Filed Pursuant to Rule 424b2
Registration No. 333-68446
Prospectus Supplement to Prospectus dated September 4, 2001.
5,500,000 Common Units
Representing Limited Partner Interests
Plains All American Pipeline, L.P.
---------------
The common units represent limited partner interests in Plains All American
Pipeline, L.P. The common units are listed on the New York Stock Exchange under
the symbol "PAA." The last reported sale price of our common units on August
15, 2002 was $23.55 per common unit.
See "Risk Factors" beginning on page S-7 of this prospectus supplement and
on page 2 of the accompanying prospectus to read about important risks that you
should consider before buying the common units.
---------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
---------------
Per
Common Unit Total
----------- ------------
Initial price to public........................................... $23.50 $129,250,000
Underwriting discount............................................. $ 1.00 $ 5,500,000
Proceeds, before expenses, to Plains All American Pipeline, L.P. . $22.50 $123,750,000
To the extent that the underwriters sell more than 5,500,000 common units,
the underwriters have the option to purchase up to an additional 825,000 common
units from Plains All American Pipeline, L.P. at the initial price to public
less the underwriting discount.
---------------
The underwriters expect to deliver the common units against payment in New
York, New York on August 21, 2002.
Goldman, Sachs & Co.
Lehman Brothers
Salomon Smith Barney
UBS Warburg
A.G. Edwards & Sons, Inc.
Wachovia Securities
---------------
Prospectus Supplement dated August 15, 2002.
TABLE OF CONTENTS
Page No.
--------
Prospectus Supplement
PLAINS ALL AMERICAN PIPELINE, L.P............ S-1
RECENT DEVELOPMENTS.......................... S-4
THE OFFERING................................. S-6
RISK FACTORS................................. S-7
USE OF PROCEEDS.............................. S-7
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS S-8
CAPITALIZATION............................... S-9
TAX CONSIDERATIONS........................... S-10
UNDERWRITING................................. S-11
LEGAL MATTERS................................ S-13
EXPERTS...................................... S-13
WHERE YOU CAN FIND MORE INFORMATION.......... S-14
Prospectus
ABOUT THIS PROSPECTUS........................ i
WHERE YOU CAN FIND MORE INFORMATION.......... ii
FORWARD-LOOKING STATEMENTS................... iii
WHO WE ARE................................... 1
RISK FACTORS................................. 2
USE OF PROCEEDS.............................. 10
RATIOS OF EARNINGS TO FIXED CHARGES.......... 10
DESCRIPTION OF OUR DEBT SECURITIES........... 11
DESCRIPTION OF OUR COMMON UNITS.............. 19
CASH DISTRIBUTION POLICY..................... 20
DESCRIPTION OF OUR PARTNERSHIP AGREEMENT..... 22
TAX CONSIDERATIONS........................... 26
SELLING UNITHOLDERS.......................... 40
PLAN OF DISTRIBUTION......................... 41
LEGAL MATTERS................................ 42
EXPERTS...................................... 42
-----------------
IMPORTANT NOTICE ABOUT INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
This document is in two parts. The first part is the prospectus supplement,
which describes our business and the specific terms of this offering. The
second part, the base prospectus, gives more general information, some of which
may not apply to this offering. Generally, when we refer only to the
"prospectus," we are referring to both parts combined.
If the description of the offering varies between the prospectus supplement
and the base prospectus, you should rely on the information in the prospectus
supplement.
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with different information. We are not making
an offer of the common units in any jurisdiction where the offer is not
permitted. You should not assume that the information contained in this
prospectus or in the documents incorporated by reference in this prospectus is
accurate as of any date other than the date on the front of those documents.
The information in this prospectus supplement is not complete. You should
review carefully all of the detailed information appearing in this prospectus
supplement, the accompanying prospectus and the documents we have incorporated
by reference before making any investment decision.
PLAINS ALL AMERICAN PIPELINE, L.P.
We are a publicly traded Delaware limited partnership engaged in interstate
and intrastate marketing, transportation and terminalling of crude oil and
marketing of liquefied petroleum gas, or LPG. We have an extensive network of
pipeline transportation, storage and gathering assets in key oil producing
basins and at major market hubs in the United States and Canada. Several
members of our existing management team founded this midstream crude oil
business in 1992, and we completed our initial public offering in 1998. Our
EBITDA, excluding the impact of unusual and non-recurring items and the impact
of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, has
increased from $1.8 million in 1993 to $118.4 million for the twelve months
ended June 30, 2002. EBITDA means earnings before interest, taxes, depreciation
and amortization.
Our operations are concentrated in Texas, California, Oklahoma and
Louisiana and in the Canadian provinces of Alberta, Saskatchewan and Manitoba
and can be categorized into two primary business activities:
. Pipeline Operations. We own and operate over 5,500 miles of gathering and
mainline crude oil pipelines located throughout the United States and
Canada. Our activities from pipeline operations generally consist of
transporting crude oil for a fee.
. Gathering, Marketing, Terminalling and Storage Operations. We own and
operate approximately 21.3 million barrels of above-ground crude oil
terminalling and storage facilities, including a state-of-the-art, crude
oil terminalling and storage facility at Cushing, Oklahoma. Cushing is
the largest crude oil trading hub in the United States, which we refer to
in this prospectus supplement as the Cushing Interchange, and the
designated delivery point for New York Mercantile Exchange, or NYMEX,
crude oil futures contracts. Our terminalling and storage operations
generate revenue through a combination of storage and throughput charges
to third parties. We also utilize our storage tanks to counter-cyclically
balance our gathering and marketing operations and to execute different
hedging strategies to stabilize profits and reduce the negative impact of
crude oil market volatility. Our gathering and marketing operations
include:
. the purchase of crude oil at the wellhead and the bulk purchase
of crude oil at pipeline and terminal facilities;
. the transportation of crude oil on trucks, barges or pipelines;
. the subsequent resale or exchange of crude oil at various points
along the crude oil distribution chain; and
. the purchase of LPG from producers, refiners and other
marketers, and the sale of LPG to end users and retailers.
For the six months ended June 30, 2002, we gathered from producers, using
our assets or third-party assets, approximately 405,000 barrels of crude oil
per day. In addition, we purchased in bulk, primarily at major trading
locations, approximately 67,000 barrels of crude oil per day. Our revenues
reflect the sale of these barrels plus the sale of additional barrels exchanged
through buy/sell arrangements entered into to enhance the margins of the
gathered and bulk purchased crude oil.
For the six months ended June 30, 2002 and the year ended December 31,
2001, we reported net income of $31.2 million and $44.2 million, respectively.
Excluding the impact of unusual and non-recurring items and the impact of SFAS
133, net income for the same periods would have been $33.0 million and $56.2
million, respectively. Cash flow from operations (net income plus noncash
items), excluding the impact of unusual and non-recurring items and the impact
of SFAS 133, for the six months ended June 30, 2002 and for the year ended
December 31, 2001, was $47.1 million and $80.5
S-1
million, respectively. EBITDA, excluding the impact of unusual and
non-recurring items and the impact of SFAS 133, for the same periods was $59.9
million and $109.6 million, respectively.
Business Strategy
Our business strategy is to capitalize on the regional crude oil supply and
demand imbalances that exist in the United States and Canada by combining the
strategic location and unique capabilities of our transportation and
terminalling assets with our extensive marketing and distribution expertise to
generate sustainable earnings and cash flow.
We intend to execute our business strategy by:
. increasing and optimizing throughput on our existing pipeline and
gathering assets and realizing cost efficiencies through operational
improvements;
. utilizing and expanding our Cushing Terminal and our other assets to
service the needs of refiners and to profit from merchant activities that
take advantage of crude oil pricing and quality differentials;
. selectively pursuing strategic and accretive acquisitions of crude oil
transportation assets, including pipelines, gathering systems,
terminalling and storage facilities and other assets that complement our
existing asset base and distribution capabilities; and
. optimizing and expanding our Canadian operations in order to take
advantage of anticipated increases in the volume and qualities of crude
oil produced in, and exported from, Canada.
Financial Strategy
Targeted Credit Profile
We believe that a major factor in our continued success will be our ability
to maintain a low cost of capital and access to the capital markets. Since our
initial public offering in 1998, we have consistently communicated to the
financial community our intention to maintain a strong credit profile that we
believe is consistent with our goal of achieving and maintaining an investment
grade credit rating. We have targeted a general credit profile with the
following attributes:
. an average long-term debt-to-total capitalization ratio of approximately
60% or less;
. an average long-term debt-to-EBITDA ratio of approximately 3.5x or less;
and
. an average EBITDA-to-interest coverage ratio of approximately 3.3x or
better.
As of June 30, 2002, we were within our targeted credit profile. In order
for us to maintain our targeted credit profile and achieve growth through
acquisitions, we intend to fund acquisitions using approximately equal
proportions of equity and debt. Because it is likely that acquisitions will
initially be financed using debt and because it is difficult to predict the
actual timing of accessing the market to raise equity, from time to time we may
be temporarily outside the parameters of our targeted credit profile.
Rating Agencies Update
On June 27, 2002, Standard & Poor's placed us on CreditWatch with positive
implications. The CreditWatch listing followed the announcement by Plains
Resources Inc., which owns an aggregate of 29% of our partnership interests,
that it is spinning off substantially all of its oil and natural gas
exploration and production assets. Historically, Standard & Poor's had
constrained our credit rating to a level no higher than one level above Plains
Resources' credit rating. In its press release, Standard & Poor's noted that
once the proposed spin-off occurs, the constraint on our credit rating will be
lifted and
S-2
we will likely be upgraded to an investment grade rating. Our current rating
with Moody's Investors Service is Ba2 with a positive outlook.
Competitive Strengths
We believe that the following competitive strengths position us to
successfully execute our business strategy:
. Our business activities are counter-cyclically balanced. We believe that
our terminalling and storage activities and our gathering and marketing
activities are counter-cyclical. We believe that this balance of
activities, combined with the long-term nature of our pipeline
transportation contracts, has a stabilizing effect on our cash flow from
operations.
. Our pipeline assets are strategically located and have additional
capacity. Our primary crude oil pipeline transportation and gathering
assets are located in prolific oil producing regions and are connected,
directly or indirectly, with our terminalling and storage assets that
service major North American refinery and distribution markets, where we
have strong business relationships. These assets are strategically
positioned to maximize the value of our crude oil by transporting it to
major trading locations and premium markets. Our pipeline networks
currently possess additional capacity that can accommodate increased
demand.
. Our Cushing Terminal is strategically located, operationally flexible and
readily expandable. Our Cushing Terminal interconnects with the Cushing
Interchange's major inbound and outbound pipelines, providing access to
both foreign and domestic crude oil. Our Cushing Terminal is the most
modern large-scale terminalling and storage facility at the Cushing
Interchange, incorporating (1) operational enhancements designed to
safely and efficiently terminal, store, blend and segregate large volumes
and multiple varieties of crude oil and (2) extensive environmental
safeguards. Collectively, our recently completed Phase II expansion
project, which became operational in July 2002, and our Phase III
expansion project, which we expect to be operational in January 2003,
will increase the total capacity of our Cushing Terminal by approximately
71% to approximately 5.3 million barrels. In addition, we believe that
the facility can be further expanded to meet additional demand should
market conditions warrant.
. We possess specialized crude oil market knowledge. We believe our
business relationships with participants in all phases of the crude oil
distribution chain, from crude oil producers to refiners, as well as our
own industry expertise, provide us with an extensive understanding of the
North American physical crude oil markets.
. We have the financial flexibility to continue to pursue expansion and
acquisition opportunities. We believe we have significant resources to
finance strategic expansion and acquisition opportunities, including our
ability to issue additional partnership units and to borrow under our
bank credit facility. Upon the completion of this offering, the
availability under our revolving credit facility will be approximately
$244 million.
. We have an experienced management team whose interests are aligned with
those of all of our unitholders. Our executive management team has an
average of more than 20 years industry experience, with an average of
over 15 years with us or our predecessors and affiliates. Members of our
senior management team own a 4% interest in our general partner and
through restricted unit grants and options, own significant contingent
equity incentives that vest only if we achieve specified performance
objectives. In addition, our senior management team collectively owns
approximately 300,000 common and subordinated units.
S-3
RECENT DEVELOPMENTS
Distribution Increase
On July 23, 2002, we announced a second quarter distribution of $0.5375 per
unit, an increase of $0.0125 per unit over the distribution for the first
quarter. The distribution was paid on August 14, 2002 to holders of record at
the close of business on August 5, 2002. This distribution increase represents
the fifth distribution increase in the last six quarters. Effective with this
second quarter distribution, we have raised our annualized distribution to
unitholders by a total of $0.35 per unit, or 19% above our minimum quarterly
distribution of $1.80 per unit, since our initial public offering in 1998.
Acquisitions
Shell Pipeline Company LP and Equilon Enterprises LLC
On August 1, 2002, we acquired interests in approximately 2,000 miles of
gathering and mainline crude oil pipelines and approximately 8.7 million
barrels (net to our interest) of above-ground crude oil terminalling and
storage assets in West Texas from Shell Pipeline Company LP and Equilon
Enterprises LLC, which we refer to collectively as Shell. The primary assets
included in the transaction are interests in the Basin Pipeline System, the
Permian Basin Gathering System and the Rancho Pipeline System. The total
purchase price of $322.7 million consisted of (i) $304.0 million in cash, which
was borrowed under our revolving credit facility, (ii) approximately $9.1
million related to the settlement of pre-existing accounts receivable and
inventory balances and (iii) approximately $9.6 million of estimated
transaction and closing costs.
The acquired assets are primarily fee-based mainline crude oil pipeline
transportation assets that gather crude oil in the Permian Basin and transport
that crude oil to major market locations in the Mid-Continent and Gulf Coast
regions. The Permian Basin has long been one of the most stable crude oil
producing regions in the United States, dating back to the 1930s. The acquired
assets fit well with our existing asset infrastructure in West Texas and
represent a valuable transportation link to Cushing, Oklahoma, where we are a
leading provider of storage and terminalling services. In addition, we believe
that the Basin Pipeline System is poised to benefit from potential shut-downs
of refineries and other pipelines due to the shifting market dynamics in the
West Texas area. We believe that the Shell acquisition will have the following
impact on us:
. increase pipeline transportation volumes by approximately 90%;
. increase crude oil storage capacity owned by approximately 70%;
. increase miles of pipelines owned by approximately 50%; and
. increase physical barrels handled by approximately 40%.
Additional information regarding the Shell acquisition, including pro forma
financial information and historical financial information regarding the
acquired business, may be found in our Current Report on Form 8-K filed August
9, 2002.
Coast Energy Group and Lantern Petroleum
In March 2002, we completed the acquisition of substantially all of the
domestic crude oil pipeline, gathering and marketing assets of Coast Energy
Group and Lantern Petroleum, divisions of Cornerstone Propane Partners, L.P.,
for approximately $7.6 million in cash net of liabilities assumed and including
transaction costs. The principal assets acquired are located in West Texas and
include several gathering lines, crude oil contracts and a small truck and
trailer fleet.
S-4
Butte Pipe Line Company
In February 2002, we acquired an approximate 22% equity interest in Butte
Pipe Line Company from Murphy Ventures, a subsidiary of Murphy Oil Corporation.
The total cost of the acquisition, including various transaction and related
expenses, was approximately $8.0 million. Butte Pipe Line Company owns the
373-mile Butte Pipeline System, principally a mainline crude oil transmission
system, that runs from Baker, Montana to Guernsey, Wyoming. The Butte Pipeline
is connected to the Poplar Pipeline System, which in turn is connected to the
Wascana Pipeline System that is 100% wholly owned by us. We believe these
pipeline systems will play an important role in moving increasing volumes of
Canadian crude oil into markets in the United States.
General
Consistent with our acquisition strategy, we are continuously engaged in
discussions with potential sellers regarding the possible purchase by us of
midstream crude oil assets. Such acquisition efforts involve participation by
us in processes that have been made public, involve a number of potential
buyers and are commonly referred to as "auction" processes as well as
situations where we believe we are the only party or one of a very limited
number of potential buyers in negotiations with the potential seller. We can
give you no assurance that our current or future acquisition efforts will be
successful or that any such acquisition will be completed on terms considered
favorable to us. Since 1998, we have announced and completed 12 acquisitions
for an aggregate purchase price of $1.1 billion.
Cushing Terminal Expansion
On July 1, 2002, we placed in service approximately 1.1 million barrels of
tank capacity associated with our Phase II expansion of the Cushing Terminal,
raising the facility's total storage capacity to approximately 4.2 million
barrels. In addition, we currently estimate that our Phase III expansion, an
additional 1.1 million barrels of tank capacity, will be completed in late 2002
or early 2003. Giving effect to these two expansions, the capacity of the
Cushing Terminal will increase approximately 71% to a total of approximately
5.3 million barrels. Upon completion of the Phase III expansion project, the
Cushing Terminal will consist of fourteen 100,000 barrel tanks, four 150,000
barrel tanks and twelve 270,000 barrel tanks, all of which are used to store
and terminal crude oil.
Credit Facility Amendment
On July 2, 2002, we amended our senior secured credit facility. The
amendment allows us to increase the size of our credit facility from $979
million to $1.13 billion and allows us to issue up to $400 million of senior
unsecured notes. As amended, our senior secured credit facility consists of:
. a letter of credit and hedged inventory facility of up to $350 million
(with current lender commitments totaling $200 million) maturing in April
2005;
. revolving credit facilities with a combined borrowing capacity of $480
million maturing in April 2005;
. a $99 million term loan maturing in 2006; and
. a $200 million term loan maturing in 2007.
S-5
THE OFFERING
Common units we are offering 5,500,000 common units; 6,325,000 common units if
the underwriters exercise their over-allotment
option in full.
Units to be outstanding
after this offering....... 37,415,939 common units if the underwriters do
not exercise their over-allotment option and
38,240,939 common units if the underwriters
exercise their over-allotment option in full;
1,307,190 Class B common units; and
10,029,619 subordinated units.
Cash distributions.......... Under our partnership agreement, we must
distribute all of our cash on hand at the end of
each quarter, less reserves established by our
general partner in its discretion. We refer to
this cash as "available cash," and we define its
meaning in our partnership agreement.
On July 23, 2002, we declared a quarterly cash
distribution for the second quarter of 2002 of
$0.5375 per common unit, or $2.15 per common unit
on an annualized basis. Under the quarterly
incentive distribution provisions, generally our
general partner is entitled to 15% of amounts we
distribute in excess of $0.450 per common unit,
25% of amounts we distribute in excess of $0.495
per common unit and 50% of amounts we distribute
in excess of $0.675 per common unit. For a
description of our cash distribution policy,
please read "Cash Distribution Policy" in the
accompanying prospectus.
Subordination period........ During the subordination period, common units are
entitled to receive a minimum quarterly
distribution of $0.45 per unit, plus arrearages
from any prior quarters, before any distributions
are paid on our subordinated units. The
subordination period will end once we meet the
financial tests in the partnership agreement, but
it generally cannot end before December 31, 2003.
When the subordination period ends, all remaining
subordinated units will convert into common
units, and the common units will no longer be
entitled to arrearages.
Early conversion of
subordinated units........ If we meet the financial tests in the partnership
agreement for any quarter ending on or after
December 31, 2002, 25% of the subordinated units
will convert into common units.
Estimated ratio of taxable
income to distributions... We estimate that if you own the common units you
purchase in this offering through December 31,
2004, you will be allocated, on a cumulative
basis, an amount of federal taxable income for
that period that will be less than 20% of the
cash distributed to you with respect to that
period. Please read "Tax Considerations" in this
prospectus supplement for the basis of this
estimate.
New York Stock Exchange
symbol.................... PAA.
S-6
RISK FACTORS
You should read carefully the discussion of the material risks relating to
an investment in the common units offered by Plains All American Pipeline, L.P.
set forth below and under the caption "Risk Factors" beginning on page 2 of the
accompanying prospectus, as well as those risks discussed in our Annual Report
on Form 10-K for the year ended December 31, 2001 and our Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002, which are
incorporated by reference.
Recent Disruptions in Industry Credit Markets
As a result of business failures, revelations of material
misrepresentations and related financial restatements by several large,
well-known companies in various industries over the last nine months, there
have been significant disruptions and extreme volatility in the financial
markets and credit markets. Because of the credit intensive nature of the
energy industry and troubling disclosures by several large, diversified energy
companies, the energy industry has been especially impacted by these
developments, with the rating agencies downgrading a number of large, energy
related companies. Accordingly, in this environment we are exposed to an
increased level of direct and indirect counter-party credit and performance
risk. We believe we have made appropriate modifications to credit arrangements
with certain of our counter-parties that have been adversely affected by these
recent events. However, there can be no assurance that we have adequately
assessed the credit worthiness of our existing or future counter-parties or
that there will not be an unanticipated deterioration in their credit
worthiness, which could have an adverse impact on us.
USE OF PROCEEDS
The net proceeds of this offering, including our general partner's
proportionate capital contribution, will be approximately $126.1 million after
deducting the underwriting discount and estimated offering expenses. We intend
to use the net proceeds of this offering to repay indebtedness outstanding
under our revolving credit facility. Indebtedness under our revolving credit
facility, which matures in April 2005, was $361.7 million as of August 15, 2002
and had a weighted average annual interest rate of 4.7%, without giving effect
to interest rate hedges.
S-7
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
As of August 15, 2002, there were 31,915,939 common units outstanding, held
by approximately 17,000 holders, including common units held in street name.
The common units are traded on the NYSE under the symbol "PAA." An additional
1,307,190 Class B units are outstanding. The Class B units are held by an
affiliate of Plains Resources and are pari passu with and have economic terms
substantially similar to the common units but are not publicly traded. The
Class B units may be converted at the option of the holder into an equal number
of common units if specified conditions are met.
The following table sets forth, for the periods indicated, the high and low
sales prices for the common units, as reported on the NYSE Composite
Transactions Tape, and quarterly declared cash distributions per common unit.
The last reported sale price of common units on the NYSE on August 15, 2002 was
$23.55 per unit.
Price Range Cash
------------- Distributions
High Low per Unit
------ ------ -------------
2000
First Quarter........................... $16.56 $13.00 $0.4500
Second Quarter.......................... 18.63 15.25 0.4625
Third Quarter........................... 19.75 18.00 0.4625
Fourth Quarter.......................... 20.06 18.00 0.4625
2001
First Quarter........................... $23.63 $19.06 $0.4750
Second Quarter.......................... 28.00 22.15 0.5000
Third Quarter........................... 29.65 23.10 0.5125
Fourth Quarter.......................... 28.00 24.35 0.5125
2002
First Quarter........................... $26.79 $23.60 $0.5250
Second Quarter.......................... 27.30 24.60 0.5375
Third Quarter (through August 15, 2002). 26.38 19.54 (1)
--------
(1) The distribution for the third quarter of 2002 has not yet been declared or
paid.
S-8
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2002 on
(1) a historical unaudited basis, (2) a pro forma basis to give effect to the
Shell acquisition, and (3) a pro forma as adjusted basis to give further effect
to the sale of the common units offered by this prospectus supplement and the
application of the proceeds from the sale of the common units and our general
partner's proportionate capital contribution, net of offering expenses. You
should read our financial statements and notes that are incorporated by
reference into this prospectus supplement for additional information about our
capital structure.
June 30, 2002
--------------
Plains All
American Pro Forma
Pipeline, L.P. Pro Forma As Adjusted
-------------- ---------- -----------
Cash and cash equivalents....... $ 5,792 $ 5,792 $ 5,792
======== ========== ==========
Long-term debt:
Revolving credit facility.... 91,591 379,834 253,746
Canadian term loan(1)........ 99,000 99,000 99,000
Term B loan(1)............... 200,000 200,000 200,000
-------- ---------- ----------
Total long-term debt..... 390,591 678,834 552,746
-------- ---------- ----------
Partners' capital:
Common unitholders........... 404,707 404,707 528,157
Class B common unitholders... 19,376 19,376 19,376
Subordinated unitholders..... (40,107) (40,107) (40,107)
General partner.............. 13,960 13,960 16,598
-------- ---------- ----------
397,936 397,936 524,024
-------- ---------- ----------
Total capitalization..... $788,527 $1,076,770 $1,076,770
======== ========== ==========
--------
(1) Outstanding amounts include current maturities of long-term debt in the
amounts of $7 million and $2 million for the Canadian term loan and the
Term B loan, respectively.
S-9
TAX CONSIDERATIONS
We estimate that if you purchase common units in this offering and own them
through the record date for the distribution for the fourth quarter of 2004,
then you will be allocated, on a cumulative basis, an amount of federal taxable
income for such period that will be less than 20% of the cash distributed to
you with respect to the years 2002, 2003 and 2004. These estimates are based
upon the assumption that our available cash for distribution will approximate
the amount required to distribute cash to the holders of the common units in an
amount equal to the current quarterly distribution of $0.5375 per unit and
other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond our control. Further, the estimates are based on
current tax law and certain tax reporting positions that we have adopted and
with which the IRS could disagree. Accordingly, we cannot assure you that the
estimates will be correct. The actual percentage of distributions that will
constitute taxable income could be higher or lower, and any differences could
be material and could materially affect the value of the common units. See "Tax
Considerations" in the accompanying prospectus.
The tax consequences to you of an investment in common units will depend in
part on your own tax circumstances. For a discussion of the principal federal
income tax considerations associated with our operations and the purchase,
ownership and disposition of common units, see "Tax Considerations" in the
accompanying prospectus. You are urged to consult your own tax advisor about
the federal, state and local tax consequences peculiar to your circumstances.
S-10
UNDERWRITING
We and the underwriters for the offering named below have entered into an
underwriting agreement with respect to the common units being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
number of common units indicated in the following table.
Number of
Underwriters Common Units
------------ ------------
Goldman, Sachs & Co...... 1,760,000
Lehman Brothers Inc...... 935,000
Salomon Smith Barney Inc. 935,000
UBS Warburg LLC.......... 935,000
A.G. Edwards & Sons, Inc. 467,500
Wachovia Securities, Inc. 467,500
---------
Total................. 5,500,000
=========
The underwriters are committed to take and pay for all of the common units
being offered, if any are taken, other than the common units covered by the
option described below unless and until this option is exercised.
If the underwriters sell more common units than the total number set forth
in the table above, the underwriters have an option to buy up to an additional
825,000 common units from us to cover such sales. The underwriters may exercise
that option for 30 days. If any common units are purchased pursuant to this
option, the underwriters will severally purchase common units in approximately
the same proportion as set forth in the table above.
The following table shows the per common unit and total underwriting
discounts and commissions to be paid to the underwriters by us. Such amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase 825,000 additional common units.
Paid by Plains All American Pipeline, L.P. No Exercise Full Exercise
------------------------------------------ ----------- -------------
Per Common Unit.............. $ 1.00 $ 1.00
Total........................ $5,500,000 $6,325,000
Common units sold by the underwriters to the public initially will be
offered at the initial price to public set forth on the cover of this
prospectus. Any common units sold by the underwriters to securities dealers may
be sold at a discount of up to $0.60 per common unit from the initial price to
public. Any such securities dealers may resell any common units purchased from
the underwriters to certain other brokers or dealers at a discount of up to
$0.10 per common unit from the initial price to public. If all of the common
units are not sold at the initial price to public, the underwriters may change
the offering price and the other selling terms.
We, our general partner, the officers and directors of the limited
liability company that controls our general partner, and Plains Holdings Inc.
(on behalf of itself and Plains Holdings LLC) have agreed with the underwriters
not to dispose of or hedge any common units or securities convertible into or
exchangeable for common units for 90 days after the date of this prospectus,
except with the prior written consent of Goldman, Sachs & Co. This agreement
does not apply to any existing employee benefit plans, to issuance of common
units in connection with acquisitions and capital improvements that increase
cash flow from operations on a per unit basis, to the transfer of subordinated
units or to certain sales of common units by the officers and directors of the
limited liability company that controls our general partner to pay certain tax
liabilities associated with the vesting of units.
S-11
In connection with the offering, the underwriters may purchase and sell
common units in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
common units than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional common units from us in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional common units or purchasing common units in
the open market. In determining the source of common units to close out the
covered short position, the underwriters will consider, among other things, the
price of common units available for purchase in the open market as compared to
the price at which they may purchase common units through their option to
purchase additional common units from us. "Naked" short sales are any sales in
excess of such option. The underwriters must close out any naked short position
by purchasing common units in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common units in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of common
units made by the underwriters in the open market prior to the completion of
the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased common units
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
common units, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common units.
As a result, the price of the common units may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
New York Stock Exchange, in the over-the-counter market or otherwise. On the
date of this prospectus, Goldman, Sachs & Co. purchased 8,400 common units on
behalf of the underwriters at a price of $23.50 per common unit.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $300,000.
We, together with our subsidiary operating partnerships and their general
partner, our general partner and the limited liability company that controls
our general partner, have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
Certain of the underwriters and their affiliates have provided from time to
time, and expect to provide in the future, investment and commercial banking
and financial advisory services to us and our affiliates in the ordinary course
of business, for which they have received and may continue to receive customary
fees and commissions. Wachovia Bank, National Association, an affiliate of
Wachovia Securities, Inc., is a lender under our bank credit facility. An
affiliate of Wachovia Securities, Inc. also owns a 3.382% interest in our
general partner as well as 328,668 subordinated units. Citicorp USA, Inc., an
affiliate of Salomon Smith Barney Inc., is also a lender under our bank credit
facility.
Because the National Association of Securities Dealers, Inc. views the
common units offered hereby as interests in a direct participation program, the
offering is being made in compliance with Rule 2810 of the NASD's Conduct
Rules. Investor suitability with respect to the common units should be judged
similarly to the suitability with respect to other securities that are listed
for trading on a national securities exchange.
S-12
LEGAL MATTERS
Vinson & Elkins L.L.P. will issue opinions about the validity of the common
units offered hereby and various other legal matters in connection with the
offering on our behalf. Baker Botts L.L.P., the underwriters' counsel, will
also issue opinions about various legal matters in connection with the offering
on behalf of the underwriters.
EXPERTS
The financial statements incorporated in this prospectus by reference to
the Annual Report on Form 10-K of Plains All American Pipeline, L.P. for the
year ended December 31, 2001, the audited balance sheet of Plains AAP, L.P. as
of December 31, 2001, included as Exhibit 99.1 to Plains All American Pipeline,
L.P.'s Current Report on Form 8-K filed May 24, 2002 and the audited historical
financial statements of Basin Pipeline System, Rancho Pipeline System and the
Permian Basin Gathering System included in Plains All American Pipeline L.P.'s
Current Report on Form 8-K filed August 9, 2002 have been so incorporated in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
S-13
WHERE YOU CAN FIND MORE INFORMATION
The SEC allows us to "incorporate by reference" information we file with
it. This procedure means that we can disclose important information to you by
referring you to documents filed with the SEC. The information we incorporate
by reference is part of this prospectus and later information that we file with
the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below:
. Annual Report on Form 10-K for the year ended December 31, 2001;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2002;
. Quarterly Report on Form 10-Q for the quarter ended June 30, 2002;
. Current Reports on Form 8-K filed on August 15, 2002, August 9, 2002, May
24, 2002, May 7, 2002, March 14, 2002, March 6, 2002 and March 1, 2002;
and
. the description of our common units contained in our Form 8-A/A filed
November 3, 1998.
You may request a copy of these filings at no cost by making written or
telephone requests for copies to:
Plains All American Pipeline, L.P.
333 Clay Street, Suite 1600
Houston, Texas 77002
Attention: Tim Moore
Telephone: (713) 646-4100
You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with any information. You should not assume that the information incorporated
by reference or provided in this prospectus is accurate as of any date other
than the date on the front of each document.
S-14
PROSPECTUS
$700,000,000
Plains All American Pipeline, L.P.
PAA Finance Corp.
-----------------
Common Units
Debt Securities
-----------------
We may from time to time offer the following securities under this
prospectus:
. common units representing limited partner interests in Plains All
American Pipeline, L.P.; and
. debt securities of Plains All American Pipeline, L.P.
PAA Finance Corp. may act as co-issuer of the debt securities, and all other
subsidiaries of Plains All American Pipeline, L.P., other than "minor"
subsidiaries as such item is interpreted in securities regulations governing
financial reporting for guarantors, may guarantee the debt securities.
Our common units are traded on the New York Stock Exchange under the symbol
"PAA."
-----------------
Each time we sell securities we will provide a prospectus supplement that
will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read this prospectus and any prospectus supplement
carefully before you invest. You should also read the documents we have
referred you to in the "Where You Can Find More Information" section of this
prospectus for information on us and for our financial statements.
The selling unitholders may offer and sell from time to time up to
17,490,247 of our common units in connection with this prospectus. Unless
otherwise provided in a prospectus supplement, we will not receive any proceeds
from the sale of common units by the selling unitholders.
Limited partnerships are inherently different from corporations. You should
consider each of the factors described under "Risk Factors," which begin on
page 2, in deciding whether or not to buy any of our securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of our 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 September 4, 2001.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS................... i
WHERE YOU CAN FIND MORE INFORMATION..... ii
FORWARD-LOOKING STATEMENTS.............. iii
WHO WE ARE.............................. 1
RISK FACTORS............................ 2
USE OF PROCEEDS......................... 10
RATIOS OF EARNINGS TO FIXED CHARGES..... 10
DESCRIPTION OF OUR DEBT SECURITIES...... 11
DESCRIPTION OF OUR COMMON UNITS......... 19
CASH DISTRIBUTION POLICY................ 20
DESCRIPTION OF OUR PARTNERSHIP AGREEMENT 22
TAX CONSIDERATIONS...................... 26
SELLING UNITHOLDERS..................... 40
PLAN OF DISTRIBUTION.................... 41
LEGAL MATTERS........................... 42
EXPERTS................................. 42
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
this shelf process, we may offer from time to time up to $700,000,000 of our
securities and the selling securityholders may sell up to 17,490,247 common
units. Each time we or the selling securityholders offer securities, we will
provide you with a prospectus supplement that will describe, among other
things, the specific amounts and prices of the securities being offered and the
terms of the offering, including, in the case of debt securities, the specific
terms of the securities. The prospectus supplement may also add, update or
change information contained in this prospectus. Therefore, before you invest
in our securities, you should read this prospectus and any attached prospectus
supplements.
In this registration statement, the terms "we," "our," "ours," and "us"
refer to Plains All American Pipeline, L.P. and its subsidiaries, unless
otherwise indicated or the context requires otherwise.
i
WHERE YOU CAN FIND MORE INFORMATION
Plains All American Pipeline files annual, quarterly and special reports and
other information with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. You can inspect and/or copy these reports and
other information at offices maintained by the SEC, including:
. the principal offices of the SEC located at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549;
. the SEC's website at http://www.sec.gov.
In addition, please call the SEC at 1-800-732-0330 for further information
on their public reference room.
Further, our common units are listed on the New York Stock Exchange, and you
can inspect similar information at the offices of the New York Stock Exchange,
located at 20 Broad Street, New York, New York 10005.
The SEC allows us to incorporate by reference information we file with it
into this prospectus. This procedure means that we can disclose important
information to you by referring you to documents on file or to be filed with
the SEC. The information we incorporate by reference is part of this prospectus
and later information that we file with the SEC will automatically update and
supersede this information. Therefore, before you decide to invest in a
particular offering under this shelf registration, you should always check for
SEC reports we may have filed after the date of this prospectus. We incorporate
by reference the documents listed below and any future filings made by Plains
All American Pipeline with the SEC under Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 until all offerings under this shelf
registration are completed:
. Annual Report on Form 10-K for the year ended December 31, 2000 (except
for the financial statements which are included in the Current Report on
Form 8-K filed August 27, 2001 and listed below);
. Quarterly Report on Form 10-Q for the quarters ended March 31, 2001 and
June 30, 2001;
. Current Reports on Form 8-K filed with the SEC on April 19, 2001, May 10,
2001, May 25, 2001, June 11, 2001, June 27, 2001, July 2, 2001, July 10,
2001 and August 27, 2001; and
. the description of our common units contained in our Form 8-A/A dated
November 3, 1998.
You may request a copy of these filings at no cost by making written or
telephone requests for copies to:
Plains All American Pipeline, L.P.
333 Clay Street, Suite 2900
Houston, Texas 77002
Attention: Tim Moore
Telephone: (713) 646-4100
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not
authorized anyone else to provide you with any information. You should not
assume that the information incorporated by reference or provided in this
prospectus or any prospectus supplement is accurate as of any date other than
the date on the front of each document.
ii
FORWARD-LOOKING STATEMENTS
Some of the information included in this prospectus, the accompanying
prospectus supplement and the documents we incorporate by reference contain
forward-looking statements. These statements use forward-looking words such as
"may," "will," "anticipate," "believe," "expect," "project" or other similar
words. These statements discuss goals, intentions and expectations as to future
trends, plans, events, results of operations or financial condition or state
other "forward-looking" information. These statements reflect Plains All
American Pipeline's current views with respect to future events and are subject
to various risks, uncertainties and assumptions including, but not limited, to
the following:
. availability of acquisition opportunities on terms that are favorable to
us;
. successful integration and future performance of recently acquired assets;
. the success of our risk management activities;
. our levels of indebtedness and our ability to receive credit on
satisfactory terms;
. the availability of adequate supplies of and demand for crude oil in the
areas in which we operate;
. successful third party drilling efforts and completion of announced
oil-sands projects;
. the impact of crude oil price fluctuations;
. the effects of competition;
. unanticipated shortages or cost increases of materials or labor;
. weather interferences with business operations or project construction;
. governmental regulatory policies that may adversely affect our business
operations; and
. environmental liabilities not covered by indemnity or insurance.
A forward-looking statement may include a statement of the assumptions or
bases underlying the forward-looking statement. We believe we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus, any prospectus supplement and the documents we
have incorporated by reference. We will not update these statements unless the
securities laws require us to do so.
iii
WHO WE ARE
We are engaged in interstate and intrastate marketing, transportation and
terminalling of crude oil. Our operations are concentrated in Texas, Oklahoma,
California, Louisiana, Illinois, the Gulf of Mexico, and in the Canadian
provinces of Alberta and Saskatchewan.
Our business strategy is to capitalize on regional crude oil supply and
demand imbalances that exist in the United States and Canada by combining the
strategic location and unique capabilities of our transportation and
terminalling assets with our extensive marketing and distribution expertise to
generate sustainable earnings and cash flow.
We intend to execute our business strategy by:
. increasing and optimizing throughput on our various pipeline and
gathering assets and realizing cost efficiencies through operational
improvements and potential strategic alliances;
. utilizing and expanding our Cushing Terminal and our other assets to
service the needs of refiners and to profit from merchant activities that
take advantage of crude oil pricing and quality differentials;
. pursuing strategic and accretive acquisitions of crude oil transportation
assets, including pipelines, gathering systems, terminalling and storage
facilities and other assets that complement our existing asset base and
distribution capabilities; and
. optimizing and expanding our Canadian operations in order to take
advantage of anticipated increases in the volume and improvements in the
quality of crude oil produced in, and exported from, Canada.
We regularly evaluate potential acquisitions of assets and businesses that
would complement our existing business. Because our general partner receives
incentive distributions when our operations generate distributions that exceed
the minimum quarterly distribution of $0.45 per common unit, our management has
a strong incentive to maximize distributions through the successful growth of
our business.
Plains All American Pipeline, L.P. is a Delaware limited partnership. PAA
Finance was incorporated under the laws of the State of Delaware in February
2001, is indirectly wholly owned by Plains All American Pipeline, and has no
material assets or any liabilities other than as a co-issuer of debt
securities. Its activities will be limited to co-issuing debt securities and
engaging in other activities incidental thereto. Plains AAP, L.P., a Delaware
limited partnership, serves as our general partner. Plains All American GP LLC
is the general partner of Plains AAP, L.P. Our U.S. operations are conducted
through, and our operating assets are owned by, Plains Marketing, L.P., a
Delaware limited partnership, and All American Pipeline, L.P., a Texas limited
partnership. Our Canadian operations are conducted through, and our Canadian
operating assets are owned by, Plains Marketing Canada, L.P., a Canadian
limited partnership.
Our principal executive offices are located at 333 Clay Street, Suite 1600,
Houston, Texas 77002, and our phone number is (713) 646-4100.
1
RISK FACTORS
You should carefully consider the following risk factors together with all
of the other information included or incorporated by reference in this
prospectus in evaluating an investment in Plains All American Pipeline. If any
of the following risks were actually to occur, our business, financial
condition or results of operations could be materially adversely affected. When
we offer and sell any securities pursuant to a prospectus supplement, we may
include additional risk factors relevant to such securities in the prospectus
supplement.
Risks Inherent in Our Business
Potential future acquisitions and expansions, if any, may affect our
business by substantially increasing the level of our indebtedness and
contingent liabilities and increasing our risks of being unable to effectively
integrate these new operations.
From time to time, we evaluate and acquire assets and businesses that we
believe complement our existing assets and businesses. Acquisitions may require
substantial capital or the incurrence of substantial indebtedness. If we
consummate any future acquisitions, our capitalization and results of
operations may change significantly and you will not have the opportunity to
evaluate the economic, financial and other relevant information that we will
consider in determining the application of these funds and other resources.
Cash distributions are not guaranteed and may fluctuate with our performance
and the establishment of financial reserves.
Because distributions on the common units are dependent on the amount of
cash we generate, distributions may fluctuate based on our performance. We
cannot guarantee that we will be able to pay the minimum quarterly
distributions of $0.45 per common unit in each quarter. The actual amount of
cash that is available to be distributed each quarter will depend upon numerous
factors, some of which are beyond our control and the control of our general
partner. Cash distributions are dependent primarily on cash flow, including
cash flow from financial reserves and working capital borrowings, and not
solely on profitability, which is affected by non-cash items. Therefore, cash
distributions might be made during periods when we record losses and might not
be made during periods when we record profits.
Our profitability is dependent upon an adequate supply of crude oil from
fields located offshore and onshore California. Production from these offshore
fields has experienced substantial production declines since 1995.
A significant portion of our gross margin is derived from the Santa Ynez and
Point Arguello fields located offshore California. For the six months ended
June 30, 2001, gross revenues less fuel and power expenses attributable to the
Santa Ynez field were $13.7 million, or 19.8%, of our gross margin, and gross
revenues less fuel and power expenses attributable to the Point Arguello field
were approximately $4.6 million, or 6.7% of our gross margin. Although we have
entered into contracts with the producers of most of the production from these
fields under which they have agreed to ship all of their production from these
fields on the All American Pipeline through August 2007, they are not obligated
to produce or ship any minimum volumes. Volumes received from the Santa Ynez
and Point Arguello fields have declined from 86,000 and 61,000 average daily
barrels, respectively, for the second quarter of 1995 to 52,000 and 16,000
average daily barrels, respectively, for the second quarter of 2001. We expect
that there will continue to be natural production declines from each of these
fields. In addition, any production disruption from these fields due to
production problems, transportation problems or other reasons could have a
material adverse effect on our business.
In 1999, we suffered a large loss from unauthorized crude oil trading by a
former employee. A loss of this kind could occur again in the future in spite
of our efforts to prevent it.
Generally, it is our policy that as we purchase crude oil, we establish a
margin by selling crude oil for physical delivery to third-party users, such as
independent refiners or major oil companies, or by entering into a
2
future delivery obligation under futures contracts on the NYMEX. Through these
transactions, we seek to maintain a position that is substantially balanced
between purchases, on the one hand, and sales or future delivery obligations,
on the other hand. Our policy is not to acquire and hold crude oil, futures
contracts or derivative products for the purpose of speculating on price
changes. We discovered in November 1999 that this policy was violated by one of
our former employees, which resulted in losses of approximately $174.0 million,
including estimated associated costs and legal expenses. In 2000, we recognized
an additional $7.0 million charge for litigation related to the unauthorized
trading losses. We have taken steps within our organization to enhance our
processes and procedures to prevent future unauthorized trading. We cannot
assure you, however, that these steps will detect and prevent all violations of
our trading policies and procedures, particularly if deception or other
intentional misconduct is involved.
We have substantial leverage that may limit our ability to borrow additional
funds, make distributions to unitholders, comply with the terms of our
indebtedness or capitalize on business opportunities.
Our leverage is significant in relation to our partners' capital. As of
August 8, 2001, our total outstanding long-term debt was approximately $439.8
million. Our credit facilities include:
. a bank credit facility consisting of:
-- a $500 million revolving credit facility maturing April 30, 2005;
-- a $100 million five-year term loan maturing May 5, 2006; and
-- a U.S. dollar equivalent $30 million revolving credit facility
maturing April 30, 2005; and
. a $200 million senior secured letter of credit and inventory facility
maturing April 30, 2004.
Our debt may:
. adversely affect our ability to finance future operations and capital
needs;
. limit our ability to pursue acquisitions and other business
opportunities; and
. make our results of operations more susceptible to adverse economic or
operating conditions.
Our payment of principal and interest on the debt will reduce the cash
available for distribution on the units. We will be prohibited from making cash
distributions during an event of default under any of our indebtedness. Various
limitations in our indebtedness may reduce our ability to incur additional
debt, to engage in some transactions and to capitalize on business
opportunities. Any subsequent refinancing of our current indebtedness or any
new indebtedness could have similar or greater restrictions.
The success of our business strategy to increase and optimize throughput on
our pipeline and gathering assets is dependent upon our securing additional
supplies of crude oil.
Our operating results are dependent upon securing additional supplies of
crude oil from increased production by oil companies and aggressive lease
gathering efforts. The ability of producers to increase production is dependent
on the prevailing market price of oil, the exploration and production budgets
of the major and independent oil companies, the depletion rate of existing
reservoirs, the success of new wells drilled, environmental concerns,
regulatory initiatives and other matters beyond our control. There can be no
assurance that production of crude oil will rise to sufficient levels to cause
an increase in the throughput on our pipeline and gathering assets.
Our operations are dependent upon demand for crude oil by refiners in the
Midwest and on the Gulf Coast. Any decrease in this demand could adversely
affect our business.
Demand also depends on the ability and willingness of shippers having access
to our transportation assets to satisfy their demand by deliveries through
those assets, and any decrease in this demand could adversely affect
3
our business. Demand for crude oil is dependent upon the impact of future
economic conditions, fuel conservation measures, alternative fuel requirements,
governmental regulation or technological advances in fuel economy and energy
generation devices, all of which could reduce demand.
We face intense competition in our terminalling and storage activities and
gathering and marketing activities.
Our competitors include other crude oil pipelines, the major integrated oil
companies, their marketing affiliates and independent gatherers, brokers and
marketers of widely varying sizes, financial resources and experience. Some of
these competitors have capital resources many times greater than ours and
control substantially greater supplies of crude oil.
The profitability of our gathering and marketing activities depends
primarily on the volumes of crude oil we purchase and gather.
To maintain the volumes of crude oil we purchase, we must continue to
contract for new supplies of crude oil to offset volumes lost because of
natural declines in crude oil production from depleting wells or volumes lost
to competitors. Replacement of lost volumes of crude oil is particularly
difficult in an environment where production is low and competition to gather
available production is intense. Generally, because producers experience
inconveniences in switching crude oil purchasers, such as delays in receipt of
proceeds while awaiting the preparation of new division orders, producers
typically do not change purchasers on the basis of minor variations in price.
Thus, we may experience difficulty acquiring crude oil at the wellhead in areas
where there are existing relationships between producers and other gatherers
and purchasers of crude oil.
We are exposed to the credit risk of our customers in the ordinary course of
our gathering and marketing activities.
In those cases where we provide division order services for crude oil
purchased at the wellhead, we may be responsible for distribution of proceeds
to all parties. In other cases, we pay all of or a portion of the production
proceeds to an operator who distributes these proceeds to the various interest
owners. These arrangements expose us to operator credit risk. Therefore, we
must determine that operators have sufficient financial resources to make such
payments and distributions and to indemnify and defend us in case of a protest,
action or complaint. Even if our credit review and analysis mechanisms work
properly, there can be no assurance that we will not experience losses in
dealings with other parties.
Our operations are subject to federal, state and provincial environmental
and safety laws and regulations relating to environmental protection and
operational safety.
Our pipeline, gathering, storage and terminalling facilities operations are
subject to the risk of incurring substantial environmental and safety related
costs and liabilities. These costs and liabilities could arise under
increasingly strict environmental and safety laws in the U.S. and Canada,
including regulations and enforcement policies, or claims for damages to
property or persons resulting from our operations. If we were not able to
recover such resulting costs through insurance or increased tariffs and
revenues, cash distributions to unitholders could be adversely affected.
The transportation and storage of crude oil results in a risk that crude oil
and other hydrocarbons may be suddenly or gradually released into the
environment, potentially causing substantial expenditures for a response
action, significant government penalties, liability for natural resources
damages to government agencies, personal injury or property damage to private
parties and significant business interruption.
Our Canadian pipeline assets are subject to federal and provincial
regulation.
The Partnership's Canadian pipeline assets are subject to regulation by the
National Energy Board and by provincial agencies in Saskatchewan and Alberta.
With respect to a pipeline over which it has jurisdiction, each of these
agencies has the power to determine the rates we are allowed to charge for
transportation on such pipeline. The extent to which regulatory agencies can
override existing transportation contracts has not been fully decided.
4
Our pipeline systems are dependent upon their interconnections with other
crude oil pipelines to reach end markets.
Reduced throughput on these interconnecting pipelines as a result of
testing, line repair, reduced operating pressures or other causes could result
in reduced throughput on our pipeline systems that would adversely affect our
profitability.
Changes in currency exchange rates and foreign currency restrictions and
shortages could adversely affect our operating results.
Because we conduct operations outside the U.S., we are exposed to currency
fluctuations and exchange rate risks that may adversely affect our results of
operations. In addition, legal restrictions or shortages in currencies outside
the U.S. may prevent us from converting sufficient local currency to enable us
to comply with our currency payment obligations not denominated in local
currency or to meet our operating needs and debt service requirements.
Risks Inherent in an Investment in Plains All American Pipeline
Cost reimbursements due to our general partner may be substantial and will
reduce our cash available for distribution to you.
Prior to making any distribution on the common units, we will reimburse our
general partner and its affiliates, including officers and directors of the
general partner, for all expenses incurred on our behalf. The reimbursement of
expenses and the payment of fees could adversely affect our ability to make
distributions. The general partner has sole discretion to determine the amount
of these expenses. In addition, our general partner and its affiliates may
provide us services for which we will be charged reasonable fees as determined
by the general partner.
You may not be able to remove our general partner even if you wish to do so.
Our general partner manages and operates Plains All American Pipeline.
Unlike the holders of common stock in a corporation, you will have only limited
voting rights on matters affecting our business. You will have no right to
elect the general partner or the directors of the general partner on an annual
or other continuing basis. Because the owners of our general partner own more
than one-third of our outstanding units, these owners have the practical
ability to prevent the removal of our general partner.
In addition, the following provisions of the partnership agreement may
discourage a person or group from attempting to remove our general partner or
otherwise change our management:
. if the holders, including the general partner and its affiliates, of at
least 662/3% of the units vote to remove the general partner without
cause, all remaining subordinated units will automatically convert into
common units and will share distributions with the existing common units
pro rata, existing arrearages on the common units will be extinguished
and the common units will no longer be entitled to arrearages if we fail
to pay the minimum quarterly distribution in any quarter. Cause is
narrowly defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding the general partner
liable for actual fraud, gross negligence or willful or wanton misconduct
in its capacity as our general partner.
. any units held by a person that owns 20% or more of any class of units
then outstanding, other than our general partner and its affiliates,
cannot be voted on any matter; and
. the partnership agreement contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting the unitholders' ability
to influence the manner or direction of management.
These provisions may discourage a person or group from attempting to remove
our general partner or otherwise change our management. As a result of these
provisions, the price at which the common units will trade may be lower because
of the absence or reduction of a takeover premium in the trading price.
5
We may issue additional common units without your approval, which would
dilute your existing ownership interests.
During the subordination period, our general partner may cause us to issue
up to approximately ten million additional common units for any purpose without
your approval. In addition, our general partner may cause us to issue an
unlimited number of common units, without your approval, in the following
circumstances:
. the issuance of common units in connection with acquisitions that
increase cash flow from operations per unit on a pro forma basis;
. the conversion of subordinated units into common units;
. the conversion of the general partner interest and the incentive
distribution rights into common units as a result of the withdrawal of
our general partner; or
. issuances of common units under our long-term incentive plan.
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
. your proportionate ownership interest in Plains All American Pipeline
will decrease:
. the amount of cash available for distribution on each unit may decrease;
. since a lower percentage of total outstanding units will be subordinated
units, the risk that a shortfall in the payment of the minimum quarterly
distribution will be borne by the common unitholders will increase;
. the relative voting strength of each previously outstanding unit may be
diminished; and
. the market price of the common units may decline.
After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of the
unitholders. In addition, we may issue at any time an unlimited number of
equity securities ranking junior to the common units without the approval of
the unitholders.
Our general partner has a limited call right that may require you to sell
your units at an undesirable time or price.
If at any time our general partner and its affiliates own 80% or more of the
common units, the general partner will have the right, but not the obligation,
which it may assign to any of its affiliates, to acquire all, but not less than
all, of the remaining common units held by unaffiliated persons at a price
generally equal to the then current market price of the common units. As a
result, you may be required to sell your common units at a time when you may
not desire to sell them or at a price that is less than the price you would
like to receive. You may also incur a tax liability upon a sale of your common
units.
You may not have limited liability if a court finds that unitholder actions
constitute control of our business.
Under Delaware law, you could be held liable for our obligations to the same
extent as a general partner if a court determined that the right of unitholders
to remove our general partner or to take other action under our partnership
agreement constituted participation in the "control" of our business.
Our general partner generally has unlimited liability for our obligations,
such as our debts and environmental liabilities, except for those contractual
obligations that are expressly made without recourse to our general partner.
In addition, Section 17-607 of the Delaware Revised Uniform Limited
Partnership Act provides that under some circumstances, a unitholder may be
liable to us for the amount of a distribution for a period of three years from
the date of the distribution.
6
Conflicts of interest could arise among our general partner and the
partnership or the unitholders.
These conflicts may include the following:
. we do not have any employees and we rely solely on employees of the
general partner and its affiliates;
. under the partnership agreement, we reimburse the general partner for the
costs of managing and operating the partnership;
. the amount of cash expenditures, borrowings and reserves in any quarter
may affect available cash to pay quarterly distributions to unitholders;
. the general partner tries to avoid being liable for partnership
obligations. The general partner is permitted to protect its assets in
this manner by the partnership agreement. Under the partnership agreement
the general partner would not breach its fiduciary duty by avoiding
liability for partnership obligations even if the partnership can obtain
more favorable terms without limiting the general partner's liability;
. under the partnership agreement, the general partner may pay its
affiliates for any services rendered on terms fair and reasonable to the
partnership. The general partner may also enter into additional contracts
with any of its affiliates on behalf of the partnership. Agreements or
contracts between the partnership and the general partner (and its
affiliates) are not the result of arms length negotiations; and
. the general partner would not breach the partnership agreement by
exercising its call rights to purchase limited partnership interests or
by assigning its call rights to one of its affiliates or to the
partnership.
Risks Related to the Debt Securities
We have a holding company structure in which our subsidiaries conduct our
operations and own our operating assets.
We have a holding company structure, and our subsidiaries conduct all of our
operations and own all of our operating assets. We have no significant assets
other than the ownership interests in our subsidiaries. As a result, our
ability to make required payments on the debt securities depends on the
performance of our subsidiaries and their ability to distribute funds to us.
The ability of our subsidiaries to make distributions to us may be restricted
by, among other things, credit facilities and applicable state partnership laws
and other laws and regulations. Pursuant to the credit facilities, we may be
required to establish cash reserves for the future payment of principal and
interest on the amounts outstanding under the credit facilities. If we are
unable to obtain the funds necessary to pay the principal amount at maturity of
the debt securities, or to repurchase the debt securities upon the occurrence
of a change of control, we may be required to adopt one or more alternatives,
such as a refinancing of the debt securities. We cannot assure you that we
would be able to refinance the debt securities.
We do not have the same flexibility as other types of organizations to
accumulate cash, which may limit cash available to service the debt securities
or to repay them at maturity.
Unlike a corporation, our partnership agreement requires us to distribute,
on a quarterly basis, 100% of our available cash to our unitholders of record
and our general partner. Available cash is generally all of our cash receipts
adjusted for cash distributions and net changes to reserves. Our general
partner will determine the amount and timing of such distributions and has
broad discretion to establish and make additions to our reserves or the
reserves of our operating partnerships in amounts the general partner
determines in its reasonable discretion to be necessary or appropriate:
. to provide for the proper conduct of our business and the businesses of
our operating partnerships (including reserves for future capital
expenditures and for our anticipated future credit needs),
. to provide funds for distributions to our unitholders and the general
partner for any one or more of the next four calendar quarters, or
7
. to comply with applicable law or any of our loan or other agreements.
Although our payment obligations to our unitholders are subordinate to our
payment obligations to debtholders, the value of our units will decrease in
direct correlation with decreases in the amount we distribute per unit.
Accordingly, if we experience a liquidity problem in the future, we may not be
able to issue equity to recapitalize.
Tax Risks to Common Unitholders
You should read "Tax Considerations" for a more complete discussion of the
following expected material federal income tax consequences of owning and
disposing of common units.
The IRS could treat us as a corporation for tax purposes, which would
substantially reduce the cash available for distribution to you.
The anticipated after-tax benefit of an investment in the common units
depends largely on our being treated as a partnership for federal income tax
purposes. We have not requested, and do not plan to request, a ruling from the
IRS on this or any other matter affecting us.
If we were classified as a corporation for federal income tax purposes, we
would pay federal income tax on our income at the corporate tax rate, which is
currently a maximum of 35%. Distributions to you would generally be taxed again
to you as corporate distributions, and no income, gains, losses, deductions or
credits would flow through to you. Because a tax would be imposed upon us as a
corporation, the cash available for distribution to you would be substantially
reduced. Treatment of us as a corporation would result in a material reduction
in the after-tax return to the unitholders, likely causing a substantial
reduction in the value of the common units.
Current law may change so as to cause us to be taxed as a corporation for
federal income tax purposes or otherwise subject us to entity-level taxation.
The partnership agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal,
state or local income tax purposes, then the minimum quarterly distribution and
the target distribution levels will be decreased to reflect that impact on us.
A successful IRS contest of the federal income tax positions we take may
adversely impact the market for common units.
We have not requested a ruling from the IRS with respect to any matter
affecting us. The IRS may adopt positions that differ from the conclusions of
our counsel expressed in this registration statement or from the positions we
take. It may be necessary to resort to administrative or court proceedings to
sustain our counsel's conclusions or the positions we take. A court may not
concur with our counsel's conclusions or the positions we take. Any contest
with the IRS may materially and adversely impact the market for common units
and the price at which they trade. In addition, the costs of any contest with
the IRS, principally legal, accounting and related fees, will be borne by us
and directly or indirectly by the unitholders and the general partner.
You may be required to pay taxes even if you do not receive any cash
distributions.
You will be required to pay federal income taxes and, in some cases, state
and local income taxes on your share of our taxable income even if you do not
receive any cash distributions from us. You may not receive cash distributions
from us equal to your share of our taxable income or even equal to the actual
tax liability that results from your share of our taxable income.
Tax gain or loss on disposition of common units could be different than
expected.
If you sell your common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax basis in those common
units. Prior distributions in excess of the total net taxable income
8
you were allocated for a common unit, which decreased your tax basis in that
common unit, will, in effect, become taxable income to you if the common unit
is sold at a price greater than your tax basis in that common unit, even if the
price you receive is less than your original cost. A substantial portion of the
amount realized, whether or not representing gain, may be ordinary income to
you. Should the IRS successfully contest some positions we take, you could
recognize more gain on the sale of units than would be the case under those
positions, without the benefit of decreased income in prior years. Also, if you
sell your units, you may incur a tax liability in excess of the amount of cash
you receive from the sale.
If you are not an individual residing in the United States, you may have
adverse tax consequences from owning common units.
Investment in common units by tax-exempt entities, regulated investment
companies or mutual funds and foreign persons raises issues unique to them. For
example, virtually all of our income allocated to organizations exempt from
federal income tax, including individual retirement accounts and other
retirement plans, will be unrelated business taxable income and will be taxable
to them. Very little of our income will be qualifying income to a regulated
investment company or mutual fund. Distributions to foreign persons will be
reduced by withholding taxes at the highest effective U.S. federal income tax
rate for individuals, and foreign persons will be required to file federal
income tax returns and pay tax on their share of our taxable income.
We are registered as a tax shelter. This may increase the risk of an IRS
audit of us or a unitholder.
We are registered with the IRS as a "tax shelter." Our tax shelter
registration number is 99061000009. The IRS requires that some types of
entities, including some partnerships, register as "tax shelters" in response
to the perception that they claim tax benefits that the IRS may believe to be
unwarranted. As a result, we may be audited by the IRS and tax adjustments
could be made. Any unitholder owning less than a 1% profits interest in us has
very limited rights to participate in the income tax audit process. Further,
any adjustments in our tax returns will lead to adjustments in the unitholders'
tax returns and may lead to audits of unitholders' tax returns and adjustments
of items unrelated to us. You will bear the cost of any expense incurred in
connection with an examination of your personal tax return.
We treat a purchaser of units as having the same tax benefits without regard
to the units purchased. The IRS may challenge this treatment, which could
adversely affect the value of the units.
Because we cannot match transferors and transferees of common units, we have
adopted depreciation and amortization positions that do not conform with all
aspects of the Treasury regulations. A successful IRS challenge to those
positions could adversely affect the amount of tax benefits available to you.
It also could affect the timing of these tax benefits or the amount of gain
from your sale of common units and could have a negative impact on the value of
the common units or result in audit adjustments to your tax returns. Please
read "Tax Considerations--Uniformity of Units" in this prospectus for further
discussion of the effect of the depreciation and amortization positions we have
adopted.
You will likely be subject to foreign, state and local taxes in
jurisdictions where you do not live as a result of an investment in units.
In addition to federal income taxes, you will likely be subject to other
taxes, including foreign taxes, state and local taxes, unincorporated business
taxes and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which we do business or own property and in which you
do not reside. We will own property or conduct business in Canada and in most
states in the United States. You may be required to file Canadian federal
income tax returns and to pay Canadian federal and provincial income taxes and
to file state and local income tax returns and pay state and local income taxes
in many or all of the jurisdictions in which we do business or own property.
Further, you may be subject to penalties for failure to comply with those
requirements. It is your responsibility to file all federal, state, local and
foreign tax returns. Our counsel has not rendered an opinion on the foreign,
state or local tax consequences of an investment in the common units.
9
USE OF PROCEEDS
Unless otherwise indicated to the contrary in an accompanying prospectus
supplement, we will use the net proceeds from the sale of securities covered by
this prospectus for general corporate purposes, which may include repayment of
indebtedness, the acquisition of businesses and other capital expenditures and
additions to working capital. Unless otherwise provided in a prospectus
supplement, we will not receive any proceeds from the sale of common units by
the selling unitholders.
RATIOS OF EARNINGS TO FIXED CHARGES
Predecessor Plains All American Pipeline
----------------------- ------------------------------------
Year Ended January 1 November 23, Year Ended Six Months
December 31, to 1998 to December 31, Ended
---------- November 22, December 31, ----------- June 30,
1996 1997 1998 1998 1999 2000 2001
---- ---- ------------ ------------ ---- ---- ----------
Ratio of earnings to fixed charges(1)(2) 1.53x 1.74x 1.58x 2.19x -- 3.78x 2.13x
--------
(1) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of pretax income from continuing operations plus fixed
charges (excluding capitalized interest). "Fixed charges" represent
interest incurred (whether expensed or capitalized), amortization of debt
expense, and that portion of rental expense on operating leases deemed to
be the equivalent of interest.
(2) In 1999, available earnings failed to cover fixed charges by $101.8
million. Included in the earnings for 1999 was $166.4 million in
unauthorized trading losses, a $16.5 million gain on the sale of linefill
and restructuring expenses of $1.4 million. Income from continuing
operations before extraordinary items used to calculate the ratio of
earnings to fixed charges for the year ended December 31, 2000 includes
gains on sales of assets of $48.2 million.
10
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 among us and First Union National Bank,
as Trustee.
Plains All American Pipeline may issue debt securities in one or more
series, and PAA Finance may be a co-issuer of one or more series of debt
securities. PAA Finance was incorporated under the laws of the State of
Delaware in February 2001, is indirectly wholly owned by Plains All American
Pipeline, and has no material assets or any liabilities other than as a
co-issuer of debt securities. Its activities will be 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 Plains All American Pipeline and PAA Finance,
and the terms "Plains All American Pipeline" and "PAA Finance" refer strictly
to Plains All American Pipeline, L.P. and PAA 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 PAA Finance will be a co-issuer of the debt securities;
. the guarantors of the debt securities, if any;
. 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 depository 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;
11
. 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.
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.
Guarantees
If specified in the prospectus supplement respecting a series of debt
securities, the subsidiaries of Plains All American Pipeline specified in the
prospectus supplement will unconditionally guarantee to each holder and the
Trustee, on a joint and several basis, the full and prompt payment of principal
of, premium, if any, and interest on the debt securities of that series when
and as the same become due and payable, whether at maturity, upon redemption or
repurchase, by declaration of acceleration or otherwise. If a series of debt
securities is guaranteed, such series will be guaranteed by all subsidiaries
other than "minor" subsidiaries as such term is interpreted in securities
regulation governing financial reporting for guarantors. The prospectus
supplement will describe any limitation on the maximum amount of any particular
guarantee and the conditions under which guarantees may be released.
The guarantees will be general obligations of the guarantors. Guarantees of
subordinated debt securities will be subordinated to the Senior Indebtedness of
the guarantors on the same basis as the subordinated debt securities are
subordinated to the Senior Indebtedness of Plains All American Pipeline.
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 issuer's responsibilities and liabilities under the
indenture including the payment of all amounts due on the debt securities and
performance of the issuer's 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 issuer's assets, including:
. the remaining or acquiring entity must be organized under the laws of the
United States, any state or the District of Columbia;
. the remaining or acquiring entity must assume the issuer's 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.
12
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 all 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 principal amount of debt securities 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 at least 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;
. 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);
. except as otherwise permitted in the indenture, release any guarantor
from its obligations under its guarantee or the indenture or change any
guarantee in any manner that would adversely affect the rights of
holders; 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;
13
. to cure any ambiguity, defect or inconsistency;
. to provide for the assumption of an issuer's or guarantor's obligations
to holders of debt securities in the case of a merger or consolidation or
disposition of all or substantially all of such issuer's or guarantor's
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 Plains All American
Pipeline;
. to add or release guarantors pursuant to the terms of the indenture;
. 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 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 and/or the guarantees.
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 best interests of the holders.
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 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 or any remedy available to the Trustee, or exercising any power
conferred upon the Trustee, for that series of debt securities.
14
No Limit on Amount of Debt Securities
The indenture will not limit the amount of debt securities that we may
issue, unless we indicate otherwise in a prospectus supplement. The 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, the general partner of Plains All American Pipeline or any guarantor
will have any liability for the obligations of the issuers or any guarantors
under the 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.
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.
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
15
. to register the transfer of or exchange any debt security called for
redemption or repurchase, except the unredeemed portion of any debt
security we are redeeming or repurchasing 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 Plains All American Pipeline. "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 Plains All American Pipeline 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 Plains All American
Pipeline 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 Plains All American Pipeline 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 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.
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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.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on
file with the SEC.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
We will wire all payments on the global debt securities to DTC's nominee. We
and the Trustee will treat DTC's 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 DTC's 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 DTC's records. In addition, it is DTC's 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, 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
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(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, 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
First Union National Bank will be the initial Trustee under each indenture.
We maintain a banking relation in the ordinary course of business with First
Union National Bank and some of its affiliates.
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 or guarantor, 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.
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DESCRIPTION OF OUR COMMON UNITS
Generally, 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.
For a description of the relative rights and preferences of holders of common
units, holders of subordinated units and our general partner in and to cash
distributions, together with a description of the circumstances under which
subordinated units convert into common units, see "Cash Distribution Policy" in
this prospectus.
Our outstanding common units are listed on the NYSE under the symbol "PAA."
Any additional common units we issue will also be listed on the NYSE.
The transfer agent and registrar for our common units is American Stock
Transfer & Trust Company.
Meetings/Voting
Each holder of common units is entitled to one vote for each common unit on
all matters submitted to a vote of the unitholders.
Status as Limited Partner or Assignee
Except as described below under "--Limited Liability," the common units will
be fully paid, and unitholders will not be required to make additional capital
contributions to us.
Each purchaser of common units offered by this prospectus must execute a
transfer application whereby the purchaser requests admission as a substituted
limited partner and makes representations and agrees to provisions stated in
the transfer application. If this 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. Purchasers may hold common units in
nominee accounts.
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.
Transferees who do not execute and deliver transfer applications will be
treated neither as assignees nor as record holders of common units and will not
receive distributions, federal income tax allocations or reports furnished to
record holders of common units. The only right the transferees will have is the
right to admission as a substituted limited partner in respect of the
transferred common units upon execution of a transfer application in respect of
the common units. 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.
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 some possible exceptions, generally to the amount
of capital he is obligated to contribute to us in respect of his units plus his
share of any undistributed profits and assets.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the 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, exceed the fair value of the assets of the limited
partnership. For
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the purposes of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of the property
subject to liability of 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 is liable to the limited partnership for the amount of the distribution for
three years from the date of the distribution.
Reports and Records
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, our general partner will furnish or make available to each
unitholder of record (as of a record date selected by our general partner) an
annual report containing our audited financial statements for the past fiscal
year. These financial statements will be prepared in accordance with generally
accepted accounting principles. In addition, no later than 45 days after the
close of each quarter (except the fourth quarter), our general partner will
furnish or make available to each unitholder of record (as of a record date
selected by our general partner) a report containing our unaudited financial
statements and any other information required by law.
Our general partner will use all reasonable efforts to furnish each
unitholder of record information reasonably required for tax reporting purposes
within 90 days after the close of each fiscal year. Our general partner's
ability to furnish this summary tax information will depend on the cooperation
of unitholders in supplying information to our general partner. Each unitholder
will receive information to assist him in determining his U.S. federal and
state and Canadian federal and provincial tax liability and filing his U.S.
federal and state and Canadian federal and provincial income tax returns.
A limited partner can, for a purpose reasonably related to the limited
partner's 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;
. 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 and other information the disclosure of which our
general partner believes in good faith is not in our best interest or which we
are required by law or by agreements with third parties to keep confidential.
CASH DISTRIBUTION POLICY
One of our principal objectives is to generate cash from our operations and
to distribute cash to our partners each quarter. We are required to distribute
to our partners 100% of our available cash each quarter. Our available cash is
defined in our partnership agreement and is generally the sum of the cash we
receive in a quarter less cash disbursements, adjusted for net changes in
reserves.
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During the subordination period the holders of our common units are entitled
to receive each quarter a minimum quarterly distribution of $0.45 per unit
($1.80 annualized) prior to any distribution of available cash to holders of
our subordinated units. The subordination period is defined generally as the
period that will end on the first day of any quarter beginning after December
31, 2003 if (1) we have distributed at least the minimum quarterly distribution
on all outstanding units with respect to each of the immediately preceding
three consecutive, non-overlapping four-quarter periods and (2) our adjusted
operating surplus, as defined in our partnership agreement, during such periods
equals or exceeds the amount that would have been sufficient to enable us to
distribute the minimum quarterly distribution on all outstanding units on a
fully diluted basis and the related distribution on the 2% general partner
interest during those periods. In addition, one-quarter of the subordinated
units may convert to common units on a one-for-one basis after December 31,
2002 if we meet the tests set forth in our partnership agreement.
During the subordination period, our cash is distributed first 98% to the
holders of common units and 2% to our general partner until there has been
distributed to the holders of common units an amount equal to the minimum
quarterly distribution and any arrearages in the payment of the minimum
quarterly distribution on the common units for any prior quarter. Any
additional cash is distributed 98% to the holders of subordinated units and 2%
to our general partner until there has been distributed to the holders of
subordinated units an amount equal to the minimum quarterly distribution. If
the subordination period ends, the rights of the holders of subordinated units
will no longer be subordinated to the rights of the holders of common units and
the subordinated units may be converted into common units.
Our general partner is entitled to incentive distributions if the amount we
distribute with respect to any quarter exceeds levels specified in our
partnership agreement. Under the quarterly incentive distribution provisions,
generally our general partner is entitled to 15% of amounts we distribute in
excess of $0.45 per common unit, 25% of amounts we distribute in excess of
$0.495 per common unit and 50% of amounts we distribute in excess of $0.675 per
common unit.
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DESCRIPTION OF OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. Our amended and restated partnership agreement has been filed with
the Securities and Exchange Commission, and is incorporated by reference in
this prospectus. The following provisions of our partnership agreement are
summarized elsewhere in this prospectus:
. distributions of our available cash are described under "Cash
Distribution Policy";
. allocations of taxable income and other tax matters are described under
"Tax Considerations"; and
. rights of holders of common units are described under "Description of Our
Common Units."
Purpose
Our purpose under our partnership agreement is to serve as a partner of our
operating partnerships and to engage in any business activities that may be
engaged in by our operating partnerships or that is approved by our general
partner. The partnership agreements of our operating partnerships provide that
they may engage in any activity that was engaged in by our predecessors at the
time of our initial public offering or reasonably related thereto and any other
activity approved by our general partner.
Power of Attorney
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to our general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for our qualification, continuance or
dissolution. The power of attorney also grants the authority for the amendment
of, and to make consents and waivers under, our partnership agreement.
Reimbursements of Our General Partner
Our general partner does not receive any compensation for its services as
our general partner. It is, however, entitled to be reimbursed for all of its
costs incurred in managing and operating our business. Our partnership
agreement provides that our general partner will determine the expenses that
are allocable to us in any reasonable manner determined by our general partner
in its sole discretion.
Issuance of Additional Securities
Our partnership agreement authorizes us to issue an unlimited number of
additional limited partner interests and other equity securities that are equal
in rank with or junior to our common units on terms and conditions established
by our general partner in its sole discretion without the approval of any
limited partners. During the subordination period, however, except as set forth
in the following paragraph, we may not issue an aggregate of more than
approximately 10 million additional common units or an equivalent number of
units that are equal in rank with our common units, in each case, without the
approval of at least a majority of our outstanding common units (excluding
common units owned by the general partner and its affiliates).
During the subordination period, we may issue an unlimited number of common
units to finance an acquisition or a capital improvement that would have
resulted, on a pro forma basis, in an increase in per unit adjusted operating
surplus, as provided in our partnership agreement.
In no event may we issue partnership interests during the subordination
period that are senior to our common units without the approval of the holders
of a majority of our outstanding common units (excluding common units owned by
the general partner and its affiliates).
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It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our cash distributions. In addition, the issuance of
additional partnership interests may dilute the value of the interests of the
then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership interests that, in the sole
discretion of our general partner, may have special voting rights to which
common units are not entitled.
Our general partner has the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase common units,
subordinated units or other equity 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 their percentage interests
in us that existed immediately prior to the issuance. The holders of common
units will not have preemptive rights to acquire additional common units or
other partnership interests in us.
Amendments to Our Partnership Agreement
Amendments to our partnership agreement may be proposed only by our general
partner. Any amendment that materially and adversely affects the rights or
preferences of any type or class of limited partner interests in relation to
other types or classes of limited partner interests or our general partner
interest will require the approval of at least a majority of the type or class
of limited partner interests or general partner interests so affected. However,
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.
Withdrawal or Removal of Our General Partner
Our general partner has agreed not to withdraw voluntarily as our general
partner prior to December 31, 2008 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, and furnishing an opinion of counsel
regarding limited liability and tax matters. On or after December 31, 2008, our
general partner may withdraw as general partner without first obtaining
approval of any unitholder by giving 90 days' written notice, and that
withdrawal will not constitute a violation of our partnership agreement. In
addition, our general partner may withdraw without unitholder approval upon 90
days' notice to our limited partners if at least 50% of our outstanding common
units are held or controlled by one person and its affiliates other than our
general partner and its affiliates.
Upon the voluntary withdrawal of our general partner, the holders of a
majority of our outstanding common units, excluding the common units held by
the withdrawing general partner and its affiliates, may elect a successor to
the withdrawing general partner. If a successor is not elected, or is elected
but an opinion of counsel regarding limited liability and tax matters cannot be
obtained, we will be dissolved, wound up and liquidated, unless within 90 days
after that withdrawal, the holders of a majority of our outstanding units,
excluding the common units held by the withdrawing general partner and its
affiliates, and the holders of a majority of the subordinated units, voting as
separate classes, agree to continue our business and to appoint a successor
general partner.
Our general partner may not be removed unless that removal is approved by
the vote of the holders of not less than two-thirds of our outstanding units,
including units held by our general partner and its affiliates, and we receive
an opinion of counsel regarding limited liability and tax matters. Any removal
of this kind is also subject to the approval of a successor general partner by
the vote of the holders of a majority of our outstanding common units,
including those held by our general partner and its affiliates, and the holders
of a majority of the subordinated units, voting as separate classes.
23
While our partnership agreement limits the ability of our general partner to
withdraw, it allows the general partner interest and incentive distribution
rights to be transferred to an affiliate or to a third party in conjunction
with a merger or sale of all or substantially all of the assets of our general
partner. In addition, our partnership agreement expressly permits the sale, in
whole or in part, of the ownership of our general partner. Our general partner
may also transfer, in whole or in part, the common units and subordinated units
it owns.
Liquidation and Distribution of Proceeds
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the person authorized to wind up our affairs (the
liquidator) will, acting with all the powers of our general partner that the
liquidator deems necessary or desirable in its good faith judgment, liquidate
our assets. The proceeds of the liquidation will be applied as follows:
. first, towards the payment of all of our creditors and the creation of a
reserve for contingent liabilities; and
. then, to all partners in accordance with the positive balance in the
respective capital accounts.
Under some circumstances and subject to some limitations, the liquidator may
defer liquidation or distribution of our assets for a reasonable period of
time. If the liquidator determines that a sale would be impractical or would
cause a loss to our partners, our general partner may distribute assets in kind
to our partners.
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 management:
. if the holders, including the general partner and its affiliates, of at
least 662/3% of the units vote to remove the general partner without
cause, all remaining subordinated units will automatically convert into
common units and will share distributions with the existing common units
pro rata, existing arrearages on the common units will be extinguished
and the common units will no longer be entitled to arrearages if we fail
to pay the minimum quarterly distribution in any quarter. Cause is
narrowly defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding the general partner
liable for actual fraud, gross negligence or willful or wanton misconduct
in its capacity as our general partner.
. any units held by a person that owns 20% or more of any class of units
then outstanding, other than our general partner and its affiliates,
cannot be voted on any matter; and
. the partnership agreement contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting the unitholders' ability
to influence the manner or direction of management.
Limited Call Right
If at any time our general partner and its affiliates own 80% or more of the
issued and outstanding limited partner interests of any class, our general
partner will have the right to purchase all, but not less than all, of the
outstanding limited partner interests of that class that are held by
non-affiliated persons. The record date for determining ownership of the
limited partner interests would be selected by our general partner on at least
10 but not more than 60 days' notice. The purchase price in the event of a
purchase under these provisions would be the greater of (1) the current market
price (as defined in our partnership agreement) of the limited partner
interests of the class as of the date three days prior to the date that notice
is mailed to the limited partners as provided in the partnership agreement and
(2) the highest cash price paid by our general partner or any of its affiliates
for any limited partner interest of the class purchased within the 90 days
preceding the date our general partner mails notice of its election to purchase
the units.
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Indemnification
Under our partnership agreement, in most circumstances, we will indemnify
our general partner, its affiliates and their officers and directors to the
fullest extent permitted by law, from and against all losses, claims or damages
any of them may suffer by reason of their status as general partner, officer or
director, as long as the person seeking indemnity acted in good faith and in a
manner believed to be in or not opposed to our best interest. Any
indemnification under these provisions will only be out of our assets. Our
general partner shall not be personally liable for, or have any obligation to
contribute or loan funds or assets to us to enable us to effectuate any
indemnification. We are authorized to purchase insurance against liabilities
asserted against and expenses incurred by persons for our activities,
regardless of whether we would have the power to indemnify the person against
liabilities under our partnership agreement.
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,
subordinated 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.
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TAX CONSIDERATIONS
This section is a summary of the material tax considerations that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States and, unless otherwise noted in the following discussion,
expresses the opinion of Vinson & Elkins L.L.P., special counsel to the general
partner and us, insofar as it relates to matters of United States federal
income tax law and legal conclusions with respect to those matters. If we offer
and sell any debt securities pursuant to a prospectus supplement, we may
include in the prospectus supplement a discussion of the material tax
considerations that may be relevant to prospective holders of the debt
securities.
This section is based upon current provisions of the Internal Revenue Code,
existing and proposed regulations and current administrative rulings and court
decisions, all of which are subject to change. Later changes in these
authorities may cause the tax consequences to vary substantially from the
consequences described below.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or our unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, nonresident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts (IRAs), real estate investment trusts (REITs) or mutual
funds. Accordingly, we recommend that each prospective unitholder consult, and
depend on, his own tax advisor in analyzing the federal, state, local and
foreign tax consequences particular to him of the ownership or disposition of
common units.
All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section, unless otherwise noted, are the
opinion of counsel and are based on the accuracy of the factual representations
made by us.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the common units and the prices
at which common units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by the unitholders and the general
partner. Furthermore, the treatment of us, or an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read "--Tax
Consequences of Unit Ownership--Treatment of Short Sales" in this
prospectus);
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"--Disposition of Common Units--Allocations Between Transferors and
Transferees" in this prospectus); and
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "--Tax Consequences of Unit Ownership--Section 754
Election" in this prospectus).
Partnership Status
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction of the
26
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made to him by the partnership. Distributions by
a partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our status or the status of the operating partnerships as
partnerships for federal income tax purposes or whether our operations generate
"qualifying income" under Section 7704 of the Code. Instead, we will rely on
the opinion of counsel that, based upon the Internal Revenue Code, its
regulations, published revenue rulings and court decisions and the
representations described below, we and the operating partnerships will be
classified as a partnership for federal income tax purposes.
In rendering its opinion, counsel has relied on factual representations made
by us and the general partner. The representations made by us and our general
partner upon which counsel has relied are:
(a) neither we nor the operating partnerships will elect to be treated as
a corporation;
(b) for each taxable year, more than 90% of our gross income will be
income from sources that our counsel has opined or will opine is "qualifying
income" within the meaning of Section 7704(d) of the Internal Revenue Code.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with
respect to publicly-traded partnerships of which 90% or more of the gross
income for every taxable year consists of "qualifying income." Qualifying
income includes income and gains derived from the transportation and marketing
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 assets held for the production of income that otherwise
constitutes qualifying income. We estimate that less than 3% of our current
income is not qualifying income; however, this estimate could change from time
to time. Based upon and subject to this estimate, the factual representations
made by us and the general partner and a review of the applicable legal
authorities, counsel is of the opinion that at least 90% of our current gross
income constitutes qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and that is cured within a
reasonable time after discovery, we will be treated as if we had transferred
all of our assets, subject to liabilities, to a newly formed corporation, on
the first day of the year in which we fail to meet the Qualifying Income
Exception, in return for stock in that corporation, and then distributed that
stock to the unitholders in liquidation of their interests in us. This
contribution and liquidation should be tax-free to unitholders and us so long
as we, at that time, do not have liabilities in excess of the tax basis of our
assets. Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to our unitholders, and our net income would
be taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
tax basis in his common units, or taxable capital gain, after the unitholder's
tax basis in his common units has been reduced to zero. Accordingly, taxation
as a corporation would result in a material reduction in a unitholder's cash
flow and after-tax return and thus would likely result in a substantial
reduction of the value of the units.
The discussion below is based on the conclusion that we will be classified
as a partnership for federal income tax purposes.
27
Limited Partner Status
Unitholders who have become limited partners of Plains All American Pipeline
will be treated as partners of Plains All American Pipeline for federal income
tax purposes. Also:
. assignees who have executed and delivered transfer applications, and are
awaiting admission as limited partners and
. unitholders whose common units are held in street name or by a nominee and
who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units,
will be treated as partners of Plains All American Pipeline for federal income
tax purposes. As there is no direct authority addressing assignees of common
units who are entitled to execute and deliver transfer applications and become
entitled to direct the exercise of attendant rights, but who fail to execute
and deliver transfer applications, counsel's opinion does not extend to these
persons. Furthermore, a purchaser or other transferee of common units who does
not execute and deliver a transfer application may not receive some federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application for those
common units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to those units for federal income tax purposes. Please
read "--Tax Consequences of Unit Ownership--Treatment of Short Sales" in this
prospectus.
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in Plains All American Pipeline for federal income tax purposes.
Tax Consequences of Unit Ownership
Flow-through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return
his share of our income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by that unitholder. Consequently,
we may allocate income to a unitholder even if he has not received a cash
distribution. Each unitholder will be required to include in income his share
of our income, gains, losses and deductions for our taxable year ending with or
within his taxable year.
Treatment of Distributions. Distributions by us to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the
distribution. Our cash distributions in excess of a unitholder's tax basis
generally will be considered to be gain from the sale or exchange of the common
units, taxable in accordance with the rules described under "--Disposition of
Common Units" below. Any reduction in a unitholder's share of our liabilities
for which no partner, including the general partner, bears the economic risk of
loss, known as "nonrecourse liabilities," will be treated as a distribution of
cash to that unitholder. To the extent our distributions cause a unitholder's
"at risk" amount to be less than zero at the end of any taxable year, he must
recapture any losses deducted in previous years. Please read "--Limitations on
Deductibility of Losses" in this prospectus.
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his share of our nonrecourse
liabilities, and thus will result in a corresponding deemed distribution of
cash. A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his common units, if the
distribution reduces the unitholder's share of our
28
"unrealized receivables," including depreciation recapture, and/or
substantially appreciated "inventory items," both as defined in Section 751 of
the Internal Revenue Code, and collectively, "Section 751 Assets." To that
extent, he will be treated as having been distributed his proportionate share
of the Section 751 Assets and having exchanged those assets with us in return
for the non-pro rata portion of the actual distribution made to him. This
latter deemed exchange will generally result in the unitholder's realization of
ordinary income. That income will equal the excess of (1) the non-pro rata
portion of that distribution over (2) the unitholder's tax basis for the share
of Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units. A unitholder's initial tax basis for his common
units will be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his share of our
income and by any increases in his share of our nonrecourse liabilities. That
basis will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to be capitalized.
A limited partner will have no share of our debt which is recourse to the
general partner, but will have a share, generally based on his share of
profits, of our nonrecourse liabilities. Please read "--Disposition of Common
Units-- Recognition of Gain or Loss" in this prospectus.
Limitations on Deductibility of Losses. The deduction by a unitholder of
his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder, if more than
50% of the value of its stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations, to the amount for which the
unitholder is considered to be "at risk" with respect to our activities, if
that is less than his tax basis. A unitholder must recapture losses deducted in
previous years to the extent that distributions cause his at risk amount to be
less than zero at the end of any taxable year. Losses disallowed to a
unitholder or recaptured as a result of these limitations will carry forward
and will be allowable to the extent that his tax basis or at risk amount,
whichever is the limiting factor, is subsequently increased. Upon the taxable
disposition of a unit, any gain recognized by a unitholder can be offset by
losses that were previously suspended by the at risk limitation but may not be
offset by losses suspended by the basis limitation. Any excess loss above that
gain previously suspended by the at risk or basis limitations will no longer
utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire
or hold his units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our
nonrecourse liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly-traded partnership.
Consequently, any passive losses we generate will only be available to offset
our passive income generated in the future and will not be available to offset
income from other passive activities or investments, including our investments
or investments in other publicly-traded partnerships, or salary or active
business income. Passive losses that are not deductible because they exceed a
unitholder's share of income we generate may be deducted in full when he
disposes of his entire investment in us in a fully taxable transaction with an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions, including the at risk rules and the basis
limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships.
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Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." The IRS has announced that Treasury
Regulations will be issued that characterize net passive income from a
publicly-traded partnership as investment income for purposes of the
limitations on the deductibility of investment interest. In addition, the
unitholder's share of our portfolio income will be treated as investment
income. Investment interest expense includes:
. interest on indebtedness properly allocable to property held for
investment;
. our interest expense attributed to portfolio income; and
. the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or
the general partner or any former unitholder, we are authorized to pay those
taxes from our funds. That payment, if made, will be treated as a distribution
of cash to the partner on whose behalf the payment was made. If the payment is
made on behalf of a person whose identity cannot be determined, we are
authorized to treat the payment as a distribution to all current unitholders.
We are authorized to amend the partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
later distributions, so that after giving effect to these distributions, the
priority and characterization of distributions otherwise applicable under the
partnership agreement is maintained as nearly as is practicable. Payments by us
as described above could give rise to an overpayment of tax on behalf of an
individual partner in which event the partner would be required to file a claim
in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made on the
common units in excess of distributions on the subordinated units, or incentive
distributions are made to the general partner, gross income will be allocated
to the recipients to the extent of these distributions. If we have a net loss
for the entire year, that loss will be allocated first to the general partner
and the unitholders in accordance with their percentage interests in us to the
extent of their positive capital accounts and, second, to the general partner.
Specified items of our income, gain, loss and deduction will be allocated to
account for the difference between the tax basis and fair market value of
property contributed to us by the general partner, referred to in this
discussion as "Contributed Property," and to account for the difference between
the fair market value of our assets and their carrying value on our books at
the time of an offering. The effect of these allocations to a unitholder
purchasing common units in an offering will be essentially the same as if the
tax basis of our assets were equal to their fair market value at the time of
the offering. In addition, items of recapture income will be allocated to the
extent possible to the partner who was allocated the deduction giving rise to
the treatment of that gain as recapture income in order to minimize the
recognition of ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result, items of our income
and gain will be allocated in an amount and manner to eliminate the negative
balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction, other than an
allocation required by the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the
30
fair market value of Contributed Property, and "tax" capital account, credited
with the tax basis of Contributed Property referred to in this discussion as
the "Book-Tax Disparity", will generally be given effect for federal income tax
purposes in determining a partner's share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's share of an item will be determined on the basis of the
partner's interest in us, which will be determined by taking into account all
the facts and circumstances, including the partner's relative contributions to
us, the interests of all the partners in profits and losses, the interest of
all the partners in cash flow and other nonliquidating distributions and rights
of the partners to distributions of capital upon liquidation.
Counsel is of the opinion that, with the exception of the issues described
in "--Tax Consequences of Unit Ownership--Section 754 Election" and "--
Disposition of Common Units--Allocations Between Transferors and Transferees,"
in this prospectus, respectively, allocations under our partnership agreement
will be given effect for federal income tax purposes in determining a partner's
share of an item of income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
those units. If so, he would no longer be a partner 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:
. any of our income, gain, loss or deduction with respect to those units
would not be reportable by the unitholder;
. any cash distributions received by the unitholder for those units would be
fully taxable; and
. all of these distributions would appear to be ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to ensure their status as partners and
avoid the risk of gain recognition from a loan to a short seller should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of partnership interests.
Please read "--Disposition of Common Units-- Recognition of Gain or Loss" in
this prospectus.
Alternative Minimum Tax. Although it is not expected that we will generate
significant tax preference items or adjustments, each unitholder will be
required to take into account his distributive share of any items of our
income, gain, loss or deduction for purposes of the alternative minimum tax.
The current minimum tax rate for noncorporate taxpayers is 26% on the first
$175,000 of alternative minimum taxable income in excess of the exemption
amount and 28% on any additional alternative minimum taxable income.
Prospective unitholders should consult with their tax advisors as to the impact
of an investment in units on their liability for the alternative minimum tax.
Tax Rates. In general the highest effective United States federal income
tax rate for individuals for 2001 is 39.1% and the maximum United States
federal income tax rate for net capital gains of an individual for 2001 is 20%
if the asset disposed of was held for more than 12 months at the time of
disposition.
Section 754 Election. We have made the election permitted by Section 754 of
the Internal Revenue Code. That election is irrevocable without the consent of
the IRS. The election will generally permit us to adjust a common unit
purchaser's tax basis in our assets ("inside basis") under Section 743(b) of
the Internal Revenue Code to reflect his purchase price. This election does not
apply to a person who purchases common units directly from us. The Section
743(b) adjustment belongs to the purchaser and not to other partners. For
purposes of this discussion, a partner's inside basis in our assets will be
considered to have two components: (1) his share of our tax basis in our assets
("common basis") and (2) his Section 743(b) adjustment to that basis.
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Treasury regulations under Section 743 of the Internal Revenue Code require,
if the remedial allocation method is adopted (which we have adopted), a portion
of the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury Regulation Section 1.167(c)-l(a)(6), a Section
743(b) adjustment attributable to property subject to depreciation under
Section 167 of the Internal Revenue Code rather than cost recovery deductions
under Section 168 is generally required to be depreciated using either the
straight-line method or the 150% declining balance method. Under our
partnership agreement, the general partner is authorized to take a position to
preserve the uniformity of units even if that position is not consistent with
these Treasury Regulations. Please read "--Tax Treatment of Operations--
Uniformity of Units" in this prospectus.
Although counsel is unable to opine as to the validity of this approach
because there is no clear authority on this issue, we intend to depreciate the
portion of a Section 743(b) adjustment attributable to unrealized appreciation
in the value of Contributed Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the common basis
of the property, or treat that portion as non-amortizable to the extent
attributable to property the common basis of which is not amortizable. This
method is consistent with the regulations under Section 743 but is arguably
inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not
expected to directly apply to a material portion of our assets. To the extent
this Section 743(b) adjustment is attributable to appreciation in value in
excess of the unamortized Book-Tax Disparity, we will apply the rules described
in the Treasury Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may take a depreciation or amortization
position under which all purchasers acquiring units in the same month would
receive depreciation or amortization, whether attributable to common basis or a
Section 743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our assets. This kind of aggregate approach may
result in lower annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read "--Uniformity of Units"
in this prospectus.
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have, among other items, a greater amount of depreciation
and depletion deductions and a smaller share of any gain or loss on a sale of
our assets. Conversely, a Section 754 election is disadvantageous if the
transferee's tax basis in his units is lower than those units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the units may be affected either favorably or unfavorably
by the election.
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 determinations we make may be successfully challenged by the IRS
and the deductions resulting from them may be reduced or disallowed altogether.
For example, the allocation of the Section 743(b) adjustment among our assets
must be made in accordance with the Internal Revenue Code. The IRS could seek
to reallocate some or all of any Section 743(b) adjustment allocated by us to
our tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. Should the IRS require a different basis
adjustment to be made, and should, in our opinion, the expense of compliance
exceed the benefit of the election, we may seek permission from the IRS to
revoke our Section 754 election. If permission is granted, a subsequent
purchaser of units may be allocated more income than he would have been
allocated had the election not been revoked.
Tax Treatment of Operations
Accounting Method and Taxable Year. We use the year ending December 31 as
our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending within or with
his taxable year. In addition, a unitholder who has a taxable year ending on a
date other than December 31 and who disposes
32
of all of his units following the close of our taxable year but before the
close of his taxable year must include his share of our income, gain, loss and
deduction in income for his taxable year, with the result that he will be
required to include in income for his taxable year his share of more than one
year of our income, gain, loss and deduction. Please read "--Disposition of
Common Units--Allocations Between Transferors and Transferees" in this
prospectus.
Initial Tax Basis, Depreciation and Amortization. The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets.
The federal income tax burden associated with the difference between the fair
market value of our assets and their tax basis immediately prior to this
offering will be borne by partners holding interests in us prior to this
offering. Please read "--Tax Consequences of Unit Ownership--Allocation of
Income, Gain, Loss and Deduction" in this prospectus.
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions
with respect to property we own will likely be required to recapture some or
all of those deductions as ordinary income upon a sale of his interest in us.
Please read "--Tax Consequences of Unit Ownership--Allocation of Income, Gain,
Loss and Deduction" and "--Disposition of Common Units--Recognition of Gain or
Loss" in this prospectus.
The costs incurred in selling our units (called "syndication expenses") must
be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as syndication expenses.
Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates of basis are subject to
challenge and will not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the character and
amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years and may incur interest and penalties with respect to
those adjustments.
Disposition of Common Units
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured
by the sum of the cash or the fair market value of other property received plus
his share of our nonrecourse liabilities. Because the amount realized includes
a unitholder's share of our nonrecourse liabilities, the gain recognized on the
sale of units could result in a tax liability in excess of any cash received
from the sale.
Prior distributions from us in excess of cumulative net taxable income for a
common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than the unitholder's tax basis in that common unit, even if the price is less
than his original cost.
33
Except as noted below, gain or loss recognized by a unitholder, other than a
"dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally
be taxed a maximum rate of 20%. A portion of this gain or loss, which will
likely be substantial, however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Capital losses may offset
capital gains and no more than $3,000 of ordinary income in the case of
individuals, and may only be used to offset capital gains in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. Although the
ruling is unclear as to how the holding period of these interests is determined
once they are combined, Treasury regulations allow a selling unitholder who can
identify common units transferred with an ascertainable holding period to elect
to use the actual holding period of the common units transferred. Thus,
according to the ruling, a common unitholder will be unable to select high or
low basis common units to sell as would be the case with corporate stock, but,
according to the regulations, may designate specific common units sold for
purposes of determining the holding period of units transferred. A unitholder
electing to use the actual holding period of common units transferred must
consistently use that identification method for all subsequent sales or
exchanges of common units. A unitholder considering the purchase of additional
units or a sale of common units purchased in separate transactions should
consult his tax advisor as to the possible consequences of this ruling and
application of the regulations.
Specific provisions of the Internal Revenue Code affect the taxation of some
financial products and securities, including partnership interests, by treating
a taxpayer as having sold an "appreciated" partnership interest, one in which
gain would be recognized if it were sold, assigned or terminated at its fair
market value, if the taxpayer or related persons enter(s) into:
. a short sale;
. an offsetting notional principal contract; or
. a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having
sold that position if the taxpayer or a related person then acquires the
partnership interest or substantially identical property. The Secretary of
Treasury is also authorized to issue regulations that treat a taxpayer that
enters into transactions or positions that have substantially the same effect
as the preceding transactions as having constructively sold the financial
position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the NYSE on
the first business day of the month (the "Allocation Date"). However, gain or
loss realized on a sale or other disposition of our assets other than in the
ordinary course of business will be allocated among the unitholders on the
Allocation Date in the month in which that gain or loss is recognized. As a
result, a unitholder transferring units may be allocated income, gain, loss and
deduction realized after the date of transfer.
34
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between unitholders. If this method
is not allowed under the Treasury Regulations, or only applies to transfers of
less than all of the unitholder's interest, our taxable income or losses might
be reallocated among the unitholders. We are authorized to revise our method of
allocation between unitholders to conform to a method permitted under future
Treasury Regulations.
A unitholder who owns units at any time during a quarter and who disposes of
them prior to the record date set for a cash distribution for that quarter will
be allocated items of our income, gain, loss and deductions attributable to
that quarter but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who sells or exchanges units is
required to notify us in writing of that sale or exchange within 30 days after
the sale or exchange. We are required to notify the IRS of that transaction and
to furnish specified information to the transferor and transferee. However,
these reporting requirements do not apply to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that describe the amount
of the consideration received for the unit that is allocated to our goodwill or
going concern value. Failure to satisfy these reporting obligations may lead to
the imposition of substantial penalties.
Constructive Termination. We will be considered to have been terminated for
tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than 12
months of our taxable income or loss being includable in his taxable income for
the year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of our deductions for
depreciation. A termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject us to, any tax legislation
enacted before the termination.
Uniformity of Units
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. In the absence of uniformity, we may be unable to
completely comply with a number of federal income tax requirements, both
statutory and regulatory. A lack of uniformity can result from a literal
application of Treasury Regulation Section 1.167(c -1(a)(6). Any non-uniformity
could have a negative impact on the value of the units. Please read "--Tax
Consequences of Unit Ownership--Section 754 Election" in this prospectus.
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property,
to the extent of any unamortized Book-Tax Disparity, using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the common basis of that property, or treat
that portion as nonamortizable, to the extent attributable to property the
common basis of which is not amortizable, consistent with the regulations under
Section 743 even though that portion may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to
a material portion of our assets. Please read "--Tax Consequences of Unit
Ownership --Section 754 Election" in this prospectus. To the extent that the
Section 743 (b) adjustment is attributable to appreciation in value in excess
of the unamortized Book-Tax Disparity, we will apply the rules described in the
Treasury Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we
35
may adopt a depreciation and amortization position under which all purchasers
acquiring units in the same month would receive depreciation and amortization
deductions, whether attributable to a common basis or Section 743(b)
adjustment, based upon the same applicable rate as if they had purchased a
direct interest in our property. If this position is adopted, it may result in
lower annual depreciation and amortization deductions than would otherwise be
allowable to some unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that these deductions are
otherwise allowable. This position will not be adopted if we determine that the
loss of depreciation and amortization deductions will have a material adverse
effect on the unitholders. If we choose not to utilize this aggregate method,
we may use any other reasonable depreciation and amortization method to
preserve the uniformity of the intrinsic tax characteristics of any units that
would not have a material adverse effect on the unitholders. The IRS may
challenge any method of depreciating the Section 743(b) adjustment described in
this paragraph. If this challenge were sustained, the uniformity of units might
be affected, and the gain from the sale of units might be increased without the
benefit of additional deductions. Please read "--Disposition of Common
Units--Recognition of Gain or Loss" in this prospectus.
Tax-Exempt Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal income
tax, including individual retirement accounts and other retirement plans, are
subject to federal income tax on unrelated business taxable income. Virtually
all of our income allocated to a unitholder which is a tax-exempt organization
will be unrelated business taxable income and will be taxable to the unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is
not anticipated that any significant amount of our gross income will include
that type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States because
of the ownership of units. As a consequence they will be required to file
federal tax returns to report their share of our income, gain, loss or
deduction and pay federal income tax at regular rates on their share of our
income or gain. And, under rules applicable to publicly traded partnerships, we
will withhold tax at the highest effective U.S. federal income tax rate for
individuals from cash distributions made quarterly to foreign unitholders. Each
foreign unitholder must obtain a taxpayer identification number from the IRS
and submit that number to our transfer agent on a Form W-8 or applicable
substitute form in order to obtain credit for these withholding taxes.
In addition, because a foreign corporation that owns units will be treated
as engaged in a United States trade or business, that corporation may be
subject to United States branch profits tax at a rate of 30%, in addition to
regular federal income tax, on its share of our income and gain, as adjusted
for changes in the foreign corporation's "U.S. net equity," which is
effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the
United States and the country in which the foreign corporate unitholder is a
"qualified resident." In addition, this type of unitholder is subject to
special information reporting requirements under Section 6038C of the Internal
Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on
the disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business of the foreign unitholder.
Apart from the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the disposition of a unit if he has owned less than 5% in
value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the disposition.
36
Administrative Matters
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take various
accounting and reporting positions, some of which have been mentioned earlier,
to determine the unitholder's share of income, gain, loss and deduction. We
cannot assure you that those positions will yield a result that conforms to the
requirements of the Internal Revenue Code, regulations or administrative
interpretations of the IRS. Neither we nor counsel can assure prospective
unitholders that the IRS will not successfully contend in court that those
positions are impermissible. Any challenge by the IRS could negatively affect
the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each unitholder to adjust a prior
year's tax liability, and possibly may result in an audit of that unitholder's
own return. Any audit of a unitholder's return could result in adjustments not
related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Internal Revenue
Code requires that one partner be designated as the "Tax Matters Partner" for
these purposes. The partnership agreement appoints the general partner as our
Tax Matters Partner.
The Tax Matters Partner has made and 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. However, if we elect to be treated as a large
partnership, a unitholder will not have the right to participate in settlement
conferences with the IRS or to seek a refund.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
However, if we elect to be treated as a large partnership, the unitholders
would be required to treat all partnership items in a manner consistent with
our return.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
. the name, address and taxpayer identification number of the beneficial
owner and the nominee;
. whether the beneficial owner is
-- a person that is noPayments due by yeart a United States person,
-- a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing, or
-- a tax-exempt entity;
37
. the amount and description of units held, acquired or transferred for the
beneficial owner; and
. specific information including the dates of acquisitions and transfers,
means of acquisitions and transfers, and acquisition cost for purchases,
as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with
the information furnished to us.
Registration as a Tax Shelter. The Internal Revenue Code requires that "tax
shelters" be registered with the Secretary of the Treasury. The temporary
Treasury Regulations interpreting the tax shelter registration provisions of
the Internal Revenue Code are extremely broad. It is arguable that we are not
subject to the registration requirement on the basis that we will not
constitute a tax shelter. However, we have registered as a tax shelter with the
Secretary of Treasury in the absence of assurance that we will not be subject
to tax shelter registration and in light of the substantial penalties which
might be imposed if registration is required and not undertaken.
Issuance of this registration number does not indicate that investment in us
or the claimed tax benefits have been reviewed, examined or approved by the IRS.
Our tax shelter registration number is 99061000009. A unitholder who sells
or otherwise transfers a unit in a later transaction must furnish the
registration number to the transferee. The penalty for failure of the
transferor of a unit to furnish the registration number to the transferee is
$100 for each failure. The unitholders must disclose our tax shelter
registration number on Form 8271 to be attached to the tax return on which any
deduction, loss or other benefit we generate is claimed or on which any of our
income is included. A unitholder who fails to disclose the tax shelter
registration number on his return, without reasonable cause for that failure,
will be subject to a $250 penalty for each failure. Any penalties discussed are
not deductible for federal income tax purposes.
Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:
. for which there is, or was, "substantial authority," or
. as to which there is a reasonable basis and the pertinent facts of that
position are disclosed on the return.
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property, or
the adjusted basis of any property, claimed on a tax return is 200% or more of
the amount determined to be the correct amount of the
38
valuation or adjusted basis. No penalty is imposed unless the portion of the
underpayment attributable to a substantial valuation misstatement exceeds
$5,000 ($10,000 for most corporations). If the valuation claimed on a return is
400% or more than the correct valuation, the penalty imposed increases to 40%.
State, Local and Other Tax Considerations
In addition to federal income taxes, you may be subject to other taxes, such
as state and local and Canadian federal and provincial 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. Although
an analysis of those various taxes is not presented herein, each prospective
unitholder should consider their potential impact on his investment in us. We
will own property or conduct business in Canada and in most states of the
United States. A unitholder may be required to file Canadian federal income tax
returns and to pay Canadian federal and provincial income taxes and to file
state income tax returns and to pay taxes in various states and may be subject
to penalties for failure to comply with such requirements. In certain states,
tax losses may not produce a tax benefit in the year incurred (if, for example,
we have no income from sources within that state) and also may not be available
to offset income in subsequent taxable years. Some of the states may require us
to withhold a percentage of income from amounts to be distributed to a
unitholder who is not a resident of the state. Withholding, the amount of which
may be greater or less than a particular unitholder's income tax liability to
the state, generally does not relieve the non-resident unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the amount distributed
by us. Please read "-Tax Consequences of Unit Ownership- Entity-Level
Collections" in this prospectus. We may also own additional property or do
business in other states in the future.
It is the responsibility of each unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities, including the
Canadian provinces and Canada, of his investment in us. Accordingly, each
prospective unitholder should consult, and must depend upon, his own tax
counsel or other advisor with regard to those matters. Further, it is the
responsibility of each unitholder to file all Canadian, Canadian province,
state and local, as well as federal tax returns that may be required of him.
Counsel has not rendered an opinion on the Canadian federal, Canadian
provincial, state or local tax consequences of an investment in us.
39
SELLING UNITHOLDERS
In addition to covering our offering of securities, this prospectus covers
the offering for resale of up to 17,490,247 common units by selling
unitholders, including 9,557,049 common units that are issuable upon the
conversion of subordinated units and 1,307,190 common units that are issuable
upon conversion of Class B common units. The following table sets forth
information relating to the selling unitholders' beneficial ownership of our
common units and subordinated units that are convertible into common units:
Number of
Number of Common Subordinated
Selling Unitholders Units Owned Units Owned
------------------- ---------------- ------------
Plains Holdings LLC.............................................. 6,626,008 4,504,148
Plains Holdings Inc. (Class B Common)............................ 1,307,190
Sable Holdings, L.P.............................................. 1,846,252
Kafu Holdings, L.P............................................... 1,595,322
E-Holdings, L.P.................................................. 874,540
First Union Investors, Inc....................................... 328,668
Mark E. Strome Ttee FBO Mark E. Strome Living Trust Dtd 1/15/1997 207,298
Strome Hedgecap Fund, L.P........................................ 103,650
John T. Raymond.................................................. 97,171
The applicable prospectus supplement will set forth, with respect to the
selling unitholders:
. the name of the selling unitholders;
. the nature of the position, office or other material relationship which
the selling unitholders will have had within the prior three years with us
or any of our affiliates;
. the number of common units owned by the selling unitholders 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 unitholders after the completion of the offering.
All expenses incurred with the registration of the common units owned by the
selling unitholders will be borne by us.
40
PLAN OF DISTRIBUTION
Under this prospectus, both we and the selling unitholders intend to offer
our securities to the public:
. through one or more broker-dealers;
. through underwriters; or
. directly to investors.
We will fix a price or prices, and we may change the price of the securities
offered from time to time:
. at market prices prevailing at the time of any sale under this
registration statement;
. prices related to market prices; or
. negotiated prices.
We and the selling unitholders will pay or allow distributors' or sellers'
commissions that will not exceed those customary in the types of transactions
involved. Broker-dealers may act as agent or may purchase securities as
principal and thereafter resell the securities from time to time:
. in or through one or more transitions (which may involve crosses and block
transactions) or distributions;
. on the New York Stock Exchange;
. in the over-the-counter market; or
. in private transactions.
Broker-dealers or underwriters may receive compensation in the form of
underwriting discounts or commissions and may receive commissions from
purchasers of the securities for whom they may act as agents. If any
broker-dealer purchases the securities as principal, it may effect resales of
the securities from time to time to or through other broker-dealers, and other
broker-dealers may receive compensation in the form of concessions or
commissions from the purchasers of securities for whom they may act as agents.
To the extent required, the names of the specific managing underwriter or
underwriters, if any, as well as other important information, will be set forth
in prospectus supplements. In that event, the discounts and commissions we and
the selling unitholders will allow or pay to the underwriters, if any, and the
discounts and commissions the underwriters may allow or pay to dealers or
agents, if any, will be set forth in, or may be calculated from, the prospectus
supplements. Any underwriters, brokers, dealers and agents who participate in
any sale of the securities may also engage in transactions with, or perform
services for, us or our affiliates in the ordinary course of their businesses.
In addition, the selling unitholders have advised us that they may sell
common units in compliance with Rule 144, if available, or pursuant to other
available exemptions from the registration requirements under the Securities
Act, rather than pursuant to this prospectus.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution.
In connection with offerings under this shelf registration and in compliance
with applicable law, underwriters, brokers or dealers may engage in
transactions which stabilize or maintain the market price of the securities at
levels above those which 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
41
market. Finally, the underwriters may impose a penalty whereby selling
concessions allowed to syndicate members or other brokers or dealers for
distribution 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.
LEGAL MATTERS
Vinson & Elkins L.L.P., will pass upon the validity of the securities
offered in this registration statement. The selling unitholders' counsel and
the underwriters' own legal counsel will advise them about other issues
relating to any offering in which they participate.
EXPERTS
The consolidated financial statements of Plains All American Pipeline, L.P.
for the year ended December 31, 2000 and 1999 and the period from inception
(November 23, 1998) to December 31, 1998 and the combined financial statements
for the period from January 1, 1998 to November 22, 1998 incorporated in this
prospectus by reference to the Current Report on Form 8-K dated August 27, 2001
and the audited balance sheet of Plains AAP, L.P. as of June 8, 2001, included
as Exhibit 99.1, to Plains All American Pipeline, L.P.'s Current Report on Form
8-K dated August 27, 2001, have been so incorporated in reliance on the reports
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
42
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No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the common units offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
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TABLE OF CONTENTS
Prospectus Supplement
Page
----
Plains All American Pipeline, L.P.. S-1
Recent Developments................ S-4
The Offering....................... S-6
Risk Factors....................... S-7
Use of Proceeds.................... S-7
Price Range of Common Units and
Distributions.................... S-8
Capitalization..................... S-9
Tax Considerations................. S-10
Underwriting....................... S-11
Legal Matters...................... S-13
Experts............................ S-13
Where You Can Find More Information S-14
Prospectus
About This Prospectus.............. i
Where You Can Find More Information ii
Forward-Looking Statements......... iii
Who We Are......................... 1
Risk Factors....................... 2
Use of Proceeds.................... 10
Ratios of Earnings to Fixed Charges 10
Description of Our Debt Securities. 11
Description of Our Common Units.... 19
Cash Distribution Policy........... 20
Description of Our Partnership
Agreement........................ 22
Tax Considerations................. 26
Selling Unitholders................ 40
Plan of Distribution............... 41
Legal Matters...................... 42
Experts............................ 42
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5,500,000 Common Units
Plains All American Pipeline, L.P.
Representing Limited Partner
Interests
---------------
[LOGO] PLAINS ALL AMERICAN PIPE
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Goldman, Sachs & Co.
Lehman Brothers
Salomon Smith Barney
UBS Warburg
A.G. Edwards & Sons, Inc.
Wachovia Securities
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