
us.
By transfer of common units in accordance with our partnership
agreement, each transferee of common units will become a
substituted limited partner of our partnership with respect to
the transferred common units automatically upon the recording of
the transfer in our books and records. Each transferee:
|
|
|
|
|
represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement;
|
|
|
|
automatically agrees to be bound by the terms and conditions of,
and is deemed to have executed, our partnership
agreement; and
|
|
|
|
is deemed to have given the consents and approvals contained in
our partnership agreement.
|
If the foregoing action is not taken, a purchaser will not be
registered as a record holder of common units on the books of
our transfer agent or issued a common unit certificate. Until a
common unit has been transferred on our books, we and the
transfer agent may treat the record holder of the unit as the
absolute owner for all purposes, except as otherwise required by
law or stock exchange regulations. Our general partner will
cause any transfers to be recorded on our books and records no
less frequently than quarterly.
Purchasers may hold common units in nominee accounts. We may, at
our discretion, 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 that are transferable according to
the laws governing the transfer of securities. In addition to
other rights acquired upon transfer, the transferor gives the
transferee the right to become a substituted limited partner in
our partnership for the transferred common units. An assignee,
pending its admission as a substituted limited partner, is
entitled to an interest in us equivalent to that of a limited
partner with respect to the right to share in allocations and
distributions, including liquidating distributions. Our general
partner will vote and exercise other powers attributable to
common units owned by an assignee who has not become a
substituted limited partner at the written direction of the
assignee. A nominee or broker who has executed a transfer
application with respect to common units held in street name or
nominee accounts will receive distributions and reports
pertaining to its common units.
12
DESCRIPTION
OF OUR CASH DISTRIBUTION POLICY
Our partnership agreement requires that we distribute all of our
available cash to our unitholders. Our cash distribution policy
may be changed at any time and is subject to certain
restrictions, including those contained in our partnership
agreement, our credit facility or other debt agreements and
applicable partnership law. Please read Forward-Looking
Statements and Risk Factors for information
regarding statements that do not relate strictly to historical
or current facts and certain risks inherent in our business.
Set forth below is a summary of our cash distribution policy and
the significant provisions of our partnership agreement that
relate to cash distributions to our unitholders.
Distributions
of Available Cash
We will distribute all of our available cash to our unitholders
of record on the applicable record date within 45 days
following the end of each quarter in the manner described under
Minimum Quarterly Distribution of Available
Cash.
Available cash generally means all cash on hand at the end of
that quarter less the amount of cash reserves that are
necessary or appropriate in the reasonable discretion of our
general partner to:
|
|
|
|
|
provide for the proper conduct of our business;
|
|
|
|
comply with applicable law, any of our debt instruments or other
agreements; or
|
|
|
|
provide funds for distributions to unitholders for any one or
more of the next four quarters.
|
Available cash may also include, if our general partner so
determines, all or a portion of cash on hand on the date of
determination of available cash for the quarter resulting from
borrowings, including working capital borrowings, made after the
end of the quarter.
Distributable
Cash Flow and Capital Surplus
All cash distributed to our unitholders will be characterized as
either distributable cash flow or capital
surplus. Our partnership agreement requires that we
distribute available cash from distributable cash flow
differently than available cash from capital surplus.
Distributable Cash Flow. Distributable Cash
Flow refers generally to:
|
|
|
|
|
net income; plus or minus (as applicable)
|
|
|
|
any amounts necessary to offset the impact of any items included
in net income that do not impact the amount of available cash;
plus
|
|
|
|
any acquisition-related expenses deducted from net income and
associated with (a) successful acquisitions or (b) any
other potential acquisitions that have not been abandoned;
minus
|
|
|
|
any acquisition-related expenses covered by the immediately
preceding clause that relate to (a) potential acquisitions
that have since been abandoned or (b) potential
acquisitions that have not been consummated within one year
following the date such expense was incurred (except that if the
potential acquisition is the subject of a pending purchase and
sale agreement as of such one-year date, such one-year period of
time shall be extended until the first to occur of the
termination of such purchase and sale agreement or the first day
following the closing of the acquisition contemplated by such
purchase and sale agreement); and minus
|
|
|
|
maintenance capital expenditures.
|
As described above, distributable cash flow does not reflect
actual cash on hand that is available for distribution to our
unitholders. Our definition of distributable cash flow is
generally designed and intended to adjust net income (as
determined in accordance with generally accepted accounting
principles) for items that do not impact the amount of available
cash we have available for distribution to our unitholders but
may be required to be reflected in net income by applicable
accounting rules and regulations.
13
Capital Surplus. Our partnership agreement
requires that we treat any amount distributed in excess of
distributable cash flow, regardless of its source, as capital
surplus. Our partnership agreement includes a provision that
will enable us, if we choose, to distribute up to
$40 million of cash we receive in the future from sources
other than distributable cash flow, such as asset sales,
issuances of securities and borrowings, without being required
to classify such distribution as a distribution from capital
surplus under our partnership agreement. We do not anticipate
that we will make any distributions from capital surplus.
General
Partner Interest and Incentive Distribution Rights
Our partnership agreement provides that our general partner
initially will be entitled to 2.0% of all distributions that we
make prior to our liquidation. Our general partner has the
right, but not the obligation, to contribute a proportionate
amount of capital to us to maintain its 2.0% general partner
interest if we issue additional units. Our general
partners 2.0% interest, and the percentage of our cash
distributions to which it is entitled, will be proportionately
reduced if we issue additional units in the future and our
general partner does not contribute a proportionate amount of
capital to us in order to maintain its 2.0% general partner
interest. Our general partner will be entitled to make a capital
contribution in order to maintain its 2.0% general partner
interest in the form of the contribution to us of common units
based on the current market value of the contributed common
units.
Our general partner currently also holds incentive distribution
rights and may transfer these rights separately from its general
partner interest, subject to restrictions in our partnership
agreement. Incentive distribution rights represent the right to
receive an increasing percentage of quarterly distributions of
available cash from distributable cash flow after the minimum
quarterly distribution and the target distribution levels have
been achieved. The target distribution levels are based on the
amounts of available cash from distributable cash flow
distributed above the payments made under the minimum quarterly
distribution, if any, and the related 2.0% distribution to our
general partner.
Effect of
Issuance of Additional Units
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities (see
Description of Our Partnership Agreement
Issuance of Additional 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 common units or other partnership securities may
dilute the value of the interests of the then-existing holders
of common units in our net assets. If we issue additional
partnership interests, our general partner will be entitled, but
not required, to make additional capital contributions to the
extent necessary to maintain its 2.0% general partner interest
in us (see General Partner Interest and
Incentive Distribution Rights).
Minimum
Quarterly Distributions of Available Cash
We will make quarterly distributions to our partners prior to
our liquidation in an amount equal to 100.0% of our available
cash for that quarter. We expect to make distributions of all
available cash within approximately 45 days after the end
of each quarter to holders of record on the applicable record
date.
The minimum quarterly distribution and the target distribution
levels are subject to certain adjustments as described in
Distributions from Distributable Cash
Flow and Adjustment to the Minimum
Quarterly Distribution and Target Distribution Levels.
We do not have a legal obligation to pay the minimum quarterly
distribution or any other distribution except to distribute
available cash as provided in our partnership agreement. Our
cash distribution policy may be changed at any time and even if
our policy is not modified or revoked, the amount of
distributions paid under our policy, if any, and the decision to
make any distribution is determined by our general partner,
taking into consideration the terms of our partnership
agreement, as well as our credit facility or other debt
agreements and applicable partnership law.
Distributions
from Distributable Cash Flow
We will make distributions of available cash from distributable
cash flow in the following manner:
|
|
|
|
|
first, 98.0% to the holders of common units and 2.0% to
our general partner, until each common unit has received the
minimum quarterly distribution, plus any arrearages from
prior quarters; and
|
14
|
|
|
|
|
second, 98.0% to the holders of Series A
subordinated units and 2.0% to our general partner, until each
Series A subordinated unit has received the minimum
quarterly distribution.
|
If cash distributions to our unitholders exceed the minimum
quarterly distribution per common unit and Series A
subordinated unit in any quarter, our general partner will
receive, in addition to distributions on its 2.0% general
partner interest, incentive distributions in increasing
percentages, up to 50.0%, of the cash we distribute in excess of
that amount, as further described in
Allocation of Incentive Distribution
Rights.
Distributions
from Capital Surplus
We will make distributions of available cash from capital
surplus in the following manner:
|
|
|
|
|
first, 98.0% to all common unitholders and Series A
subordinated unitholders, pro rata, and 2.0% to our general
partner, until we distribute for each common unit, an amount of
available cash from capital surplus equal to the initial public
offering price;
|
|
|
|
second, 98.0% to the common unitholders, pro rata, and
2.0% to our general partner, until we distribute for each common
unit, an amount of available cash from capital surplus equal to
any unpaid arrearages in payment of the minimum quarterly
distribution on the common units; and
|
|
|
|
thereafter, we will make all distributions of available
cash from capital surplus as if they were from distributable
cash flow.
|
Allocation
of Incentive Distribution Rights
For any quarter that we have distributed available cash from
distributable cash flow to our common unitholders and
Series A subordinated unitholders in an amount equal to the
minimum quarterly distribution, then we will distribute any
additional available cash from distributable cash flow for that
quarter among our unitholders and our general partner in the
following manner:
|
|
|
|
|
first, 85.0% to all common unitholders and Series A
subordinated unitholders, pro rata, and 15.0% to our general
partner, until each such unitholder receives a total of
approximately $0.37125 per unit for that quarter (the
first target distribution);
|
|
|
|
second, 75.0% to all common unitholders and Series A
subordinated unitholders, pro rata, and 25.0% to our general
partner, until each such unitholder receives a total of
approximately $0.50625 per unit for that quarter (the
second target distribution); and
|
|
|
|
thereafter, 50.0% to all common unitholders and
Series A subordinated unitholders, pro rata, and 50.0% to
our general partner.
|
The distributions to our general partner outlined above, other
than in its capacity as a holder of units and that are in excess
of its aggregate 2.0% general partner interest, represent the
incentive distribution rights. The right to receive incentive
distribution rights is not part of our general partners
general partner interest and may be transferred separately from
that interest, subject to certain restrictions (see
General Partner Interest and Incentive
Distribution Rights).
Adjustments
to Incentive Distribution Rights; General Partners Right
to Reset Incentive Distribution Levels
Our general partner, as the holder of our incentive distribution
rights, has the right under our partnership agreement to elect
to relinquish the right to receive incentive distribution
payments based on the initial cash target distribution levels
and to reset, at higher levels, the minimum quarterly
distribution amount, and cash target distribution levels upon
which the incentive distribution payments to our general partner
would be set. Our general partners right to reset the
minimum quarterly distribution amount, and the target
distribution levels upon which the incentive distributions
payable to our general partner are based, may be exercised,
without approval of our unitholders or the conflicts committee
of our general partner, at any time when there are no
Series A subordinated units outstanding and we have made
cash distributions to the holders of the incentive distribution
rights at the highest level of incentive distribution for each
of the prior four consecutive fiscal quarters. Our general
partner will have the right to reset the minimum quarterly
distribution whether or not any Series B subordinated units
remain outstanding. The reset minimum quarterly distribution
amount and target
15
distribution levels will be higher than the minimum quarterly
distribution amount and the target distribution levels prior to
the reset such that our general partner will not receive any
incentive distributions under the reset target distribution
levels until cash distributions per common unit following this
event increase as described below. We anticipate that our
general partner would exercise this reset right in order to
facilitate acquisitions or internal growth projects that would
otherwise not be sufficiently accretive to cash distributions
per common unit, taking into account the existing levels of
incentive distribution payments being made to our general
partner.
In connection with the resetting of the minimum quarterly
distribution amount and the target distribution levels and the
corresponding relinquishment by our general partner of incentive
distribution payments based on the target cash distributions
prior to the reset, our general partner will be entitled to
receive a number of newly issued common units based on a
predetermined formula described below that takes into account
the cash parity value of the average cash
distributions related to the incentive distribution rights
received by our general partner for the two quarters prior to
the reset event as compared to the average cash distributions
per common unit during this period. In addition, our general
partner will be issued a general partner interest necessary to
maintain our general partners interest in us immediately
prior to the reset election.
The number of common units that our general partner would be
entitled to receive from us in connection with a resetting of
the minimum quarterly distribution amount and the target
distribution levels then in effect would be equal to the
quotient determined by dividing (x) the average amount of
cash distributions received by our general partner in respect of
its incentive distribution rights during the two consecutive
fiscal quarters ended immediately prior to the date of such
reset election by (y) the average of the amount of cash
distributed per common unit during each of these two quarters.
Following a reset election by our general partner, the minimum
quarterly distribution amount will be reset to an amount equal
to the average cash distribution amount per common unit for the
two fiscal quarters immediately preceding the reset election
(which amount we refer to as the reset minimum quarterly
distribution) and the target distribution levels will be
reset to be correspondingly higher such that we would distribute
all of our available cash from distributable cash flow for each
quarter thereafter as follows:
|
|
|
|
|
first, 98.0% to all common unitholders, pro rata, and 2.0% to
our general partner, until each such unitholder receives an
amount per unit equal to the reset minimum quarterly
distribution for that quarter;
|
|
|
|
second, 85.0% to all common unitholders, pro rata, and 15.0% to
our general partner, until each such unitholder receives an
amount per unit equal to 110% of the reset minimum quarterly
distribution for the quarter;
|
|
|
|
third, 75.0% to all common unitholders, pro rata, and 25.0% to
our general partner, until each such unitholder receives an
amount per unit equal to 150% of the reset minimum quarterly
distribution for the quarter; and
|
|
|
|
thereafter, 50.0% to all common unitholders, pro rata, and 50.0%
to our general partner.
|
Our general partner will be entitled to cause the minimum
quarterly distribution amount and the target distribution levels
to be reset on more than one occasion, provided that it may not
make a reset election except at a time when it has received
incentive distributions for the prior four consecutive fiscal
quarters based on the highest level of incentive distributions
that it is entitled to receive under our partnership agreement.
Neither the existence of the reset right nor the exercise
thereof will preclude our general partner from unilaterally
foregoing the payment of all or a portion of the incentive
distribute rights otherwise payable, whether temporarily or
permanently.
Adjustment
to the Minimum Quarterly Distribution and Target Distribution
Levels
In addition to adjusting the minimum quarterly distribution and
target distribution levels to reflect a distribution of capital
surplus, if we combine our common units into a fewer number of
common units or subdivide our common units into a greater number
of common units, our partnership agreement specifies that the
following items will be proportionately adjusted:
|
|
|
|
|
the minimum quarterly distribution;
|
|
|
|
the target distribution levels;
|
16
|
|
|
|
|
the unrecovered initial unit price; and
|
|
|
|
the number of Series A subordinated units and Series B
subordinated units.
|
For example, in the event of a two-for-one split of the common
units (assuming no prior adjustments), the minimum quarterly
distribution, the target distribution levels and the unrecovered
initial unit price would each be reduced to 50.0% of its initial
level, and each Series A subordinated unit and
Series B subordinated unit would convert into two
Series A subordinated units and two Series B
subordinated units, respectively. Our partnership agreement
provides that we do not make any adjustment by reason of the
issuance of additional units for cash or property.
In addition, if legislation is enacted or if existing law is
modified or interpreted by the relevant governmental authority
so that we become taxable as a corporation or otherwise subject
to taxation as an entity for federal, state or local income tax
purposes, the minimum quarterly distribution and the target
distribution levels for each quarter may be reduced by
multiplying each distribution level by a fraction, the numerator
of which is available cash for that quarter and the denominator
of which is the sum of available cash for that quarter plus
our general partners estimate of our aggregate
liability for the quarter for such income taxes payable by
reason of such legislation or interpretation. To the extent that
the actual tax liability differs from the estimated tax
liability for any quarter, the difference will be accounted for
in subsequent quarters.
Distribution
of Cash Upon Liquidation
If we dissolve and liquidate, we will sell or otherwise dispose
of our assets and we will adjust the partners capital
account balances to show any resulting gain or loss. We will
first apply the proceeds of liquidation to the payment of our
creditors in the order of priority provided in our partnership
agreement and by law and, thereafter, distribute to our
unitholders and our general partner in accordance with their
adjusted capital account balances.
The allocations of gain and loss upon liquidation are intended,
to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding
subordinated units upon our liquidation, to the extent required
to permit common unitholders to receive their unrecovered
initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid
arrearages in payment of the minimum quarterly distribution on
the common units. However, there may not be sufficient gain upon
our liquidation to enable the holders of common units to fully
recover all of these amounts, even though there may be cash
available for distribution to the holders of subordinated units.
Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive
distribution rights of our general partner.
Although the Series B subordinated units will not be
entitled to quarterly distributions, the Series B
subordinated units would participate in distributions upon
liquidation in accordance with their capital account balances.
After conversion of the Series B subordinated units,
special allocations of income, gain, loss, deduction, unrealized
gain, and unrealized loss among the partners will be utilized to
create economic uniformity among the units into which the
Series B subordinated units convert.
Manner of Adjustment for Gain. If we
liquidate, we will generally allocate any gain to our general
partner and each unitholder as follows:
|
|
|
|
|
first, to our 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;
|
|
|
|
second, 98.0% to the common unitholders, pro rata, and
2.0% to our general partner, until the capital account for each
common unit is equal to the sum of: (1) the unrecovered
initial unit price; (2) the amount of the minimum quarterly
distribution for the quarter during which our liquidation
occurs; and (3) any unpaid arrearages in payment of the
minimum quarterly distribution;
|
|
|
|
third, 98.0% to the Series A subordinated
unitholders, pro rata, and 2.0% to our general partner, until
the capital account for each Series A subordinated unit is equal
to the sum of: (1) the unrecovered initial unit price; and
(2) the amount of the minimum quarterly distribution for
the quarter during which our liquidation occurs;
|
|
|
|
fourth, 85.0% to all common unitholders and Series A
subordinated unitholders, pro rata, and 15.0% to our general
partner, until we allocate under this paragraph an amount per
unit equal to: (1) the sum of the excess of the first
|
17
|
|
|
|
|
target distribution per unit over the minimum quarterly
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from distributable cash flow in excess of the
minimum quarterly distribution per unit that we distributed
85.0% to our unitholders, pro rata, and 15.0% to our general
partner for each quarter of our existence;
|
|
|
|
|
|
fifth, 75.0% to all common unitholders and Series A
subordinated unitholders, pro rata, and 25.0% to our general
partner, until we allocate under this paragraph an amount per
unit equal to: (1) 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 (2) the
cumulative amount per unit of any distributions of available
cash from distributable cash flow in excess of the first target
distribution per unit that we distributed 75.0% to our
unitholders, pro rata, and 25.0% to our general partner for each
quarter of our existence; and
|
|
|
|
thereafter, 50.0% to all common unitholders and
Series A subordinated unitholders, pro rata, and 50.0% to
our general partner.
|
If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that clause (3) of the second
bullet point above and all of the third bullet point above will
no longer be applicable.
Manner of Adjustments for Losses. If our
liquidation occurs before the end of the subordination period,
after making allocations of loss to our general partner and our
unitholders in a manner intended to offset in reverse order the
allocations of gains that have previously been allocated, we
will generally allocate any loss to our general partner and our
unitholders in the following manner:
|
|
|
|
|
first, 98.0% to holders of Series A subordinated
units in proportion to the positive balances in their capital
accounts and 2.0% to our general partner, until the capital
accounts of the Series A subordinated unitholders have been
reduced to zero;
|
|
|
|
second, 98.0% to the holders of common units in
proportion to the positive balances in their capital accounts
and 2.0% to our general partner, until the capital accounts of
the common unitholders have been reduced to zero; and
|
|
|
|
thereafter, 100.0% to our general partner.
|
If the liquidation occurs after the end of the subordination
period, the distinction between common units and Series A
subordinated units will disappear, so that all of the first
bullet point above will no longer be applicable.
We may make special allocations of gain or loss among the
partners in a manner to create economic uniformity among the
units, including among the units into which the Series A
subordinated units and Series B subordinated units convert,
and among the common units issued in connection with a reset of
the incentive distribution levels and the common units held by
public unitholders.
Adjustments to Capital Accounts. Our
partnership agreement requires that we make adjustments to
capital accounts upon the issuance of additional units. In this
regard, our partnership agreement specifies that we allocate any
unrealized and, for tax purposes, unrecognized gain resulting
from the adjustments to our unitholders and our general partner
in the same manner as we allocate gain upon liquidation. In the
event that we make positive adjustments to the capital accounts
upon the issuance of additional units, our partnership agreement
requires that we generally 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 partners capital
account balances equaling the amount which they would have been
if no earlier positive adjustments to the capital accounts had
been made. By contrast to the allocations of gain, and except as
provided above, we generally will allocate any unrealized and
unrecognized loss resulting from the adjustments to capital
accounts upon the issuance of additional units to our
unitholders and our general partner based on their respective
percentage ownership of us. In this manner, prior to the end of
the subordination period, we generally will allocate any such
loss equally with respect to our common and Series A
subordinated units. In the event we make negative adjustments to
the capital accounts as a result of such loss, future positive
adjustments resulting from the issuance of additional units will
be allocated in a manner designed to reverse the prior negative
adjustments, and special allocations will be made upon
liquidation in a manner that results, to the extent possible, in
our unitholders capital account balances equaling the
amounts they would have been if no earlier adjustments for loss
had been made.
18
DESCRIPTION
OF OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement. The following provisions of our
partnership agreement are summarized elsewhere in this
prospectus:
|
|
|
|
|
rights of holders of common units are described under
Description of Our Common Units;
|
|
|
|
distributions of our available cash are described under
Description of Our Cash Distribution Policy; and
|
|
|
|
allocations of taxable income and other tax matters are
described under Material Income Tax Consequences.
|
Purpose
Our purpose, as set forth in our partnership agreement, is
limited to any business activity that is approved by our general
partner and that lawfully may be conducted by a limited
partnership organized under Delaware law; provided, that our
general partner shall not cause us to engage, directly or
indirectly, in any business activity that our general partner
determines would cause us to be treated as an association
taxable as a corporation or otherwise taxable as an entity for
federal income tax purposes.
Although our general partner has the ability to cause us and our
subsidiaries to engage in activities other than the business of
the acquisition, development, operation and commercial
management of natural gas storage facilities and related
activities, our general partner has no current plans to do so
and may decline to do so free of any fiduciary duty or
obligation whatsoever to us or the limited partners, including
any duty to act in good faith or in the best interests of us or
the limited partners. Our general partner is generally
authorized to perform all acts it determines to be necessary or
appropriate to carry out our purposes and to conduct our
business.
Cash
Distributions
Our partnership agreement specifies the manner in which we will
make cash distributions to holders of our common units and other
partnership securities, as well as to our general partner in
respect of its general partner interest and its incentive
distribution rights. For a description of these cash
distribution provisions, please read Description of Our
Cash Distribution Policy.
Capital
Contributions
Unitholders are not obligated to make additional capital
contributions, except as described below under
Limited Liability.
If we issue additional units, our general partner has the right,
but not the obligation, to contribute a proportionate amount of
capital to us to maintain its 2.0% general partner interest. Our
general partners 2.0% interest, and the percentage of our
cash distributions to which it is entitled, will be
proportionately reduced if we issue additional units in the
future and our general partner does not contribute a
proportionate amount of capital to us to maintain its 2.0%
general partner interest. Our general partner will be entitled
to make a capital contribution in order to maintain its 2.0%
general partner interest in the form of the contribution to us
of common units based on the current market value of the
contributed common units.
Meetings;
Voting
Our unitholders have only limited voting rights on matters
affecting our business or governance, subject in all cases to
any specific unitholder rights contained in our partnership
agreement. As a result, we do not hold annual meetings of
unitholders and do not anticipate that any meeting of our
unitholders will be called in the foreseeable future. Any action
that is required or permitted to be taken by our unitholders may
be taken either at a meeting of our unitholders or without a
meeting, if consents in writing describing the action so taken
are signed by holders of the number of units necessary to
authorize or take that action at a meeting.
Meetings of our unitholders may be called by our general partner
or by unitholders owning at least 20.0% of the outstanding units
of the class for which a meeting is proposed. Except as
described below regarding a person or group owning 20.0% or more
of any class of units then outstanding, record holders of units
on the record date will be entitled to
19
notice of, and to vote at, meetings of our limited partners and
to act upon matters for which approvals may be solicited.
Unitholders may vote either in person or by proxy at meetings.
The holders of a majority of the outstanding units of the class
or classes for which a meeting has been called, represented in
person or by proxy, will constitute a quorum, unless any action
by our unitholders requires approval by holders of a greater
percentage of the units, in which case the quorum will 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. Please
read Issuance of Additional Securities.
However, if at any time any person or group, other than our
general partner and its affiliates, or a direct or subsequently
approved transferee of our general partner or its affiliates,
acquires, in the aggregate, beneficial ownership of 20.0% or
more of any class of units then outstanding, that person or
group will lose voting rights on all of its units and the 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. Except as our partnership agreement
otherwise provides, subordinated units will vote together with
common units, as a single class.
The 2.0% general partner interest is not deemed outstanding for
purposes of voting rights and such interest represents a
non-voting general partner interest. In voting their common and
subordinated units, our general partner and its affiliates will
have no fiduciary duty or obligation whatsoever to us or the
limited partners, including any duty to act in good faith or in
the best interests of us or the limited partners.
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.
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. However, if it were determined that the
right, or exercise of the right, by the limited partners as a
group:
|
|
|
|
|
to remove or replace our general partner;
|
|
|
|
to approve some amendments to our partnership agreement; or
|
|
|
|
to take other action under our partnership agreement;
|
constituted participation in the control of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as our general
partner. This liability would extend to persons who transact
business with us under the reasonable belief that the limited
partner is a general partner. Neither our partnership agreement
nor the Delaware Act specifically provides for legal recourse
against our general partner if a limited partner were to lose
limited liability through any fault of our general partner.
While this does not mean that a limited partner could not seek
legal recourse, we know of no precedent for this type of a claim
in Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, would 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
from the date of the distribution. Under the Delaware Act, a
substituted limited partner of a limited partnership is liable
for the obligations of his assignor to make contributions to the
partnership, except that such person is not obligated for
liabilities unknown to him at the time he became a limited
partner and that could not be ascertained from our partnership
agreement.
20
Limitations on the liability of limited partners for the
obligations of a limited partnership have not been clearly
established in many jurisdictions. If, by virtue of our
ownership interest in our operating company or otherwise, it
were determined that we were conducting business in any state
without compliance with the applicable limited partnership or
limited liability company statute, or that the right or exercise
of the right by the limited partners as a group to remove or
replace our general partner, to approve some amendments to our
partnership agreement, or to take other action under our
partnership agreement constituted participation in the
control of our business for purposes of the statutes of
any relevant jurisdiction, then the limited partners could be
held personally liable for our obligations under the law of that
jurisdiction to the same extent as our general partner under the
circumstances. We will operate in a manner that our general
partner considers reasonable and necessary or appropriate to
preserve the limited liability of the limited partners.
Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities for the
consideration and on the terms and conditions determined by our
general partner in its sole discretion without the approval of
our unitholders.
It is possible that we will fund acquisitions through the
issuance of additional common units, Series A subordinated
units or other partnership 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 common
units or other partnership securities 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, as determined by our general partner, may have
special voting rights to which the common units are not
entitled. In addition, our partnership agreement does not
prohibit our subsidiaries from issuing equity securities, which
may effectively rank senior to the common units.
Upon issuance of additional partnership securities (other than
the issuance of partnership securities issued in connection with
a reset of the incentive distribution target levels relating to
our general partners incentive distribution rights or the
issuance of partnership securities upon conversion of
outstanding partnership securities), our general partner will be
entitled, but not required, to make additional capital
contributions to the extent necessary to maintain its 2.0%
general partner interest in us. Our general partners 2.0%
interest in us will be reduced if we issue additional units in
the future and our general partner does not contribute a
proportionate amount of capital to us to maintain its 2.0%
general partner interest. 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,
Series A subordinated units or other partnership securities
whenever, and on the same terms that, we issue those securities
to persons other than our general partner and its affiliates, to
the extent necessary to maintain the percentage interest of our
general partner and its affiliates, including such interest
represented by common units and Series A subordinated
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.
Amendments
to Our Partnership Agreement
Amendments to our partnership agreement may be proposed only by
or with the consent of our general partner. However, our general
partner will have no duty or obligation to propose any amendment
and may decline to do so free of any fiduciary duty or
obligation whatsoever to us or the limited partners, including
any duty to act in good faith or in the best interests of us or
the limited partners.
In some circumstances, more particularly described in our
partnership agreement, our general partner may make amendments
to our partnership agreement without the approval of our limited
partners or assignees. In order to adopt a proposed amendment,
other than the amendments that our general partner may make
without the approval of any limited partner, our general partner
is required to seek written approval of the holders of the
number of units required to approve the amendment or to call a
meeting of the limited partners to consider and vote upon the
proposed amendment.
Any amendment that would enlarge the obligations of, restrict in
any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable by us
to our general partner or any of its affiliates will
21
require the consent of our general partner, which consent may be
given or withheld at its option. Any amendment that would
enlarge the obligations of any limited partner without its
consent will require the approval of a majority of the type or
class of limited partner interests so affected. Additionally,
any amendment that would have a material adverse effect on the
rights or preferences of any type or class of outstanding units
in relation to other classes of units will require the approval
of a majority of the type or class of units so affected. Any
amendment that reduces the voting percentage required to take
any action is required to be approved by the affirmative vote of
limited partners whose aggregate outstanding units constitute
not less than the voting requirement sought to be reduced.
Withdrawal
or Removal of Our General Partner
Our general partner has agreed not to withdraw voluntarily as
our general partner prior to June 30, 2020 without
obtaining the approval of the holders of a majority of our
outstanding common units, excluding those held by our general
partner and its affiliates, directors and executive officers,
and furnishing an opinion of counsel regarding limited liability
and tax matters. On or after June 30, 2020, our general
partner may withdraw as general partner without first obtaining
approval of any unitholder by giving 90 days written
notice. In addition, our general partner may withdraw without
unitholder approval upon 90 days notice to the
limited partners if at least 50.0% of the outstanding common
units are held or controlled by one person and its affiliates,
other than our general partner and its affiliates.
Upon withdrawal of our general partner under any circumstances,
other than as a result of a transfer by our general partner of
all or a part of its general partner interest in us, the holders
of a unit majority may select a successor to that 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 a specified period after that
withdrawal, the holders of a unit majority agree in writing to
continue our business and to appoint a successor general
partner. Please read Termination and
Dissolution.
Our general partner may not be removed unless such removal is
approved by the vote of the holders of not less than
662/3%
of the outstanding units, voting together as a single class,
including units held by our general partner and its affiliates,
and we receive an opinion of counsel regarding limited liability
and tax matters. Any removal of our general partner is also
subject to the approval of a successor general partner by the
vote of the holders of a majority of the outstanding common
units, voting as a single class, and the outstanding
subordinated units, voting as a single class. The ownership of
more than
331/3%
of the outstanding units by our general partner and its
affiliates would give them the practical ability to prevent our
general partners removal.
Our partnership agreement provides that if our general partner
is removed as our general partner under circumstances where
cause does not exist and the units held by our general partner
and its affiliates are not voted in favor of that removal:
|
|
|
|
|
the subordination period will end, and all outstanding
Series A subordinated units will immediately convert into
common units on a one-for-one basis;
|
|
|
|
each Series B subordinated unit will immediately convert
into one common unit;
|
|
|
|
any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
|
|
|
|
our general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests
based on the fair market value of those interests at that time.
|
Our general partner may transfer all or any part of its general
partner interest and incentive distribution rights to another
person at any time without unitholder consent. As a condition of
the transfer of our general partner interest, the transferee
must assume, among other things, the rights and duties of our
general partner, agree to be bound by the provisions of our
partnership agreement and furnish an opinion of counsel
regarding limited liability and tax matters. Additionally, our
general partner and its affiliates may, at any time, transfer
common units or subordinated units to one or more persons,
without unitholder approval, except that they may not transfer
Series A subordinated units or Series B subordinated
units to us without the approval of the holders of a majority of
the outstanding common units (excluding common units held by our
general partner and its affiliates, directors and executive
officers).
22
In addition, our partnership agreement expressly permits the
sale, in whole or in part, of the ownership of our general
partner. At any time, PAA and its affiliates may sell or
transfer all or part of its ownership interests in our general
partner to an affiliate or third party without the approval of
our unitholders.
Merger,
Consolidation, Conversion, Sale or Other Disposition of
Assets
A merger, consolidation or conversion of us requires the prior
consent of our general partner. However, our general partner
will have no duty or obligation to consent to any merger,
consolidation or conversion and may decline to do so free of any
fiduciary duty or obligation whatsoever to us or the limited
partners, including any duty to act in good faith or in the best
interests of us or the limited partners.
Our partnership agreement generally prohibits our general
partner, without the prior approval of the holders of a unit
majority, from causing us to, among other things, sell, exchange
or otherwise dispose of all or substantially all of our assets
in a single transaction or a series of related transactions,
including by way of merger, consolidation or other combination,
or approving on our behalf the sale, exchange or other
disposition of all or substantially all of the assets of our
subsidiaries. Additionally, our general partner cannot cause us
to enter into any such transactions before the end of the
subordination period that involve an exchange of any of the
subordinated units for cash or other consideration without
obtaining the approval of the conflicts committee of our general
partner, after due inquiry, based on a subjective belief that
the course of action or determination that is the subject of
such approval is fair and reasonable to us. Our general partner
may, however, mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of our assets without such
approval. Our general partner may also sell all or substantially
all of our assets under a foreclosure or other realization upon
those encumbrances without such approval. Finally, our general
partner may consummate any merger without the prior approval of
our unitholders if we are the surviving entity in the
transaction, our general partner has received an opinion of
counsel regarding limited liability and tax matters, the
transaction would not result in a material amendment to our
partnership agreement, each of our units will be an identical
unit of our partnership following the transaction and the
partnership securities to be issued do not exceed 20.0% of our
outstanding partnership securities immediately prior to the
transaction.
If the conditions specified in our partnership agreement are
satisfied, our general partner may convert us or any of our
subsidiaries into a new limited liability entity or merge us or
any of our subsidiaries into, or convey all of our assets to, a
newly formed entity, if the sole purpose of that conversion,
merger or conveyance is to effect a mere change in our legal
form into another limited liability entity, our general partner
has received an opinion of counsel regarding limited liability
and tax matters and the governing instruments of the new entity
provide the limited partners and our general partner with the
same rights and obligations as contained in our partnership
agreement. Our unitholders are not entitled to dissenters
rights of appraisal under our partnership agreement or
applicable Delaware law in the event of a conversion, merger or
consolidation, a sale of substantially all of our assets or any
other similar transaction or event.
Termination
and Dissolution
We will continue as a limited partnership until terminated under
our partnership agreement. We will dissolve upon:
|
|
|
|
|
the election of our general partner to dissolve us, if approved
by the holders of units representing a unit majority;
|
|
|
|
there being no limited partners, unless we are continued without
dissolution in accordance with applicable Delaware law;
|
|
|
|
the entry of a decree of judicial dissolution of our
partnership; or
|
|
|
|
the withdrawal or removal of our general partner or any other
event that results in its ceasing to be our general partner
other than by reason of a transfer of its general partner
interest in accordance with our partnership agreement or its
withdrawal or removal following the approval and admission of a
successor.
|
Upon a dissolution under the last clause listed above, the
holders of a unit majority may also elect, within specific time
limitations, to continue our business on the same terms and
conditions described in our partnership agreement by appointing
as a successor general partner an entity approved by the holders
of units representing a unit majority, subject to our receipt of
an opinion of counsel to the effect that:
|
|
|
|
|
the action would not result in the loss of limited liability of
any limited partner; and
|
23
|
|
|
|
|
neither our partnership nor any of our subsidiaries would be
treated as an association taxable as a corporation or otherwise
be taxable as an entity for federal income tax purposes upon the
exercise of that right to continue.
|
Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are continued as a new limited
partnership, the liquidator authorized to wind up our affairs
will, acting with all of the powers of our general partner that
are necessary or appropriate, liquidate our assets and apply the
proceeds of the liquidation as described in Description of
Our Cash Distribution Policy Distributions of Cash
Upon Liquidation. The liquidator may defer liquidation or
distribution of our assets for a reasonable period of time or
distribute assets to partners in-kind if it determines that a
sale would be impractical or would cause undue loss to our
partners.
If the liquidator determines that a sale would be impractical or
would cause undue loss to our partners, the liquidator may defer
liquidation or distribution of our assets for a reasonable
period of time or may distribute assets in-kind to our partners.
Change of
Management Provisions
Our partnership agreement contains the following specific
provisions that are intended to discourage a person or group
from attempting to remove our general partner or otherwise
change our management:
|
|
|
|
|
generally, if a person or group (other than our general partner
and its affiliates) acquires beneficial ownership of 20.0% or
more of any class of units then outstanding, that person or
group loses voting rights on all of its units, unless the units
are acquired directly from our general partner or its affiliates
or any transferee of that person or group that is approved by
our general partner or to any person or group who acquires the
units with the prior approval of the board of directors of our
general partner; and
|
|
|
|
provisions limiting the ability of unitholders to call meetings
or to acquire information about our operations, as well as other
provisions limiting our unitholders ability to influence
the manner or direction of management.
|
Limited
Call Right
If at any time our general partner and its affiliates own more
than 80.0% of the then-issued and outstanding limited partner
interests of any class, our general partner will have the right,
which it may assign in whole or in part to any of its affiliates
or to us, to acquire all, but not less than all, of the limited
partner interests of the class held by unaffiliated persons as
of a record date to be selected by our general partner, on at
least 10, but not more than 60, days notice. The purchase price
in the event of this purchase is the greater of:
|
|
|
|
|
the highest price paid by our general partner or any of its
affiliates for any limited partner interests of the class
purchased within the 90 days preceding the date on which
our general partner first mails notice of its election to
purchase those limited partner interests; and
|
|
|
|
the average of the daily closing prices of the partnership
securities of such class over the 20 trading days preceding the
date three days before the date the notice is mailed.
|
Our general partner may assign its limited call right to its
affiliates.
As a result of our general partners right to purchase
outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests
purchased at a price that may be lower than market prices at
various times prior to such purchase or lower than a unitholder
may anticipate the market price to be in the future. The tax
consequences to a unitholder of the exercise of this call right
are the same as a sale by that unitholder of his common units in
the market. Please read Material Income Tax Consequences
Disposition of Common Units.
Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages or similar
events:
24
|
|
|
|
|
any departing general partner;
|
|
|
|
any person who is or was an affiliate of our general partner or
any departing general partner;
|
|
|
|
any person who is or was a director, officer, member, partner,
fiduciary or trustee of any entity set forth in the preceding
three bullet points;
|
|
|
|
any person who is or was serving as director, officer, member,
partner, fiduciary or trustee of another person at the request
of our general partner, any departing general partner, an
affiliate of our general partner or an affiliate of any
departing general partners; and
|
|
|
|
any person designated by our general partner.
|
Any indemnification under these provisions will only be out of
our assets. Unless our general partner otherwise agrees, it will
not be personally liable for, or have any obligation to
contribute or lend funds or assets to us to enable us to
effectuate, indemnification. We may 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.
Reimbursement
of Expenses of Our General Partner
Our general partner does not receive any compensation for its
services as our general partner. Our partnership agreement
requires us, to reimburse our general partner for all direct and
indirect expenses it incurs or payments it makes on our behalf
and all other expenses allocable to us or otherwise incurred by
our general partner in connection with the operation of our
business. These expenses include salary, bonus, incentive
compensation and other amounts paid to persons who perform
services for us or on our behalf and expenses allocated to our
general partner by its affiliates. Our general partner is
entitled to determine in good faith the expenses that are
allocable to us.
Books and
Reports
We will furnish or make available to record holders (as of a
record date selected by our general partner) of our common
units, within 120 days after the close of each fiscal year,
an annual report containing audited consolidated financial
statements for the past fiscal year and a report on those
consolidated financial statements by our independent public
accountants. In addition, within 90 days after the close of
each quarter (except the fourth quarter), we will furnish or
make available to record holders (as of a record date selected
by our general partner) of our common units a report containing
our unaudited financial statements and any other information
required by law.
Right to
Inspect Our Books and Records
We will furnish each record holder 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 our unitholders will depend
on their cooperation in supplying us with specific information.
Every unitholder will receive information to assist him in
determining his federal and state tax liability and in filing
his federal and state income tax returns, regardless of whether
he supplies us with the necessary information.
A limited partner can, for a purpose reasonably related to the
limited partners interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him:
|
|
|
|
|
a current list of the name and last known address of each
partner;
|
|
|
|
a copy of our tax returns;
|
|
|
|
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;
|
|
|
|
copies of our partnership agreement, our certificate of limited
partnership, amendments to either of them and powers of attorney
which have been executed under our partnership agreement;
|
25
|
|
|
|
|
information regarding the status of our business and financial
condition; and
|
|
|
|
any other information regarding our affairs as is just and
reasonable.
|
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 is not in our
best interests or that we are required by law or by agreements
with third parties to keep confidential.
Registration
Rights
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units, or other partnership securities proposed
to be sold by our general partner or any of its affiliates or
their assignees if an exemption from the registration
requirements is not otherwise available. We are obligated to pay
all expenses incidental to the registration, excluding
underwriting discounts and commissions.
26
MATERIAL
INCOME TAX CONSEQUENCES
This section is a summary of the material federal income tax
consequences that may be relevant to prospective unitholders. To
the extent this section discusses federal income taxes, that
discussion is based upon current provisions of the
U.S. Internal Revenue Code of 1986, as amended (the
Code), existing and proposed U.S. Treasury
regulations thereunder (the Treasury Regulations),
and current administrative rulings and court decisions, all of
which are subject to change. Changes in these authorities may
cause the U.S. federal income tax consequences to a
prospective unitholder to vary substantially from those
described below.
Legal conclusions contained in this section, unless otherwise
noted, are the opinion of Vinson & Elkins L.L.P. and
are based on the accuracy of representations made by us to them
for this purpose. However, this section does not address all
federal income tax matters that affect us or our unitholders.
Furthermore, this section focuses on unitholders who are
individual citizens or residents of the United States (for
federal income tax purposes), whose functional currency is the
U.S. dollar and who hold units as capital assets
(generally, property that is held for investment). This section
has only limited applicability to corporations, partnerships
(and entities treated as partnerships for U.S. federal
income tax purposes), estates, trusts, non-resident aliens or
other unitholders subject to specialized tax treatment, such as
tax-exempt institutions,
non-U.S. persons,
individual retirement accounts, employee benefit plans, real
estate investment trusts or mutual funds. Accordingly, because
unitholders may have unique circumstances beyond the scope of
the discussion herein, we encourage each unitholder to consult
such unitholders own tax advisor in analyzing the federal,
state, local and
non-U.S. tax
consequences particular to that unitholder resulting from their
ownership or disposition of its units.
We are relying on opinions and advice of Vinson &
Elkins L.L.P. with respect to the matters described herein. An
opinion of counsel represents only that counsels best
legal judgment and does not bind the Internal Revenue Service
(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 such contest of the matters described
herein may materially and adversely impact the market for our
units and the prices at which such units trade. In addition, our
costs of any contest with the IRS will be borne indirectly by
our unitholders and our general partner because the costs will
reduce our cash available for distribution. Furthermore, our tax
treatment, or the tax treatment of an investment in us, may be
significantly modified by future legislative or administrative
changes or court decisions, which might be retroactively applied.
For the reasons described below, Vinson & Elkins
L.L.P. has not rendered an opinion with respect to the following
federal income tax issues: (1) the treatment of a
unitholder whose units are loaned to a short seller to cover a
short sale of 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 Units Allocations Between Transferors and
Transferees); and (3) whether our method for taking
into account Section 743 adjustments is sustainable in
certain cases (please read Tax Consequences of Unit
Ownership Section 754 Election and
Uniformity of Units).
Taxation
of the Partnership
Partnership Status. We expect to be treated as
a partnership for federal income tax purposes and, therefore,
generally will not be liable for federal income taxes. Instead,
as described below, each of our unitholders will take into
account its respective share of our items of income, gain, loss
and deduction in computing its federal income tax liability as
if the unitholder had earned such income directly, even if no
cash distributions are made to the unitholder. Distributions by
us to a unitholder generally will not give rise to income or
gain taxable to such unitholder, unless the amount of cash
distributed to a unitholder exceeds the unitholders
adjusted tax basis in its units.
Section 7704 of the Code generally provides that publicly
traded partnerships will be treated as corporations for federal
income tax purposes. However, if 90% or more of a
partnerships gross income for every taxable year it is
publicly traded consists of qualifying income, the
partnership may continue to be treated as a partnership for
U.S. federal income tax purposes (the Qualifying
Income Exception). Qualifying income includes income and
gains derived from the transportation, storage and processing of
crude oil, natural gas and products thereof. Other types of
qualifying income include interest (other than from a financial
business), dividends, gains from the sale of real property and
gains from the sale or other disposition of capital assets held
for the production of income that otherwise constitutes
qualifying income. We estimate that less than 5% of our current
gross income is not qualifying income; however, this estimate
could change from time to time.
27
Based upon factual representations made by us and our general
partner regarding the composition of our income and the other
representations set forth below, Vinson & Elkins
L.L.P. is of the opinion that we will be treated as a
partnership for federal income tax purposes for the current
year. 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 include,
without limitation:
(a) Neither we nor any of our partnership or limited
liability company subsidiaries has elected to be treated as a
corporation for federal income tax purposes;
(b) For each taxable year since the year of our initial
public offering, more than 90% of our gross income has been
income of a character that Vinson & Elkins L.L.P. has
opined is qualifying income within the meaning of
Section 7704(d) of the Code; and
(c) Each hedging transaction that we treat as resulting in
qualifying income has been appropriately identified as a hedging
transaction pursuant to applicable Treasury Regulations, and has
been associated with crude oil, natural gas, or products thereof
that are held or to be held by us in activities that
Vinson & Elkins L.L.P. has opined generate qualifying
income.
We believe that these representations are true and will be true
in the future.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery (in which case
the IRS may also require us to make adjustments with respect to
our unitholders or pay other amounts), we will be treated as
transferring 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 our
unitholders in liquidation of their interests in us. This deemed
contribution and liquidation should not result in the
recognition of taxable income by our unitholders or us so long
as our liabilities do not exceed the tax basis of our assets.
Thereafter, we would be treated as an association taxable as a
corporation for federal income tax purposes.
If for any reason we are taxable as a corporation, our items of
income, gain, loss and deduction would be taken into account by
us in determining the amount of our liability for federal income
tax, rather than being passed through to our unitholders.
Accordingly, our taxation as a corporation would materially
reduce our cash distributions to unitholders and thus would
likely substantially reduce the value of our units. In addition,
any distribution made to a unitholder would be treated as
(i) a taxable dividend income to the extent of our current
or accumulated earnings and profits then (ii) a nontaxable
return of capital to the extent of the unitholders tax
basis in our units and thereafter (iii) taxable capital
gain.
The remainder of this discussion assumes that we will be treated
as a partnership for federal income tax purposes.
Tax
Consequences of Unit Ownership
Limited Partner Status. Unitholders who are
admitted as limited partners of the partnership, as well as
unitholders whose 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 units, will
be treated as partners of the partnership for federal income tax
purposes. For a discussion related to the risks of losing
partner status as a result of short sales, please read
Tax Consequences of Unit Ownership
Treatment of Short Sales. Unitholders who are not treated
as partners in us as described above are urged to consult their
own tax advisors with respect to the tax consequences applicable
to them under the circumstances.
Flow-Through of Taxable Income. Subject to the
discussion below under
Entity-Level Collections of Unitholder
Taxes with respect to payments we may be required to make
on behalf of our unitholders, and aside from any taxes paid by
our corporate operating subsidiary, we do not pay any federal
income tax. Rather, each unitholder will be required to report
on its income tax return its share of our income, gains, losses
and deductions for our taxable year or years ending with or
within its taxable year. Consequently, we may allocate income to
a unitholder even if that unitholder has not received a cash
distribution.
Basis of Units. A unitholders
U.S. federal income tax basis in its units initially will
be the amount it paid for those units plus its share of our
nonrecourse liabilities at the time of purchase. That basis will
be (i) increased by the unitholders share of our
income and by any increases in such unitholders share of
our nonrecourse liabilities, and
28
(ii) decreased, but not below zero, by distributions to it,
by its share of our losses, by any decreases in its share of our
nonrecourse liabilities and by its share of our expenditures
that are not deductible in computing taxable income and are not
required to be capitalized.
Treatment of Distributions. Distributions made
by us to a unitholder generally will not be taxable to the
unitholder, unless such distributions exceed the
unitholders tax basis in its units, in which case the
unitholder will recognize gain taxable in the manner described
below under Disposition of Units.
Any reduction in a unitholders share of our
nonrecourse liabilities (liabilities for which no
partner bears the economic risk of loss) will be treated as a
distribution by us of cash to that unitholder. A decrease in a
unitholders percentage interest in us because of our
issuance of additional units will decrease the unitholders
share of our nonrecourse liabilities. For purposes of the
foregoing, a unitholders share of our nonrecourse
liabilities generally will be based upon that unitholders
share of the unrealized appreciation (or depreciation) in our
assets, to the extent thereof, with any excess liabilities
allocated based on the unitholders share of our profits.
Please read Disposition of Units.
A non-pro rata distribution of money or property (including a
deemed distribution described above) may cause a unitholder to
recognize ordinary income, if the distribution reduces the
unitholders share of our unrealized
receivables, including depreciation recapture and
substantially appreciated inventory items, both as
defined in Section 751 of the Code (Section 751
Assets). To the extent of such reduction, the unitholder
would be deemed to receive its proportionate share of the
Section 751 Assets and exchange such assets with us in
return for an allocable portion of the non-pro rata
distribution. This latter deemed exchange generally will result
in the unitholders realization of ordinary income in an
amount equal to the excess of (1) the non-pro rata portion
of that distribution over (2) the unitholders tax
basis (generally zero) in the Section 751 Assets deemed to
be relinquished in the exchange.
Limitations on Deductibility of Losses. The
deduction by a unitholder of its share of our losses will be
limited to the lesser of (i) the unitholders tax
basis in its units, and (ii) in the case of a unitholder
who is an individual, estate, trust or corporation (if more than
50% of the corporations stock is owned directly or
indirectly by or for five or fewer individuals or a specific
type of tax exempt organization), the amount for which the
unitholder is considered to be at risk with respect
to our activities. In general, a unitholder will be at risk to
the extent of its tax basis in its units, reduced by
(1) any portion of that basis attributable to the
unitholders share of our liabilities, (2) any portion
of that basis representing amounts otherwise protected against
loss because of a guarantee, stop loss agreement or similar
arrangement and (3) any amount of money the unitholder
borrows to acquire or hold its units, if the lender of those
borrowed funds owns an interest in us, is related to another
unitholder or can look only to the units for repayment.
A unitholder subject to the basis and at risk limitation must
recapture losses deducted in previous years to the extent that
distributions cause the unitholders 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 in a
later year to the extent that the unitholders tax basis or
at risk amount, whichever is the limiting factor, is
subsequently increased. Upon a taxable disposition of units, any
gain recognized by a unitholder can be offset by losses that
were previously suspended by the at risk limitation but not
losses suspended by the basis limitation. Any loss previously
suspended by the at risk limitation in excess of that gain can
no longer be used.
In addition to the basis and at risk limitations, passive
activity loss limitations generally limit the deductibility of
losses incurred by individuals, estates, trusts, some closely
held corporations and personal service corporations from
passive activities (generally, trade or business
activities in which the taxpayer does not materially
participate). The passive loss limitations are applied
separately with respect to each publicly-traded partnership.
Consequently, any passive losses we generate will be available
to offset only 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 a
unitholders investments in other publicly traded
partnerships, such as PAA other than the share of PAAs
income attributable to its investment in us), or a
unitholders salary or active business income. Passive
losses that are not deductible because they exceed a
unitholders share of income we generate may be deducted in
full when he disposes of all of his units in a fully taxable
transaction with an unrelated party. The passive activity loss
rules are applied after other applicable limitations on
deductions, including the at risk and basis limitations.
29
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:
|
|
|
|
|
interest on indebtedness properly allocable to property held for
investment;
|
|
|
|
our interest expense attributed to portfolio income; and
|
|
|
|
the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
|
The computation of a 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.
Such term generally does not include qualified dividend income
or gains attributable to the disposition of property held for
investment. A unitholders share of a publicly-traded
partnerships portfolio income and, according to the IRS,
net passive income will be treated as investment income for
purposes of the investment interest expense limitation.
Entity-Level Collections of Unitholder
Taxes. If we are required or elect under
applicable law to pay any federal, state, local or
non-U.S. tax
on behalf of any current or former unitholder or our general
partner, we are authorized to pay those taxes and treat the
payment as a distribution of cash to the relevant unitholder or
general partner. Where the relevant unitholders 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 a unitholder, in which event the unitholder may be
entitled to claim a refund of the overpayment amount.
Unitholders are urged to consult their tax advisors to determine
the consequences to them of any tax payment we make on their
behalf.
Allocation of Income, Gain, Loss and
Deduction. In general, if we have a net profit,
our items of income, gain, loss and deduction will be allocated
among the general partner and our unitholders in accordance with
their percentage interests in us. If we have a net loss, our
items of income, gain, loss and deduction will be allocated
first among the general partner and our unitholders in
accordance with their percentage interests in us to the extent
of their positive capital accounts and thereafter to our general
partner. At any time that distributions are made to the common
units and not to the subordinated units, or that incentive
distributions are made to the general partner, gross income will
be allocated to the recipients to the extent of such
distributions.
Specified items of our income, gain, loss and deduction will be
allocated under Section 704(c) of the Code to account for
any difference between the tax basis and fair market value of
our assets at the time such assets are contributed to us and any
time we issue additional units (a Book-Tax
Disparity). In addition, items of recapture income will be
specially allocated to the extent possible to the unitholder who
was allocated the deduction giving rise to that recapture income
in order to minimize the recognition of ordinary income by other
unitholders.
An allocation of items of our income, gain, loss or deduction,
generally must have substantial economic effect as
determined under Treasury Regulations. If an allocation does not
have substantially economic effect, it will be reallocated to
our unitholders the basis of their interests in us, which will
be determined by taking into account all the facts and
circumstances, including
|
|
|
|
|
its relative contributions to us;
|
|
|
|
the interests of all the partners in profits and losses;
|
|
|
|
the interest of all the partners in cash flow; and
|
|
|
|
the rights of all the partners to distributions of capital upon
liquidation.
|
Vinson & Elkins L.L.P. is of the opinion that, with
the exception of the issues described in
Section 754 Election and
Disposition of Units Allocations
Between Transferors and Transferees, allocations under our
partnership agreement will be given substantial economic effect.
30
Treatment of Short Sales. A unitholder whose
units are loaned to a short seller to cover a short
sale of units may be treated as having disposed of those units.
If so, such unitholder would no longer be treated for tax
purposes as a partner with respect to those units during the
period of the loan and may recognize gain or loss from the
disposition. As a result, during this period (i) any of our
income, gain, loss or deduction allocated to those units would
not be reportable by the unitholder, and (ii) any cash
distributions received by the unitholder as to those units would
be fully taxable, possibly as ordinary income.
Vinson & Elkins L.L.P. has not rendered an opinion
regarding the tax treatment of a unitholder whose units are
loaned to a short seller to cover a short sale of our units.
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 and lending their
units. The IRS has announced that it is studying issues relating
to the tax treatment of short sales of partnership interests.
Please read Disposition of Units
Recognition of Gain or Loss.
Alternative Minimum Tax. If a unitholder is
subject to federal alternative minimum tax, such tax will apply
to such unitholders distributive share of any items of our
income, gain, loss or deduction. The current alternative minimum
tax rate for non-corporate 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 with respect to the impact of an
investment in our units on their alternative minimum tax
liability.
Tax Rates. Under current law, the highest
marginal federal income tax rates for individuals applicable to
ordinary income and long-term capital gains (generally, gains
from the sale or exchange of certain investment assets held for
more than one year) are 35% and 15%, respectively. However,
absent new legislation extending the current rates, beginning
January 1, 2013, the highest marginal federal income tax
rate applicable to ordinary income and long-term capital gains
of individuals will increase to 39.6% and 20%, respectively.
These rates are subject to change by new legislation at any time.
A 3.8% Medicare tax on certain investment income earned by
individuals, estates, and trusts will apply for taxable years
beginning after December 31, 2012. For these purposes,
investment income generally includes a unitholders
allocable share of our income and gain realized by a unitholder
from a sale of units. In the case of an individual, the tax will
be imposed on the lesser of (i) the unitholders net
investment income from all investments, or (ii) the amount
by which the unitholders modified adjusted gross income
exceeds $250,000 (if the unitholder is married and filing
jointly or a surviving spouse) or $200,000 (if the unitholder is
unmarried). In the case of an estate or trust, the tax will be
imposed on the lesser of (i) undistributed net investment
income, or (ii) the excess adjusted gross income over the
dollar amount at which the highest income tax bracket applicable
to an estate or trust begins.
Section 754 Election. We have made the
election permitted by Section 754 of the Code. That
election will generally permit us to adjust the tax bases in our
assets as to specific purchased units under Section 743(b)
of the Code to reflect the unit purchase price. The
Section 743(b) adjustment separately applies to each
unitholder who purchases units from another unitholder based
upon the values of our assets and our tax bases in our assets at
the time of the unit purchase. The Section 743(b)
adjustment does not apply to a person who purchases units
directly from us. For purposes of this discussion, a Partnership
unitholders inside basis in our assets will be considered
to have two components: (1) its share of our tax basis in
our assets (common basis) and (2) its
Section 743(b) adjustment to that tax basis.
Under Treasury Regulations, a Section 743(b) adjustment
attributable to property depreciable under Section 168 of
the Code, such as our storage assets, may be amortizable over
the remaining cost recovery period for such property, while a
Section 743(b) adjustment attributable to properties
subject to depreciation under Section 167 of the Code, must
be amortized straight-line or using the 150% declining balance
method. As a result, if we owned any assets subject to
depreciation under Section 167 of the Code, the
amortization rates could give rise to differences in the
taxation of unitholders purchasing units from us and unitholders
purchasing from other unitholders.
Under our partnership agreement, we are authorized to take a
position to preserve the uniformity of units even if that
position is not consistent with these or any other Treasury
Regulations. Please read Uniformity of
Units. Consistent with this authority, we intend to treat
properties depreciable under Section 167, if any, in the
same manner as properties depreciable under Section 168 for
this purpose. These positions are consistent with the methods
employed by other
31
publicly-traded partnerships but are inconsistent with the
existing Treasury Regulations, and Vinson & Elkins
L.L.P. has not opined on the validity of this approach.
The IRS may challenge our position with respect to depreciating
or amortizing the Section 743(b) adjustment we take to
preserve the uniformity of units. Because a unitholders
tax basis for its units is reduced by its share of our items of
deduction or loss, any position we take that understates
deductions will overstate a unitholders basis in its
units, and may cause the unitholder to understate gain or
overstate loss on any sale of such units. Please read
Disposition of Units Recognition
of Gain or Loss. If a challenge to such treatment were
sustained, the gain from the sale of units may be increased
without the benefit of additional deductions.
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. The IRS could seek to
reallocate some or all of any Section 743(b) adjustment we
allocated to our assets subject to depreciation to goodwill or
nondepreciable assets. 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 any unitholder that the determinations
we make will not be successfully challenged by the IRS or that
the resulting deductions will not be reduced or disallowed
altogether. Should the IRS require a different tax 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 it would have been allocated had the
election not been revoked.
Tax
Treatment of Operations
Accounting Method and Taxable Year. We will
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 its share
of our income, gain, loss and deduction for each taxable year
ending within or with its 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 its units following the
close of our taxable year but before the close of its taxable
year must include its share of our income, gain, loss and
deduction in income for its taxable year, with the result that
it will be required to include in income for its taxable year
its share of more than one year of our income, gain, loss and
deduction. Please read Disposition of
Units Allocations Between Transferors and
Transferees.
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 interests
in us prior to this offering. Please read Tax
Consequences of Unit Ownership Allocation of Income,
Gain, Loss and Deduction.
If we dispose of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely be
required to recapture some or all of those deductions as
ordinary income upon a sale of its interest in us. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction and
Disposition of Units Recognition
of Gain or Loss.
The costs we incur in offering and selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. While
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 deduction
previously reported by unitholders could
32
change, and unitholders could be required to adjust their tax
liability for prior years and incur interest and penalties with
respect to those adjustments.
Disposition
of Units
Recognition of Gain or Loss. A unitholder will
be required to recognize gain or loss on a sale of units equal
to the difference between the unitholders amount realized
and tax basis for the units sold. A unitholders amount
realized will equal the sum of the cash or the fair market value
of other property it receives plus its share of our liabilities
with respect to such units. Because the amount realized includes
a unitholders share of our liabilities, the gain
recognized on the sale of units could result in a tax liability
in excess of any cash received from the sale.
Except as noted below, gain or loss recognized by a unitholder
on the sale or exchange of a unit held for more than one year
generally will be taxable as long-term capital gain or loss.
However, gain or loss recognized on the disposition of units
will be separately computed and taxed as ordinary income or loss
under Section 751 of the Code to the extent attributable to
Section 751 Assets, primarily depreciation recapture.
Ordinary income attributable to Section 751 Assets may
exceed net taxable gain realized on the sale of a unit and may
be recognized even if there is a net taxable loss realized on
the sale of a unit. Thus, a unitholder may recognize both
ordinary income and a capital loss upon a sale of units. Net
capital loss may offset capital gains and, in the case of
individuals, up to $3,000 of ordinary income per year.
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 its 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 Code allow a
selling unitholder who can identify units transferred with an
ascertainable holding period to elect to use the actual holding
period of the units transferred. Thus, according to the ruling
discussed above, a unitholder will be unable to select high or
low basis units to sell as would be the case with corporate
stock, but, according to the Treasury Regulations, it may
designate specific units sold for purposes of determining the
holding period of units transferred. A unitholder electing to
use the actual holding period of units transferred must
consistently use that identification method for all subsequent
sales or exchanges of our units. A unitholder considering the
purchase of additional units or a sale of units purchased in
separate transactions is urged to consult its tax advisor as to
the possible consequences of this ruling and application of the
Treasury Regulations.
Specific provisions of the Code affect the taxation of some
financial products and securities, including partnership
interests, by treating a taxpayer as having sold an
appreciated partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
|
|
|
|
|
a short sale;
|
|
|
|
an offsetting notional principal contract; or
|
|
|
|
a futures or forward contract with respect to the partnership
interest or substantially identical property.
|
Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue 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 or
loss will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders
in proportion to the number of units owned by each of them as of
the opening of the applicable exchange on the first business day
of the month (the Allocation Date). However, gain or
loss realized on a sale or other disposition of our assets or,
in the discretion of the general partner, any other
extraordinary item of income, gain, loss or deduction will be
allocated among the unitholders on the Allocation Date in the
month in which such income, gain, loss or deduction is
recognized. As a result, a unitholder transferring units may be
allocated income, gain, loss and deduction realized after the
date of transfer.
33
Although simplifying conventions are contemplated by the Code
and most publicly-traded partnerships use similar simplifying
conventions, the use of this method may not be permitted under
existing Treasury Regulations. Recently, however, the Department
of the Treasury and the IRS issued proposed Treasury Regulations
that provide a safe harbor pursuant to which a publicly-traded
partnership may use a similar monthly simplifying convention to
allocate tax items among transferor and transferee unitholders,
although such tax items must be prorated on a daily basis.
Nonetheless, the proposed regulations do not specifically
authorize the use of the proration method we have adopted.
Accordingly, Vinson & Elkins L.L.P. is unable to opine
on the validity of this method of allocating income and
deductions between transferee and transferor 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 transferee and
transferor unitholders, as well as among unitholders whose
interests vary during a taxable year, to conform to a method
permitted under future Treasury Regulations.
A unitholder who disposes of units 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 the
month of disposition but will not be entitled to receive a cash
distribution for that period.
Notification Requirements. A unitholder who
sells or purchases any of its units is generally required to
notify us in writing of that transaction within 30 days
after the transaction (or, if earlier, January 15 of the year
following the transaction). 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 transfer of units 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 through a
broker who will satisfy such requirements.
Constructive Termination. We will be
considered to have terminated our partnership for federal income
tax purposes upon the sale or exchange of 50% or more of the
total interests in our capital and profits within a twelve-month
period. For such purposes, multiple sales of the same unit are
counted only once. 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 such unitholders 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 for one
fiscal year and the cost of the preparation of these returns
will be borne by all unitholders. However, pursuant to an IRS
relief procedure the IRS may allow, among other things, a
constructively terminated partnership to provide a single
Schedule K-1
for the calendar year in which a termination occurs. We would be
required to make new tax elections after a termination,
including a new election under Section 754 of the Code, and
a termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if we
were unable to determine that the termination had occurred.
Moreover, a termination might either accelerate the application
of, or subject us to, any tax legislation enacted before the
termination.
Uniformity
of Units
Because we cannot match transferors and transferees of units and
for other reasons, 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 could result from a literal application of Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not anticipated to apply to a material portion of our
assets. Any non-uniformity could have a negative impact on the
value of the units. Please read Tax
Consequences of Unit Ownership Section 754
Election.
Our partnership agreement permits our general partner to take
positions in filing our tax returns that preserve the uniformity
of our units even under circumstances like those described
above. These positions may include reducing for some unitholders
the depreciation, amortization or loss deductions to which they
would otherwise be entitled or reporting a slower amortization
of Section 743(b) adjustments for some unitholders than
that to which they would otherwise be entitled.
Vinson & Elkins L.L.P. is unable to opine as to
validity of such filing positions. A unitholders basis in
units is reduced by its or her share of our deductions (whether
or not such deductions were claimed on an individual income tax
return) so that any position that we take that understates
deductions will overstate the unitholders basis in its
units, and may cause the unitholder to understate gain or
overstate loss on any sale of such units. Please read
Disposition of
34
Units Recognition of Gain or Loss above and
Tax Consequences of Unit Ownership
Section 754 Election above. The IRS may challenge one
or more of any positions we take to preserve the uniformity of
units. If such a challenge were sustained, the uniformity of
units might be affected, and, under some circumstances, the gain
from the sale of units might be increased without the benefit of
additional deductions.
Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens,
non-U.S. corporations
and other
non-U.S. persons
raises issues unique to those investors and, as described below,
may have substantially adverse tax consequences to them.
Prospective unitholders who are tax-exempt entities or
non-U.S. persons
should consult their tax advisor before investing in our units.
Employee benefit plans and most other tax-exempt organizations,
including IRAs and other retirement plans, are subject to
federal income tax on unrelated business taxable income.
Virtually all of our income will be unrelated business taxable
income and will be taxable to a tax-exempt unitholder.
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 their ownership of our units.
Consequently, 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, distributions to
non-U.S. unitholders
are subject to withholding at the highest applicable effective
tax rate. Each
non-U.S. 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 Code.
A foreign unitholder who sells or otherwise disposes of a unit
will be subject to federal income tax on gain realized from the
sale or disposition of that unit to the extent the gain is
effectively connected with a U.S. trade or business of the
foreign unitholder. Under a ruling published by the IRS,
interpreting the scope of effectively connected
income, a foreign unitholder would be considered to be
engaged in a trade or business in the U.S. by virtue of the
U.S. activities of the partnership, and part or all of that
unitholders gain would be effectively connected with that
unitholders indirect U.S. trade or business.
Moreover, under the Foreign Investment in Real Property Tax Act,
a foreign unitholder generally will be subject to federal income
tax upon the sale or disposition of a unit if (i) it owned
(directly or constructively applying certain attribution rules)
more than 5% of our units at any time during the five-year
period ending on the date of such disposition and (ii) 50%
or more of the fair market value of all of our assets consisted
of U.S. real property interests at any time during the
shorter of the period during which such unitholder held the
units or the
5-year
period ending on the date of disposition. Currently, more than
50% of our assets consist of U.S. real property interests
and we do not expect that to change in the foreseeable future.
Therefore, foreign unitholders may be subject to federal income
tax on gain from the sale or disposition of their units.
Administrative
Matters
Information Returns and Audit Procedures. We
intend to furnish to each unitholder, within 90 days after
the close of each taxable year, specific tax information,
including a
Schedule K-1,
which describes its 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 our
unitholders that those positions will yield a result that
conforms to the requirements of the 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, and
such a contention could negatively affect the value of the
units. The
35
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 its own return. Any audit of
a unitholders return could result in adjustments not
related to our returns as well as those related to its returns.
Partnerships generally are treated as entities separate from
their owners for purposes of federal income 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 Code requires that one partner be designated
as the Tax Matters Partner for these purposes, and
our partnership agreement designates our general 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 in that action.
A unitholder must file a statement with the IRS identifying the
treatment of any item on its 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:
(1) the name, address and taxpayer identification number of
the beneficial owner and the nominee;
(2) a statement regarding whether the beneficial owner is:
(a) a
non-U.S. person;
(b) a
non-U.S. government,
an international organization or any wholly owned agency or
instrumentality of either of the foregoing; or
(c) a tax-exempt entity;
(3) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(4) 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
U.S. persons and specific information on units they
acquire, hold or transfer for their own account. A penalty of
$100 per failure, up to a maximum of $1.5 million 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 Code. No penalty will
be imposed, however, for any portion of an underpayment if it is
shown that there was a reasonable cause for the underpayment of
that portion and that the taxpayer acted in good faith regarding
the underpayment of 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.
36
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
relevant facts of that position are disclosed on the return.
If any item of income, gain, loss or deduction included in the
distributive shares of unitholders might result in that kind of
an understatement of income for which no
substantial authority exists, we must disclose the
relevant facts on their returns. In addition, we will make a
reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns and to
take other actions as may be appropriate to permit unitholders
to avoid liability for this penalty. More stringent rules apply
to tax shelters, which we do not believe includes
us, or any of our investments, plans or arrangements.
A substantial valuation misstatement exists if (a) the
value of any property, or the tax basis of any property, claimed
on a tax return is 150% or more of the amount determined to be
the correct amount of the valuation or tax basis, (b) the
price for any property or services (or for the use of property)
claimed on any such return with respect to any transaction
between persons described in Internal Revenue Code
Section 482 is 200% or more (or 50% or less) of the amount
determined under Section 482 to be the correct amount of
such price, or (c) the net Code Section 482
transfer price adjustment for the taxable year exceeds the
lesser of $5 million or 10% of the taxpayers gross
receipts. No penalty is imposed unless the portion of the
underpayment attributable to a substantial valuation
misstatement exceeds $5,000 ($10,000 for a corporation other
than an S Corporation or a personal holding company). The
penalty is increased to 40% in the event of a gross valuation
misstatement.
Reportable Transactions. If we were to engage
in a reportable transaction, we (and possibly our
unitholders 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 tax year, or
$4 million in any combination of six successive tax years.
Our participation in a reportable transaction could increase the
likelihood that our federal income tax information return (and
possibly our unitholders tax return) would be audited by
the IRS. Please read Administrative
Matters 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, our unitholders may be subject to the
following provisions of the American Jobs Creation Act of 2004:
|
|
|
|
|
accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related
Penalties;
|
|
|
|
for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability; and
|
|
|
|
in the case of a listed transaction, an extended statute of
limitations.
|
We do not expect to engage in any reportable
transactions.
State,
Local 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 do business or own property or in
which you are a resident. Although an analysis of those various
taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We
currently own property or do business in Louisiana, Michigan and
Mississippi. Each of these states imposes a personal income tax
on individuals and imposes an income tax on 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
37
or own property and may be subject to penalties for failure to
comply with those requirements. In some jurisdictions, tax
losses may not produce a tax benefit in the year incurred and
may not be available to offset income in subsequent taxable
years. Some of the jurisdictions may require us, or we may
elect, to withhold a percentage of income from amounts to be
distributed to a unitholder who is not a resident of the
jurisdiction. Withholding, the amount of which may be greater or
less than a particular unitholders income tax liability to
the jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will be treated as if distributed to
unitholders for purposes of determining the amounts distributed
by us. Please read Tax Consequences of Unit
Ownership Entity-Level Collections. Based
on current law and our estimate of our future operations, our
general partner anticipates that any amounts required to be
withheld will not be material.
It is the responsibility of each unitholder to investigate the
legal and tax consequences, under the laws of pertinent states
and localities, of its investment in us. Vinson &
Elkins L.L.P. has not rendered an opinion on the state, local,
or
non-U.S. tax
consequences of an investment in us. We strongly recommend that
each prospective unitholder consult, and depend on, its own tax
counsel or other advisor with regard to those matters. It is the
responsibility of each unitholder to file all tax returns that
may be required of it.
38
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.
39
SELLING
UNITHOLDER
This prospectus covers the offering for resale from time to
time, in one or more offerings, of up to 28,214,198 common units
owned by the selling unitholder. These common units were issued
to the selling unitholder in a private placement in connection
with our initial public offering, which closed on May 5,
2010, and on February 8, 2011 in a private placement
transaction exempt from the registration requirements of the
Securities Act under Section 4(2) thereof. The selling
unitholder also owns 11.9 million Series A
subordinated units and 13.5 million Series B
subordinated units that were issued to the selling unitholder in
connection with our initial public offering. The Series A
subordinated units may be converted into common units on a
one-for-one basis upon termination of the subordination period
under certain circumstances, as set forth in our partnership
agreement. The Series B subordinated units may be converted
into Series A subordinated units on a one-for-one basis
upon the satisfaction of certain operational and financial
conditions or, if the subordination period has ended at the time
the various operation and financial conditions are satisfied,
into common units on a one-for-one basis, as set forth in our
partnership agreement.
As described above, the selling unitholder received
approximately 18.1 million common units and all of our
subordinated units in connection with our initial public
offering pursuant to a contribution agreement dated
April 29, 2010. The common and subordinated units were
issued to the selling unitholder pursuant to such agreement in
exchange for its contribution of its natural gas storage
business to us.
The selling unitholder additionally received approximately
10.2 million common units for consideration of
approximately $218 million in a private placement that
closed on February 8, 2011. The private placement was
consummated pursuant to an unwritten commitment of the selling
unitholder, pursuant to which the selling unitholder purchased
common units as part of our overall private placement of
approximately 27.6 million common units. The funds raised
in the private placement, including the $218 million
received from the selling unitholder, were used to partially
fund our acquisition of the Southern Pines Energy Center.
In addition to holding an approximate 62% limited partner
interest in us (including the common units, Series A
subordinated units and Series B subordinated units), the
selling unitholder is also the sole member of our general
partner and therefore the ultimate owner of our 2% general
partner interest and all of our incentive distribution rights.
See Who We Are for additional information regarding
our relationship with the selling unitholder.
The selling unitholder is neither a broker-dealer registered
under Section 15 of the Exchange Act, nor an affiliate of a
broker-dealer registered under Section 15 of the Exchange
Act.
The following table sets forth information relating to the
selling unitholder as of July 7, 2011 based on information
supplied to us by the selling unitholder on or prior to that
date. We have not sought to verify such information. Information
concerning the selling unitholder may change over time and may
have changed since the date on which the information reflected
herein was provided to us. The selling unitholder may hold or
acquire at any time common units in addition to those offered by
this prospectus and may have acquired additional common units
since the date on which the information reflected herein was
provided to us. In addition, the selling unitholder may have
sold, transferred or otherwise disposed of some or all of their
common units since the date on which the information reflected
herein was provided to us and may in the future sell, transfer
or otherwise dispose of some or all of their common units in
private placement transactions exempt from or not subject to the
registration requirements of the Securities Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units
|
|
|
Common Units
|
|
|
|
Owned After Offering
|
|
|
Owned Prior to
|
|
Common Units
|
|
Number
|
|
|
Selling Unitholder
|
|
Offering(1)
|
|
Being Offered(1)
|
|
of Units(2)
|
|
Percentage(3)
|
|
Plains All American Pipeline, L.P.(4)
|
|
|
28,214,198
|
|
|
|
28,214,198
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include 11,934,351 Series A subordinated units and
13,500,000 Series B subordinated units, which are
convertible into common units. |
|
(2) |
|
Assumes the sale of all common units held by such selling
unitholder offered by this prospectus. |
|
|
|
(3) |
|
Based on 59,184,450 common units outstanding as of July 7,
2011. |
|
|
|
(4) |
|
PAA GP LLC is the sole general partner of the selling
unitholder. Plains AAP, L.P. is the sole member of PAA GP LLC
and Plains All American GP LLC is the sole general partner of
Plains AAP, L.P. Accordingly, PAA GP LLC, |
40
|
|
|
|
|
Plains AAP, L.P. and Plains All American GP LLC may be deemed
to be indirect beneficial owners of any securities held by the
selling unitholder. Any determination with respect to the
disposition of common units by the selling unitholder pursuant
to this prospectus will be made by the board of directors of the
general partner of the selling unitholder. As of July 7,
2011, the members of the board of directors of the general
partner of the selling unitholder were Greg L. Armstrong,
Everardo Goyanes, Gary R. Petersen, John T.
Raymond, Robert V. Sinnott, Vicky Sutil,
Taft Symonds and Christopher M. Temple. |
Because the selling unitholder owns a substantial amount of our
limited partner interests and controls our general partner, it
will be deemed to be an underwriter within the
meaning of the Securities Act with respect to any common units
offered by it pursuant to this prospectus, and any such offer
would be deemed to be a primary offering by us.
Each time the selling unitholder sells any common units offered
by this prospectus, the selling unitholder is required to
provide you with this prospectus and the related prospectus
supplement containing specific information about the selling
unitholder and the terms of the common units being offered in
the manner required by the Securities Act. The prospectus
supplement will set forth the following information with respect
to the selling unitholder:
|
|
|
|
|
the name of the selling unitholder;
|
|
|
|
the nature of any position, office or other material
relationship that the selling unitholder has had within the last
three years with us or any of our affiliates;
|
|
|
|
the number of common units owned by the selling unitholder prior
to the offering;
|
|
|
|
the amount of common units to be offered for the selling
unitholders account; and
|
|
|
|
the amount and (if one percent or more) the percentage of common
units to be owned by the selling unitholder after the completion
of the offering.
|
No offer or sale may occur unless the registration statement
that includes this prospectus has been declared effective by the
SEC and remains effective at the time the selling unitholder
offers or sells common units. We are required, under certain
circumstances, to update, supplement or amend this prospectus to
reflect material developments in our business, financial
position and results of operations and may do so by an amendment
to this prospectus, a prospectus supplement or a future filing
with the SEC incorporated by reference in this prospectus.
41
PLAN OF
DISTRIBUTION
The securities offered pursuant to this prospectus and any
accompanying prospectus supplement may be sold in any of the
following ways:
|
|
|
|
|
directly to one or more purchasers;
|
|
|
|
through agents;
|
|
|
|
through underwriters, brokers or dealers; or
|
|
|
|
through a combination of any of these methods of sale.
|
In addition, we or the selling unitholder may from time to time
sell securities in compliance with Rule 144 under the
Securities Act, if available, or pursuant to other available
exemptions from the registration requirements under the
Securities Act, rather than pursuant to this prospectus. In such
event, we and the selling unitholder, if applicable, may be
required by the securities laws of certain states to offer and
sell the common units only through registered or licensed
brokers or dealers.
We will fix a price or prices of our securities at:
|
|
|
|
|
market prices prevailing at the time of any sale under this
registration statement;
|
|
|
|
prices related to market prices; or
|
|
|
|
negotiated prices.
|
We may change the price of the securities offered from time to
time.
The selling unitholder may act independently of us in making
decisions with respect to the timing, manner and size of each of
its sales. The selling unitholder may make sales of the common
units on the NYSE or otherwise at prices and under terms
prevailing at the time of the sale, or at prices related to the
then-current market price, at fixed prices, or in privately
negotiated transactions.
Offers to purchase securities may be solicited directly by us
and the sale thereof may be made by us directly to institutional
investors or others. In this case, no underwriters or agents
would be involved. We may use electronic media, including the
Internet, to sell offered securities directly.
We, or agents designated by us, may directly solicit, from time
to time, offers to purchase the securities. Any such agent may
be deemed to be an underwriter as that term is defined in the
Securities Act. We will name any agents involved in the offer or
sale of the securities and describe any commissions payable by
us to these agents in the prospectus supplement. Unless
otherwise indicated in the prospectus supplement, these agents
will be acting on a best efforts basis for the period of their
appointment. The agents may be entitled under agreements which
may be entered into with us to indemnification by us against
specific civil liabilities, including liabilities under the
Securities Act. The agents may also be our customers or may
engage in transactions with or perform services for us in the
ordinary course of business.
If we or the selling unitholder utilizes any underwriters in the
sale of the securities in respect of which this prospectus is
delivered, we and, if applicable, the selling unitholder, will
enter into an underwriting agreement with those underwriters at
the time of sale to them. We will set forth the names of these
underwriters and the terms of the transaction in the prospectus
supplement, which will be used by the underwriters to make
resales of the securities in respect of which this prospectus is
delivered to the public. We or the selling unitholder may
indemnify the underwriters under the relevant underwriting
agreement against specific liabilities, including liabilities
under the Securities Act. The underwriters or their affiliates
may be customers of, may engage in transactions with and may
perform services for us or our affiliates in the ordinary course
of business.
If we or the selling unitholder utilizes a dealer in the sale of
the securities in respect of which this prospectus is delivered,
we or the selling unitholder, as applicable, will sell those
securities to the dealer, as principal. The dealer may then
resell those securities to the public at varying prices to be
determined by the dealer at the time of resale. We or the
selling unitholder may indemnify the dealers against specific
liabilities, including liabilities under the Securities Act. The
dealers or their affiliates may also be our customers or may
engage in transactions with, or perform services for us in the
ordinary course of business.
42
We or the selling unitholder may offer the common units covered
by this prospectus into an existing trading market on the terms
described in the prospectus supplement relating thereto.
Underwriters, dealers and agents who participate in any
at-the-market offerings will be described in the prospectus
supplement relating thereto.
A prospectus and accompanying prospectus supplement in
electronic form may be made available on the web sites
maintained by the underwriters. The underwriters may agree to
allocate a number of securities for sale to their online
brokerage account holders. Such allocations of securities for
internet distributions will be made on the same basis as other
allocations. In addition, securities may be sold by the
underwriters to securities dealers who resell securities to
online brokerage account holders.
The aggregate maximum compensation the underwriters will receive
in connection with the sale of any securities under this
prospectus and the registration statement of which it forms a
part will not exceed 10% of the gross proceeds from the sale.
Because the Financial Industry Regulatory Authority views our
common units as interests in a direct participation program, any
offering of common units under the registration statement of
which this prospectus forms a part will be made in compliance
with Rule 2310 of the FINRA Conduct Rules.
To the extent required, this prospectus may be amended or
supplemented from time to time to describe a specific plan of
distribution. The place and time of delivery for the securities
in respect of which this prospectus is delivered will be set
forth in the accompanying prospectus supplement.
In connection with offerings of securities under the
registration statement of which this prospectus forms a part and
in compliance with applicable law, underwriters, brokers or
dealers may engage in transactions that stabilize or maintain
the market price of the securities at levels above those that
might otherwise prevail in the open market. Specifically,
underwriters, brokers or dealers may over-allot in connection
with offerings, creating a short position in the securities for
their own accounts. For the purpose of covering a syndicate
short position or stabilizing the price of the securities, the
underwriters, brokers or dealers may place bids for the
securities or effect purchases of the securities in the open
market. Finally, the underwriters may impose a penalty whereby
selling concessions allowed to syndicate members or other
brokers or dealers for distribution of the securities in
offerings may be reclaimed by the syndicate if the syndicate
repurchases previously distributed securities in transactions to
cover short positions, in stabilization transactions or
otherwise. These activities may stabilize, maintain or otherwise
affect the market price of the securities, which may be higher
than the price that might otherwise prevail in the open market,
and, if commenced, may be discontinued at any time.
43
LEGAL
MATTERS
The validity of the securities offered in this prospectus will
be passed upon for PAA Natural Gas Storage, L.P. and PNG Finance
Corp. by Vinson & Elkins L.L.P., Houston, Texas.
Vinson & Elkins L.L.P. will also render an opinion on
the material federal income tax consequences regarding the
securities.
The selling unitholders own legal counsel and the
underwriters own legal counsel will advise them about
other issues relating to any offering in which they participate.
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 selling unitholder
or underwriters of such offering, that counsel will be named in
the applicable prospectus supplement related to that offering.
EXPERTS
The consolidated financial statements of PAA Natural Gas
Storage, L.P. and managements assessment of the
effectiveness of internal control over financial reporting
(which is included in Managements Report on Internal
Control over Financial Reporting) incorporated in this
prospectus by reference to the Annual Report on
Form 10-K
of PAA Natural Gas Storage, L.P. for the year ended
December 31, 2010, have been so incorporated in reliance on
the reports of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of SG Resources Mississippi, L.L.C. as
of December 31, 2010 and 2009 and for each of the three
years in the period ended December 31, 2010 incorporated by
reference in this prospectus and elsewhere in the registration
statement have been so incorporated by reference in reliance
upon the report of Grant Thornton LLP, independent public
accountants, upon the authority of said firm as experts in
accounting and auditing in giving said report.
44