As filed with the Securities and Exchange Commission on April 2, 2003
Registration No. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-------------------------
ATLAS PIPELINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 23-3011077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
311 Rouser Road
Moon Township, PA 15108
(412) 262-2830
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
Michael L. Staines
Atlas Pipeline Partners GP, LLC
1845 Walnut Street
Philadelphia, PA 19102
(215) 546-5005
(Address, including zip code, and telephone number, including area code, of
agent for service)
Please send copies of communications to:
J. Baur Whittlesey, Esq. Emanuel Faust, Jr., Esq.
Lisa A. Ernst, Esq. Jennifer M. Eck, Esq.
Ledgewood Law Firm, P.C. Dickstein Shapiro Morin &
1521 Locust Street Oshinsky LLP
Philadelphia, PA 19102 2101 L Street, N.W.
(215) 731-9450 Washington, D.C. 20037
(202) 785-9700
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / /
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. / /
------------------------- ---------------------- ---------------------- ----------------------- ----------------------
Proposed Proposed
maximum maximum
Title of each class of offering aggregate Amount of
securities to be Amount to be price offering registration
registered Registered per unit(1) price(1) fee
------------------------- ---------------------- ---------------------- ----------------------- ----------------------
Common Units 1,092,500 $27.08 $29,584,900 $2,394
------------------------- ---------------------- ---------------------- ----------------------- ----------------------
(1) Estimated solely for the purpose of calculating the registration fee;
computed in accordance with Rule 457(c) on the basis of the average of
the high and low sales prices for a common unit on March 31, 2003 as
reported on the American Stock Exchange.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell nor does it seek an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
Subject to Completion, dated April 2, 2003
950,000 Common Units
ATLAS PIPELINE PARTNERS, L.P.
Representing Limited Partner Interests
We are selling 950,000 of our common units representing limited partner
interests with this prospectus. We will receive all of the net proceeds of this
offering. Our common units are quoted on the American Stock Exchange under the
symbol "APL." The last reported sales price of our common units on March 31,
2003 was $ 27.20.
Our common units are entitled to receive cash distributions of $0.42
per quarter, or $1.68 on an annualized basis, before any distributions are paid
on our subordinated units. We expect this priority to continue until at least
January 1, 2005.
You should read "Risk Factors" beginning on page 18 for a discussion of
important factors that you should consider before buying common units.
These risks include the following:
o Substantially all of our revenue for the foreseeable future
will be derived from gathering fees paid to us by affiliates
of our general partner under natural gas gathering agreements.
o Our ability to maintain or increase our revenues primarily
depends upon the ability of affiliates of our general partner
to identify, fund and drill new wells for connection to our
gathering systems.
o Our revenues may fluctuate with changes in natural gas prices.
o Conflicts of interest may arise between our general partner
and its affiliates, on the one hand, and us and our investors,
on the other, particularly in connection with supervision of
the performance of obligations of the affiliates of our
general partner to us.
o Our business will be managed by our general partner. You will
have limited voting rights and limited ability to remove our
general partner.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Per
common unit Total
----------- -----
Public offering price........................ $ $
Underwriting discounts....................... $ $
Proceeds, before expenses.................... $ $
The underwriters may purchase up to an additional 142,500 common units
from us at the public offering price, less the underwriting discount, to cover
over-allotments.
The underwriters expect to deliver the common units against payment in
Arlington, Virginia on _______ ___, 2003.
Friedman Billings Ramsey McDonald Investments Inc.
Sanders Morris Harris
Prospectus dated _____________, 2003
2
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the
information that may be important to you. You should read the entire prospectus,
including the "Risk Factors" section, together with our consolidated financial
statements and the related notes, before deciding to invest in our common units.
For a summary discussion of the tax consequences of an investment in us, see
"Summary of Tax Considerations" below.
Atlas Pipeline
We own and operate natural gas pipeline gathering systems through our
operating partnership and its operating subsidiaries. Our primary assets consist
of approximately 1,380 miles of intrastate gathering systems located in eastern
Ohio, western New York and western Pennsylvania. Our gathering systems currently
serve approximately 4,200 wells with an average daily throughput for the year
ended December 31, 2002 of 50.4 mmcf of natural gas. Our gathering systems
provide a means through which well owners and operators can transport the
natural gas produced by their wells to public utility pipelines for delivery to
customers. To a lesser extent, our gathering systems transport natural gas
directly to customers. Our gathering systems currently connect with public
utility pipelines operated by Peoples Natural Gas Company, National Fuel Gas
Supply, Tennessee Gas Pipeline Company, National Fuel Gas Distribution Company,
East Ohio Gas Company, Columbia of Ohio, Consolidated Natural Gas Co., Texas
Eastern Pipeline, Columbia Gas Transmission Corp. and Equitable Utilities. We do
not engage in storage or gas marketing programs, nor do we engage in the
purchase and resale for our own account of natural gas transported through our
gathering systems.
We originally acquired the gathering systems of Atlas America, Inc. and
its affiliates, all of which are subsidiaries of Resource America, Inc. (NASDAQ:
REXI), when we commenced operations in January 2000. Throughout this prospectus,
we refer to the Resource America energy subsidiaries with which we have
contractual relationships, including Atlas America, collectively as "Atlas
America," unless specifically stated otherwise. Atlas America and its affiliates
sponsor limited and general partnerships to raise funds from investors to
explore for natural gas, and produce natural gas and, to a lesser extent, oil
from locations in eastern Ohio, western New York and western Pennsylvania. Our
gathering system is connected to 3,800 of those wells. Atlas America drilled and
connected 195 wells to our gathering systems for the year ended December 31,
2002, 196 wells in the year ended December 31, 2001 and 109 wells in the year
ended December 31, 2000.
We are party to an omnibus agreement with Atlas America that is
intended to maximize the use and expansion of our gathering systems and the
amount of natural gas they transport. Among other things, the omnibus agreement
requires Atlas America to install required flow lines and connect wells it
operates that are located within 2,500 feet of one of our gathering systems.
We are also party to natural gas gathering agreements with Atlas
America under which it pays us gathering fees generally equal to a percentage,
generally 16%, of the gross or weighted average sales price of the natural gas
we transport subject, in certain cases, to minimum prices of $0.35 or $0.40 per
mcf. During the year ended December 31, 2002, we received gathering fees of an
average of $0.58 per mcf. Our business, therefore, depends in large part on the
prices at which the natural gas we transport is sold. Due to the volatility of
natural gas prices, our gross revenues can vary materially from period to
period.
3
Objectives and Strategy
Our objective is to increase cash flow, earnings and returns to our
unitholders by:
o expanding our existing asset base through construction of extensions
necessary to service additional wells drilled by Atlas America and
others;
o expanding our existing asset base through accretive acquisitions of
gathering systems from other persons;
o achieving economies of scale as a result of expanding our operations
through extensions and acquisitions; and
o continuing to strengthen our balance sheet by financing our growth
with a combination of long-term debt and equity to provide the
financial flexibility to fund future opportunities.
Since commencing operations in January 2000, we have pursued these
objectives by:
o adding 360 miles of pipeline to our original system;
o connecting 559 wells to our pipeline, 500 of which were drilled by
Atlas America;
o acquiring two gathering systems in Ohio and Pennsylvania, aggregating
120 miles of pipeline, with approximately 433 wells connected to
those systems; and
o upgrading our system and substantially expanding our capacity.
We believe that our singular focus on gathering systems, the extensive
prior experience of our general partner's management in operating gathering
systems, our position as one of the largest operators of gathering systems in
the Appalachian Basin and our relationship with Atlas America provide us with a
competitive advantage in executing our growth strategy to achieve our business
objectives.
Partnership Information
We were formed in May 1999 as a Delaware limited partnership and, under
our partnership agreement, will be required to dissolve no later than December
31, 2098. We own a 98.9899% limited partnership interest in Atlas Pipeline
Operating Partnership, L.P., also a Delaware limited partnership, which owns our
gathering systems through subsidiaries. We have no significant assets other than
our limited partnership interest in the operating partnership. Our general
partner has sole responsibility for conducting our business and managing our
operations. As is commonly the case with publicly traded limited partnerships,
we do not directly employ any of the persons responsible for our management or
operation. Rather, Atlas America personnel manage and operate our business. Our
general partner also acts as general partner of the operating partnership. As a
consequence, the affairs of the operating partnership are controlled by our
general partner and not by us. However, our general partner may not, without the
consent of all of our limited partners, consent to any act that would make it
impossible to carry on our ordinary business and may not, without the consent of
limited partners holding a majority of the outstanding common units and
subordinated units, voting as separate classes, dispose of all or substantially
all of our assets or the assets of the operating partnership. Our common units
are entitled to receive cash distributions of $0.42 per quarter, or $1.68 on an
annualized basis, before any distributions are paid on our subordinated units.
We expect this priority to continue until at least January 1, 2005. Our general
partner owns all of our outstanding 1,641,026 subordinated units.
Our principal executive offices are located at 311 Rouser Road, Moon
Township, Pennsylvania 15108 and our telephone number is (412) 262-2830.
4
Partnership Structure
The following chart shows our current organization and ownership.
5
[OBJECT OMITTED]
6
Summary of Conflicts of Interest and Fiduciary Responsibilities
Our general partner has a fiduciary duty to manage us in a manner
beneficial to us and our unitholders. However, because our general partner is a
corporate subsidiary of Atlas America, its officers and directors have fiduciary
duties to manage its business in a manner beneficial to Atlas America. As a
result, conflicts of interest may arise in the future between us and our
unitholders, on the one hand, and Atlas America and its affiliates, on the other
hand.
The following situations, among others, could give rise to conflicts of
interest:
o our general partner determines the amount and timing of asset
purchases and sales, capital expenditures, issuances of
additional common units, borrowings and reserves, which can
impact the amount of distributions to unitholders;
o our general partner may take actions on our behalf that have
the effect of enabling our general partner to receive
distributions on its subordinated units;
o some of the officers of our general partner who will provide
services to us will also devote significant time to the
businesses of our general partner's affiliates, and
competition for their services may develop;
o the officers of our general partner may make decisions on
behalf of Atlas America, as the operator of natural gas wells
connected to our gathering systems, as to the volume of gas
produced by these wells, and these decisions may affect the
volume of natural gas transported by us and, thus, our
revenues; and
o our general partner makes decisions that affect the
obligations of Atlas America to us in constructing gathering
systems, providing financing for that construction and
identifying gathering systems for possible acquisition.
Our general partner has a conflicts committee, consisting of three
independent members of its managing board, that is available to review matters
involving conflicts of interest.
Our partnership agreement limits the liability and reduces the
fiduciary duties of our general partner to our unitholders. Our partnership
agreement also restricts the remedies available to unitholders for actions that
might otherwise constitute breaches of its fiduciary duty. By purchasing a
common unit, you are treated as having consented to these restrictions, and to
various actions contemplated in the partnership agreement and to conflicts of
interest that might otherwise be considered a breach of fiduciary or other
duties under applicable state law.
7
Distributions and Payments to Our General Partner and Its Affiliates
The following table summarizes the distributions and payments to be
made by us to our general partner and its affiliates in connection with our
operation and liquidation. These distributions and payments were determined by
and among affiliated entities and, consequently, are not the result of arm's
length negotiations.
Cash distributions to our general partner............ Cash distributions are generally made 98% to the
unitholders, including to our general partner as
holder of the subordinated units, and 2% to our
general partner. If distributions exceed specified
target levels, our general partner will receive from
15% to 50% of the excess distributions. We refer to
these distributions as our general partner's
"incentive distribution rights." For the year ended
December 31, 2002, our general partner received
distributions of $4,035,100, including $313,900 of
incentive distributions, $152,000 on its general
partner interest and $3,569,200 on its subordinated
units.
Payments to our general partner...................... Our general partner does not receive management fees or other
compensation for managing us. We reimburse our general partner
for all direct and indirect expenses it incurs on our behalf.
For the year ended December 31, 2002, we reimbursed $4,363,100
to our general partner.
Withdrawal or removal of our general partner......... If our general partner withdraws or is removed, its
general partner interest and incentive distribution
rights will either be sold to the new general partner for
cash or converted into common units, in each case for an
amount equal to the fair market value of those interests.
Liquidation........................................ Upon our liquidation and after payment of our creditors, the
partners, including our general partner, will be entitled to
receive liquidating distributions according to their
particular capital account balances. For a description of how
capital account balances are determined and adjusted upon
liquidation, see "Cash Distribution Policy -- Distributions of
Cash Upon Liquidation."
The Offering
Securities offered................................... 950,000 common units; 1,092,500 common units if the
underwriters' over-allotment option is exercised in full.
Units outstanding after this offering................ 2,571,159 common.units, representing a 61% limited
partnership interest in us on a combined basis, and
1,641,026 subordinated units, representing a 39% limited
partnership interest in us.
If the underwriters' over-allotment option is exercised
in full, 2,713,659 common units, representing a 62%
limited partnership interest in us on a combined basis,
and 1,641,026 subordinated units, representing a 38%
limited partnership interest in us, will be outstanding.
Use of proceeds...................................... The proceeds of the offering will be approximately $23.75
million, assuming a public offering price of $25.00, and
assuming the underwriters do not exercise their
over-allotment option. We will use $1.5 million for
underwriting discounts and commissions, $350,000 for
expenses of this offering, $14.9 million to fund capital
projects, $6.5 million to pay down our existing line of
credit and the balance, approximately $439,000, as
working capital.
8
Risk Factors......................................... An investment in our common units involves risks. Please
read "Risk Factors" beginning on page 18 of this
prospectus.
AMEX symbol.......................................... APL
Our Partnership Agreement
Cash distributions................................... 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. The amount of this cash may be
greater than or less than the minimum quarterly
distribution referred to in the next paragraph. We
generally make cash distributions within 45 days after
the end of each quarter. For a two-year history of our
distributions, see "Market Price and Distributions on Our
Common Units."
In general, we make cash distributions each quarter based
on the following priorities:
o first, 98% to the common units and 2% to our general
partner until each common unit has received a minimum
quarterly distribution of $0.42, plus any arrearages in
the payment of the minimum quarterly distribution from
prior quarters;
o second, 98% to the subordinated units and 2% to our
general partner until each subordinated unit has received
a minimum quarterly distribution of $0.42;
o third, 85% to all units and 15% to our general partner until
each unit has received a total distribution of $0.52 in that
quarter;
o fourth, 75% to all units and 25% to our general partner
until each unit has received a total distribution of $0.60
in the quarter; and
o after that, 50% to all units and 50% to our general
partner.
The distributions to our general partner in the third
through fifth distribution levels are incentive
distributions and are disproportionate to its 2% interest
in us as our general partner.
9
If we make a distribution from capital surplus, which
generally means distributions from cash generated other
than from operations or from working capital reserves, it
is treated as if it were repayment of the unit price from
our initial public offering of common units, which was
$13.00 per common unit. To reflect repayment,
distribution levels, including the minimum quarterly
distributions, will be adjusted downward by multiplying
each distribution amount by a fraction. This fraction is
determined as follows:
o the numerator is the unrecovered initial unit price of
the common unit immediately after giving effect to the
repayment, and
o the denominator is the unrecovered initial unit price of
the common units immediately before the repayment.
The unrecovered initial unit price is the initial public
offering price per common unit of $13.00 less any
distributions from capital surplus. Distributions from
capital surplus will not reduce the minimum quarterly
distribution or target or other distribution levels for
the quarter in which they are distributed. We do not
anticipate that there will be significant distributions
from capital surplus.
Upon liquidation, we will distribute any cash remaining,
after we have paid our creditors, to unitholders and our
general partner in accordance with their capital account
balances. To the extent proceeds of liquidation are
available, we will adjust the capital accounts of our
general partner and the common unitholders to give our
general partner amounts representing incentive
distributions.
Subordinated units; subordination period............. The subordinated units are a separate class of interest in us
whose rights to distributions are subordinate to those of the
common units during the subordination period. The subordination
period will extend to at least December 31, 2004 and will
continue beyond that date until the financial tests in the
partnership agreement are met. When the subordination period
ends, all remaining subordinated units will convert into common
units on a one-for-one basis. The subordinated units will
similarly convert to common units if our general partner is
removed without cause. Converted subordinated units will have
the same rights as common units and will thus participate
equally with the other common units in distributions.
10
Issuance of additional units......................... During the subordination period we can issue up to 150,000
additional common units without obtaining unitholder approval,
all of which we intend to issue in this offering. We can issue
an unlimited number of common units for acquisitions or capital
improvements which do not decrease per unit cash flow from
operations on a pro forma basis or to pay debt incurred to
finance acquisition or capital improvements to the extent the
acquisition or capital improvement was done within one year of
the issuance of the common units. To date, we have issued
121,159 common units in connection with pipeline acquisitions.
We can also issue common units in connection with Atlas
America's construction financing commitment.
Amendment of our partnership agreement............... Our partnership agreement may generally be amended by a
vote of persons holding a majority of the common units
and subordinated units, voting as separate classes,
provided that we obtain an opinion of counsel that the
amendment will not materially adversely affect the
limited liability of the limited partners. Amendments may
be proposed only by or with the consent of our general
partner, which may withhold its consent in its sole
discretion. Our general partner may, without the consent
of unitholders, amend the partnership agreement to
accommodate administrative functions such as admission,
withdrawal or substitution of limited partners, to effect
our qualification to do business in a jurisdiction or to
prevent us from being deemed an investment company. No
amendment may be made that would enlarge the obligations
of any limited partner without that partner's consent;
enlarge, restrict or reduce the rights, obligations, or
amounts distributable or reimbursable to our general
partner; change our term or modify the nature of those
events causing our dissolution.
Limited liability of limited partners................ The liability of a person purchasing common units will be
limited to the amount of the purchaser's investment plus
the purchaser's share of any of our undistributed profits
or assets, so long as the purchaser does not participate
in the control of our business within the meaning of
Delaware law and otherwise acts in conformity with our
partnership agreement.
Limited voting rights................................ Holders of common units do not have voting rights except
with respect to the following matters, for which the
partnership agreement requires unitholder approval:
o a sale or exchange of all or substantially all of our
assets;
11
o the removal or withdrawal of our general partner;
o the election of a successor general partner;
o our dissolution or reconstitution;
o a merger;
o termination or material modification of the master natural
gas gathering agreement and omnibus agreement with Atlas
America;
o approval of the transfer by our general partner of its
general partner interest or incentive distribution rights,
except in a merger or to an affiliate; and
o in general, amendments to the partnership agreement.
Change of control.................................... Any person or group, other than our general partner and
its affiliates or a direct transferee of our general
partner or its affiliates, that acquires beneficial
ownership of 20% or more of our common units will lose
its voting rights with respect to all of its common
units.
Removal or withdrawal of our general partner......... Our general partner may be removed by the vote of at
least 66 2/3% of our outstanding common units and the
election of a successor general partner by the vote of a
majority of the outstanding common units, excluding in
both cases common units held by our general partner and
its affiliates.
Our general partner may not withdraw as our general
partner without the vote of at least a majority of the
outstanding common units, excluding common units held by
our general partner and its affiliates. However, our
general partner may withdraw without approval of our
common units if at least 50% of our common units are held
or controlled by one person or its affiliates other than
our general partner and its affiliates.
Consequences of removal of our general partner....... If our general partner is removed other than for cause,
the subordination period will end and all outstanding
subordinated units will immediately convert into common
units on a one-for-one basis. Any existing arrearages in
the payment of the minimum quarterly distribution to the
common units will be extinguished, and our general
partner will have the right to convert its general
partner interest and its right to receive incentive
distributions into common units or to receive cash in
exchange for such interests. In addition, the omnibus
agreement will terminate and the master natural gas
gathering agreement will terminate with respect to future
wells drilled and completed by Atlas America.
12
Summary Financial Data
We derived the summary financial data set forth below for the three
years ended December 31, 2002 from our consolidated financial statements for
those periods, which have been audited by Grant Thornton LLP, independent
accountants. You should read the financial data in this table together with, and
such financial data is qualified by reference to, our consolidated financial
statements, the notes to our consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The financial data for the year ended
December 31, 2000 is for the period beginning with the inception of our
operations on January 28, 2000 through December 31, 2000.
For the years ended Inception
December 31, through
---------------------- December 31,
2002 2001 2000
---------- ---------- ------------
(in thousands, except per unit data)
Income statement data:
Revenues....................................................... $ 10,667 $ 13,129 $ 9,466
========== ========== ============
Total transportation and compression, general and
administrative expenses..................................... $ 3,544 $ 3,042 $ 1,813
========== ========== ============
Depreciation and amortization.................................. $ 1,476 $ 1,356 $ 1,020
========== ========== ============
Net income..................................................... $ 5,398 $ 8,556 $ 6,625
========== ========== ============
Net income per limited partner unit - basic and diluted........ $ 1.54 $ 2.30 $ 2.07
========== ========== ============
At December 31,
-------------------------------------------
2002 2001 2000
---------- ---------- -----------
(in thousands, except per unit data)
Balance sheet data:
Total assets................................................... $ 28,515 $ 26,002 $ 22,092
========== ========== ============
Long-term debt................................................. $ 6,500 $ 2,089 -
========== ========== ============
Common unitholders' capital.................................... $ 19,164 $ 20,129 $ 18,122
Subordinated unitholder's capital.............................. 684 1,661 2,074
General partner's capital (deficit)............................ (161) (116) (89)
---------- ---------- ------------
Total partners' capital........................................ $ 19,687 $ 21,674 $ 20,107
========== ========== ============
Distributions declared per common unit......................... $ 2.14 $ 2.50 $ 1.85
========== ========== ============
13
Summary Operating Data
The following table summarizes information concerning the volumes of
natural gas we transported during 2002, 2001 and 2000 as well as the average
transportation fees we received during each of those years.
For the years ended Inception
December 31, through
-------------------------- December 31,
2002 2001 2000
--------- --------- ----------
Total volume of natural gas transported (in mcfs).......... 18,382,600 17,125,000 14,486,800
========== ========== ==========
Average daily volume of natural gas
transported (in mcfs)................................... 50,363 46,918 42,669
========== ========== ==========
Average transportation rate per mcf............................ $ 0.58 $ 0.76 $ 0.65
========== ========== ==========
Available cash from operating surplus(1)...................... $7,385,300 $9,284,600 $5,123,100
========== ========== ==========
-----------------
(1) We define operating surplus under "Our Partnership Agreement--Cash
Distribution Policy--Distributions of Available Cash from Operating
Surplus." Available cash from operating surplus is not a measure of cash
flow as determined by generally accepted accounting principles. We have
included information concerning available cash from operating surplus
because it provides investors and management additional information as to
our ability to pay our required distributions to common units holders and
fixed charges and is presented solely as a supplemental financial measure.
Available cash from operating surplus should not be considered as an
alternative to, or more meaningful than, net income or cash flow as
determined in accordance with generally accepted accounting principles or
as an indicator of our operating performance or liquidity. Available cash
from operating surplus is not necessarily comparable to a similarly titled
measure of another company. The table below shows how we calculated
available cash from operating surplus.
For the years ended Inception
December 31, through
---------------------------------- December 31,
2002 2001 2000
------------- ---------------- ---------
(in thousands)
Net cash provided by operating activities.......................... $ 8,138 $ 10,268 $ 5,968
Capital expenditures less net borrowings.......................... (820) (1,039) (17,965)
Capital contributions and net proceeds from offering............... - 45 17,384
Increase in other assets........................................... (61) (38) (105)
Reserves........................................................... 128 49 (159)
---------- ---------- ---------
Available cash from operating surplus.............................. $ 7,385 $ 9,285 $ 5,123
========== ========== =========
14
Summary of Tax Considerations
We have included below a summary of the primary tax considerations
associated with the ownership and sale of common units. For a discussion of the
material tax considerations associated with the ownership and sale of common
units, please see the discussion included under "Tax Considerations" which
appears later in this prospectus.
We will be classified as a partnership for tax purposes.
In the opinion of Ledgewood Law Firm, P.C., counsel to us and our
general partner, we will be classified for federal income tax purposes as a
partnership. Accordingly, we will pay no federal income taxes, and you will be
required to report in your federal income tax return your share of our income,
gains, losses and deductions.
Your share of our taxable income may exceed distributions you receive.
In general, our income and loss will be allocated to our general
partner and the unitholders for each taxable year in accordance with their
percentage interests in us. You will be required to take into account, in
determining your federal income tax liability, your share of our income for each
of our taxable years ending within or with your taxable year even if we do not
make cash distributions to you. As a consequence, your share of our taxable
income, and possibly the income tax payable with respect to that income, may
exceed the cash we actually distributed to you.
The ratio of taxable income to distributions should be less than ____ percent.
We estimate that if you purchase common units in this offering and own
them through December 31, 2005, you will be allocated an amount of federal
taxable income for that period which is less than ___% of the cash we expect to
distribute for that period. Due principally to the use of accelerated
depreciation methods, we anticipate that, for taxable years beginning after
December 31, 2005, the taxable income allocable to you will represent a
significantly higher percentage of cash distributed to you. We cannot assure you
that the estimates will be correct.
Losses are only available to offset our future income.
In the case of taxpayers subject to the passive loss rules, generally
individuals and closely held corporations, our losses will only be available to
offset our future income and cannot be used to offset income from other
activities, including passive activities or investments, salary or other active
business income. You may deduct any losses unused by virtue of the passive loss
rules when you dispose of all of your common units in a taxable transaction with
an unrelated party.
You may incur a gain upon the sale of our common units even if you sell them at
less than your original cost.
If you sell your common units you will recognize gain or loss equal to
the difference between the amount realized and your adjusted tax basis in those
common units. Our cash distributions to you in excess of your share of our
taxable income that decrease your tax basis in your common units will, in
effect, become taxable income if you sell the common units at a price greater
than your adjusted tax basis even if the price is less than your original cost.
We made an election to permit us to adjust a purchaser's tax basis in our assets
to reflect the purchase price of a purchaser's common units.
15
We made the election provided for by Section 754 of the Internal
Revenue Code. This election generally permits us to adjust a common unit
purchaser's tax basis in our assets to reflect the purchase price of his common
units and gives the purchaser income and deductions calculated by reference to
the portion of his purchase price attributable to each of our assets. This
election does not apply to a person who purchases common units directly from us,
including purchasers in this offering.
Ownership of common units by tax-exempt organizations and other investors raises
tax issues.
An investment in common units by tax-exempt organizations, including
IRAs and other retirement plans, mutual funds and other regulated investment
companies, and foreign persons raises issues unique to them. 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 that unitholder.
Furthermore, no significant amount of our gross income will be qualifying income
for purposes of determining whether a unitholder will qualify as a regulated
investment company. A unitholder who is a nonresident alien, foreign corporation
or other foreign person will be subject to federal income tax withholding on
distributions we make to him and will be required to file federal income tax
returns and to pay tax on his share of our taxable income.
The completion of this offering will cause us to have two "short" taxable years
in 2003.
As a result of this offering, our general partner's percentage
ownership of us will be reduced below 50%, with the result that our taxable year
will change from a fiscal year ending September 30 to a calendar year. Thus, in
calendar 2003 we will have two "short" taxable years that each will be less than
12 months long, which may result in some unitholders including their share of 15
months of our income, gain, loss and deduction in one of their taxable years. If
you purchase common units in this offering, you will be subject to tax for the
period between the closing of the offering and December 31, 2003, and
thereafter. For a more complete description of these effects, see "Tax
Considerations - Tax Treatment of Operations - Accounting Method and Taxable
Year."
We registered as a tax shelter with the IRS.
We registered as a tax shelter with the U.S. Secretary of the
Treasury. Please see the discussion appearing under the caption "Tax
Considerations -- Administrative Matters -- Registration as a Tax Shelter" for a
more complete discussion of the impact of that registration. Issuance of a
registration number does not indicate that an investment in us or the claimed
tax benefits have been reviewed, examined or approved by the IRS.
Other tax considerations.
In addition to federal income taxes, you will likely be subject to
other taxes, including state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which you reside or in which we do business or own
property. You will likely be required to file state income tax returns and to
pay taxes in various states as a result of owning our units. You may also be
subject to penalties for failure to comply with these requirements.
The tax consequences of an investment in us, including federal income
tax consequences, will depend in part on your own tax circumstances. You should
consult your own tax adviser to determine whether specific tax consequences
apply to you, as well as about the state, local and foreign tax consequences.
16
RISK FACTORS
Limited partner interests are inherently different from capital stock
of a corporation, although many of the business risks we encounter are similar
to those that would be faced by a corporation engaged in a similar business. You
should consider the following risk factors together with all of the other
information included in this prospectus in evaluating an investment in the
common units. If any of the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common units could decline and
you may lose some or all of your investment.
Risks Inherent in Our Business
Our cash distributions are not assured and may fluctuate with our performance.
The amounts of cash that we generate may not be sufficient to pay the
minimum quarterly distributions established in our partnership agreement or any
other level of distributions. The actual amounts of cash we generate will depend
upon numerous factors relating to our business which may be beyond our control,
including:
o the demand for and price of natural gas;
o the volume of natural gas we transport;
o continued development of wells for connection to our gathering
systems;
o the expenses we incur in providing our gathering services;
o the cost of acquisitions and capital improvements;
o our issuance of equity securities;
o required principal and interest payments on our debt;
o fluctuations in working capital;
o prevailing economic conditions;
o fuel conservation measures;
o alternate fuel requirements;
o government regulations; and
o technical advances in fuel economy and energy generation devices.
Our ability to make cash distributions depends primarily on our cash
flow. Cash distributions do not depend directly on our profitability, which is
affected by non-cash items. Therefore, cash distributions may be made during
periods when we record losses and may not be made during periods when we record
profits.
The failure of Atlas America to perform its obligations under the natural gas
gathering agreements may adversely affect our revenues.
Our revenues consist of the fees we receive under the master natural
gas gathering agreement and other transportation agreements we have with Atlas
America and its affiliates. While Atlas America receives gathering fees from the
well owners, it is contractually obligated to pay our fees even if those
gathering fees are less than the fees it must pay us. Our cash flow could be
materially adversely affected if Atlas America failed to discharge its
obligations to us.
17
The amount of natural gas we transport will decline over time unless new wells
are connected to our gathering systems.
Production of natural gas from a well generally declines over time
until the well can no longer economically produce natural gas and is plugged and
abandoned. Failure to connect new wells to our gathering systems could,
therefore, result in the amount of natural gas we transport reducing
substantially over time and could, upon exhaustion of the current wells, cause
us to abandon one or more of our gathering systems and, possibly, cease
operations. As a consequence, our revenues and, thus, our ability to make
distributions to unitholders would be materially adversely affected.
Although we entered into the omnibus agreement described in
"Business-Agreements with Atlas America-Omnibus Agreement" to, among other
things, increase the number of natural gas wells connected to our gathering
systems, well connections resulting from that agreement depend principally upon
the success of Atlas America in sponsoring drilling investment partnerships and
completing wells for these partnerships in areas where our gathering systems are
located. We cannot assure you that Atlas America will be able to continue to
organize these partnerships, the amount of money these partnerships will raise,
the number of wells that will actually be drilled or that wells drilled for
these partnerships will produce natural gas in economic quantities. Moreover, we
cannot assure you that production from any newly developed wells will be
sufficient to offset production declines from existing wells.
The amount of natural gas we transport may be reduced if the public utility
pipelines to which we deliver gas cannot or will not accept the gas.
Our gathering systems principally serve as intermediate transportation
facilities between sales lines from wells connected to our systems and the
public utility pipelines to which we deliver natural gas. If one or more of
these public utility pipelines has service interruptions, capacity limitations
or otherwise does not accept the natural gas we transport, and we cannot arrange
for delivery to other public utility pipelines, local distribution companies or
end users, the amount of natural gas we transport may be reduced. Since our
revenues depend upon the volumes of natural gas we transport, this could result
in a material reduction in our revenues.
Governmental regulation of our pipelines could increase our operating costs.
Currently our gathering of natural gas from wells is exempt from
regulation under the Natural Gas Act. We cannot assure you, however, that this
will remain the case. The implementation of new laws or policies that would
subject us to regulation by the Federal Energy Regulatory Commission under the
Natural Gas Act could increase our costs, decrease our revenues, or both, as
discussed under "Business--Regulation."
Gas gathering operations are subject to regulation at the state level.
Matters subject to regulation include rates, service and safety. We have been
granted an exemption from regulation as a public utility in Ohio. Presently, our
rates are not regulated in New York and Pennsylvania. Changes in state
regulations, or our status under these regulations that subject us to further
regulation, could increase our operating costs or require material capital
expenditures.
Litigation or governmental regulation relating to environmental protection and
operational safety may result in substantial costs and liabilities.
18
Our operations are subject to federal and state environmental laws
under which owners of natural gas pipelines can be liable for clean-up costs and
fines in connection with any pollution caused by the pipelines. We may also be
held liable for clean-up costs resulting from pollution which occurred before
our acquisition of the gathering systems. In addition, we are subject to federal
and state safety laws that dictate the type of pipeline, quality of pipe
protection, depth, methods of welding and other construction-related standards.
While we believe that our gathering systems comply in all material respects with
applicable laws, we cannot assure you that future events will not occur for
which we may be liable. Possible future developments, including stricter laws or
enforcement policies, or claims for personal or property damages resulting from
our operations could impose substantial costs on us.
We are also subject to the requirements of the Occupational Health and
Safety Act, or OSHA, and comparable state statutes. We believe that our
operations comply in all material respects with OSHA requirements, including
general industry standards, record keeping, hazard communication requirements
and monitoring of occupational exposure to regulated substances. We cannot,
however, assure you that future events will not occur for which we may be
liable, imposing substantial costs on us.
We cannot predict whether or in what form any new legislation or
regulatory requirements might be enacted or adopted or the costs of compliance.
In general, we expect that new regulations would increase our operating costs
and, possibly, require us to obtain additional capital to pay for improvements
or other compliance action necessitated by those regulations.
We may not be able to fully execute our growth strategy.
Our current strategy contemplates substantial growth through both the
acquisition of other gathering systems and the development of our existing
system. Typically, we have paid for system development in cash and have made
acquisitions either for cash or a combination of cash and common units. As a
result, limitations on our access to capital or on the market for our common
units will impair our ability to execute our growth strategy. In addition, our
strategy of growth through acquisitions involves numerous risks particular to
it, including:
o we may not be able to identify suitable acquisition candidates;
o we may not be able to make acquisitions on economically
acceptable terms;
o irrespective of estimates at the time we make an acquisition, the
acquisition may prove to be dilutive to earnings and operating
surplus; and
o we may encounter difficulties in integrating operations and
systems.
If Atlas America and its affiliates default on their obligations to us, we do
not have contractual recourse to Resource America.
The omnibus agreement and natural gas agreements with Atlas America are
material to our business, financial condition and results of operations.
Although Atlas America is a subsidiary of Resource America, Resource America has
not guaranteed or otherwise assumed responsibility for any of these obligations.
A decline in natural gas prices could adversely affect our revenues.
Our gathering fees are generally equal to a percentage of either the
gross or weighted average sales price of the natural gas we transport, although
in some cases we receive a flat fee per mcf of gas transported. Our income
therefore depends upon the prices at which the natural gas we transport is sold.
Historically, the price of natural gas has been volatile; as a result, our
income may vary widely from period to period.
19
Gathering system operations are subject to operational hazards and unforeseen
interruptions.
The operations of our gathering systems are subject to hazards and
unforeseen interruptions, including natural disasters, adverse weather,
accidents or other events beyond our control. A casualty occurrence might result
in injury and extensive property or environmental damage. Although we maintain
customary insurance coverage for gathering systems of similar capacity, we can
offer no assurance that this coverage will be sufficient for any casualty loss
we may incur.
Risks Inherent in an Investment in Us
You will have very limited voting rights and ability to control management,
which may diminish the price at which the common units will trade.
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 our general partner or its managing board on an annual or other
continuing basis. The managing board of our general partner is chosen by the
members of our general partner, all of which are subsidiaries of Atlas America.
In addition, our general partner may be removed only upon the vote of
the holders of at least 66 2/3% of the outstanding common units, excluding
common units held by our general partner and its affiliates, and a successor
general partner must be elected by a vote of the holders of at least a majority
of the outstanding common units, excluding common units held by our general
partner and its affiliates. Further, if any person or group, other than our
general partner or its affiliates, acquires beneficial ownership of 20% or more
of any class of units, that person or group will lose voting rights for all of
its units. These provisions have the practical effect of making removal of our
general partner difficult. Our partnership agreement requires that amendments to
our partnership agreement must first be proposed or consented to by our general
partner before they can be considered by unitholders. As a result, unitholders
will not be able to initiate amendments to our partnership agreement not
supported by our general partner. These provisions may diminish the price at
which the common units trade.
Our general partner currently owns 51% of the outstanding common and
subordinated units, considered as a single class. Upon completion of this
offering, our general partner will own 37% of the outstanding common and
subordinated units if the underwriters exercise the over-allotment option and
39% if they don't, and will likely continue to be our single largest unitholder.
As a result, it will be difficult for limited partners to approve or disapprove
matters without the concurrence of our general partner.
Our partnership agreement contains provisions that will discourage attempts to
change control of us, which may diminish the price at which the common units
trade and may prevent a change of control even if doing so would be beneficial
to the holders of common units.
Our partnership agreement contains provisions that may have the effect
of discouraging a person or group from attempting to remove our general partner
or otherwise seeking to change our management. As described in the immediately
preceding risk factor, any person or group, other than our general partner or
its affiliates, that acquires beneficial ownership of 20% or more of any class
of units will lose voting rights for all of its units. In addition, if our
general partner is removed under circumstances where cause does not exist and
our general partner does not consent to that removal, then:
20
o the obligations of Atlas America under the omnibus agreement to
connect wells to our gathering systems and to provide financing
and other assistance for the expansion of our gathering systems
will terminate;
o the obligations of Atlas America under the master natural gas
gathering agreement will terminate as to any future wells
drilled and completed by Atlas America;
o any existing arrearages in the payment of minimum quarterly
distributions will be extinguished;
o the subordination period will end, and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis; and
o our general partner will have the right to convert its general
partner interest and incentive distribution rights into common
units or receive cash in exchange for those interests.
These provisions may diminish the price at which the common units trade. These
provisions may also prevent a change of control of us even if a change of
control would be beneficial to the holders of the common units.
We may issue additional common units or securities senior to the common units
without your approval, which would dilute existing unitholders' interests.
Our general partner can cause us to issue additional common units
without the approval of unitholders subject, during the subordination period, to
the restrictions described under "Our Partnership Agreement-Issuance of
Additional Securities." For example, we may issue common units if the use of
proceeds from their issuance of does not reduce our surplus operating cash flow
per common unit, determined on a pro forma basis, giving effect to the issuance
of the additional units and the use of proceeds from their sale. However, the
timing of the actual use of the proceeds may result in a reduction of our actual
surplus operating cash flow per common unit after giving effect to the issuance
of additional common units, or our general partner's estimate of the impact of
the use of such proceeds on our operating surplus operating cash flow per common
unit may prove to be incorrect. In either circumstance, the issuance of
additional units may increase the risk that we will be unable to pay the minimum
quarterly distribution.
We may also issue securities senior to the common units without the
approval of unitholders after the subordination period terminates. The issuance
of additional common units or senior securities may dilute the value of the
interests of the existing unitholders in our net assets, dilute the interests of
unitholders in distributions by us, increase the risk that we will be unable to
pay the full minimum quarterly distribution and, if issued during the
subordination period, reduce the support provided by the subordination feature
of the subordinated units.
Cost reimbursements to our general partner could reduce our cash available for
distribution.
Before making any distribution on the common units, we must reimburse
our general partner and its affiliates for all expenses incurred by them on our
behalf during the related period. Our general partner determines the amount of
these expenses in its sole discretion. Our reimbursement to our general partner
in 2002 was $4.4 million. In addition, our general partner and its affiliates
may provide us services for which we will be charged reasonable fees as
determined by our general partner. The reimbursement of expenses and the payment
of fees could adversely affect our ability to make distributions.
Our general partner has conflicts of interest and limited fiduciary
responsibilities, which may permit our general partner to favor its and its
affiliates' interests to the detriment of the common unitholders.
21
Our general partner has a fiduciary duty to manage us in a manner
beneficial to us and our unitholders. However, because our general partner is a
corporate subsidiary of Atlas America, its officers and directors have fiduciary
duties to manage its business in a manner beneficial to Atlas America. As a
result, conflicts of interest may arise in the future between us and our
unitholders, on the one hand, and Atlas America and its affiliates, on the other
hand. We describe the situations which could give rise to conflicts of interest,
and our general partner's modified fiduciary responsibilities to us and our
common unitholders, below under "Conflicts of Interest and Fiduciary
Responsibilities."
If we were to lose the management expertise of Atlas America, we would not have
sufficient stand-alone resources to operate.
We do not directly employ any of the persons responsible for our
management. Rather, Atlas America personnel manage and operate our business.
Therefore, if we were to lose the management expertise of Atlas America, we
would not have sufficient stand-alone resources to operate. Further, neither we
nor our general partner has or intends to obtain key man life insurance for the
officers and employees of our general partner.
Tax Risks to Common Unitholders
For a discussion of the expected material federal income tax
consequences of owning and disposing of common units, see "Tax Considerations."
Recent tax proposals may affect the relative attractiveness of an investment in
our common units.
On January 7, 2003, President Bush proposed changes to the tax laws
that would, among other things, exempt dividends from taxation at the individual
level in certain circumstances. Since distributions with respect to our units
are not dividends and are not taxed at the partnership level, they would not be
exempt from tax at the individual level under the Bush tax proposals. We are
unable to predict whether or in what form the proposal to exempt dividends from
taxation may be enacted. However, if the current proposals are enacted they may
adversely affect the attractiveness of an investment in our common units as
compared to other equity securities, which may adversely affect the price at
which common units may be sold.
The IRS could treat us as a corporation, which would substantially reduce the
cash available for distribution to unitholders.
The federal income 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. We have, however, received an
opinion of Ledgewood Law Firm, P.C., counsel to us and our general partner, that
we will be classified as a partnership for federal income tax purposes. Opinions
of counsel are based on specific factual assumptions and are not binding on the
IRS or any court.
If we were classified as a corporation for federal income tax purposes,
we would pay tax on our income at the corporate tax rate, which is currently
35%. Distributions would generally be taxed again to the unitholders as
corporate distributions, and no income, gains, losses or deductions would flow
through to unitholders. Because a tax would be imposed upon us as an entity, the
cash available for distribution to you would be substantially reduced, likely
causing a substantial reduction in the value of the common units.
22
We cannot assure you that the law will not be changed and cause us to
be treated as a corporation for federal income tax purposes or otherwise to be
subject 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
specified provisions of the partnership agreement will be subject to change,
including a decrease in distributions to reflect the impact of that law on us.
We may incur significant legal, accounting and related costs if the IRS
challenges our characterization as a limited partnership.
We have not requested a ruling from the IRS with respect to any matter
affecting us. The IRS may adopt positions that differ from the conclusions of
our counsel expressed in this prospectus or from the positions we take. It may
be necessary to resort to administrative or court proceedings to sustain
counsel's conclusions or the positions we take. A court may not concur with our
conclusions. Any contest with the IRS may materially and adversely impact the
market for the common units and the prices at which common units trade. In
addition, the costs of any contest with the IRS, principally legal, accounting
and related fees and expenses, will be borne directly or indirectly by our
unitholders and our general partner.
You may be required to pay taxes on income from us even if you do not receive
cash distributions.
You will be required to pay federal income taxes and, in certain cases,
state and local income taxes on your allocable share of our income, whether or
not you receive cash distributions from us. We cannot assure you that you will
receive cash distributions equal to your allocable share of our taxable income
or even equal to the tax liability to you resulting from that income. Further,
you may incur a tax liability in excess of the amount of cash received upon the
sale of your common units.
In prior taxable years, common unitholders received cash distributions
that exceeded the amount of taxable income allocated to the common unitholders.
This excess was partially the result of depreciation deductions, but was
primarily the result of special allocations to our general partner of taxable
income earned by our operating subsidiary of $2,778,000 for the 2000 taxable
year, $1,603,000 for the 2001 taxable year and $1,603,000 for the 2002 taxable
year which caused a corresponding reduction in the amount of taxable income
allocable to us. Upon future events specified in the partnership agreement of
our operating subsidiary, including liquidation, the special allocations of
taxable income previously made to our general partner of $5,984,000 will be
reversed by making special allocations of taxable income to us. This offering is
not a triggering event for reversal of the special allocation. To the extent
there is not sufficient income available to fully reverse the prior special
allocations to our general partner, our general partner will receive additional
distributions upon our liquidation. Consequently, it is possible that in future
years common unitholders will recognize taxable income in excess of liquidation
distributions. We cannot be certain that the IRS will not challenge these
allocations.
Tax gain or loss on disposition of common units could be different than
expected.
Upon the sale of common units, you will recognize gain or loss equal to
the difference between the amount realized and your adjusted tax basis in those
common units. Prior distributions in excess of the net taxable income you were
allocated for a common unit which decreased your tax basis in that common unit
will, in effect, become taxable income if you sell the common unit at a price
greater than your tax basis in that common unit, even if the price is less than
your original cost. A substantial portion of the amount realized, whether or not
representing gains, may be ordinary income. Furthermore, should the IRS
successfully contest our conventions, including our method of allocating income
and loss as between transferors and transferees, you could realize more gain on
the sale of common units than would be the case under those conventions without
the benefit of decreased income in prior years.
23
Investors, other than individuals who are U.S. residents, may have adverse tax
consequences from owning units.
Investment in common units by tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to them. For example,
virtually all of our income will be unrelated business taxable income and will
be taxable to organizations exempt from federal income tax, including IRAs and
other retirement plans. Very little of our income will be qualifying income to a
regulated investment company. Distributions to foreign persons will be reduced
by withholding taxes.
We registered as a tax shelter; this may increase the risk of an audit of us or
a unitholder.
We registered as a "tax shelter" with the Secretary of the Treasury.
The Secretary of the Treasury requires partnerships meeting specified
characteristics to register as "tax shelters" in response to the perception that
they claim to generate tax benefits that the IRS may believe to be unwarranted.
We cannot assure unitholders that as a result of our registration as a tax
shelter we will not be audited by the IRS or that tax adjustments will not be
made. The rights of a unitholder owning less than a 1% profit interest in us to
participate in the income tax audit process are very limited. 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. Each unitholder would bear the cost of any expenses
incurred in connection with an examination of his personal tax return.
We treat a purchaser of units as having the same tax benefits as the seller; 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
will take certain tax positions that may not conform with all aspects of
proposed and final Treasury regulations. For example, upon a transfer of units,
we treat a portion of the Section 743(b) adjustment to a common unitholder's tax
basis in our assets as amortizable over the same remaining life and by the same
method as the underlying assets, or nonamortizable if the underlying assets are
nonamortizable. A successful IRS challenge to those conventions, including our
method of amortizing Section 743(b) adjustments, 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.
You will likely be subject to state and local taxes as a result of an investment
in common units.
In addition to federal income taxes, you will likely be subject to
other taxes, including state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes imposed by the various jurisdictions in
which we do business or own property. You will likely be required to file state
and local income tax returns and pay state and local income taxes in some or all
of the various jurisdictions in which we do business or own property. Further,
you may be subject to penalties for failure to comply with those requirements.
We currently own assets and do business in Ohio, Pennsylvania and New York. Each
of these states currently imposes a personal income tax. It is your
responsibility to file all United States federal, state and local tax returns.
Our counsel has not rendered an opinion on the state or local tax consequences
of an investment in the common units.
24
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be
approximately $23.75 million, assuming a public offering price of $25.00 per
common unit and the underwriters do not exercise their over-allotment option,
and after deducting underwriting discounts and commissions of $1.5 million and
expenses of $350,000 incurred in connection with the offering. We intend to use
the net proceeds as follows:
o $ 6.5 million to repay amounts drawn under our line of credit for
capital improvements we completed within 365 days of the date
this offering closes;
o $4.0 million to purchase compressors we currently lease and new
compressors required by expansion of our gathering systems or to
replace leased compressors that we cannot purchase or which are
unsuitable for our current operations;
o $10.9 million to fund continuing expansion of our gathering
systems to service wells drilled by Atlas America or others
during the remainder of 2003 and 2004; and
o $439,000 as working capital.
25
MARKET PRICE RANGE AND CASH DISTRIBUTIONS ON COMMON UNITS
Our common units trade on the American Stock Exchange under the symbol
"APL." Approximately 3,300 record holders held our common units as of December
31, 2002. In connection with our initial public offering, we also issued
1,641,026 subordinated units, all of which are held by our general partner.
There is no established public trading market for the subordinated units.
The following table sets forth the range of high and low sales prices
of our common units and distributions on our common and subordinated units for
the periods indicated.
Distributions
Fiscal 2003 High Low declared
----------- --------- ------- -------------
First quarter.................................................... $ 28.96 $ 24.90 $ 0.56
Fiscal 2002
-----------
Fourth quarter................................................... $ 27.90 $ 21.80 $ 0.54
Third quarter.................................................... $ 26.95 $ 20.40 $ 0.54
Second quarter................................................... $ 29.10 $ 22.00 $ 0.54
First quarter.................................................... $ 29.60 $ 23.51 $ 0.52
Fiscal 2001
-----------
Fourth quarter................................................... $ 29.50 $ 19.25 $ 0.58
Third quarter.................................................... $ 31.95 $ 25.01 $ 0.60
Second quarter................................................... $ 53.95 $ 24.00 $ 0.67
First quarter.................................................... $ 28.00 $ 19.19 $ 0.65
26
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 2002 on an actual basis and as adjusted to give effect to the sale
in this offering of 950,000 common, at an assumed offering price of $25.00 per
common unit, and the application of net proceeds as described in "Use of
Proceeds."
As of December 31, 2002
---------------------------
Actual As adjusted
-------- -----------
(in thousands)
--------------
Cash and cash equivalents............................. $ 1,859 $17,695
======= =======
Long-term debt........................................ $ 6,500 -
Partner's capital (deficit)
Common unitholders................................ 19,164 41,020
Subordinated unitholder........................... 684 684
General partner................................... (161) 319 (1)
------ -------
Total partners' capital........................... 19,687 42,023
------ -------
Total capitalization.................................. $26,187 $42,023
======= =======
-----------------
(1) Under the terms of our partnership agreement and that of our operating
partnership, our general partner is required to make capital contributions
equal to its aggregate 2% general partner interest in us and our operating
partnership. We have not included this $479,800 contribution in our
calculation of net proceeds in "Use of Proceeds."
27
SELECTED FINANCIAL DATA
We derived the selected financial data set forth below for of the three
years ended December 31, 2002, 2001 and 2000 from our consolidated financial
statements for those periods, which have been audited by Grant Thornton LLP,
independent accountants. You should read the selected financial data in this
table together with, and such financial data is qualified by reference to, our
consolidated financial statements, the notes to our consolidated financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this prospectus.
Inception
For the years ended December 31, through
------------------------------------ December 31,
2002 2001 2000
------------ ------------ ------------
(in thousands, except per unit data)
Income statement data:
Revenues....................................................... $ 10,667 $ 13,129 $ 9,466
========== ========== ============
Total transportation and compression, general and
administrative expenses..................................... $ 3,544 $ 3,042 $ 1,813
========== ========== ============
Depreciation and amortization.................................. $ 1,476 $ 1,356 $ 1,020
========== ========== ============
Net income..................................................... $ 5,398 $ 8,556 $ 6,625
========== ========== ============
Net income per limited partner unit - basic and diluted........ $ 1.54 $ 2.30 $ 2.07
========== ========== ============
For the years ended Inception
December 31, through
--------------------- December 31,
2002 2001 2000
---------- ---------- ----------
(in thousands, except per unit data)
Balance sheet data:
Total assets................................................... $ 28,515 $ 26,002 $ 22,092
========== ==========
$ 6,500 $ 2,089 -
========== ========== ==========
Long-term debt.................................................
19,164 20,129 18,122
Common unitholders' capital....................................
Subordinated unitholder's capital.............................. 684 1,661 2,074
General partner's capital (deficit)............................ (161) (116) (89)
---------- ---------- ----------
Total partner's capital........................................ $ 19,687 $ 21,674 $ 20,107
========== ========== ==========
Distributions declared per common unit......................... $ 2.14 $ 2.50 $ 1.85
========== ========== ==========
28
SELECTED OPERATING DATA
The following table summarizes information concerning the volumes of
natural gas we transported during 2002, 2001 and 2000 as well as the average
transportation fees we received during each of those years.
For the years ended
December 31, Inception
---------------------- through
December 31,
2002 2001 2000
---------- ---------- -----------
Total volume of natural gas transported (in mcfs).............. 18,382,600 11,176,300 10,175,800
========== ========== ==========
Average daily volume of natural gas
transported (in mcfs)....................................... 50,363 46,918 42,669
========== ========== ==========
Average transportation rate per mcf............................ $ 0.58 $ 0.76 $ 0.65
========== ========== ==========
Available cash from operating surplus(1)....................... $7,385,300 $9,284,600 $5,123,100
========== ========== ==========
------------
(1) We define operating surplus under "Our Partnership Agreement--Cash
Distribution Policy--Distributions of Available Cash from Operating
Surplus." Available cash from operating surplus is not a measure of cash
flow as determined by generally accepted accounting principles. We have
included information concerning available cash from operating surplus
because it provides investors and management additional information as to
our ability to pay distributions to common unit holders and fixed charges
and is presented solely as a supplemental financial measure. Available cash
from operating surplus should not be considered as an alternative to, or
more meaningful than, net income or cash flow as determined in accordance
with generally accepted accounting principles or as an indicator of our
operating performance or liquidity. Available cash from operating surplus
is not necessarily comparable to a similarly titled measure of another
company. The table below shows how we calculated available cash from
operating surplus.
For the years ended Inception
December 31, through
---------------------------------- December 31,
2002 2001 2000
---------- ---------- -----------
(in thousands)
Net cash provided by operating activities.......................... $ 8,138 $ 10,268 $ 5,968
Capital expenditures less net borrowings........................... (820) (1,039) (17,965)
Capital contributions and net proceeds from offering............... - 45 17,384
Increase in other assets........................................... (61) (38) (105)
Reserves........................................................... 128 49 (159)
---------- ---------- -----------
Available cash from operating surplus.............................. $ 7,385 $ 9,285 $ 5,123
========== ========== ===========
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Our principal business objective is to generate income for distribution
to our unitholders from the transportation of natural gas through our gathering
systems. We completed an initial public offering of our common units in February
2000 and used the proceeds of that offering to acquire the gathering systems
formerly owned by Atlas America. The acquisition agreement provided that
operations of the gathering systems from and after January 28, 2000 would be for
our account. Accordingly, we deem January 28, 2000 to be the commencement of our
operations and we refer to the period from that date through December 31, 2000
as the year ended December 31, 2000.
In January 2001, we acquired the gas gathering system of Kingston Oil
Corporation, consisting of approximately 100 miles of pipeline located in
southeastern Ohio. The purchase price consisted of $1,250,000 of cash and 88,235
common units valued at $17.00 per unit. In March 2001, we acquired the gas
gathering system of American Refining and Exploration Company, consisting of
approximately 20 miles of pipeline located in Fayette County, Pennsylvania. The
purchase price consisted of $150,000 of cash and 32,924 common units valued at
$22.78 per unit. These acquisitions were accounted for under the purchase method
of accounting and, accordingly, we allocated the purchase prices to the assets
acquired based on their fair values at the dates of acquisition. In addition to
these acquisitions, we added approximately 80, 180 and 100 miles of pipeline to
our systems during fiscal years 2002, 2001and 2000, respectively.
On January 18, 2002, we entered into an agreement to acquire
substantially all of the equity interests in Triton Coal Company from New Vulcan
Coal Holdings, L.L.C. and Vulcan Intermediary, L.L.C. On July 31, 2002, we
terminated the agreement. We incurred approximately $1,456,000 in costs in
connection with the terminated Triton transaction through December 31, 2002.
Pursuant to the terms of the acquisition agreement, we have requested
reimbursement from the Vulcan entities of $1,187,500 of the transaction costs.
We have expensed transaction costs of $268,500, the difference between costs
incurred and those reimbursable by the Vulcan entities. As of December 31, 2002,
Vulcan has reimbursed us $687,500 of these costs. Because Atlas America advanced
funds to us in order to pay our transaction costs, we have remitted amounts
reimbursed thus far to Atlas America. The advances, net of the reimbursements,
are included in "accounts payable-affiliates" at December 31, 2002. We include
our remaining reimbursable costs of $500,000 on our consolidated balance sheet
as accounts receivable; we expect to collect this amount over the first two
quarters of fiscal 2003.
Results of Operations
In the years ended December 31, 2002, 2001 and 2000, our principal
revenues came from the operation of our pipeline gathering systems which
transport and compress natural gas. Two variables which affect our
transportation revenues are:
o the volumes of natural gas transported by us which, in turn,
depend upon the number of wells connected to our gathering
system, the amount of natural gas they produce, and the demand
for that natural gas and
o the transportation fees paid to us which, in turn, depend upon
the price of the natural gas we transport, which itself is a
function of the relevant supply and demand in the mid-Atlantic
and northeastern areas of the United States.
30
We set forth the average volumes we transported, our average
transportation rates per mcf and revenues received by us for the periods
indicated in the following table:
For the years ended
December 31, Inception
----------------------------- through
December 31,
2002 2001 2000
------------ ------------ ------------
Average daily throughput volumes, in mcf....................... 50,363 46,918 42,669
============ ============= =============
Average transportation rate per mcf............................ $ 0.58 $ 0.76 $ 0.65
============ ============= =============
Total transportation and compression revenues.................. $ 10,660,300 $ 13,094,700 $ 9,441,000
============ ============= =============
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Our transportation revenues decreased to $10,660,300 in the
year ended December 31, 2002 from $13,094,700 in the year ended December 31,
2001. This decrease of $2,434,400 (19%) resulted from a decrease in the average
transportation rate paid to us ($3,163,700), partially offset by an increase in
the volumes of natural gas we transported ($729,300).
Our average daily throughput volumes were 50,363 mcfs in the year ended
December 31, 2002 as compared to 46,918 mcfs in the year ended December 31,
2001, an increase of 3,445 mcfs (7%). The increase in the average daily
throughput volume resulted principally from volumes associated with new wells
added to our pipeline systems; we turned on-line 214 and 234 wells in the years
ended December 31, 2002 and 2001, respectively. These increases were partially
offset by the natural decline in production volumes inherent in the life of a
well.
Our transportation rates are primarily at fixed percentages of the
sales price of the natural gas we transport. Our average transportation rate was
$0.58 per mcf in the year ended December 31, 2002 as compared to $0.76 per mcf
in the year ended December 31, 2001, a decrease of $0.18 per mcf (24%). The
decrease in our average transportation rate resulted from the decrease in the
average natural gas price received by producers for gas transported through our
pipeline system.
Costs and Expenses. Our transportation and compression expenses
increased to $2,061,600 in the year ended December 31, 2002 as compared to
$1,929,200 in the year ended December 31, 2001, an increase of $132,400 (7%),
principally due to the increased volumes of natural gas we transported in 2002.
Our average cost per mcf of transportation and compression was $0.11 in both the
years ended December 31, 2002 and 2001. The majority of our compressors are
under short term leases which will be expiring over the next twelve months.
Our general and administrative expenses increased to $1,481,900 in the
year ended December 31, 2002 as compared to $1,112,800 in the year ended
December 31, 2001, an increase of $369,100 (33%). This increase primarily
resulted from professional fees of $268,500 incurred in connection with the
terminated Triton transaction (see Note 8 to our Consolidated Financial
Statements) and our cost of insurance ($92,000) reflecting increased operating
activities and assets, as well as significant increases in insurance rates in
general.
Our depreciation and amortization expense increased to $1,475,600 in
the year ended December 31, 2002 as compared to $1,356,100 in the year ended
December 31, 2001, an increase of $119,500 (9%). This increase resulted from the
increased asset base associated with pipeline extensions and acquisitions
partially offset by a reduction in goodwill amortization as compared to the
previous period due to the adoption of Statement of Financial Accounting
Standards No. 142, or SFAS 142, on January 1, 2002.
31
Our interest expense increased to $249,800 in the year ended December
31, 2002 as compared to $175,600 in the year ended December 31, 2001. This
increase of $74,200 (42%) resulted primarily from the write-off of deferred
finance fees of $51,000 relating to our former credit facility with PNC Bank,
which we paid off upon obtaining our current credit facility with Wachovia Bank.
In addition, we had an increase in the amount of funds borrowed due to an
increase in pipeline extensions. These increases were partially offset by lower
borrowing rates.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
We commenced operations as of January 28, 2000, when the pipeline
operations owned by Atlas America began to be operated for our account. Because
our initial year of operations was not a full 12 months, the year ended December
31, 2001 may not be entirely comparable to the year ended December 31, 2000.
Revenues. Our transportation revenue increased to $13,094,700 in the
year ended December 31, 2001 from $9,441,000 in the year ended December 31,
2000. The increase of $3,653,700 (39%) resulted from an increase in the volumes
of natural gas we transported ($2,017,300) and an increase in the average
transportation fees paid to us ($1,636,400).
Our average daily throughput volumes were 46,918 mcf in the year ended
December 31, 2001 as compared to 42,669 mcf in the year ended December 31, 2000,
an increase of 4,249 mcf (10%). The increase in the average daily throughput
volume resulted principally from volumes associated with pipelines acquired
during the first quarter of 2001 and new wells added to our pipeline system; 196
wells were turned on-line in the year ended December 31, 2001. These increases
were partially offset by the natural decline in production volumes inherent in
the life of a well.
Our average transportation rate was $0.76 per mcf in the year ended
December 31, 2001 as compared to $0.65 per mcf in the year ended December 31,
2000, an increase of $0.11 per mcf (17%). The increase in our average
transportation rate resulted from the increase in the average natural gas price
received by producers for gas transported through our pipeline system.
Transportation rates had increased significantly during the year, but had fallen
back to an average of $0.50 per mcf for the month ended December 31, 2001.
Costs and Expenses. Our transportation and compression expenses
increased to $1,929,200 in the year ended December 31, 2001 as compared to
$1,223,800 in the year ended December 31, 2000, an increase of $705,400 (58%).
Our average cost per mcf of transportation and compression was $0.11 in the year
ended December 31, 2001 as compared to $0.08 in the year ended December 3, 2000,
an increase of $0.03 (38%). This increase primarily resulted from an increase in
compressor expenses, including lease payments, in the year ended December 31,
2001 as compared to the prior year, due to upgrades and additions, and increased
costs approximating $253,600 associated with operating pipelines acquired in the
first quarter of 2001.
Our general and administrative expenses increased to $1,112,800 in the
year ended December 31, 2001 as compared to $589,400 in the year ended December
31, 2000, an increase of $523,400 (89%). This increase primarily resulted from
an increase in allocated compensation and benefits ($182,000), legal and
professional fees ($200,000) due to the increased level of activity associated
with acquisitions and an increase in our insurance ($88,600), reflecting an
increase in our operating activities and assets and in insurance rates.
Our depreciation and amortization expense increased to $1,356,100 in
the year ended December 31, 2001 as compared to $1,019,600 in the year ended
December 31, 2000, an increase of $336,500 (33%). This increase resulted from
the increased depreciation associated with pipeline extensions and acquisitions.
32
Our interest expense increased to $175,600 in the year ended December
31, 2001 as compared to $8,800 in the year ended December 31, 2000. This
increase of $166,800 resulted from borrowings on our credit facility in January
and March of 2001 to fund two acquisitions and an additional draw in June 2001
to fund capital expenditures associated with pipeline extensions.
Liquidity and Capital Resources
Our primary cash requirements, in addition to normal operating
expenses, are for debt service, maintaining capital expenditures, expansion
capital expenditures and quarterly distributions to our unitholders and general
partner. In addition to cash generated from operations, we have the ability to
meet our cash requirements, other than distributions to our unitholders and
general partner, through borrowings under our credit facility. In general, we
expect to fund:
o cash distributions and sustaining capital expenditures through
existing cash and cash flows from operating activities;
o expansion capital expenditures and working capital deficits
through the retention of cash and additional borrowings;
o interest payments through cash flows from operating activities;
and
o debt principal payments through additional borrowings as they
become due or by the issuance of additional common units.
At December 31, 2002, we had $1.0 million of remaining borrowing
capacity under our credit facility. We recently received a commitment to
increase the borrowing capacity to $15.0 million.
The following table summarizes our financial condition and liquidity at
the dates indicated:
December 31,
------------------------------------
2002 2001 2000
--------- -------- --------
Current ratio.................................................. 1.0x 1.6x 1.9x
Working capital (in thousands)................................. $ 57 $ 1,359 $ 1,845
Ratio of long-term debt to total partners' capital............. .33x .10x N/A
Net cash provided by operations of $8,138,000 was derived principally
from $6,963,600 of income from operations before depreciation and amortization.
This decrease of $2,130,200 in cash provided by operations from 2001 resulted
primarily from a decrease of $2,434,400 in transportation fees earned by us as a
result of lower gas prices received by producers for gas transported through our
pipeline system. The change in the decrease in "accounts receivable-affiliates"
in the current year of $559,000 resulted primarily from the advance by Atlas
America for expenses we incurred in connection with the terminated Triton
acquisition.
Net cash used in investing activities was $5,230,600 for the year ended
December 31, 2002, an increase of $2,102,600 from $3,128,000 in the year ended
December 31, 2001. Net cash used in investing activities during the year ended
December 31, 2001 consisted of the acquisition of two small pipelines from third
parties ($1,400,000) and capital expenditures associated with gathering system
extensions and compressor upgrades to our existing pipeline systems
($1,728,000). In the year ended December 31, 2002, we used $165,000 for the
acquisition of one small gathering system and incurred capital expenditures of
$5,065,600 for gathering system extensions and compressor upgrades to
accommodate new wells drilled by Atlas America and its affiliates.
33
Net cash used in financing activities was $3,211,000 for the year ended
December 31, 2002, a decrease of $3,810,500 from cash used in financing
activities of $7,021,500 in the year ended December 31, 2001. Distributions paid
to partners in the year ended December 31, 2002 decreased $1,557,200 as compared
to the year ended December 31, 2001 as a result of a decrease in net income. Net
borrowings during the year increased $2,322,000 to $4,411,000 in the year ended
December 31, 2002 due to an increase in pipeline extensions and compressor
upgrades.
Partnership Distributions
Our partnership agreement requires that we distribute 100% of available
cash to our partners within 45 days following the end of each calendar quarter
in accordance with their respective percentage interests. Available cash
consists generally of all of our cash receipts, less cash disbursements and net
additions to reserves, including any reserves required under debt instruments
for future principal and interest payments.
Our general partner is granted discretion by our partnership agreement
to establish, maintain and adjust reserves for future operating expenses, debt
service, maintenance capital expenditures, rate refunds and distributions for
the next four quarters. These reserves are not restricted by magnitude, but only
by type of future cash requirements with which they can be associated. When our
general partner determines our quarterly distributions, it considers current and
expected reserve needs along with current and expected cash flows to identify
the appropriate sustainable distribution level.
Available cash is initially distributed 98% to our limited partners and
2% to our general partner. These distribution percentages are modified to
provide for incentive distributions to be paid to our general partner if
quarterly distributions to unitholders exceed certain specified targets.
Incentive distributions are generally defined as all cash distributions
paid to our general partner that are in excess of 2% of the aggregate amount of
cash being distributed. Our general partner's incentive distribution for the
distributions that we declared for the year ended December 31, 2002 was
$313,900.
Capital Expenditures
Our property and equipment were approximately 83% and 77% of our total
consolidated assets at December 31, 2002 and 2001, respectively. Capital
expenditures, other than the acquisitions of gathering systems, were $5.1
million and $1.7 million for the years ended December 31, 2002 and 2001,
respectively. These capital expenditures principally consisted of costs relating
to expansion of our existing gathering systems to accommodate new wells drilled
in our service area and compressor upgrades. During 2002, we connected 214 wells
to our gathering system. As of December 31, 2002, we were committed to expend
approximately $1.3 million for pipeline extensions. Our capital expenditures
could increase materially if the number of wells connected to our gathering
systems in fiscal 2003 increases significantly.
Inflation and Changes in Prices
Inflation affects the operating expenses of our gathering systems.
Increases in those expenses are not necessarily offset by increases in
transportation fees that the gathering operations are able to charge. We have
not been materially affected by inflation because we were formed relatively
recently and have only a limited period of operations. While we anticipate that
inflation will affect our future operating costs, we cannot predict the timing
or amounts of any such effects. In addition, the value of the gathering systems
has been and will continue to be affected by changes in natural gas prices.
Natural gas prices are subject to fluctuations which we are unable to control or
accurately predict.
34
Environmental Regulation
A continuing trend to greater environmental and safety awareness and
increasing environmental regulation has generally resulted in higher operating
costs for the oil and gas industry. We monitor environmental and safety laws and
we believe we comply with applicable standards. To date, compliance with
environmental laws and regulations has not had a material impact on our capital
expenditures, earnings or competitive position. We cannot assure you that
compliance with environmental laws and regulations will not, in the future,
materially adversely affect our operations through increased costs of doing
business or restrictions on the manner in which we conduct our operations.
Contractual Obligations and Commercial Commitments
The following tables set forth our obligations and commitments as of
December 31, 2002:
Payments due by period
(in thousands)
------------------------------------------------------------------
Contractual cash obligations: Less than 1 - 3 4 - 5 After 5
Total 1 year Years Years years
-------------- -------------- --------------- ------------ -------------
Long-term debt........................... $ 6,500 $ - $ 6,500 - -
Capital lease obligations................ - - - - -
Operating leases......................... 127 127 - - -
Unconditional purchase obligations....... - - - - -
Other long-term obligations.............. - - - - -
----------- ----------- ----------- --------- ---------
Total contractual cash obligations....... $ 6,627 $ 127 $ 6,500 - -
=========== ========== =========== ========= =========
Amount of commitment expiration per period
(in thousands)
------------------------------------------------------------------
Other commercial commitments: Less than 1 - 3 4 - 5 After 5
Total 1 year Years Years years
-------------- -------------- --------------- ------------ -------------
Lines of credit........................ $ 1,000 - $ 1,000 - -
Standby letter of credit............... - - - - -
Guarantees............................. - - - - -
Standby replacement commitments........ - - - - -
Other commercial commitments........... - - - - -
----------- ---------- ------------ --------- ---------
Total commercial commitments........... $ 1,000 - $ 1,000 - -
=========== ========== ============ ========= =========
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of actual revenues and
expenses during the reporting period. Although we believe our estimates are
reasonable, actual results could differ from those estimates. We summarize our
significant accounting policies in Note 2 to our Consolidated Financial
Statements included in this prospectus. The critical accounting policies that we
have identified are discussed below.
35
Revenue and Expenses
We routinely make accruals for both revenues and expenses due to the
timing of receiving information from third parties and reconciling our records
with those of third parties. We have determined these estimates using available
market data and valuation methodologies. We believe our estimates for these
items are reasonable, but we cannot assure you that actual amounts will not vary
from estimated amounts.
Depreciation and Amortization
We calculate our depreciation based on the estimated useful lives and
salvage values of our assets. However, factors such as usage, equipment failure,
competition, regulation or environmental matters could cause us to change our
estimates, thus impacting the future calculation of depreciation and
amortization.
Impairment of Assets
Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." In accordance with SFAS No. 144,
whenever events or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable, we review our long-lived assets for
impairment and recognize an impairment loss if estimated future cash flows
associated with an asset or group of assets are less than the asset carrying
amount.
Our gathering systems are subject to numerous factors which could
affect future cash flows as described in "Risk Factors." We continuously monitor
these factors and pursue alternative strategies to maintain or enhance cash
flows associated with these assets; however, we cannot assure you that we can
mitigate the effects, if any, on future cash flows related to any changes in
these factors.
Goodwill
At December 31, 2002, we had $2.3 million of goodwill, all of which
relates to our acquisition of pipeline assets. We test our goodwill for
impairment each year. Our test during the current year resulted in no
impairment. We will continue to evaluate our goodwill at least annually and will
reflect the impairment of goodwill, if any, in operating income in the income
statement in the period in which the impairment is indicated.
Recently Issued Financial Accounting Standards
Recently the Financial Accounting Standards Boards issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," and SFAS No. 144. SFAS 143
establishes requirements for accounting for removal costs associated with asset
retirements and SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 143 is effective for fiscal
years beginning after September 15, 2002, with earlier adoption encouraged, and
SFAS 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. We are currently assessing the impact
of the adoption SFAS 143 on our results of operations and financial position.
The adoption of SFAS 144 had no impact on our operations or financial position.
36
In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was
issued. SFAS 145 rescinds the automatic treatment of gains or losses from
extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in APB No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
145 also requires sale-leaseback accounting for certain lease modifications that
have economic effects similar to a sale-leaseback transaction and makes various
technical corrections to existing pronouncements. SFAS 145 is effective for all
financial statements issued by us after January 1, 2003. We do not expect the
adoption of SFAS 145 to have a material effect on our consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 addresses significant
issues relating to the recognition, measurement, and reporting of costs
associated with exit and disposal activities, including restructuring
activities, and nullifies the guidance in Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of this statement are effective for exit and
disposal activities that are initiated after December 31, 2002. We do not
expect SFAS 146 to have a material impact on our results of operations or
financial position.
37
BUSINESS
General
We are a Delaware limited partnership with common units traded on the
American Stock Exchange under the symbol "APL." We own and operate natural gas
pipeline gathering systems in eastern Ohio, western New York and western
Pennsylvania and are one of the largest gathering system operators in the
Appalachian Basin. As of December 31, 2002, our gathering systems, in the
aggregate, consisted of over 1,380 miles of intrastate pipelines, including
approximately 80 miles of intrastate pipelines we constructed or acquired during
the year then ended. Our gathering systems served approximately 4,200 wells at
December 31, 2002, with an average daily throughput for the year then ended of
50.4 mmcf of natural gas. Our gathering systems provide a means through which
well owners and operators can transport the natural gas produced by their wells
to public utility pipelines for delivery to customers. To a significantly lesser
extent, our gathering systems transport natural gas directly to customers.
During the year ended December 31, 2002, our gathering systems transported 18.4
billion cubic feet, or bcf, of natural gas, an increase of 7% and 27% from the
years ended December 31, 2001 and 2000, respectively. We connected 214 wells in
the year ended December 31, 2002 and 559 wells since we commenced operations in
January 2000. In addition, we have added 433 wells through acquisitions of
pipeline.
Our gathering systems currently connect with public utility pipelines
operated by Peoples Natural Gas Company, National Fuel Gas Supply, Tennessee Gas
Pipeline Company, National Fuel Gas Distribution Company, East Ohio Gas Company,
Columbia of Ohio, Consolidated Natural Gas Co., Texas Eastern Pipeline, Columbia
Gas Transmission Corp. and Equitable Utilities. Public utility pipelines charge
transportation fees to the person having title to the natural gas being
transported, typically the well owner, an intermediate purchaser such as a
natural gas distribution company, or a final purchaser. We do not have title to
the natural gas gathered and delivered by us and, accordingly, do not pay
transportation fees charged by public utility pipelines. We do not engage in
storage or gas marketing programs, nor do we engage in the purchase and resale
for our own account of natural gas transported through our gathering systems. We
do not transport any oil produced by wells connected to our gathering systems.
During the years ended December 31, 2002, 2001 and 2000, we had one
business segment, the transportation segment. We derive our revenues primarily
from the transportation of natural gas. During the year ended December 31, 2002,
substantially all of our revenues were generated by transporting natural gas
produced by Atlas America, a wholly-owned subsidiary of Resource America, Inc.,
the indirect parent of our general partner, Atlas Pipeline Partners GP, LLC.
Under most of our transportation agreements, the gathering fees we receive are
equal to a percentage, generally 16%, of the gross or weighted average sales
price of the natural gas we transport subject, in certain cases, to minimum
prices of $0.35 or $0.40 per mcf. Our business therefore depends in large part
upon the prices at which the natural gas we transport is sold. Due to the
volatility of natural gas prices, our gross revenues can vary materially from
period to period.
The Appalachian Basin
The Appalachian Basin, in which our gas gathering system is located,
includes the states of Kentucky, Maryland, New York, Ohio, Pennsylvania,
Virginia, West Virginia and Tennessee. It is the most mature oil and gas
producing region in the United States, having established the first oil
production in 1859. In addition, the Basin is strategically located near the
energy consuming regions of the mid-Atlantic and northeastern United States
which has historically resulted in Appalachian producers selling their natural
gas at a premium to the benchmark price for natural gas on the New York
Mercantile exchange.
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According to the Energy Information Administration, a branch of the
U.S. Department of Energy, in 2001 there were 22.2 trillion cubic feet, or tcf,
of natural gas consumed in the United States which represented approximately
22.9% of the total energy used. Additionally, there were approximately 137,000
gas wells in the Appalachian Basin which represented approximately 37.3% of the
total number of gas wells in the United States. Of those wells, approximately
4,200 are currently connected and delivering gas into our gathering system.
The Appalachian Basin accounted for approximately 3.4% of total 2001
domestic natural gas production, or 678 bcf. Furthermore, according to the
Natural Gas Annual 2001, an annual report published by the Energy Information
Administration, Office of Oil and Gas, the Appalachian Basin holds 9.35 tcf of
economically recoverable reserves representing approximately 5.1% of total
domestic reserves as of December 31, 2001.
The 2003 forecast issue of World Oil magazine predicted that
approximately 4,600 gas wells would be drilled in the Appalachian Basin during
2003, representing approximately 15% of the total number of wells to be drilled
in the United States, and that the average depth of those 4,600 wells would be
approximately 3,100 feet, compared to an estimated average depth of 5,100 feet
for nationwide drilling efforts in 2003. The American Petroleum Institute has
reported that in recent years the drilling success rate in the Appalachian basin
has exceeded 90%. Success rates for Atlas America, an operator of more than
3,800 of the 4,200 wells connected to our system, has averaged in excess of 95%
over the past 15 years.
Business Strategy and Competitive Strengths
Our goal is to increase the distributions to our unit holders by
increasing the amount of natural gas transported by our gathering systems. We
intend to accomplish this goal by:
Expanding our existing asset base through construction of extensions
necessary to service additional wells drilled by Atlas America and others. Atlas
America develops natural gas wells for general and limited partnerships
sponsored by it. Atlas America expects that it will continue to sponsor general
and limited partnerships to develop both its existing properties and properties
it may acquire in the future. We will seek to expand the number of wells
connected to our gathering systems by adding wells drilled and operated by Atlas
America and constructing the gathering systems necessary to serve these wells.
We transport gas from more than 400 wells that are operated by companies other
than Atlas America, which represents less than 5% of our total system
throughput. While Atlas America is the largest operator, in terms of wells
operated and mineral leases held, in the area we serve, we continue to seek
additional gas transportation volumes from other operators.
Expanding our existing asset base through accretive acquisitions of
gathering systems from other parties. The ownership of gathering systems in the
region in which we operate is fragmented, with gathering systems being operated
by numerous small energy companies on behalf of themselves or investors, as well
as by large entities such as public utility pipeline companies. We believe that
aggregating smaller gathering systems in the region could provide operational
economies of scale and thus we intend to pursue the acquisition of additional
gathering systems on an opportunistic basis.
Achieving economies of scale as a result of expanding our operations
through extensions and acquisitions. We expect that as we expand our operations,
our general and administrative costs will not increase proportionately, thereby
resulting in an economy of scale and a greater portion of our revenue being
distributable to our unit holders.
39
Maintaining cost efficient operations and expansion of the system. We
are constantly monitoring the condition of the gathering system and related
facilities and effecting upgrades and repairs to maintain the system's integrity
and capacity to transport gas at the least cost possible. In addition, we are
diligent that any expansion of our system adheres to the highest design and
construction standards suitable for the specific application such that the
system can continue to meet our expectations of a greater than 50 year life.
Continuing to strengthen our balance sheet by financing our growth with
a combination of long-term debt and equity to provide financial flexibility to
fund future opportunities. In order to have the financial strength to take
advantage of growth opportunities, we intend to maintain a strong balance sheet
emphasizing a conservative balance of debt and equity. On occasion we may have
to incur debt to complete acquisitions or significant capital projects on a
timely basis. In those circumstances we would seek to position our capital
structure to achieve our objective of maintaining financial flexibility.
We believe that our focus on the mid-stream gas industry, specifically
gas gathering systems, and the extensive prior experience of the management of
our general partner in the operation of gathering systems, our position as one
of largest operators of gathering systems in the Appalachian Basin and our
relationship with Atlas America provide us with a competitive advantage in
executing our growth strategy.
Pipeline Characteristics
We set forth in the following table the volumes of the natural gas we
transported, in mcfs, in the years ended December 31, 2002, 2001 and 2000.
For the years ended Inception through
December 31, December 31,
----------------------------- -------------------
2002 2001 2000
---- ---- ----
New York systems............................................... 408,800 93,600 570,500
Ohio systems........................................................ 5,396,900 5,378,200 3,902,200
Pennsylvania systems................................................ 12,492,100 11,176,300 10,175,800
------------ ------------- --------------
18,382,600 17,125,000 14,486,800
============ ============= ==============
Of the approximately 4,200 wells currently connected to our gathering
systems, approximately 3,800 are owned by Atlas America or by investment
partnerships managed or operated by Atlas America, with the remainder being
owned or managed by third parties. We have agreements with Atlas America and its
affiliates relating to the connection of future wells owned or controlled by
them to our gathering systems and the transportation fees we will charge. We
describe these agreements under "-Agreements with Atlas America." These wells
are the principal producers of gas transported by our gathering systems and we
anticipate that wells controlled by Atlas America will continue in the future to
be the principal producers into our gathering systems. As of December 31, 2002,
Atlas America and its affiliates controlled leases on developed properties in
the operational area of our gathering systems totaling approximately 265,000
gross acres. In addition, Atlas America and its affiliates control leases on
approximately 223,000 undeveloped gross acres of land. During the year ended
December 31, 2002, Atlas America and its affiliates drilled and connected 195
wells to our gathering systems as compared to 196 wells during the year ended
December 31, 2001.
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The gathering systems are generally constructed with 2, 4, 6, 8 and 12
inch cathodically protected and wrapped steel pipe and are generally buried 36
inches below the ground. Pipelines constructed in this manner typically are
expected to last at least 50 years from the date of construction. For the years
ended December 31, 2002, 2001 and 2000, the cost of operating the gathering
systems, excluding depreciation, was approximately $2.1 million, $1.9 million
and $1.2 million, respectively. We do not believe that there are any significant
geographic limitations upon our ability to expand in the areas serviced by our
gathering systems.
Our revenues are determined primarily by the amount of natural gas
flowing through our gathering systems and the price received for this natural
gas. Our ability to increase the flow of natural gas through our gathering
systems and to offset the natural decline of the production already connected to
our gathering systems will be determined primarily by our ability to connect new
wells to our gathering systems and to acquire additional gathering assets.
Agreements with Atlas America
At the completion of our initial public offering, we entered into an
omnibus agreement and a master natural gas gathering agreement with Atlas
America and two of its affiliates, Resource Energy, Inc. and Viking Resources
Corporation. The purpose of these agreements is to maximize the use and
expansion of our gathering systems and the volume of natural gas they transport.
Since then, we have entered into additional gas gathering agreements with
subsidiaries of Atlas America. None of these agreements resulted from arm's
length negotiations and, accordingly, we cannot assure you that we could not
have obtained more favorable terms from independent third parties similarly
situated. However, since these agreements principally involve the imposition of
obligations on Atlas America and its affiliates, we do not believe that we could
obtain similar agreements from independent third parties.
Omnibus Agreement
Under the omnibus agreement, Atlas America and its affiliates agreed to
add wells to the gathering systems, provide consulting services with respect to
gathering system acquisitions, provide management services when we construct new
gathering systems or extend existing systems and, at our election, provide
construction financing for system extensions. The omnibus agreement also imposes
conditions upon our general partner's disposition of its general partner
interest in us. The omnibus agreement is a continuing obligation, having no
specified term or provisions regarding termination except for a provision
terminating the agreement if our general partner is removed as general partner
without cause.
Well Connections. Atlas America sponsors oil and gas drilling programs
in areas served by the gathering systems. Under the omnibus agreement, Atlas
America must construct up to 2,500 feet of small diameter (two inches or less)
sales or flow lines from the wellhead of any well it drills and operates to a
point of connection to our gathering systems. Where Atlas America has extended
sales and flow lines to within 1,000 feet of one of our gathering systems, we
must extend our system to connect to that well.
With respect to wells drilled that are more than 3,500 feet from our
gathering systems, we have the right, at our cost, to extend our gathering
systems. If we do not elect to extend our gathering systems, Atlas America may
connect the wells to an interstate or intrastate pipeline owned by third
parties, a local natural gas distribution company or an end user; however, we
will have the right to assume the cost of construction of the necessary lines,
which then become part of our gathering systems. We must exercise our rights
within 30 days of notice to us from Atlas America that it intends to drill on a
particular site that is not within 3,500 feet of our gathering systems. If we
elect to have the well connected to our gathering systems, we must complete
construction of one of our gathering systems to within 2,500 feet of the well
within 60 days after Atlas America has notified us that the well will be
completed as a producing natural gas well. If we elect to assume the cost of
constructing lines, Atlas America will be responsible for the construction, and
we must pay the cost of that construction within 30 days of Atlas America's
invoice.
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Consulting Services. The omnibus agreement requires Atlas America to
assist us in identifying existing gathering systems for possible acquisition and
to provide consulting services to us in evaluating and making a bid for these
systems. Any gathering system that Atlas America or its affiliates identify as a
potential acquisition must first be offered to us. We will have 30 days to
determine whether we want to acquire the identified system and advise Atlas
America of our intent. If we intend to acquire the system, we have an additional
60 days to complete the acquisition. If we do not complete the acquisition, or
advise Atlas America that we do not intend to acquire the system, then Atlas
America may do so.
Gathering System Construction. The omnibus agreement requires Atlas
America to provide us with construction management services if we determine to
expand one or more of our gathering systems. We must reimburse Atlas America for
its costs, including an allocable portion of employee salaries, in connection
with its construction management services.
Construction Financing. The omnibus agreement requires Atlas America to
provide us with stand-by financing of up to $1.5 million per year for the cost
of constructing new gathering systems or gathering system expansions until
February 2005. If we choose to use the stand-by commitment, the financing will
be provided through the purchase by Atlas America of our common units in the
amount of the construction costs as they are incurred. The purchase price of the
common units will be the average daily closing price for the common units on the
American Stock Exchange for the 20 consecutive trading days before the purchase.
Construction costs do not include maintenance expenses or capital improvements
following construction or costs of acquiring gathering systems. We are not
obligated to use the stand-by commitment and may seek financing from other
sources. We have not used the stand-by commitment to date.
Disposition of Interest in Our General Partner. Direct and indirect
wholly-owned subsidiaries of Atlas America act as the general partners,
operators or managers of the oil and gas investment partnerships sponsored by
Atlas America. Our general partner is a subsidiary of Atlas America. Under the
omnibus agreement, those subsidiaries, including our general partner, that
currently act as the general partners, operators or managers of partnerships
sponsored by Atlas America must also act as the general partners, operators or
managers for all new partnerships sponsored by Atlas America. Atlas America and
its affiliates may not divest their ownership of one entity without divesting
their ownership of the other entities to the same acquiror. For these purposes,
divestiture means a sale of all or substantially all of the assets of an entity,
the disposition of more than 50% of the capital stock or equity interest of an
entity, or a merger or consolidation that results in Atlas America and its
affiliates, on a combined basis, owning, directly or indirectly, less than 50%
of the entity's capital stock or equity interest. Atlas America and its
affiliates may transfer their interests to each other, or to their wholly or
majority-owned direct or indirect subsidiaries, or to a parent of any of them,
provided that their combined direct or indirect interest is not reduced to less
than 50%.
Natural Gas Gathering Agreements
Under the master natural gas gathering agreement, we receive a fee from
Atlas America for gathering natural gas, determined as follows:
42
o for natural gas from well interests allocable to Atlas America or
its subsidiaries (excluding general or limited partnerships
sponsored by it) that were connected to our gathering systems at
February 2, 2000, the greater of $0.40 per mcf or 16% of the
gross sales price of the natural gas transported;
o for natural gas from well interests allocable to general and
limited partnerships sponsored by Atlas America that are
connected to our gathering systems at any time, and well
interests allocable to independent third parties in wells
connected to our gathering systems before February 2, 2000, the
greater of $0.35 per mcf or 16% of the gross sales price of the
natural gas transported;
o for natural gas from well interests allocable to Atlas America
that were connected to our gathering systems after February 2,
2000, the greater of $0.35 per mcf or 16% of the gross sales
price of the natural gas transported; and
o for natural gas from well interests operated by Atlas America and
drilled after December 1, 1999 that are connected to a gathering
system that is not owned by us and for which we assume the cost
of constructing the connection to that gathering system, an
amount equal to the greater of $0.35 per mcf or 16% of the gross
sales price of the natural gas transported, less the gathering
fee charged by the other gathering system.
Atlas America receives gathering fees from contracts or other
arrangements with third party owners of well interests connected to our
gathering systems. However, Atlas America must pay gathering fees owed to us
from its own resources regardless of whether it receives payment under those
contracts or arrangements.
The master natural gas gathering agreement is a continuing obligation
and, accordingly, has no specified term or provisions regarding termination.
However, if our general partner is removed as our general partner without cause,
then no gathering fees will be due under the agreement with respect to new wells
drilled by Atlas America. The agreement provides that Atlas America, as the
shipper of natural gas, will indemnify us against claims relating to ownership
of the natural gas transported. For all other claims relating to natural gas we
transport, the party that has control and possession of the natural gas must
indemnify the other party with respect to losses arising in connection with or
related to the natural gas when it is in the first party's possession and
control.
In addition to the master natural gas gathering agreement, we have
three other gas gathering agreements with subsidiaries of Atlas America. Under
two of these agreements, relating to wells located in southeastern Ohio which
Atlas America acquired from Kingston Oil Corporation and wells located in
Fayette County, Pennsylvania which Atlas America acquired from American Refining
and Exploration Company, we receive a fee of $0.80 per mcf. Under the third
agreement, which covers wells owned by third-parties unrelated to Atlas America
or the investment partnerships it sponsors, we receive fees that range from
$0.20 to $0.29 per mcf and 10% to 16% of the weighted average sales price for
the natural gas we transport.
Credit Facility
In December 2002, we entered into a $7.5 million credit facility
administered by Wachovia Bank, National Association. In March 2003, Wachovia
Bank and KeyBank, National Association increased the facility to $15.0 million.
Borrowings under the facility are secured by a lien on and security interest in
all of our property and that of our subsidiaries. Up to $3.0 million of the
facility may be used for standby letters of credit. The revolving credit
facility has a term ending in December 2005 and bears interest at one of two
rates, elected at our option:
43
o the base rate plus the applicable margin; or
o the adjusted LIBOR plus the applicable margin.
The base rate for any day equals the higher of the federal funds rate
plus 1/2 of 1% or the Wachovia Bank prime rate. Adjusted LIBOR is LIBOR divided
by 1.00 minus the percentage prescribed by the Federal Reserve Board for
determining the reserve requirement for euro currency funding. The applicable
margin is as follows:
o where our leverage ratio, that is, the ratio of our debt to
EBITDA, as defined in the credit facility agreement, is less than
or equal to 1.5, the applicable margin is 0.00% for base rate
loans and 1.50% for LIBOR loans;
o where our leverage ratio is greater than 1.5 but less than or
equal to 2.5, the applicable margin is 0.25% for base rate loans
and 1.75% for LIBOR loans; and
o where our leverage ratio is greater than 2.5, the applicable
margin is 0.50% for base rate loans and 2.00% for LIBOR loans.
The credit facility requires us to maintain a specified net worth and
specified ratios of current assets to current liabilities and debt to EBITDA,
and requires us to maintain a specified interest coverage ratio. We used this
credit facility to pay off our previous revolving credit facility with PNC Bank.
Our principal purpose in obtaining the facility was to fund the
expansion of our existing gathering systems and the acquisitions of other gas
gathering systems. In the years ended December 31, 2002 and 2001, we used $4.4
million and $2.1 million of our credit facility to fund, in part, capital
expenditures for expansions of our existing gathering systems and the
acquisitions of gas gathering systems. At December 31, 2002, $6.5 million was
outstanding under our credit facility.
Competition
Our gathering systems do not encounter direct competition in their
respective service areas since Atlas America controls the majority of the
drillable acreage in each area. However, because we principally service wells
drilled by Atlas America we are affected by competitive factors affecting Atlas
America's ability to obtain properties and drill wells. Atlas America may
encounter competition in obtaining drilling sources from third-party providers.
Any competition it encounters could delay Atlas America in drilling wells for
its sponsored partnerships, and thus delay the connection of wells to our
gathering systems. These delays would reduce the volume of gas we otherwise
would have transported, thus reducing our potential transportation revenues.
As our omnibus agreement with Atlas America generally requires it to
connect wells it operates to our system, we do not expect any direct competition
in connecting wells drilled and operated by Atlas America in the future. In
addition, we occasionally connect wells operated by third parties. During 2002
we connected 19 such wells. We did not encounter, nor do we expect, significant
competition to connect such wells as they are generally in close proximity to
our gathering system and distant from others. In any case, revenue derived from
the gas transportation on behalf of third parties represents an insignificant
portion of our annual revenue.
During 2002 we did encounter competition in acquiring gas gathering
systems owned by third parties. In several instances we submitted bids in
auction situations and in direct negotiations for the acquisition of existing
gas gathering systems. In each case we were either outbid by others or were
unwilling to meet the sellers' expectations and, as a result, were unsuccessful
in acquiring other systems. In the future, we expect to encounter equal if not
greater competition for such acquisitions because as gas prices increase, the
economic attractiveness of owning such assets increases as well.
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Regulation
Federal Regulation. Under the Natural Gas Act, the Federal Energy
Regulatory Commission regulates various aspects of the operations of any
"natural gas company," including the transportation of natural gas, rates and
charges, construction of new facilities, extension or abandonment of services
and facilities, the acquisition and disposition of facilities, reporting
requirements, and similar matters. However, the Natural Gas Act definition of a
"natural gas company" requires that the company be engaged in the transportation
of natural gas in interstate commerce, or the sale in interstate commerce of
natural gas for resale. Since we believe that each of our individual gathering
systems performs primarily a gathering function, we believe that we are not
subject to regulation under the Natural Gas Act. If we were determined to be a
natural gas company, our operations would become regulated under the Natural Gas
Act. We believe the expenses associated with seeking certificates of authority
for construction, service and abandonment, establishing rates and a tariff for
our gas gathering activities, and meeting the detailed regulatory accounting and
reporting requirements would substantially increase our operating costs and
would adversely affect our profitability, thereby reducing our ability to make
distributions to unitholders.
State Regulation. Our gas operations are subject to regulation at the
state level. The Public Utility Commission of Ohio, the New York Public Service
Commission and the Pennsylvania Public Utilities Commission regulate the
transportation of natural gas in their respective states. In Ohio, a producer or
gatherer of natural gas may file an application seeking exemption from
regulation as a public utility. We have been granted an exemption by the Public
Utility Commission of Ohio for our Ohio facilities. The New York Public Service
Commission imposes traditional public utility regulation on the transportation
of natural gas by companies subject to its regulation. This regulation includes
rates, services and sitting authority for the construction of certain
facilities. Our gas gathering operations currently are not subject to regulation
by the New York Public Service Commission. Our operations in Pennsylvania
currently are not subject to the Pennsylvania Public Utility Commission's
regulatory authority since they do not provide service to the public generally
and, accordingly, do not constitute the operation of a public utility. In the
event the New York and Pennsylvania authorities seek to regulate our operations,
we believe that our operating costs could increase and our transportation fees
could be adversely affected, thereby reducing our net revenues and ability to
make distributions to unitholders.
Environmental and Safety Regulation
Under the Comprehensive Environmental Response, Compensation and
Liability Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, the Clean Air Act, the Clean Water Act and other federal and state
laws relating to the environment, owners of natural gas pipelines can be liable
for fines, penalties and clean-up costs with respect to pollution caused by the
pipelines. Moreover, the owners' liability can extend to pollution costs from
situations that occurred prior to their acquisition of the pipeline. Natural gas
pipelines are also subject to safety regulation under the Natural Gas Pipeline
Safety Act of 1968 and the Pipeline Safety Act of 1992 which, among other
things, dictate the type of pipeline, quality of pipeline, depth, methods of
welding and other construction-related standards. The state public utility
regulators discussed above have either adopted the federal standards or
promulgated their own safety requirements consistent with federal regulations.
Although we believe that our gathering systems comply in all material respects
with applicable environmental and safety regulations, risks of substantial costs
and liabilities are inherent in pipeline operations, and we cannot assure you
that we will not incur these costs and liabilities. Moreover, it is possible
that other developments, such as increasingly rigorous environmental laws,
regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from our operations, could result in substantial
costs and liabilities to us.
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We are also subject to the requirements of OSHA and comparable state
statutes. We believe that our operations comply in all material respects with
OSHA requirements, including general industry standards, record keeping, hazard
communication requirements and monitoring of occupational exposure and other
regulated substances.
We have not expended and do not anticipate that we will be required in
the near future to expend, amounts that are material in relation to our revenues
by reason of environmental and safety laws. However, we cannot predict
legislative or regulatory developments or the costs of compliance with those
developments. In general, however, we anticipate that new laws, regulations or
policies will increase our operating costs and impose additional capital
expenditure requirements on us.
Properties
As of December 31, 2002, our principal facilities include approximately
1,380 miles of 2-inch to 12-inch diameter pipeline and 55 compressors, of which
eight are leased from third parties. Substantially all of our gathering systems
are constructed within rights-of-way granted by property owners named in the
appropriate land records. In a few cases, property for gathering system purposes
was purchased in fee. All of our compressor stations are located on property
owned in fee or on property under long-term leases. Our general partner believes
that we have satisfactory title to all of our properties.
Our property or rights-of-way are subject to encumbrances, restrictions
and other imperfections, although these imperfections have not interfered, and
our general partner does not expect that they will materially interfere with the
conduct of our business. In many instances, lands over which rights-of-way have
been obtained are subject to prior liens which have not been subordinated to the
right-of-way grants. In a few instances, our rights-of-way are revocable at the
election of the land owners. In some cases, not all of the owners named in the
appropriate land records have joined in the right-of-way grants, but in
substantially all such cases signatures of the owners of majority interests have
been obtained. Substantially all permits have been obtained from public
authorities to cross over or under, or to lay facilities in or along, water
courses, county roads, municipal streets, and state highways, where necessary,
although in some instances these permits are revocable at the election of the
grantor. Substantially all permits have also been obtained from railroad
companies to cross over or under lands or rights-of-way, many of which are also
revocable at the grantor's election.
Certain of our rights to lay and maintain pipelines are derived from
recorded gas well leases, which wells are currently in production; however, the
leases are subject to termination if the wells cease to produce. In some of
these cases, the right to maintain existing pipelines continues in perpetuity,
even if the well associated with the lease ceases to be productive. In addition,
because many of these leases affect wells at the end of lines, these
rights-of-way will not be used for any other purpose once the related well
ceases to produce.
Quantitative And Qualitative Disclosures About Market Risk
All of our assets and liabilities are denominated in U.S. dollars, and
as a result, we do not have exposure to currency exchange risks.
We do not engage in any interest rate, foreign currency exchange rate
or commodity price-hedging transactions, and as a result, we do not have
exposure to derivatives risk.
46
Market risk inherent in our debt is the potential change arising from
increases or decreases in interest rates. Changes in interest rates usually do
not affect the fair value of variable rate debt, but may affect our future
earnings and cash flows. At December 31, 2002, we had a $7.5 million revolving
credit facility to fund the expansion of our existing gathering systems and the
acquisition of other gas gathering systems. We have a commitment to increase
this facility to $15.0 million. The carrying value of our debt was $6.5 million
at December 31, 2002. At our option, the facility bears interest at the lending
institution's prime rate plus 0 to 50 basis points, depending on our leverage
ratio, or the Euro rate, which is the average of specified LIBOR plus 150 or 200
basis points, depending upon our leverage ratio. At December 31, 2002, the
interest rate was 2.92%. At December 31, 2002 and 2001, respectively, a
hypothetical 10% change in the average interest rate applicable to this debt
would result in a change of approximately $19,000 and $9,000 in our annual net
income and would not affect the market value of this debt.
Litigation
We are not, nor are any of our gathering systems, subject to any
pending legal proceeding.
Partnership Information
We were formed in May 1999 as a Delaware limited partnership and, under
our partnership agreement, will be required to dissolve no later than December
31, 2098. We act as the limited partner of Atlas Pipeline Operating Partnership,
which owns the gathering systems through subsidiaries. We have no significant
assets other than our limited partnership interest in the operating partnership.
Our general partner is solely responsible for conducting our business
and managing our operations. As is commonly the case with publicly traded
limited partnerships, we do not directly employ any of the persons responsible
for our management or operation. Rather, Atlas America personnel manage the
gathering systems and operate our business. Our general partner also acts as the
general partner of the operating partnership. As a consequence, the affairs of
the operating partnership are controlled by our general partner and not by us.
However, our general partner may not consent to any act that would make it
impossible to carry on our ordinary business and may not, without the consent of
persons holding a majority of the common units and subordinated units, voting as
separate classes, dispose of all or substantially all of our assets or the
assets of the operating partnership.
Conflicts of interest that may arise between our general partner and us
are discussed in "Conflicts of Interest and Fiduciary Responsibilities." Our
management and that of our general partner is discussed in "Management."
47
MANAGEMENT
Our Management
Our general partner manages our activities. Unitholders do not directly
or indirectly participate in our management or operation or have actual or
apparent authority to enter into contracts on our behalf or to otherwise bind
us. Our general partner will be liable, as general partner, for all of our debts
to the extent not paid, except to the extent that indebtedness or other
obligations incurred by us are made specifically non-recourse to our general
partner. Whenever possible, our general partner intends to make any indebtedness
or other obligations non-recourse to it.
Three members of the managing board of our general partner who are
neither officers nor employees of our general partner nor directors, managing
board members, officers or employees of any affiliate of our general partner
(and have not been for the past five years) serve on the conflicts committee.
Messrs. Bagnell, Beyer and Levin currently serve as the conflicts committee. The
conflicts committee has the authority to review specific matters as to which the
managing board believes there may be a conflict of interest in order to
determine if the resolution of the conflict proposed by our general partner is
fair and reasonable to us. Any matters approved by the conflicts committee are
conclusively judged to be fair and reasonable to us, approved by all our
partners and not a breach by our general partner or its managing board of any
duties they may owe us or the unitholders. See "Conflicts of Interest and
Fiduciary Responsibilities--Fiduciary Duties." In addition, the members of the
conflicts committee also constitute an audit committee which reviews the
external financial reporting by our management and reviewed by our independent
public accountants and reviews procedures for internal auditing and the adequacy
of our internal accounting controls.
As is commonly the case with publicly traded limited partnerships, we
do not directly employ any of the persons responsible for our management or
operation. Rather, Atlas America personnel manage and operate our business.
Officers of our general partner may spend a substantial amount of time managing
the business and affairs of Atlas America and its affiliates and may face a
conflict regarding the allocation of their time between our business and affairs
and their other business interests.
Managing Board Members and Executive Officers of Our General Partner
The following table sets forth information with respect to the
executive officers and managing board members of our general partner. Executive
officers and managing board members are elected for one year terms.
Year
in which
Name Age Position with general partner service began
---- --- ----------------------------- -------------
Edward E. Cohen 64 Chairman of the Managing Board 1999
Jonathan Z. Cohen 32 Vice Chairman of the Managing Board 1999
Michael L. Staines 53 President, Chief Operating Officer, Secretary
and Managing Board Member 1999
Steven J. Kessler 60 Chief Financial Officer 2002
Tony C. Banks 48 Managing Board Member 1999
William R. Bagnell 40 Managing Board Member 1999
George C. Beyer, Jr. 64 Managing Board Member 1999
Murray S. Levin 60 Managing Board Member 2001
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Edward E. Cohen has been Chairman of the Board of Directors of Resource
America since 1990, Chief Executive Officer and a director of Resource America
since 1988 and President of Resource America since 2000. He has been Chairman of
the Board of Directors of Atlas America since 1998. He is Chairman of the Board
of Directors of Brandywine Construction & Management, Inc., a property
management company, and a director of TRM Corporation, a publicly traded
consumer services company. Mr. Cohen is the father of Jonathan Z. Cohen.
Jonathan Z. Cohen has been Chief Operating Officer and a director of
Resource America since 2002 and Executive Vice President since 2001. Before
that, Mr. Cohen had been a Senior Vice President since 1999. Mr. Cohen has been
Vice Chairman of Atlas America since 1998. Mr. Cohen has also served as Trustee
and Secretary of RAIT Investment Trust, a real estate investment trust, since
1997 and Chairman of the Board of Directors of The Richardson Company, a sales
consulting company, since 1999. Mr. Cohen is the son of Edward E. Cohen.
Michael L. Staines has been Senior Vice President of Resource America
since 1989 and served as a director from 1989 through 2000 and Secretary from
1989 through 1998. Since 1998, Mr. Staines has been Executive Vice President,
Secretary and a director of Atlas America. Mr. Staines is a member of the Ohio
Oil and Gas Association and the Independent Oil and Gas Association of New York.
Steven J. Kessler has been Senior Vice President and Chief Financial
Officer of Resource America since 1997. Before that he was Vice President,
Finance and Acquisitions, at Kravco Company, a national shopping center
developer and operator.
Tony C. Banks is a consultant to utilities, energy service companies
and energy technology firms. From 2000 through early 2002, Mr. Banks was
President of RAI Ventures, Inc. and Chairman of the Board of Optiron
Corporation, which was an energy technology subsidiary of Atlas America until
2002. In addition, Mr. Banks served as President of our general partner during
2000. He was Chief Executive Officer and President of Atlas America from 1998
through 2000. From 1995 to 1998, Mr. Banks was Vice President of various
subsidiaries of Atlas America.
William R. Bagnell has been Vice President-Energy for Planalytics,
Inc., an energy industry software company, since March 2000. Before that, he was
from 1998 the Director of Sales for Fisher Tank Company, a national manufacturer
of carbon and stainless steel bulk storage tanks. From 1992 through 1998, Mr.
Bagnell was a Manager of Business Development for Buckeye Pipeline Partners,
L.P., a publicly traded master limited partnership which is a transporter of
refined petroleum products.
George C. Beyer, Jr. has been Chief Executive Officer of Valley Forge
Financial Group, Inc., a financial planning company, since 1967, and is a
co-founder of Valley Forge Technologies Group, Inc. Mr. Beyer was also a
co-founder of IBS, Inc., an employee benefits consulting firm. Mr. Beyer serves
as a director of Commonwealth Bancorp and IBS, Valley Forge Financial Group,
Valley Forge Pension Management, Inc., Valley Forge Investment Consultants, Inc.
and Valley Forge Technologies Group, Inc.
Murray S. Levin is a senior litigation partner at Pepper Hamilton LLP.
Mr. Levin served as the first American president of the Association
Internationale des Jeunes Avocats (Young Lawyers International Association),
headquartered in Western Europe. He is a past president of the American Chapter
and a member of the board of directors of the Union Internationale des Avocats
(International Association of Lawyers), a Paris-based organization that is the
world's oldest international lawyers association.
49
Other Significant Employees
Nancy J. McGurk, 47, has been the Chief Accounting Officer of our
general partner since 1999. Ms. McGurk has been Vice President of Resource
America since 1992 and Treasurer and Chief Accounting Officer since 1989.
Reimbursement of Expenses of Our General Partner and its Affiliates
Our general partner does not receive any management fee or other
compensation for its services apart from its general partnership and incentive
distribution interests. We reimburse our general partner and its affiliates,
including Atlas America, for all expenses incurred on our behalf. These expenses
include the costs of employee, officer and managing board member compensation
and benefits properly allocable to us, and all other expenses necessary or
appropriate to the conduct of 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.
Our general partner allocates the costs of employee and officer compensation and
benefits based upon the amount of business time spent by those employees and
officers on our business. We reimbursed our general partner $4.4 million for
expenses incurred during 2002.
Compensation Committee Interlocks and Insider Participation
Neither we nor the managing board of our general partner has a
compensation committee. Compensation of the personnel of Atlas America and its
affiliates who provide us with services is set by Atlas America and such
affiliates. The independent members of the managing board of our general
partner, however, do review the allocation of the salaries of such personnel for
purposes of reimbursement. None of the independent managing board members is an
employee or former employee of ours or of our general partner. However, Mr.
Bagnell was, until September 1992, an employee of Resource America, the ultimate
parent of our general partner, and served from December 1998 until February 2003
as a trustee of its employee stock ownership plan and from September 1999 until
February 2003 as a trustee of its 401(k) plan. No executive officer of our
general partner is a director or executive officer of any entity in which an
independent managing board member is a director or executive officer.
Executive Compensation
We do not directly compensate the executive officers of our general
partner. Rather, Atlas America and its affiliates allocate the compensation of
the executive officers between activities on behalf of our general partner and
us and activities on behalf of Atlas America and its affiliates based upon an
estimate of the time spent by such persons on activities for us and for Atlas
America and its affiliates, and we reimburse our general partner for the
compensation allocated to us. The compensation allocation was $344,700 and
$397,500 for the years ended December 31, 2002 and 2001, respectively. The
following table sets forth the compensation allocation for our general partner's
President since we commenced operations. No other executive officer of our
general partner received aggregate salary and bonus from us in excess of
$100,000 during the periods indicated.
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Summary Compensation Table
All other
Name and principal position Year Salary compensation
--------------------------- ---- ----------- ------------
Michael L. Staines, President, Chief Operating Officer, Secretary and
Managing Board Member 2002 $162,250 $22,575
2001 167,895 23,505
2000 87,719 12,281
Compensation of Managing Board Members
Our general partner does not pay additional remuneration to officers or
employees of Resource America who also serve as managing board members. Each
independent managing board member receives an annual retainer of $6,000 together
with $1,000 for each board meeting attended, $1,000 for each committee meeting
attended where he is chairman of the committee and $500 for each committee
meeting attended where he is not chairman. In addition, our general partner
reimburses each independent board member for out-of-pocket expenses in
connection with attending meetings of the board or committees. We reimburse our
general partner for these expenses and indemnify our general partner's managing
board members for actions associated with being managing board members to the
extent permitted under Delaware law.
51
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of Interest
General
Conflicts of interest exist and may arise in the future as a result of
the relationships between our general partner and Atlas America and its
affiliates, on the one hand, and us and our limited partners, on the other hand.
The managing board members and officers of our general partner have fiduciary
duties to manage our general partner in a manner beneficial to Atlas America and
its affiliates as members. At the same time, our general partner has a fiduciary
duty to manage us in a manner beneficial to us and our unitholders.
Our partnership agreement contains provisions that allow our general
partner to take into account the interests of parties in addition to ours in
resolving conflicts of interest. In effect, these provisions limit our general
partner's fiduciary duty to the unitholders. The partnership agreement also
restricts the remedies available to unitholders for actions taken that might,
without those limitations, constitute breaches of fiduciary duty.
Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us or any partner, on the other, our general
partner has the responsibility to resolve that conflict. A conflicts committee
of our general partner's managing board will, at the request of our general
partner, review conflicts of interest. The conflicts committee will consist of
the independent managing board members, currently Messrs. Bagnell, Beyer and
Levin. Our general partner will not be in breach of its obligations under the
partnership agreement or its duties to us or our unitholders if the resolution
of the conflict is considered to be fair and reasonable to us. Any resolution is
considered to be fair and reasonable to us if that resolution is:
o approved by the conflicts committee, although no party is
obligated to seek approval and our general partner may adopt a
resolution or course of action that has not received approval;
o on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
o fair to us, taking into account the totality of the relationships
between the parties involved, including other transactions that
may be particularly favorable or advantageous to us.
In resolving a conflict, our general partner may, unless the resolution
is specifically provided for in the partnership agreement, consider:
o the relative interest of the parties involved in the conflict or
affected by the action;
o any customary or accepted industry practices or historical
dealings with a particular person or entity; and
o generally accepted accounting practices or principles and other
factors as it considers relevant, if applicable.
Conflicts of interest could arise in the situations described below,
among others:
52
Actions taken by our general partner may affect the amount of cash available for
distribution to unitholders or accelerate the conversion of subordinated units.
The amount of cash that is available for distribution to unitholders is
affected by decisions of our general partner regarding various matters,
including:
o amount and timing of asset purchases and sales;
o cash expenditures;
o borrowings;
o issuances of additional units; and
o the creation, reduction or increase of reserves in any quarter.
In addition, our borrowings do not constitute a breach of any duty owed
by our general partner to the unitholders, including borrowings that have the
purpose or effect of:
o enabling our general partner and its affiliates to receive
distributions on any subordinated units held by them or the
incentive distribution rights or
o hastening the expiration of the subordination period.
Our partnership agreement provides that we and the operating
partnership may borrow funds from our general partner and its affiliates. Our
general partner and its affiliates may not borrow funds from us or the operating
partnership. The partnership agreement limits the amount of debt we may incur,
including amounts borrowed from our general partner.
We do not have any employees and rely on the employees of our general partner
and its affiliates.
We do not have any officers or employees and rely solely on officers
and employees of our general partner and its affiliates. Affiliates of our
general partner will conduct business and activities of their own in which we
will have no economic interest. If these separate activities are significantly
greater than our activities, there could be material competition between us, our
general partner and affiliates of our general partner for the time and effort of
the officers and employees who provide services to our general partner. The
officers of our general partner who provide services to us are not required to
work full time on our affairs. These officers may devote significant time to the
affairs of our general partner's affiliates and be compensated by these
affiliates for the services rendered to them. There may be significant conflicts
between us and affiliates of our general partner regarding the availability of
these officers to manage us.
We must reimburse our general partner and its affiliates for expenses.
We must reimburse our general partner and its affiliates for costs
incurred in managing and operating us, including costs incurred in rendering
corporate staff and support services properly allocable to us. See
"Management--Reimbursement of Expenses of Our General Partner and its
Affiliates."
53
Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual
arrangements so that the other party has recourse only as to all or particular
assets of ours and not against our general partner or its assets. The
partnership agreement provides that any action taken by our general partner to
limit our or its liability is not a breach of our general partner's fiduciary
duties, even if we could have obtained more favorable terms without the
limitation on liability.
Common unitholders have no right to enforce obligations of our general partner
and its affiliates under agreements with us.
Any agreements between us, on the one hand, and our general partner and
its affiliates, on the other, will not grant to the unitholders, separate and
apart from us, the right to enforce the obligations of our general partner and
those affiliates in favor of us.
Determinations by our general partner may affect its obligations and the
obligations of Atlas America.
We have agreements with Atlas America regarding, among other things,
transporting natural gas from wells controlled by it and its affiliates,
construction of expansions to our gathering systems, financing that construction
and identification of other gathering systems for acquisition. Determinations
made by our general partner will significantly affect the obligations of Atlas
America under these agreements. For example, a determination by our general
partner to seek outside financing to expand our gathering systems would reduce
the amount of additional investment Atlas America would be required to make in
us. A determination not to acquire a gathering system identified by Atlas
America could result in the acquisition of that system by Atlas America.
Contracts between us, on the one hand, and our general partner and Atlas America
and its affiliates, on the other, will not be the result of arm's-length
negotiations.
The partnership agreement allows our general partner to pay itself or
its affiliates for any services rendered, provided these services are on terms
fair and reasonable to us. Our general partner may also enter into additional
contractual arrangements with any of its affiliates on our behalf. Neither the
partnership agreement nor any of the other agreements, contracts and
arrangements between us, on the one hand, and our general partner and its
affiliates on the other, are or will be the result of arm's length negotiations.
In addition, our general partner will negotiate the terms of any acquisitions
from Atlas America subject to the approval of the conflicts committee consisting
of persons unaffiliated with Atlas America.
We may not retain separate counsel or other professionals.
Attorneys, independent public accountants and others who perform
services for us are selected by our general partner or the conflicts committee
and may also perform services for our general partner and Atlas America and its
affiliates. We may retain separate counsel in the event of a conflict of
interest arising between our general partner and its affiliates, on the one
hand, and us or the holders of common units, on the other, depending on the
nature of that conflict. We do not intend to do so in most cases.
Fiduciary Duties
State Law Fiduciary Duty Standards
Fiduciary duties are generally considered to include an obligation to
act with due care and loyalty. The duty of care, in the absence of a provision
in a partnership agreement providing otherwise, would generally require a
general partner to act for the partnership in the same manner as a prudent
person would act on his own behalf. The duty of loyalty, in the absence of a
provision in a partnership agreement providing otherwise, would generally
prohibit a general partner of a Delaware limited partnership from taking any
action or engaging in any transaction where a conflict of interest is present.
54
The Delaware Revised Uniform Limited Partnership Act provides that a
limited partner may institute legal action on our behalf to recover damages from
a third party where our general partner has refused to institute the action or
where an effort to cause our general partner to do so is not likely to succeed.
In addition, the statutory or case law may permit a limited partner to institute
legal action on behalf of himself and all other similarly situated limited
partners to recover damages from a general partner for violations of its
fiduciary duties to the limited partners.
Partnership Agreement Modified Standards; Limitations on Remedies of Unitholders
Our partnership agreement contains provisions that waive or consent to
conduct by our general partner and its affiliates that might otherwise raise
issues as to compliance with fiduciary duties or applicable law. For example,
the partnership agreement permits our general partner to make a number of
decisions in its "sole discretion." This entitles our general partner to
consider only the interests and factors that it desires; it has no duty or
obligation to give any consideration to any interest of, or factors affecting,
us, our affiliates or any limited partner. Other provisions of the partnership
agreement provide that our general partner's actions must be made in its
reasonable discretion. These standards reduce the obligations to which our
general partner would otherwise be held and limit the remedies that would
otherwise be available to unitholders for actions by our general partner that,
in the absence of those standards, might constitute breaches of fiduciary duty
to unitholders.
Our partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not involving a required
vote of unitholders must be "fair and reasonable" to us under the factors
previously described. In determining whether a transaction or resolution is
"fair and reasonable," our general partner may consider interests of all parties
involved, including its own. Unless our general partner has acted in bad faith,
the action taken by our general partner will not constitute a breach of its
fiduciary duty. These standards reduce the obligations to which our general
partner would otherwise be held and limit the remedies that would otherwise be
available to unitholders for actions by our general partner that, in the absence
of those standards, might constitute breaches of fiduciary duty to unitholders.
Our partnership agreement specifically provides that, subject only to
the obligations of Atlas America and its affiliates to us under the omnibus
agreement, the master natural gas gathering agreement or similar agreements, it
will not be a breach of our general partner's fiduciary duty if its affiliates
engage in business interests and activities in preference to or to the exclusion
of us. Also, our general partner and its affiliates have no obligation to
present business opportunities to us except for the obligation of Atlas America
to us in connection with the identification of potential acquisitions of
existing gathering systems. These standards reduce the obligations to which our
general partner would otherwise be held and limit the remedies that would
otherwise be available to unitholders for actions by our general partner that,
in the absence of those standards, might constitute breaches of fiduciary duty
to unitholders.
In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement further provides
that our general partner and its officers and managing board members will not be
liable for monetary damages to us, our limited partners or assignees for errors
of judgment or for any acts or omissions if our general partner and those other
persons acted in good faith.
55
In order to become a limited partner, a common unitholder is required
to agree to be bound by the provisions of our partnership agreement, including
the provisions discussed above. This is in accordance with the policy of the
Delaware Revised Uniform Limited Partnership Act favoring the principle of
freedom of contract and the enforceability of partnership agreements. The
failure of a limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against that person.
We are required to indemnify our general partner and its officers,
managing board members, employees, affiliates, partners, members, agents and
trustees, to the fullest extent permitted by law, against liabilities, costs and
expenses incurred by our general partner or these other persons. This
indemnification is required if our general partner or the other persons acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
our best interests. Indemnification is required for criminal proceedings if our
general partner or these other persons had no reasonable cause to believe their
conduct was unlawful. See "Our Partnership Agreement--Indemnification."
56
OUR PARTNERSHIP AGREEMENT
The following is a summary of our current partnership agreement.
Organization and Duration
We were formed in May 1999. We will dissolve on December 31, 2098,
unless sooner dissolved under the terms of our partnership agreement.
Purpose
Our purpose under our partnership agreement is limited to serving as
the limited partner of our operating partnership and engaging in any business
activity that may be engaged in by our operating partnership or that is approved
by our general partner. The operating partnership agreement provides that our
operating partnership may, directly or indirectly, engage in:
o operations as conducted on February 2, 2000, including the
ownership and operation of the gathering systems formerly owned,
by Atlas America, Inc., Resource Energy, Inc. and Viking
Resources Corporation and their affiliates;
o any other activity approved by our general partner, but only to
the extent that our general partner reasonably determines that,
as of the date of the acquisition or commencement of the
activity, the activity generates "qualifying income" as that term
is defined in Section 7704 of the Internal Revenue Code; or
o any activity that enhances the operations described above.
The Units
The common units and the subordinated units represent limited partner
interests in us. The holders of units are entitled to participate in partnership
distributions and exercise the rights or privileges available to limited
partners under our partnership agreement. For a description of the relative
rights and preferences of holders of common units and subordinated units to
partnership distributions, together with a description of the circumstances
under which subordinated units may convert into common units, see "--Cash
Distribution Policy" and "--Description of the Subordinated Units."
Description of the Subordinated Units
The subordinated units are a separate class of interest and the rights
of holders to participate in distributions to partners differ from, and are
subordinated to, the rights of the holders of common units. For any given
quarter, any available cash is first distributed to our general partner and to
the holders of common units, plus any arrearages on the common units, and then
distributed to the holders of subordinated units.
The subordination period will extend until the first day of any quarter
beginning after December 31, 2004 that each of the following three events
occurs:
o distributions of available cash from operating surplus on the
common units and the subordinated units equal or exceed the sum
of the minimum quarterly distributions on all of the outstanding
common units and the subordinated units for each of the 12
consecutive quarters immediately preceding that date;
57
o the adjusted operating surplus generated during each of the 12
immediately preceding quarters equals or exceeds the sum of the
minimum quarterly distributions on all of the outstanding common
units and the subordinated units during those periods on a fully
diluted basis and the related distributions on the general
partner interests during those periods; and
o there are no arrearages in the payment of the minimum quarterly
distribution on the common units.
Once the subordination period ends, all remaining subordinated units
will convert into common units on a one-for-one basis and will participate, pro
rata, with the other common units in distributions of available cash.
Limited Voting Rights
Holders of common units generally vote as a class separate from the
holders of subordinated units and have similarly limited voting rights. During
the subordination period, common units and subordinated units will vote
separately as a class on the following matters:
o a sale or exchange of all or substantially all of our assets;
o our dissolution or reconstitution;
o our merger;
o termination or material modification of the omnibus agreement or
master natural gas gathering agreement; and
o substantive amendments to our partnership agreement, including
any amendment that would cause us to become taxable as a
corporation.
Only the common units are entitled to vote on approval of the removal
or voluntary withdrawal of our general partner or the transfer by our general
partner of its general partner interest or incentive distribution rights during
the subordination period, except that our general partner may transfer all of
its general partner interest and incentive distribution rights to an affiliate
or in connection with a merger of our general partner without approval of the
common unitholders. Removal of our general partner requires a two-thirds vote of
all outstanding common units, excluding those held by our general partner and
its affiliates. Our partnership agreement permits our general partner generally
to make amendments to it that do not materially adversely affect unitholders
without the approval of any unitholders.
Cash Distribution Policy
Quarterly Distributions of Available Cash. Our operating partnership is
required by the operating partnership agreement to distribute to us, within 45
days of the end of each fiscal quarter, all of its available cash for that
quarter. We, in turn, distribute to our partners all of the available cash
received from our operating partnership for that quarter.
Available cash generally means, for any of our fiscal quarters, all
cash on hand at the end of the quarter less cash reserves that our general
partner determines are appropriate to provide for our operating costs, including
potential acquisitions, and to provide funds for distributions to the partners
for any one or more of the next four quarters. We generally make distributions
of all available cash within 45 days after the end of each quarter to holders of
record on the applicable record date.
58
For each quarter during the subordination period, to the extent there
is sufficient available cash, the holders of common units have the right to
receive the minimum quarterly distribution of $0.42 per unit, plus any
arrearages on the common units, before any distribution is made to the holders
of subordinated units. This subordination feature enhances our ability to
distribute the minimum quarterly distribution on the common units during the
subordination period.
We make distributions of available cash to unitholders regardless of
whether the amount distributed is less than the minimum quarterly distribution.
If distributions from available cash on the common units for any quarter during
the subordination period are less than the minimum quarterly distribution of
$0.42 per common unit, holders of common units will be entitled to arrearages.
Common unit arrearages will accrue and be paid in a future quarter after the
minimum quarterly distribution is paid for that quarter. Subordinated units will
not accrue any arrearages on distributions for any quarter.
The holders of subordinated units will have the right to receive the
minimum quarterly distribution only after the common units have received the
minimum quarterly distribution plus any arrearages in payment of the minimum
quarterly distribution. Upon expiration of the subordination period, the
subordinated units will convert into common units on a one-for-one basis, and
will then participate pro rata with the other common units in distributions of
our available cash.
Distributions of Available Cash from Operating Surplus. Cash
distributions are characterized as distributions from either operating surplus
or capital surplus. This distinction affects the amounts distributed to
unitholders relative to our general partner, and also determines whether holders
of subordinated units receive any distributions.
Operating surplus means:
o our cash balance, excluding cash constituting capital surplus
less
o all of our operating expenses, debt service payments, maintenance
costs, capital expenditures and reserves established for future
operations.
Capital surplus means capital generated only by borrowings other than
working capital borrowings, sales of debt and equity securities and sales or
other dispositions of assets for cash, other than inventory, accounts receivable
and other assets disposed of in the ordinary course of business.
We treat all available cash distributed from any source as distributed
from operating surplus until the sum of all available cash distributed since we
began operations equals the operating surplus as of the end of the quarter
before the distribution. This method of cash distribution avoids the difficulty
of trying to determine whether available cash is distributed from operating
surplus or capital surplus. We treat any excess available cash, irrespective of
its source, as capital surplus, which would represent a return of capital, and
we will distribute it accordingly. For a discussion of distributions of capital
surplus, see "--Distributions of Capital Surplus" below.
We distribute available cash from operating surplus for any quarter
during the subordination period in the following manner:
o first, 98% to the common units, pro rata, and 2% to our general
partner, until we have distributed for each outstanding common
unit an amount equal to the minimum quarterly distribution for
that quarter;
59
o second, 98% to the common units, pro rata, and 2% to our general
partner, until we have distributed for each outstanding common
unit an amount equal to any arrearages in payment of the minimum
quarterly distribution on the common units;
o third, 98% to the subordinated units, pro rata, and 2% to our
general partner, until we have distributed for each outstanding
subordinated unit an amount equal to the minimum quarterly
distribution for that quarter; and
o after that, in the manner described in "-Incentive Distribution
Rights" below.
The 2% allocation of available cash from operating surplus to our
general partner includes our general partner's percentage interest in
distributions from us and our operating partnership on a combined basis,
exclusive of its interest as a subordinated unitholder.
We distribute available cash from operating surplus for any quarter
after the subordination period in the following manner:
o first, 98% to all units, pro rata, and 2% to our general partner,
until we have distributed for each unit an amount equal to the
minimum quarterly distribution for that quarter;
o second, 98% to the common units, pro rata, and 2% to our general
partner, until we have distributed for each outstanding common
unit an amount equal to any arrearages in payment of the minimum
quarterly distribution on the common units; and
o after that, in the manner described in "-Incentive Distribution
Rights" below.
Adjusted operating surplus for any period generally means operating
surplus generated during that period, less:
o any net increase in working capital borrowings during that period
and
o any net reduction in cash reserves for operating expenditures
during that period not relating to an operating expenditure made
during that period,
and plus:
o any net decrease in working capital borrowings during that period
and
o any net increase in cash reserves for operating expenditures
during that period required by any debt instrument for the
repayment of principal, interest or premium.
Operating surplus generated during a period is equal to the difference
between:
o the operating surplus determined at the end of that period and
o the operating surplus determined at the beginning of that period.
60
Incentive Distribution Rights. By "incentive distribution rights" we
mean the right to receive an increasing percentage of quarterly distributions of
available cash from operating surplus after we have made the minimum quarterly
distributions and we have met specified target distribution levels, as described
below. Our general partner currently holds the incentive distribution rights,
but may transfer them separately from its general partner interest subject,
during the subordination period, to the consent of a majority of the common
units and the subordinated units voting as separate classes. After the
subordination period no consent is required.
We make incentive distributions to our general partner for any quarter
in which each of the following occurs:
o we have distributed available cash from operating surplus to the
common and subordinated unitholders in an amount equal to the
minimum quarterly distribution and
o we have distributed available cash from operating surplus on the
common units in an amount necessary to eliminate any cumulative
common unit arrearages.
For any quarter in which these conditions to making incentive
distributions have been satisfied, we will distribute additional available cash
from operating surplus for that quarter among the unitholders and our general
partner as described below. The distributions to our general partner described
below that exceed its aggregate 2% general partner interest represent the
incentive distribution rights.
o First, 85% to all units, pro rata, and 15% to our general
partner, until each unitholder has received a total of $0.52 per
unit for that quarter, in addition to any distributions to common
unitholders to eliminate any cumulative arrearages in payment of
the minimum quarterly distribution on the common units;
o second, 75% to all units, pro rata, and 25% to our general
partner, until each unitholder has received a total of $0.60 per
unit for that quarter, in addition to any distributions to common
unitholders to eliminate any cumulative arrearages in payment of
the minimum quarterly distribution on the common units; and
o after that, 50% to all units, pro rata, and 50% to our general
partner.
Distributions from Capital Surplus. We distribute available cash from
capital surplus in the following manner:
o first, 98% to all units, pro rata, and 2% to our general partner,
until each common unit has received distributions equal to $13.00
per unit;
o second, 98% to the common units, pro rata, and 2% to our general
partner, until each common unit has received an aggregate amount
equal to any unpaid arrearages in payment of the minimum
quarterly distribution on the common units; and
o after that, we will distribute all available cash from capital
surplus, as if it were from operating surplus.
When we make a distribution from capital surplus, we will treat it as
if it were a repayment of your investment in your common units. For these
purposes the partnership agreement deems the investment to be $13.00 per common
unit, which is the unit price from our initial public offering, regardless of
the price you actually pay for your common units in this offering. To reflect
this repayment, we will reduce the amount of the minimum quarterly distribution
and the distribution levels at which our general partner's incentive
distribution rights begin, which we refer to in this prospectus as "target
distribution levels," by multiplying each amount by a fraction, determined as
follows:
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o the numerator is $13.00 less all distributions from capital
surplus including the distribution just made, and
o the denominator is $13.00 less all distributions from capital
surplus excluding the distribution just made.
As used in this prospectus, the "unrecovered unit price" means the
initial public offering price of $13.00 per common unit less any distributions
from capital surplus. This adjustment to the minimum quarterly distribution may
accelerate the dates at which the subordinated units convert into common units.
After the minimum quarterly distribution and the target distribution
levels have been reduced to zero, we will treat all distributions of available
cash from all sources as if they were from operating surplus. Because the
minimum quarterly distribution and the target distribution levels will have been
reduced to zero, our general partner will then be entitled to receive 50% of all
distributions of available cash in its capacity as general partner and holder of
the incentive distribution rights, in addition to any distributions to which it
may be entitled as a holder of units.
Distributions from capital surplus will not reduce the minimum
quarterly distribution or target distribution levels for the quarter in which
they are distributed.
Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels. In addition to adjustments made upon a distribution of available cash
from capital surplus, we will proportionately adjust each of the following
upward or downward, as appropriate, if any combination or subdivision of units
occurs:
o the minimum quarterly distribution,
o the target distribution levels,
o the unrecovered unit price,
o the number of common units issuable upon conversion of the
subordinated units, and
o other amounts calculated on a per unit basis.
For example, if a two-for-one split of the common units occurs, we will reduce
the minimum quarterly distribution, the target distribution levels and the
unrecovered initial unit price of the common units to 50% of their initial
levels.
We will not make any adjustment for the issuance of additional common
units for cash or property.
We may also adjust the minimum quarterly distribution and the target
distribution levels if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us or our operating partnership to become
taxable as a corporation or otherwise subject to taxation as an entity for
federal, state or local income tax purposes. In this event, we will reduce the
minimum quarterly distribution and the target distribution levels for each
quarter after that time to amounts equal to the product of:
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o the minimum quarterly distribution and each of the target
distribution levels multiplied by
o one minus the sum of:
o the highest marginal federal income tax rate which could apply to
the partnership that is taxed as a corporation plus
o any increase in the effective overall state and local income
tax rate that would have been applicable in the preceding
calendar year as a result of the new imposition of the
entity level tax, after taking into account the benefit of
any deduction allowable for federal income tax purposes for
the payment of state and local income taxes, but only to the
extent of the increase in rates resulting from that
legislation or interpretation.
For example, assuming we are not previously subject to state and local income
tax, if we became taxable as a corporation for federal income tax purposes and
subject to a maximum marginal federal, and effective state and local, income tax
rate of 40%, then we would reduce the minimum quarterly distribution and the
target distribution levels to 60% of the amount immediately before the
adjustment.
Distributions of Cash Upon Liquidation. When we commence dissolution
and liquidation, we will sell or otherwise dispose of our assets and we will
adjust the partners' capital account balances to reflect any resulting gain or
loss. We will first apply the proceeds of liquidation to the payment of our
creditors in the order of priority provided in our partnership agreement and by
law. After that, we will distribute the proceeds to the unitholders and our
general partner in accordance with their capital account balances, as so
adjusted.
Capital accounts are maintained in order to ensure that the
partnership's allocations of income, gain, loss and deduction are respected
under the Internal Revenue Code. The balance of a partner's capital account also
determines how much cash or other property the partner will receive on
liquidation of the partnership. A partner's capital account is credited with
(increased by) the following items:
o the amount of cash and fair market value of any property (net of
liabilities) contributed by the partner to the partnership, and
o the partner's share of "book" income and gain (including income
and gain exempt from tax).
A partner's capital account is debited with (reduced by) the following items:
o the amount of cash and fair market value (net of liabilities) of
property distributed to the partner, and
o the partner's share of loss and deduction (including some items
not deductible for tax purposes).
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Partners are entitled to liquidating distributions in accordance with
their capital account balances. The allocations of gains and losses upon
liquidation are intended, to the extent possible, to entitle common unitholders
to a preference over the subordinated unitholders upon our liquidation to the
extent required to permit common unitholders to receive the unrecovered initial
public offering unit price plus any unpaid arrearages in payment of the minimum
quarterly distributions. For the purposes of these calculations, the unrecovered
unit price will be the $13.00 unit price from our initial public offering,
regardless of the price you actually pay for your units. Thus, we will allocate
net losses recognized upon our liquidation to the holders of the subordinated
units to the extent of their capital account balances before we allocate any
loss to the holders of the common units. Also we will allocate net gains
recognized upon our liquidation first to restore negative balances in the
capital account of our general partner and any unitholders and then to the
common unitholders until their capital account balances equal the unrecovered
initial unit price plus unpaid arrearages in payment of the minimum quarterly
distributions. However, we cannot assure you that there will be sufficient gain
upon our liquidation to enable the holders of common units to fully recover all
of these amounts, even though there may be cash available for distribution to
the holders of subordinated units.
The manner of the adjustment is as provided in our partnership
agreement. If our liquidation occurs before the end of the subordination period,
any gain, or unrealized gain attributable to assets distributed in kind, will be
allocated to the partners in the following manner:
o first, to our general partner and the holders of units who have
negative balances in their capital accounts to the extent of and
in proportion to those negative balances;
o second, 98% to the common units, pro rata, and 2% to our general
partner, until the capital account for each common unit is equal
to the sum of:
o the unrecovered unit price,
o the amount of the minimum quarterly distribution for the
quarter during which our liquidation occurs, and
o any unpaid arrearages in payment of the minimum quarterly
distribution;
o third, 98% to the subordinated units, pro rata, and 2% to our
general partner, until the capital account for each subordinated
unit is equal to the sum of:
o the unrecovered capital on that subordinated unit and
o the amount of the minimum quarterly distribution for the
quarter during which our liquidation occurs;
o fourth, 85% to all units, pro rata, and 15% to our general
partner, until there has been allocated under this paragraph an
amount per unit equal to:
o the excess of the $0.52 target distribution per unit over
the minimum quarterly distribution per unit for each quarter
of our existence less
o the cumulative amount per unit of any distribution of
available cash from operating surplus in excess of the
minimum quarterly distribution per unit that was distributed
85% to the units, pro rata, and 15% to our general partner
for each quarter of our existence;
o fifth, 75% to all units, pro rata, and 25% to our general
partner, until there has been allocated under this paragraph an
amount per unit equal to:
o the excess of the $0.60 target distribution per unit over
the $0.52 target distribution per unit for each quarter of
our existence less
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o the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the first
target distribution per unit that was distributed 75% to the
units, pro rata, and 25% to our general partner for each
quarter of our existence; and
o after that, 50% to all units, pro rata, and 50% to our general
partner.
If our liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
the second and third priorities above will no longer be applicable.
Upon our liquidation, any loss will generally be allocated to our
general partner and the unitholders in the following manner:
o first, 98% to holders of subordinated units in proportion to the
positive balances in their capital accounts and 2% to our general
partner, until the capital accounts of the holders of the
subordinated units have been reduced to zero;
o second, 98% to the holders of common units in proportion to the
positive balances in their capital accounts and 2% to our general
partner, until the capital accounts of the common unitholders
have been reduced to zero; and
o after that, 100% to our general partner.
If our liquidation occurs after the subordination period, the distinction
between common units and subordinated units will disappear, so that all of the
first priority above will no longer be applicable.
In addition, we will make interim adjustments to the capital accounts
at the time we issue additional equity interests or make distributions of
property. We will base these adjustments on the fair market value of the
interests or the property distributed and we will allocate any gain or loss
resulting from the adjustments to the unitholders and our general partner in the
same manner as we allocate gain or loss upon liquidation. In the event that we
make positive interim adjustments to the capital accounts, we will allocate any
later negative adjustments to the capital accounts resulting from the issuance
of additional equity interests, our distributions of property, or upon our
liquidation, in a manner which results, to the extent possible, in the capital
account balances of our general partner equaling the amount which would have
been our general partner's capital account balances if we had not made any
earlier positive adjustments to the capital accounts.
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 and the amendment of our partnership agreement, and
to make consents and waivers under our partnership agreement.
Capital Contributions
Unitholders are not obligated to make additional capital contributions,
except as described below under "--Limited Liability."
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Limited Liability
So long as a limited partner does not participate in the control of our
business within the meaning of the Delaware Revised Uniform Limited Partnership
Act and otherwise acts in conformity with the provisions of our partnership
agreement, the limited partner's liability under the Delaware Act will be
limited to the amount of capital he is obligated to contribute to us for his
common units plus his share of any undistributed profits and assets. If it were
determined that a limited partner participated in the control of our business,
then the limited partner could be held personally liable for our obligations
under Delaware law to the same extent as our general partner. This liability
would extend only to persons who transact business with us who reasonably
believe that the limited partner is a general partner.
Under the Delaware Act, we cannot make a distribution to a partner if,
after the distribution, all our liabilities, other than liabilities to partners
on account of their partnership interests and liabilities for which the recourse
of creditors is limited to specific property, exceed the fair value of our
assets. For the purpose of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of property subject
to liability for which recourse of creditors is limited shall be included in the
assets of the limited partnership only to the extent that the fair value of that
property exceeds the nonrecourse liability. The Delaware Act provides that a
limited partner who receives a distribution and knew at the time of the
distribution that the distribution was in violation of the Delaware Act is
liable to the limited partnership for the amount of the distribution for three
years. Under the Delaware Act, an assignee who becomes a substituted limited
partner is liable for the obligations of his assignor to make contributions to
the partnership, except the assignee is not obligated for liabilities unknown to
him at the time he became a limited partner and which he could not ascertain
from our partnership agreement.
Our operating partnership currently conducts business in New York, Ohio
and Pennsylvania. The limitations on the liability of limited partners for the
obligations of a limited partnership have not been clearly established in many
jurisdictions. If it were determined that we were, by virtue of our limited
partner interest in our operating partnership or otherwise, conducting business
in any state under the applicable limited partnership statute, or that the right
or exercise of the right by the limited partners as a group to remove or replace
our general partner, to approve some amendments to our partnership agreement, or
to take other action under our partnership agreement constituted "participation
in the control" of our business for purposes of the statutes of any relevant
jurisdiction, then the limited partners could be held personally liable for our
obligations under the law of that jurisdiction to the same extent as our general
partner. We operate in a manner our general partner considers reasonable and
appropriate to preserve the limited liability of the limited partners.
Transfer Agent and Registrar
American Stock Transfer and Trust Company is our registrar and transfer
agent for the common units. We pay all fees charged by the transfer agent for
transfers of common units, except that the following fees must be paid by
unitholders:
o surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges,
o special charges for services requested by a holder of a common
unit, and
o other similar fees or charges.
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There is no charge to unitholders for disbursements of cash distributions.
We will indemnify the transfer agent, its agents and each of their
particular shareholders, directors, officers and employees against all claims
and losses that may arise out of acts performed or omitted in its capacity as
our transfer agent, except for any liability due to any negligence, gross
negligence, bad faith or intentional misconduct of the indemnified person or
entity.
Transfer of Common Units
The transfer agent will not record a transfer of common units, and we
will not recognize the transfer, unless the transferee executes and delivers a
transfer application. The form of transfer application appears on the reverse
side of the certificates representing the common units. By executing and
delivering a transfer application, the transferee of common units:
o becomes the record holder of the common units and is an assignee
until admitted as a substituted limited partner;
o automatically requests admission as a substituted limited
partner;
o agrees to be bound by the terms and conditions of our partnership
agreement;
o represents that the transferee has the capacity, power and
authority to enter into our partnership agreement;
o grants powers of attorney to officers of our general partner and
our liquidator, as specified in our partnership agreement; and
o makes the consents and waivers contained in our partnership
agreement.
An assignee will become a substituted limited partner as to the
transferred common units upon the consent of our general partner and the
recordation of the name of the assignee on our books and records. Our general
partner may withhold its consent in its sole discretion.
A transferee's broker, agent or nominee may complete, execute and
deliver the transfer applications. We are entitled to treat the nominee holder
of a common unit as the absolute owner. In that case, the beneficial holder's
rights are limited solely to those that it has against the nominee holder as a
result of any agreement between the beneficial owner and the nominee holder.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to the rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner. A purchaser or transferee of common units who
does not execute and deliver a transfer application will have only
o the right to assign the common units to a purchaser or other
transferee and
o the right to transfer the right to seek admission as a
substituted limited partner.
Thus, a purchaser or transferee of common units who does not execute and deliver
a transfer application will not receive
o cash distributions or federal income tax allocations unless the
common units are held in a nominee or "street name" account and
the nominee or broker has executed and delivered a transfer
application and
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o may not receive federal income tax information or reports
furnished to record holders of common units.
The transferor of common units must provide the transferee with all
information necessary to transfer the common units. The transferor will not be
required to insure the execution of the transfer application by the transferee
and will have no liability or responsibility if the transferee neglects or
chooses not to execute and forward the transfer application to the transfer
agent. See "-Status as Limited Partner or Assignee."
Until a common unit has been transferred on our books, we and the
transfer agent may treat the record holder of the unit as the absolute owner for
all purposes, except as otherwise required by law or stock exchange regulations,
even if either of us has notice of an attempted transfer.
Issuance of Additional Securities
Our partnership agreement generally authorizes us to issue an unlimited
number of additional limited partner interests and other equity securities for
the consideration and on the terms and conditions established by our general
partner in its sole discretion without the approval of any limited partners.
During the subordination period, we cannot issue more than 150,000 additional
common units or units on a parity with common units without the approval of the
holders of a majority of the common units and subordinated units, voting as
separate classes, subject to the exceptions described below. The 150,000
additional units may be issued for any purpose other than asset acquisitions or
capital improvements. We may issue an unlimited number of common units during
the subordination period in the following situations:
o upon conversion of subordinated units;
o pursuant to employee benefit plans;
o upon conversion of the general partner interests and incentive
distribution rights as a result of a withdrawal or removal of our
general partner;
o in the event of a combination or subdivision of common units;
o in connection with an acquisition or capital improvement that
would have resulted in no decrease in cash flow on a per unit
basis pro forma for the preceding four-quarter period; or
o upon our election to require Atlas America to provide us with
construction financing.
We have funded, and will likely continue to fund, acquisitions through
the issuance of additional common units or other equity securities. Holders of
any additional common units we issue will be entitled to share equally with the
then-existing holders of common units in our distributions of available cash. In
addition, the issuance of additional partnership interests may dilute the value
of the interests of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership securities that, in the sole
discretion of our general partner, may have special voting rights to which the
common units are not entitled.
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Upon issuance of additional partnership securities, our general partner
must make additional capital contributions to the extent necessary to maintain
its combined 2% general partner interest in us and in our operating partnership.
Moreover, our general partner will have the right, which it may from time to
time assign in whole or in part to any of its affiliates, to purchase common
units, 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 its percentage interest
that existed immediately before each issuance. The holders of common units will
not have preemptive rights to acquire additional common units or other
partnership interests.
Limitations on Debt During Subordination Period
Our partnership agreement generally authorizes us to incur indebtedness
in support of our operations, to maintain or expand our gathering systems or for
other appropriate purposes. However, during the subordination period, our
partnership agreement prohibits us from incurring debt that will:
o result in an interest coverage ratio of less than four to one or
o result in our aggregate indebtedness exceeding two times EBITDA
for the immediately preceding fiscal year, determined on a pro
forma basis giving effect to acquisitions completed in the fiscal
year.
The interest coverage ratio will be calculated as EBITDA for the
immediately preceding fiscal year, determined on a pro forma basis giving effect
to acquisitions completed in the year, divided by the annual interest payments
required under all debt to which we are subject, including interest required
under the proposed indebtedness. EBITDA means our income or loss before interest
expense, income taxes and depreciation, depletion and amortization.
Amendment of Our Partnership Agreement
Amendments to our partnership agreement may be proposed only by or with
the consent of our general partner, which it may withhold in its sole
discretion. In order to adopt a proposed amendment, other than the amendments
discussed in "--No Unitholder Approval" below, our general partner must seek
written approval of the holders of the number of units required to approve the
amendment or call a meeting of the limited partners to consider and vote upon
the proposed amendment.
Prohibited Amendments. No amendment may be made that would:
o change the percentage of outstanding units required to take
partnership action, unless approved by the affirmative vote of
unitholders constituting at least the voting requirement sought
to be reduced;
o enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or
class of limited partner interests so affected;
o enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by us to our general partner or
any of its affiliates without its consent, which may be given or
withheld in its sole discretion;
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o change our term;
o provide that we are not dissolved upon the expiration of our
term or upon an election to dissolve us by our general partner
that is approved by holders of a majority of the units of each
class; or
o give any person the right to dissolve us other than our
general partner's right to dissolve us with the approval of
holders of a majority of the units of each class.
The provision of our partnership agreement preventing the amendments having the
effects described above can be amended upon the approval of the holders of at
least 90% of the outstanding units voting together as a single class.
No Unitholder Approval. Our general partner may make amendments to our
partnership agreement without the approval of the unitholders to reflect:
o a change in our name, the location of our principal place of
business, our registered agent or registered office;
o the admission, substitution, withdrawal or removal of partners in
accordance with our partnership agreement;
o a change that, in the sole discretion of our general partner, is
necessary to qualify us or continue our qualification as a
limited partnership under the laws of any state or to ensure that
neither we nor our operating partnership will be taxed as a
corporation or otherwise taxed as an entity for federal income
tax purposes;
o an amendment that is necessary, in the opinion of our counsel, to
prevent us or our general partner, or its directors, officers,
agents or trustees, from being subject to the provisions of the
Investment Advisers Act of 1940 or "plan asset" regulations
adopted under the Employee Retirement Income Security Act of
1974;
o an amendment that in the discretion of our general partner is
necessary for the authorization of additional limited or general
partner interests;
o any amendment expressly permitted in our partnership agreement to
be made by our general partner acting alone;
o an amendment necessitated by a merger agreement that has been
approved under the terms of our partnership agreement;
o any amendment that, in the discretion of our general partner, is
necessary for the formation by us of, or our investment in, any
corporation, partnership or other entity, other than the
operating partnership, as otherwise permitted by our partnership
agreement;
o a change in our fiscal year or taxable year and related changes;
and
o any other amendments substantially similar to any of the matters
described above.
In addition, our general partner may make amendments to our partnership
agreement without the approval of the unitholders if those amendments, in its
discretion:
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o do not adversely affect the limited partners in any material
respect;
o are necessary to satisfy any requirements or guidelines contained
in any opinion, directive, order, ruling or regulation of any
federal or state agency or judicial authority or contained in any
federal or state statute;
o are necessary to facilitate the trading of limited partner
interests or to comply with any rule or guideline of any
securities exchange or interdealer quotation system on which the
limited partner interests are or will be listed for trading;
o are necessary for any action taken by our general partner
relating to splits or combinations of units under the provisions
of our partnership agreement; or
o are required to effect the intent expressed in this prospectus or
the intent of the provisions of our partnership agreement or are
otherwise contemplated by our partnership agreement.
Opinion of Counsel and Unitholder Approval. Except in the case of the
amendments described above under "--No Unitholder Approval," amendments to our
partnership agreement will not become effective without the approval of holders
of at least 90% of the units unless we obtain an opinion of counsel to the
effect that the amendment will not affect the limited liability under applicable
law of any limited partner or cause us or our operating partnership to be
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously taxed as such). Subject to
obtaining the opinion of counsel, any amendment that would have a material
adverse effect on the rights or preferences of any type or class of outstanding
units in relation to other classes of units will require the approval of at
least a majority of the type or class of units so affected.
Merger, Sale or Other Disposition of Our Assets
Our general partner may not, without the prior approval of holders of a
majority of the outstanding units of each class, cause us to sell, exchange or
otherwise dispose of all of substantially all of our assets, including by way of
merger, consolidation or other combination, or approve on our behalf the sale,
exchange or other disposition of all or substantially all of the assets of our
operating partnership. However, our general partner may mortgage or otherwise
grant a security interest in all or substantially all of our assets or sell all
or substantially all of our assets under a foreclosure without that approval.
Furthermore, provided that conditions specified in our partnership agreement are
satisfied, our general partner may merge us or any of our subsidiaries into, or
convey some or all of our and their assets to, a newly formed entity if the sole
purpose of that merger or conveyance changes our legal form into another limited
liability entity.
The unitholders are not entitled to dissenters' rights of appraisal
under our partnership agreement or applicable Delaware law in the event of a
merger or consolidation, a sale of substantially all of our assets or any other
transaction or event.
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Termination and Dissolution
We will continue until December 31, 2098, unless terminated sooner
upon:
o the election of our general partner to dissolve us, if approved
by the holders of a majority of the outstanding units of each
class;
o the sale, exchange or other disposition of all or substantially
all of our assets and those of our operating partnership;
o the entry of a decree of judicial dissolution of us; or
o the withdrawal or removal of our general partner or any other
event that results in its ceasing to be our general partner other
than because of a transfer of its general partner interest in
accordance with our partnership agreement or withdrawal or
removal following approval and admission of a successor.
Upon a dissolution under the last item above, the holders of a majority of the
units of each class may also elect, within specific time limitations, to
reconstitute us by forming a new limited partnership on terms identical to those
in our partnership agreement and having as general partner an entity approved by
the holders of a majority of the units of each class subject to our receipt of
an opinion of counsel to the effect that:
o the action would not result in the loss of limited liability of
any limited partner and
o we, the reconstituted limited partnership, and the operating
partnership would not be taxed as a corporation or otherwise be
taxed as an entity for federal income tax purposes upon the
exercise of that right to continue.
Liquidation and Distribution of Proceeds
Unless we are reconstituted and continue as a new limited partnership,
upon our liquidation the liquidator will, acting with all of the powers of our
general partner that the liquidator deems necessary or desirable in its good
faith judgment, liquidate our assets and apply the proceeds of the liquidation
as described in "-Cash Distribution Policy--Distributions of Cash Upon
Liquidation." The liquidator may defer liquidation or distribution of our assets
for a reasonable period of time or distribute assets to partners in kind if it
determines that a sale would be impractical or would cause undue loss to the
partners.
Withdrawal or Removal of Our General Partner
Except as described below, our general partner will not withdraw
voluntarily either as our general partner or as general partner of our operating
partnership during the subordination period without obtaining the approval of
the holders of at least a majority of the outstanding common units, excluding
common units held by our general partner and its affiliates, and furnishing an
opinion of counsel regarding limited liability and tax matters. At the end of
the subordination period, our general partner may withdraw as our general
partner without first obtaining approval from the unitholders by giving 90 days'
written notice. In addition, our general partner may withdraw at any time
without unitholder approval upon 90 days' notice if at least 50% of the
outstanding common units are held or controlled by one person and its affiliates
other than our general partner and its affiliates. Our general partner may also
sell or otherwise transfer all of its general partner interests in us without
the approval of the unitholders as described below under "-Transfer of General
Partner Interest and Incentive Distribution Rights." Upon withdrawal, our
general partner is entitled to reimbursement for all expenses incurred by it on
our behalf or allocable to us in connection with operating our business.
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If our general partner withdraws, other than as a result of a transfer
of all or a part of its general partner interests in us, the holders of a
majority of the common units 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 and liquidated, unless within 180 days after that withdrawal the
holders of a majority of the units of each class agree in writing to continue
our business and to appoint a successor general partner. See "--Termination and
Dissolution."
Our general partner may not be removed except by the vote of the
holders of at least 66 2/3% of the outstanding common units, excluding common
units held by our general partner and its affiliates, and we receive an opinion
of counsel regarding limited liability and tax matters. Any removal is also
subject to the approval of a successor general partner by the vote of the
holders of a majority of the common units, excluding common units held by our
general partner and its affiliates. If our general partner is removed under
circumstances where cause does not exist and does not consent to that removal:
o the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
o the agreement of Atlas America to connect wells to our gathering
systems will terminate;
o the master natural gas gathering agreement with Atlas America
will not apply to any future wells drilled by Atlas America
although it will continue as to wells connected to the gathering
system at the time of removal;
o the obligations of Atlas America to provide financing and other
assistance for the extension of our gathering systems and to
provide assistance in the identification and acquisition of
gathering systems from third parties will terminate;
o any existing arrearages in payment of the minimum quarterly
distributions will be extinguished; and
o our general partner will have the right to convert its general
partner interests and incentive distribution rights into common
units or to receive cash in exchange for those interests from the
successor general partner.
Our partnership agreement defines "cause" as existing where a court has
rendered a final, non-appealable judgment that our general partner has committed
fraud, gross negligence or willful or wanton misconduct in its capacity as
general partner.
Withdrawal or removal of our general partner as our general partner
also constitutes its withdrawal or removal as the general partner of our
operating partnership.
In the event of removal of our general partner under circumstances
where cause exists or a withdrawal of our general partner that violates our
partnership agreement, a successor general partner will have the option to
purchase the general partner interests and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where our general partner
withdraws or is removed, the departing general partner will have the option to
require the successor general partner to purchase those interests for their fair
market value. In each case, fair market value will be determined by agreement
between the departing general partner and the successor general partner. If they
cannot reach an agreement, an independent expert selected by the departing
general partner and the successor general partner will determine the fair market
value. If the departing general partner and the successor general partner cannot
agree on an expert, then an expert chosen by agreement of the experts selected
by each of them will determine the fair market value. If the purchase option is
not exercised by either the departing general partner or the successor general
partner, the general partner interests and incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests. The successor general partner must indemnify the departing general
partner (or its transferee) from all of our debt and liability arising on or
after the date on which the departing general partner becomes a common
unitholder as a result of the conversion. Except for this limited indemnity
right and the right of the departing general partner to receive distributions on
its common units, no other payments will be made to our general partner after
withdrawal.
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Transfer of General Partner Interest and Incentive Distribution Rights
Except for a transfer by our general partner of all, but not less than
all, of its general partner interests in us and our operating partnership to:
o an affiliate of our general partner or
o another person as part of the merger or consolidation of the
general partner with or into another person or the transfer by
the general partner of all or substantially all of its assets to
another person,
our general partner may not transfer any part of its general partner interest in
us and our operating partnership to another person during the subordination
period without the approval of the holders of at least a majority of the
outstanding common units, excluding those held by our general partner and its
affiliates. After the subordination period ends, our general partner may
transfer all or any part of its general partner interest without obtaining the
consent of the common unitholders. As a condition to the transfer of a general
partner interest, either before or after the subordination period ends, the
transferee must assume the rights and duties of the general partner to whose
interest it has succeeded, furnish an opinion of counsel regarding limited
liability and tax matters, agree to acquire all of the general partner's
interest in our operating partnership and agree to be bound by the provisions of
the partnership agreement of our operating partnership. Our general partner may
at any time, however, transfer its subordinated units without unitholder
approval. In addition, the members of our general partner may sell or transfer
all or part of their interest in our general partner to an affiliate without the
approval of the unitholders.
Our general partner or a later holder may transfer its incentive
distribution rights to an affiliate or another person as part of its merger or
consolidation with or into, or sale of all or substantially all of its assets
to, that person without the prior approval of the unitholders. However, the
transferee must agree to be bound by the provisions of our partnership
agreement. Before the end of the subordination period, other transfers of the
incentive distribution rights will require the affirmative vote of holders of a
majority of the outstanding common units, excluding those held by our general
partner and its affiliates. After the subordination period ends, the incentive
distribution rights will be freely transferable.
Atlas America and its affiliates have agreed that they will not divest
their interest in our general partner without also divesting to the same
acquiror their ownership interest in subsidiaries which act as the general
partner of oil and gas investment partnerships sponsored by them. For a
discussion of this agreement, see "Business-Agreements with Atlas
America-Omnibus Agreement-Disposition of Interest in Our General Partner."
Change of Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to remove Atlas
Pipeline Partners GP, LLC as our general partner or otherwise change management.
If any person or group other than our general partner and its affiliates
acquires beneficial ownership of 20% or more of any class of units, that person
or group will lose voting rights on all of its units and the units will not be
considered outstanding for the purposes of noticing meetings, determining the
presence of a quorum, calculating required votes and other similar matters. In
addition, the removal of our general partner under circumstances where cause
does not exist and our general partner does not consent to that removal has the
adverse consequences described under "--Withdrawal or Removal of Our General
Partner."
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Limited Call Right
If at any time not more than 20% of the outstanding limited partner
interests of any class are held by persons other than our general partner and
its affiliates, our general partner will have the right, which it may assign in
whole or in part to any of its affiliates or to us, to acquire all, but not less
than all, of the remaining limited partner interests of the class held by
unaffiliated persons as of a record date selected by our general partner, on at
least 10 but not more than 60 days' notice. The purchase price is the greater
of:
o the highest cash price paid by our general partner or any of its
affiliates for any limited partner interests of the class
purchased within the 90 days preceding the date on which our
general partner first mails notice of its election to purchase
those limited partner interest and
o the current market price as of the date three days before the
date the notice is mailed.
As a result of our general partner's right to purchase outstanding
limited partner interests, a holder of limited partner interests may have his
limited partner interests purchased at an undesirable time or price. The tax
consequences to a unitholder of the exercise of this call right are the same as
a sale by that unitholder of his common units in the market.
Meetings; Voting
Except as described above for persons owning 20% or more of a class of
units, unitholders or assignees who are record holders of units on a record date
will be entitled to notice of, and to vote at, meetings of our limited partners
and to act upon matters for which approvals may be solicited. Common units that
are owned by an assignee who is a record holder, but who has not yet been
admitted as a substituted limited partner, will be voted by our general partner
at the written direction of the record holder. Absent direction of this kind,
the common units will not be voted, except that, in the case of common units
held by our general partner on behalf of non-citizen assignees, our general
partner shall distribute the votes on those common units in the same ratios as
the votes of limited partners on other units are cast.
Any action to be taken by the unitholders may be taken either at a
meeting of the unitholders or without a meeting if consents in writing
describing the action so taken are signed by holders of the same number of units
as would be necessary to take the action. Meetings of the unitholders may be
called by our general partner or by unitholders owning at least 20% of the
outstanding units of the class for which a meeting is proposed. Unitholders may
vote either in person or by proxy at meetings. The holders of a majority of the
outstanding units of the class or classes for which a meeting has been called,
represented in person or by proxy, will constitute a quorum unless any action by
the unitholders requires approval by holders of a greater percentage of the
units, in which case the quorum will be the greater percentage.
Except as described above under "--Change of Management Provisions,"
each record holder will have a vote in accordance with his percentage interest,
although additional limited partner interests having different voting rights
could be issued. See "--Issuance of Additional Securities." Common units held in
nominee or street name account will be voted by the broker or other nominee in
accordance with the instruction of the beneficial owner. Except as otherwise
provided in our partnership agreement, subordinated units will vote together
with common units as a single class.
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We or the transfer agent will deliver any notice, report or proxy
material required or permitted to be given or made to record holders of common
units under our partnership agreement to the record holder.
Status as Limited Partner or Assignee
The common units will be fully paid, and, except as described above
under "--Limited Liability," unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner sharing 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. See "--Meetings; Voting." We will not treat
transferees who do not execute and deliver a transfer application as assignees
or as record holders of common units, and they will not receive cash
distributions, federal income tax allocations or reports furnished to record
holders. See "-Transfer of Common Units."
Non-Citizen Assignees; Redemption
If we are or become subject to federal, state or local laws or
regulations that, in the reasonable determination of our general partner, create
a substantial risk of cancellation or forfeiture of any property in which we
have an interest because of the nationality, citizenship or related status of
any limited partner or assignee, we may redeem the units held by the limited
partner or assignee at their current market price. In order to avoid any
cancellation or forfeiture, our general partner may require each limited partner
or assignee to furnish information about his nationality, citizenship or related
status. If a limited partner or assignee fails to furnish this information
within 30 days after a request for it, or our general partner determines after
receipt of the information that the limited partner or assignee is not an
eligible citizen, then the limited partner or assignee may be treated as a
non-citizen assignee. In addition to other limitations on the rights of an
assignee who is not a substituted limited partner, a non-citizen assignee does
not have the right to direct the voting of his units and may not receive
distributions in kind upon our liquidation.
Indemnification
Under the partnership agreement, we will indemnify the following
persons, by reason of their status as such, to the fullest extent permitted by
law, from and against all losses, claims or damages arising out of or incurred
in connection with our business:
o our general partner;
o any departing general partner;
o any person who is or was an affiliate of our general partner or
any departing general partner;
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o any person who is or was a member, partner, officer, director,
employee, agent or trustee of our general partner, any departing
general partner or the operating partnership or any affiliate of
a general partner, any departing general partner or the operating
partnership; or
o any person who is or was serving at the request of a general
partner or any departing general partner or any affiliate of a
general partner or any departing general partner as an officer,
director, employee, member, partner, agent, fiduciary or trustee
of another person.
Our indemnification obligation arises only if the indemnified person
acted in good faith and in a manner the person reasonably believed to be in, and
not opposed to, our best interests. With respect to criminal proceedings, the
indemnified person must not have had reasonable cause to believe that the
conduct was unlawful.
Any indemnification under these provisions will be only out of our
assets. Our general partner will not be personally liable for the
indemnification obligations and will not have any obligation to contribute or
loan funds to us in connection with it. The partnership agreement permits us 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 the partnership agreement.
Books and Reports
Our general partner keeps appropriate books on our business at our
principal offices. The books are maintained for both tax and financial reporting
purposes on an accrual basis. For tax and financial reporting purposes, our
fiscal year is the calendar year.
We furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we also furnish
or make available summary financial information within 90 days after the close
of each quarter.
We furnish each record holder information reasonably required for tax
reporting purposes within 90 days after the close of each calendar year. We
expect to furnish information in summary form so that some complex calculations
normally required of partners can be avoided. Our ability to furnish this
summary information to unitholders depends on the cooperation of unitholders in
supplying us with specific information. We will furnish every unitholder with
information to assist him in determining his federal and state tax liability and
filing his federal and state income tax returns, regardless of whether he
supplies us with information.
Right to Inspect Our Books and Records
Our partnership agreement provides that a limited partner can, for a
purpose reasonably related to his interest as a limited partner, upon reasonable
demand and at his own expense, have furnished to him:
o a current list of the name and last known address of each
partner;
o a copy of our tax returns;
o 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;
o copies of our partnership agreement, the certificate of limited
partnership and related amendments and powers of attorney under
which they have been executed;
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o information regarding the status of our business and financial
condition; and
o other information regarding our affairs that is just and
reasonable.
Our general partner intends to keep confidential from the limited
partners trade secrets or other information the disclosure of which our general
partner believes in good faith is not in our best interests or which we are
required by law or by agreements with third parties to keep confidential.
Registration Rights
Under the 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 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
General
The following summarizes material federal income tax considerations
that may be relevant to a prospective unitholder who is a citizen or resident of
the United States. The tax consequences of investing in us may not be the same
for all investors. A careful analysis of your particular tax situation is
required to analyze an investment in our common units properly. Moreover, this
summary does not purport to address all aspects of taxation that may be relevant
to particular unitholders, such as insurance companies, tax-exempt
organizations, foreign corporations and persons who are not citizens or
residents of the United States who may be subject to special treatment under
federal income tax laws, except to the extent specifically discussed in this
summary. As a consequence, we urge you to consult your own tax advisor.
Opinion of Tax Counsel
We have obtained an opinion from Ledgewood Law Firm, P.C., our tax
counsel, concerning the federal tax issues described in this section. The
opinion is based on the facts described in this prospectus and on additional
facts that we provided to tax counsel about how we plan to operate. Any
alteration of our activities from the description we gave to tax counsel may
render the opinion unreliable.
The statements in this discussion and our counsel's opinion are based
on current provisions of the Internal Revenue Code, existing, temporary and
currently proposed Treasury Regulations promulgated under the Internal Revenues
Code, the legislative history of the Internal Revenue Code, existing
administrative rulings and practices of the IRS, and judicial decisions. Future
legislative, judicial or administrative actions or decisions, which may be
retroactive in effect, may cause actual tax consequences to vary substantially
from those discussed in this summary. Moreover, the tax opinion represents only
tax counsel's best legal judgment. It is not binding on the IRS nor does it have
any other official status. We cannot assure you that the IRS will accept tax
counsel's conclusions.
For the reasons set forth in the more detailed discussion as to each
item, Ledgewood Law, P.C. has not rendered an opinion with respect to the
following specific federal income tax issues:
o the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (see "-Tax
Consequences of Unit Ownership-Treatment of Short Sales"),
o whether a unitholder acquiring common units in separate
transactions must maintain a single aggregate adjusted tax basis
in his or her common units (see "-Disposition of Common
Units-Recognition of Gain or Loss"),
o whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (see
"-Disposition of Common Units-Allocations Between Transferors and
Transferees"), and
o whether our method for depreciating Section 743 adjustments is
sustainable (see "-Disposition of Common Units-Section 754
Election").
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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 or her allocable share of the partnership's items of income, gain,
loss and deduction in computing his or her federal income tax liability,
regardless of whether cash distributions are made. Distributions by a
partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of his or her adjusted basis in the partnership
interest immediately before the distribution.
Our counsel is of the opinion that we and our operating partnership
will be treated as a partnerships for federal income tax purposes. We have not
and will not request a ruling from the IRS on this matter. Counsel's opinion is
based partially upon our representations that:
o neither we nor our operating partnership or any operating
subsidiary has elected or will elect to be treated as an
association or corporation;
o we, our operating partnership and each operating subsidiary have
been operated and will be operated in accordance with all
applicable partnership statutes, its applicable partnership
agreement or limited liability company agreement; and
o for each taxable year, more than 90% of our gross income has been
and will be derived from:
o the exploration, development, production, processing,
refining, transportation or marketing of any mineral or
natural resource, including oil, gas or products thereof, or
o other items of income as to which counsel has opined or will
opine are "qualifying income" within the meaning of Section
7704(d) of the Code.
Section 7704 of the Code provides that publicly-traded partnerships
such as us will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "qualifying income exception" exists if at least
90% of a publicly-traded partnership's gross income for every taxable year
consists of "qualifying income." Qualifying income includes income and gains
derived from the transportation of crude oil, natural gas and products thereof.
Other types of qualifying income include interest from other than a financial
business, dividends, gains from the sale or lease of real property and gains
from the sale or other disposition of capital assets held for the production of
income that otherwise constitutes qualifying income. For this purpose, our share
of the gross income earned by our operating subsidiaries will be included in our
gross income as if we directly earned such income. We estimate that less than 1%
of our current gross income is not qualifying income; however, this estimate
could change from time to time. Based upon and subject to this estimate, the
factual representations made by us and our general partner, and a review of the
applicable legal authorities, Ledgewood Law Firm, P.C. is of the opinion that at
least 90% of our gross income will constitute qualifying income. Because this
opinion is based on future operations, it is impossible for the opinion to be
more definitive. Unless our business changes from that of transporting natural
gas, it is unlikely that we would fail to meet the 90% test.
If we fail to meet the qualifying income exception, other than a
failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery, we will be treated as if we had
transferred all of our assets, subject to liabilities, to a newly formed
corporation on the first day of the year in which we fail to meet the qualifying
income exception in return for stock in that corporation, and then distributed
that stock to our unitholders in liquidation of their units. This contribution
and liquidation should be tax-free to us and our unitholders so long as we, at
that time, do not have liabilities in excess of the tax basis of our assets.
Although the tax basis of our assets is now greater than our liabilities, our
tax basis will be reduced over time by depletion and depreciation deductions. If
we incur substantial indebtedness in the future, it is possible that at some
time in the future our liabilities may exceed our tax basis in our assets. If
the deemed contribution and distribution in liquidation happened after such
time, our unitholders would be taxed on the excess of our liabilities over our
assets. Whether or not there is taxable income at the time of this event,
thereafter we would be treated as a corporation for federal income tax purposes.
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If we were treated as a corporation in any taxable year, either as a
result of a failure to meet the qualifying income exception or otherwise, our
items of income, gain, loss and deduction would be reflected only on our tax
return rather than being passed through to the unitholders, and our net income
would be taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
basis in his or her common units, or taxable capital gain, after his or her tax
basis in his or her common units is reduced to zero. Accordingly, treatment of
us 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 common units.
The discussion below is based on the assumption that we will be treated
as a partnership for federal income tax purposes.
Limited Partner Status
Unitholders who have become our limited partners will be treated as our
partners for federal income tax purposes. Counsel is also of the opinion, based
upon and in reliance upon those same representations set forth under
"-Partnership Status," that
o assignees who have executed and delivered transfer applications
and are awaiting admission as limited partners, and
o 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 our partners 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 thereby 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 or her status
as a partner with respect to such units for federal income tax purposes. See
"-Tax Consequences of Unit Ownership-Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by
a unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as our
partners for federal income tax purposes.
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Tax Consequences of Unit Ownership
Flow-through of Taxable Income. We do not pay any federal income tax.
Instead, each unitholder is required to report on his or her income tax return
his or her allocable share of our income, gains, losses and deductions without
regard to whether we make cash distributions to that unitholder. Consequently,
we may allocate income to our unitholders although we have made no cash
distribution to them. Each unitholder will be required to include in income his
or her allocable share of our income, gain, loss and deduction for our taxable
year ending with or within his or her taxable year.
Treatment of Distributions. Our distributions generally will not be
taxable for federal income tax purposes to the extent of a unitholders' tax
basis in his or her common units immediately before the distribution. Our cash
distributions in excess of that 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 our
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, the unitholder must recapture any
losses deducted in previous years. See "-Limitations on Deductibility of Our
Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his or her 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 or her tax basis in
our common units, if the distribution reduces his or her share of our
"unrealized receivables," including depreciation recapture, or substantially
appreciated "inventory items," both as defined in Section 751 of the Internal
Revenue Code, known collectively as "Section 751 assets." To that extent, a
unitholder will be treated as having been distributed his or her 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 or
her. This latter deemed exchange will generally result in the unitholder's
realization of ordinary income under Section 751(b) of the Internal Revenue
Code. That income will equal the excess of:
o the non-pro rata portion of that distribution over
o his or her tax basis for the share of Section 751 assets deemed
relinquished in the exchange.
Ratio of Taxable Income to Distributions. In prior taxable years,
common unitholders received cash distributions that exceeded the amount of
taxable income allocated to the common unitholders. This excess was partially
the result of depreciation deductions, but was primarily the result of special
allocations to our general partner of taxable income earned by our operating
subsidiary of $2,778,000 for the 2000 taxable year, $1,603,000 for the 2001
taxable year and $1,603,000 for the 2002 taxable year which caused a
corresponding reduction in the amount of taxable income allocable to us. Upon
future events specified in the partnership agreement of our operating
subsidiary, including the issuance of additional interests or liquidation, the
special allocations of taxable income previously made to our general partner of
$5,984,000 will be reversed by making special allocations of taxable income to
us. To the extent there is not sufficient income available in such years to
fully reverse the prior special allocations to our general partner, our general
partner will receive additional distributions upon our liquidation.
Consequently, it is possible that in future years common unitholders will
recognize taxable income in excess of cash distributions for the years in which
such reversal is made or have a reduction in liquidation distributions, or both.
Since this will depend upon the timing of future events and the distributions
made at such time, no more definitive conclusion can be made currently.
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Tax Rates. In general the highest effective United States federal
income tax rate for individuals for 2003 is 38.6% and the maximum United States
federal income tax rate for net capital gains of an individual for 2003 is 20%
if the asset disposed of was held for more than 12 months at the time of
disposition. Under tax proposals made by the Bush administration, the reduction
in maximum rates to 35.0% scheduled to be effective in 2006 would be effective
for 2003 and thereafter.
Alternative Minimum Tax. Although we do not expect to 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, deduction or loss for purposes of the alternative minimum tax.
Basis of Common Units. A unitholder's initial tax basis for his or her
common units will be the amount he or she paid for the common units plus his or
her share of our nonrecourse liabilities. That basis will be increased by his or
her share of our income and by any increases in his or her share of our
nonrecourse liabilities. That basis will be decreased, but not below zero, by
our distributions to him or her, by his or her share of our losses, by any
decreases in his or her share of our nonrecourse liabilities and by his or her
share of our expenditures that are not deductible in computing taxable income
and are not required to be capitalized.
Limitations on Deductibility of Our Losses. The deduction by a
unitholder of his or her share of our losses will be limited to the tax basis in
his or her units and, in the case of an individual unitholder or a corporate
unitholder that is subject to the "at risk" rules (for example, 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 its tax basis. A unitholder must recapture losses deducted in
previous years to the extent that distributions cause his at risk amount to be
less than zero at the end of any taxable year. Losses disallowed to a unitholder
or recaptured as a result of these limitations will carry forward and will be
allowable to the extent that his tax basis or at risk amount, whichever is the
limiting factor, is subsequently increased. Upon the taxable disposition of a
unit, any gain recognized by a unitholder can be offset by losses that were
previously suspended by the at risk limitation but may not be offset by losses
suspended by the basis limitation. Any excess loss above that gain previously
suspended by the at risk or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the tax basis
of his or her units, excluding any portion of that basis attributable to his or
her share of our nonrecourse liabilities, reduced by any amount of money he or
she borrows to acquire or hold the 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 or
her 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 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 our income may be deducted in full when the unitholder
disposes of his or her 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.
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A unitholder's share of our net income may be offset by any of our
suspended passive losses, but it may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly-traded partnerships.
Limitations on Interest Deductions. The deductibility of a
non-corporate taxpayer's "investment interest expense" is generally limited to
the amount of that taxpayer's "net investment income." As noted, a unitholder's
share of our net passive income will be treated as investment income for this
purpose. In addition, a unitholder's share of our portfolio income will be
treated as investment income. Investment interest expense includes:
o interest on indebtedness properly allocable to property held for
investment;
o our interest expense attributed to portfolio income; and
o 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.
Allocation of Income, Gain, Loss and Deductions. In general, if we have
a net profit, our items of income, gain, loss and deduction will be allocated
among our general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made to the
common units and in excess of distributions to the subordinated units, or that
incentive distributions are made to our general partner, gross income will be
allocated to the recipients to the extent of these distributions. If we have a
net loss for the entire year, the amount of that loss will generally be
allocated first to our general partner and the unitholders in accordance with
their particular percentage interests in us to the extent of their positive
capital accounts and, second, to our general partner.
As required by the Internal Revenue Code some items of our income,
deduction, gain and loss will be allocated to account for the difference between
the tax basis and fair market value of property contributed to us by our general
partner referred to in this discussion as "contributed property." The effect of
these allocations to a unitholder will be essentially the same as if the tax
basis of the contributed property were equal to its fair market value at the
time of contribution. In addition, specified 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 sufficient to eliminate the negative balance as quickly as possible.
Ledgewood Law Firm, P.C. is of the opinion that, with the exception of
the issues described in "-Disposition of Common Units-Section 754 Election" and
"-Disposition of Common Units-Allocations Between Transferors and Transferees,"
allocations under our partnership agreement will be recognized for federal
income tax purposes in determining a partner's share of an item of our income,
gain, loss or deduction.
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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
our general partner or any former unitholder, we are authorized to pay those
taxes from our funds. That payment, if made, will be treated as a distribution
of cash to the person 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 and
our general partner. 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 a unitholder in which event he could file a claim for credit
or refund.
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 ownership of those units. If so, the unitholder would no longer own
units for federal income tax purposes during the period of the loan and may
recognize gain or loss from the disposition. As a result, during this period:
o any of our income, gain, deduction or loss with respect to those
units would not be reportable by the unitholder;
o any cash distributions we make to that unitholder with respect to
those units would be fully taxable; and
o all of those distributions would appear to be treated as ordinary
income.
Unitholders desiring to assure ownership of their units for tax
purposes and avoid these consequences 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. See also "-Disposition of Common
Units-Recognition of Gain or Loss." Because the IRS has not announced the
results of its study and there is no authority addressing the treatment of short
sales of partnership interests, Ledgewood Law Firm, P.C. is unable to opine on
the treatment of such short sales.
Tax Treatment of Operations
Accounting Method and Taxable Year. We use the accrual method of
accounting for federal income tax purposes. Since the beginning of our
operations, we have used the tax year ending September 30 as our tax year, which
is the tax year for Resource America and its subsidiaries. Section 706 of the
Code generally requires that a partnership's taxable year coincide with the
taxable year of the partners holding a majority interest. As a result of this
offering, Resource America and its subsidiaries will cease to hold a majority of
our interests, and therefore we will convert to a December 31 taxable year. As a
result, we will have two taxable years ending in the 2003 calendar year, and
unitholders will receive two Schedule K-1s from us:
o one for the short taxable year beginning October 1, 2002 and
ending on the date on which units are issued pursuant to
this offering; and
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o a second for the short taxable year beginning on the date on
which units are issued pursuant to this offering and ending
on December 31, 2003.
Each unitholder must include in income his or her share of our income, gain,
loss and deduction for our taxable year(s) ending within or with his or her
taxable year. In addition, a unitholder who has a taxable year ending on a date
other than December 31, and who disposes of all of his or her units following
the close of our taxable year but before the close of his or her taxable year,
must include his or her share of our income, gain, loss and deduction in income
for his or her taxable year, with the result that he or she will be required to
report income for his or her taxable year for his or her share of more than one
year of our income, gain, loss and deduction.
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 property contributed and the tax basis established for that property will be
borne by our general partner and the unitholders. See "-Tax Treatment of
Unitholders-Allocation of Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we acquire or construct is depreciated using accelerated
methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain, determined by reference to the amount
of depreciation previously deducted and the nature of the property, may be
subject to the recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a unitholder who has taken cost recovery or depreciation
deductions with respect to our property may be required to recapture those
deductions as ordinary income upon a sale of his units. See "-Tax Consequences
of Unit Ownership-Allocation of Income, Gain, Loss and Deduction" and
"-Disposition of Common Units-Recognition of Gain or Loss."
Uniformity of Units. We must maintain economic and tax uniformity of
the units to all holders. A lack of tax uniformity can result from a literal
application of Treasury Regulation Sections 1.167(c)-1(a)(6) and 1.197-2(g)(3).
Any resulting non-uniformity could have a negative impact on the value of the
common units by reducing the tax deductions available to a purchaser of units.
See "-Disposition of Common Units-Section 754 Election."
We intend to continue to depreciate or amortize the Section 743(b)
adjustment attributable to unrealized appreciation in the value of contributed
property in a way that will avoid non-uniformity of tax treatment among
unitholders. See "-Disposition of Common Units-Section 754 Election." If we
determine that this position cannot reasonably be taken, we may adopt a
different position in an effort to maintain uniformity. This could 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.
The IRS may challenge any method of depreciating the Section 743(b) adjustment
we adopt. If such a challenge were made and 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. See "-Disposition of Common
Units-Recognition of Gain or Loss."
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Valuation of Our Properties. The federal income tax consequences of the
ownership and disposition of units depends in part on our estimates of the
relative fair market values of our assets. Although we may from time to time
consult with professional appraisers regarding valuation matters, we make many
of the relative fair market value estimates ourselves. These estimates are
subject to challenge and will not be binding on the IRS or the courts. If the
estimates of fair market value are later found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years and incur interest and penalties with respect to such
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 in 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 or her 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.
Should the IRS successfully contest our method of depreciating or
amortizing the Section 743(b) adjustment, described under "-Disposition of
Common Units-Section 754 Election," attributable to contributed property, a
unitholder could realize additional gain from the sale of units than had our
method been respected. In that case, the unitholder may have been entitled to
additional deductions against income in prior years but may be unable to claim
them, with the result to him of greater overall taxable income than appropriate.
Due to the lack of final regulations, Ledgewood Law Firm, P.C. is unable to
opine as to the validity of the convention but believes a contest by the IRS is
unlikely because a successful contest could result in substantial additional
deductions to other unitholders.
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%. However, a portion of this gain or
loss, which will likely be substantial, will be separately computed and taxed as
ordinary income 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. 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 that sale. Thus, a
unitholder may recognize both ordinary income and a capital loss upon a
disposition of units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those interests and maintain a
single adjusted tax basis. 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 would allow a selling unitholder, who can
identify units transferred with an ascertainable holding period, to use the
actual holding period of the units transferred. Thus, according to the ruling, a
unitholder will not be able to select high or low basis common units to sell, as
would be the case with corporate stock, but 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 units transferred must
consistently use that identification method for all subsequent sales or
exchanges of units. A unitholder considering the purchase of additional common
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 Treasury regulations.
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Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or related persons enter into:
o a short sale;
o an offsetting notional principal contract; or
o 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. Our taxable income and
losses are determined annually, prorated on a monthly basis and apportioned
among the unitholders in proportion to the number of units owned by each of them
as of the opening of the American Stock Exchange on the first business day of
the month. However, gain or loss realized on a sale or other disposition of our
assets other than in the ordinary course of business is allocated among the
unitholders as of the opening of the American Stock Exchange on the first
business day of 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 accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Ledgewood Law Firm, P.C. is unable to opine on the
validity of this method of allocating income and deductions between transferors
and transferees of units. 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. Under our partnership agreement, we are authorized to revise our
method of allocation between transferors and transferees, as well as among
partners whose interests otherwise vary during a taxable period, 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 a share of our income, gain, loss and deductions
attributable to that quarter but will not be entitled to receive that cash
distribution.
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 generally permits us to adjust a common unit
purchaser's tax basis in our assets ("inside basis") to reflect his or her
purchase price. This election does not apply to a person who purchases common
units directly from us. The adjustment belongs to the purchaser and not to other
unitholders. For purposes of this discussion, a partner's inside basis in our
assets will be considered to have two components:
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o his or her share of our tax basis in our assets ("common basis")
and
o his or her Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal Revenue Code
require, if the remedial allocation method is adopted, a portion of the
adjustment attributable to recovery property to be depreciated over the
remaining cost recovery period for built-in gain. Under Treasury Regulation
Section 1.167(c)-1(a)(6), an 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. A
literal application of these different rules result in lack of uniformity. Under
our partnership agreement, our general partner is authorized to adopt a position
intended to preserve the uniformity of units even if that position is not
consistent with the Treasury Regulations. See "-Tax Treatment of
Operations-Uniformity of Units."
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. If the contributed property is
not amortizable, we will treat that portion as non-amortizable. This method is
consistent with the regulations under Section 743. This method, however, is
arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6) and
Treasury Regulation Section 1.197-2(g)(3), neither of which is expected to
directly apply to a material portion of our assets. To the extent this Section
743(b) adjustment exceeds that amount, we will apply the rules described in the
Treasury Regulations and legislative history. If we determine that this position
cannot reasonably be taken, we may adopt a different position which could result
in lower annual depreciation or amortization deductions than would otherwise be
allowable to specified unitholders. See "-Tax Treatment of Operations-Uniformity
of Units."
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
allocate some or all of any Section 743(b) adjustment to goodwill not so
allocated by us. Goodwill, as an intangible asset, is generally amortizable over
a longer period of time or under a less accelerated method than our tangible
assets.
A Section 754 election is advantageous if the transferee's tax basis in
his or her units is higher than that 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 a higher tax basis in his or her share of
our assets for purposes of calculating, among other items, his or her
depreciation and depletion deductions and 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 or her units is lower than that 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 adversely
by the election.
The calculations involved in the Section 754 election are complex and
we will make them on the basis of assumptions as to the value of our assets and
other matters. There is no assurance that the determinations we make will not be
successfully challenged by the IRS and that the deductions resulting from them
will not be reduced or disallowed altogether. Should the IRS require a different
basis adjustment to be made, and should, in our opinion, the expense of
compliance exceed the benefit of the election, we may seek permission from the
IRS to revoke our Section 754 election. If permission is granted, a subsequent
purchaser of units may be allocated more income than he would have been
allocated had the election not been revoked.
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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 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.
Dissolutions and Terminations
Upon our dissolution, our assets will be sold and any resulting gain or
loss will be allocated among our general partner and the unitholders. See "-Tax
Consequences of Unit Ownership--Allocation of Income, Gain Loss and Deductions."
We will distribute all cash to our general partner and unitholders in
liquidation in accordance with their positive capital account balances. See "Our
Partnership Agreement-Cash Distribution Policy-Distributions of Cash on
Liquidation."
We will be considered to have 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. Our termination would result 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 might result in more than 12 months of our taxable income or loss
being includable in his taxable income for the year of termination. See "-Tax
Treatment of Operations-Accounting Method and Taxable Year." 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 could 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.
Tax-Exempt Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, nonresident 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.
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 taxable income allocated to a unitholder which is a
tax-exempt organization will be unrelated business taxable income and thus will
be taxable to that 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. Under
current law, it is not anticipated that any significant amount of our gross
income will include that type of income.
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Non-resident aliens and foreign corporations, trusts or estates that
own units will be considered to be engaged in business in the United States on
account of ownership of our units. As a consequence they will be required to
file federal tax returns reporting their share of our income, gain, loss or
deduction and pay federal income tax at regular rates on any net income or gain.
Generally, a partnership is required to pay a withholding tax on the portion of
the partnership's income that is effectively connected with the conduct of a
United States trade or business and which is allocable to foreign partners.
Under rules applicable to publicly traded partnerships, we will withhold
(currently at the rate of 38.6%) on cash distributions made to foreign
unitholders. Each foreign unitholder must obtain a taxpayer identification
number from the IRS and submit that number to our transfer agent on a Form W-8
in order to obtain credit for the taxes withheld.
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 a rate of 30%, in addition to regular federal
income tax, on its share of our income and gain, as adjusted for changes in its
"U.S. net equity," which are effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated by an income tax
treaty between the United States and the country in which the foreign corporate
unitholder is a "qualified resident." In addition, this type of unitholder is
subject to special information reporting requirements under Section 6038C of the
Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
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.
Administrative Matters
Information Returns and Audit Procedures. We 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 or her share of our
income, gain, loss and deduction for our preceding taxable year. In preparing
this information, which is generally not reviewed by counsel, we 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 accounting and reporting positions will yield a
result that conforms with the requirements of the Internal Revenue Code,
regulations, or administrative interpretations of the IRS. We also cannot assure
you that the IRS will not successfully contend in court that those accounting
and reporting 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 any such 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 provides
for one partner to be designated as the "tax matters partner" for these
purposes. The partnership agreement appoints our general partner as our tax
matters partner.
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The tax matters partner will make some elections on our behalf and on
behalf of unitholders. In addition, the tax matters partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The tax matters partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
authority to the tax matters partner. The tax matters partner may seek judicial
review, by which all the unitholders are bound, of a final partnership
administrative adjustment and, if the tax matters partner fails to seek judicial
review, judicial review may be sought by any unitholder having at least a 1%
interest in profits and by unitholders having in the aggregate at least a 5%
profits interest. However, only one action for judicial review will go forward,
and each unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is not consistent
with the treatment of the item on our return. Intentional or negligent disregard
of the consistency requirement may subject a unitholder to substantial
penalties.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
o the name, address and taxpayer identification number of the
beneficial owner and the nominee;
o whether the beneficial owner is
o a person that is not a United States person;
o a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the
foregoing; or
o a tax-exempt entity;
o the amount and description of units held, acquired or transferred
for the beneficial owner; and
o 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, our general partner has registered us 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. Our tax
shelter registration number is 99344000008. Issuance of this registration number
does not mean that an investment in us or the claimed tax benefits have been
reviewed examined or approved by the IRS.
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Registration as a tax shelter may increase the likelihood of an audit
of our tax return or the tax return of a holder of common units. See
"-Administrative Matters-Information Returns and Audit Procedures." Registration
as a tax shelter could also result in penalties being assessed to a holder of
units if he does not comply with the rules discussed in the next paragraph.
We will furnish the registration number to the unitholders, and 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 generated by us 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. These penalties 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 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:
o for which there is, or was, "substantial authority" or
o 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 allocated to 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.
State, Local and Other Tax Considerations
In addition to federal income taxes, you will be subject to other
taxes, including state and local income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property. Although an analysis of
those various taxes is not presented here, each prospective unitholder should
consider their potential impact on his or her investment in us. We currently own
property or do business in Ohio, Pennsylvania and New York, each of which
currently imposes a personal income tax. We may also own property or do business
in other states in the future. A unitholder will be required to file state
income tax returns and to pay state income taxes in some or all of these states
in which we do business or own property and may be subject to penalties for
failure to comply with those requirements. In some states, tax losses may not
produce a tax benefit in the year incurred and also may not be available to
offset income in subsequent taxable years. Some of the states may require us, or
we may elect, to withhold a percentage of income from amounts to be distributed
to a unitholder who is not a resident of the state. Withholding, the amount of
which may be greater or less than a particular unitholder's income tax liability
to the state, generally does not relieve a nonresident unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the amounts distributed
by us. See "-Tax Treatment of Unitholders-Entity-Level Collections." Based on
current law and our anticipated future operations, our general partner
anticipates that any amounts required to be withheld will not be material.
93
It is the responsibility of each unitholder to investigate the legal
and tax consequences, under the laws of pertinent states and localities, of his
or her investment in us. Accordingly, each prospective unitholder should
consult, and must depend upon, his or her own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each unitholder to
file all state and local, as well as United States federal tax returns that may
be required of him or her. Ledgewood Law Firm, P.C. has not rendered an opinion
on the state or local tax consequences of an investment in us.
Investment by Employee Benefit Plans
An investment in us by an employee benefit plan is subject to
additional considerations because the investments of these plans are subject to
the fiduciary responsibility and prohibited transaction provisions of ERISA and
restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other things,
consideration should be given to:
o whether the investment is prudent under Section 404(a)(1)(B) of
ERISA;
o whether, in making the investment, the plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of ERISA;
and
o whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in us is authorized by the appropriate governing instrument and is a
proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit employee benefit plans, and also IRAs that are not considered part of
an employee benefit plan, from engaging in specified transactions involving
"plan assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether the plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that our general partner also would be a
fiduciary of the plan and our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Internal Revenue Code.
94
The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under some circumstances. Under these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things,
o the equity interests acquired by employee benefit plans are
publicly offered securities, i.e., the equity interests are
widely held by 100 or more investors independent of the issuer
and each other, freely transferable and registered under some
provisions of the federal securities laws;
o the entity is an "operating company," i.e., it is primarily
engaged in the production or sale of a product or service other
than the investment of capital either directly or through a
majority-owned subsidiary or subsidiaries; or
o there is no significant investment by benefit plan investors,
which is defined to mean that less than 25% of the value of each
class of equity interest, disregarding some interests held by our
general partner, its affiliates, and some other persons, is held
by the employee benefit plans referred to above, IRAs and other
employee benefit plans not subject to ERISA, including
governmental plans.
Our assets should not be considered "plan assets" under these
regulations because we satisfy the first requirement above.
Plan fiduciaries contemplating a purchase of common units should
consult with their own counsel regarding the consequences under ERISA and the
Internal Revenue Code is light of the serious penalties imposed on persons who
engage in prohibited transactions or other violations.
95
EXPERTS
The financial statements included in this prospectus have been so
included in reliance upon the reports of Grant Thornton LLP, independent
certified public accountants, upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the common units and tax matters will be passed upon
for us by Ledgewood Law Firm, P.C., Philadelphia, Pennsylvania. Specific legal
matters in connection with the common units offered by this prospectus are being
passed upon for the underwriters by Dickstein Shapiro Morin & Oshinsky LLP,
Washington, D.C.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-2 with
respect to this offering of our common units. This prospectus only constitutes
part of the registration statement and does not contain all of the information
set forth in the registration statement, its exhibits, and its schedules.
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms. Please call the
SEC at 1-800-SEC-0330 for additional information on the public reference rooms.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it. This means that we can disclose important information to you by
referring to these documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 will
automatically update and supersede this information.
We incorporate the following document by reference in this prospectus:
o our Annual Report on Form 10-K for the fiscal year ended December
31, 2002.
You may obtain a copy of this filing without charge by writing or
calling us at:
Investor Relations
Atlas Pipeline Partners, L.P.
311 Rouser Road
P.O. Box 611
Moon Township, Pennsylvania 15108
(412) 262-2830
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 different information. We are not making an offer to sell these securities
or soliciting an offer to buy these securities in any state where the offer or
sale is not permitted. You should not assume that the information in this
prospectus or the documents we have incorporated by reference is accurate as of
any date other than the date on the front of those documents.
96
UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement with respect to the common units being offered. Subject to specified
conditions, each underwriter has severally agreed to purchase the number of
common units indicated in the following table. Friedman, Billings, Ramsey & Co.,
Inc., McDonald Investments Inc. and Sanders Morris Harris are the
representatives of the underwriters.
Number of
Underwriters common units
------------ ------------
Friedman, Billings, Ramsey & Co., Inc.......................
McDonald Investments Inc....................................
Sanders Morris Harris Inc...................................
Total.................................................. 950,000
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 142,500 common units from us to cover the sales. They may exercise
that option for 30 days. If any common units are purchased pursuant to that
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 we will pay to the underwriters, assuming both no
exercise and full exercise of the underwriters' option to purchase additional
common units.
No exercise Full exercise
----------- -------------
Per common unit............................. $_____ $_____
Total................................... $_____ $_____
Common units sold by the underwriters to the public will be offered at
the public offering price 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 $______ per common unit from the public offering price. Securities
dealers may resell any common units purchased from the underwriters to various
other brokers or dealers at a discount of up to $_____ per common unit from the
public offering price. If all the common units are not sold at the offering
price, the representatives may change the offering price and the other selling
terms.
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. Stabilizing
transactions consist of some bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common units while
the offering is in progress.
97
The underwriters also may 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 representatives have repurchased common
units sold by or for the account of the underwriter in stabilizing or short
covering transactions.
These activities by the underwriters 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 by the
underwriters at any time. These transactions may be effected on the American
Stock Exchange or otherwise.
We estimate that the total expenses of the offering payable by us,
excluding underwriting discounts and commissions, will be approximately
$__________.
Because the National Association for 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.
Accordingly, the representatives have informed us that the underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority without the prior written approval of the transaction by the customer.
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. The underwriters do not expect sales to
discretionary accounts to exceed five percent of the total number of common
units offered.
We and our general partner have agreed to indemnify the underwriters
against various liabilities, including liabilities under the Securities Act.
The underwriters have engaged in transactions with, and, from time to
time, have performed services for, Resource America, the parent company of Atlas
America, in the ordinary course of business and have received customary fees for
performing these services. Friedman, Billings, Ramsey & Co., Inc. and McDonald
Investments Inc. provided advisory services to us in connection with our
proposed acquisition of Triton, which was terminated in July 2002. In addition,
an affiliate of McDonald Investments Inc. is a lender under our credit facility.
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.
98
Report of Independent Certified Public Accountants
Partners
Atlas Pipeline Partners, L.P.
We have audited the accompanying consolidated balance sheets of Atlas
Pipeline Partners, L.P. and subsidiaries (the "Partnership") as of December 31,
2002 and 2001, and the related consolidated statements of income, partners'
capital (deficit) and cash flows for the years then ended and for the period
from commencement of operations on January 28, 2000 through December 31, 2000,
hereafter referred to as the year ended December 31, 2000. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Partnership at December 31, 2002 and 2001 and the consolidated results of
its operations and its consolidated cash flows for each of the three years in
the period ended December 31, 2002, 2001 and 2000 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements,
effective January 1, 2002, the Partnership changed its method of accounting for
goodwill for the adoption of SFAS No. 142.
/s/ Grant Thornton LLP
---------------------
Cleveland, Ohio
January 27, 2003
F-1
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 1,858,600 $ 2,162,200
Accounts receivable....................................................... 500,000 -
Accounts receivable - affiliates.......................................... - 1,312,300
Prepaid expenses.......................................................... 26,800 123,500
-------------- --------------
Total current assets.................................................... 2,385,400 3,598,000
Property and equipment:
Gas gathering and transmission facilities................................. 29,384,000 24,153,400
Less - accumulated depreciation........................................... (5,619,600) (4,144,000)
-------------- --------------
Net property and equipment.............................................. 23,764,400 20,009,400
Goodwill (net of accumulated amortization of $285,300)........................ 2,304,600 2,304,600
Other assets (net of accumulated amortization of $0 and $53,300).............. 60,900 89,800
-------------- --------------
$ 28,515,300 $ 26,001,800
============== ==============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................................. $ 107,800 $ 189,600
Accounts payable - affiliates............................................. 347,200 -
Distribution payable...................................................... 1,873,800 2,049,600
-------------- --------------
Total current liabilities............................................... 2,328,800 2,239,200
Long-term debt................................................................ 6,500,000 2,089,000
Partners' capital (deficit)
Common unitholders, 1,621,159 units outstanding........................... 19,163,500 20,128,700
Subordinated unitholder, 1,641,026 units outstanding...................... 683,700 1,660,900
General partner........................................................... (160,700) (116,000)
-------------- --------------
Total partners' capital................................................. 19,686,500 21,673,600
-------------- --------------
$ 28,515,300 $ 26,001,800
============== ==============
See accompanying notes to consolidated financial statements
F-2
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
December 31,
-------------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Revenues:
Transportation and compression.............................. $ 10,660,300 $ 13,094,700 $ 9,441,000
Interest income............................................. 6,800 34,600 25,200
--------------- -------------- --------------
Total revenues............................................ 10,667,100 13,129,300 9,466,200
Costs and expenses:
Transportation and compression.............................. 2,061,600 1,929,200 1,223,800
General and administrative.................................. 1,481,900 1,112,800 589,400
Depreciation and amortization............................... 1,475,600 1,356,100 1,019,600
Interest.................................................... 249,800 175,600 8,800
--------------- -------------- --------------
Total costs and expenses.................................. 5,268,900 4,573,700 2,841,600
--------------- -------------- --------------
Net income...................................................... $ 5,398,200 $ 8,555,600 $ 6,624,600
=============== ============== ==============
Net income - limited partners................................... $ 5,022,300 $ 7,499,200 $ 6,492,100
=============== ============== ==============
Net income - general partner.................................... $ 375,900 $ 1,056,400 $ 132,500
=============== ============== ==============
Basic and diluted net income per limited partner unit........... $ 1.54 $ 2.30 $ 2.07
=============== ============== ==============
Weighted average limited partner units outstanding.............. 3,262,185 3,254,543 3,141,026
=============== ============== ==============
See accompanying notes to consolidated financial statements
F-3
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Number of Limited Total
Partner Units Partners'
----------------------- General Capital
Common Subordinated Common Subordinated Partner (Deficit)
------------------------------------------------------------------------------------------
Balance at January 1, 2000........... - - $ - $ - $ 1,000 $ 1,000
Issuance of common units............. 1,500,000 - 18,135,000 - - 18,135,000
Issuance of subordinated units....... - 1,641,026 - 1,220,600 - 1,220,600
Payment of offering expenses......... - - (352,500) (382,400) (16,100) (751,000)
Capital contribution................. - - - - 443,100 443,100
Distributions paid to partners....... - - (1,920,600) (1,237,200) (525,100) (3,682,900)
Distribution payable................. - - (840,000) (919,000) (124,300) (1,883,300)
Net income........................... - - 3,100,300 3,391,800 132,500 6,624,600
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000......... 1,500,000 1,641,026 $ 18,122,200 $ 2,073,800 $ (88,900) $ 20,107,100
Issuance of common units............. 121,159 - 2,250,000 - - 2,250,000
Capital contributions................ - - - - 45,500 45,500
Distributions paid to partners....... - - (3,112,800) (3,150,700) (971,500) (7,235,000)
Distribution payable................. - - (940,300) (951,800) (157,500) (2,049,600)
Net income........................... - - 3,809,600 3,689,600 1,056,400 8,555,600
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001......... 1,621,159 1,641,026 $ 20,128,700 $ 1,660,900 $ (116,000) $ 21,673,600
Distributions paid to partners....... (2,585,700) (2,617,400) (308,400) (5,511,500)
Distribution payable................. (875,400) (886,200) (112,200) (1,873,800)
Net income........................... 2,495,900 2,526,400 375,900 5,398,200
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002......... 1,621,159 1,641,026 $ 19,163,500 $ 683,700 $ (160,700) $ 19,686,500
========= ========= ============= ============ ============= =============
See accompanying notes to consolidated financial statements
F-4
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended Inception through
December 31, December 31,
----------------------------- -----------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 5,398,200 $ 8,555,600 $ 6,624,600
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................................. 1,475,600 1,356,100 1,019,600
Amortization of deferred finance costs......................... 89,800 44,500 8,800
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable
and prepaid expenses......................................... 909,000 350,000 (1,785,800)
(Decrease) increase in accounts payable and
accrued liabilities.......................................... (81,800) (38,000) 101,100
Increase in accounts payable - affiliates...................... 347,200 - -
------------ ------------ ------------
Net cash provided by operating activities.................... 8,138,000 10,268,200 5,968,300
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of gathering systems................................... (165,000) (1,400,000) (16,635,100)
Capital expenditures............................................... (5,065,600) (1,728,000) (1,329,500)
------------ ------------ ------------
Net cash used in investing activities........................ (5,230,600) (3,128,000) (17,964,600)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility............................ 10,815,800 2,089,000 -
Repayments on revolving credit facility............................ (6,404,800) - -
Proceeds from initial public offering.............................. - - 18,135,000
Capital contributions.............................................. - 45,500 443,100
Payment of formation costs......................................... - - (751,000)
Distributions paid to partners..................................... (7,561,100) (9,118,300) (3,682,900)
Increase in other assets........................................... (60,900) (37,700) (105,400)
------------ ------------ ------------
Net cash (used in) provided by financing activities.......... (3,211,000) (7,021,500) 14,038,800
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents................... (303,600) 118,700 2,042,500
Cash and cash equivalents, beginning of year....................... 2,162,200 2,043,500 1,000
------------ ------------ ------------
Cash and cash equivalents, end of year............................. $ 1,858,600 $ 2,162,200 $ 2,043,500
============ ============ ============
Supplemental Cash Flow Information:
Cash paid during the year for interest............................. $ 165,200 $ 94,800 $ -
Non-cash Activities:
Issuance of units in exchange for gas gathering and transmission
facilities:
Common......................................................... - $ 2,250,000 -
Subordinated................................................... - - $ 1,220,600
Liability assumed for gas system acquisition....................... - $ 126,500 -
See accompanying notes to consolidated financial statements
F-5
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1 - NATURE OF OPERATIONS
The Partnership
Atlas Pipeline Partners, L.P. (the "Partnership") is a Delaware limited
partnership formed in May 1999 to acquire, own and operate natural gas gathering
systems theretofore owned by Atlas and its affiliates, Viking Resources
Corporation ("VRC") and Resource Energy, Inc. ("REI") (collectively referred to
as the "Predecessor"), all of which are wholly-owned subsidiaries of Resource
America, Inc. ("RAI" or "Parent"). RAI is a publicly traded company (trading
under the symbol REXI on NASDAQ) operating in energy, real estate and financial
services.
The accompanying financial statements and related notes present the
Partnership's consolidated financial position as of December 31, 2002 and 2001
and its consolidated results of operations, cash flows and changes in partners'
capital (deficit) for the years ended December 31, 2002, 2001 and the period
from commencement of operations on January 28, 2000 through December 31, 2000,
hereafter referred to as the year ended December 31, 2000.
Initial Public Offering and Concurrent Transactions
On January 28, 2000, the Partnership completed its initial public
offering (the "IPO") of 1,500,000 common units ("Common Units") representing
limited partner interests in the Partnership at a price of $13.00 per unit. The
Partnership retained for working capital purposes $750,000 of the $18.1 million
of net proceeds from the IPO and used the balance to pay certain offering costs
and, along with the issuance of 1,641,026 subordinated units valued at $21.3
million, to acquire the gathering systems from the Predecessor.
Consistent with guidance provided by the Emerging Issues Task Force in
Issue No. 87-21 "Change of Accounting Basis in Master Limited Partnership
Transactions," the Partnership maintained the carrying value of the
Predecessor's historical gas gathering and transmission facilities and
associated goodwill of $17.8 million. The issuance of the subordinated units
were valued in the financial statements at $1.2 million, which represented the
excess of the Predecessor's carrying value in the transferred assets over the
cash amount paid for them.
Partnership Structure and Management
The Partnership's operations are conducted through subsidiary entities
whose equity interests are owned by the Partnership's operating partnership
subsidiary, Atlas Pipeline Operating Partnership, L.P., (the "Operating
Partnership"). Atlas Pipeline Partners GP, LLC (the General Partner and a
wholly-owned subsidiary of Atlas), owns, through its general partner interests
in the Partnership and the Operating Partnership, a 2% general partner interest
in the consolidated pipeline operations. The remaining 98% consists of limited
partner interests of which 49.7% consists of Common Units and 50.3% consists of
Subordinated Units. The rights of holders of the Subordinated Units to
distributions are different from and are subordinated to the rights of the
holders of Common Units. Through the ownership of these Subordinated Units and
the General Partner interest, the General Partner effectively manages and
controls both the Partnership and the Operating Partnership.
F-6
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
(except as otherwise noted) in the preparation of the accompanying consolidated
financial statements follows.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Partnership, the Operating Partnership and the Operating Partnership's
wholly-owned subsidiaries. The General Partner's interest in the Operating
Partnership is reported as part of its overall 2% general partner interest in
the Partnership, as opposed to a minority interest. All material intercompany
transactions have been eliminated.
Critical Accounting Policies and Estimates
Certain amounts included in or affecting the Partnership's consolidated
financial statements and related disclosures must be estimated, requiring the
Partnership to make certain assumptions with respect to values or conditions
that cannot be known with certainty at the time the financial statements are
prepared.
The preparation of its consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires the Partnership to make estimates and assumptions that affect:
o the amount the Partnership reports for assets and liabilities;
o the Partnership's disclosure of contingent assets and liabilities at
the date of the financial statements; and
o the amounts the Partnership reports for revenues and expenses during
the reporting period.
Therefore, the reported amounts of the Partnership's assets and
liabilities, revenues and expenses and associated disclosures with respect to
contingent assets and obligations are necessarily affected by these estimates.
The Partnership evaluates these estimates on an ongoing basis, utilizing
historical experience, consultation with experts and other methods the
Partnership considers reasonable in the particular circumstances. Nevertheless,
actual results may differ significantly from the Partnership's estimates. Any
effects on the Partnership's business, financial position or results of
operations resulting from revisions to these estimates are recorded in the
period in which the facts that give rise to the revision become known.
In preparing its consolidated financial statements and related
disclosures, the Partnership must use estimates in determining the economic
useful lives or impairment of its long-lived assets, provisions for
uncollectible accounts receivable, exposures under contractual indemnifications
and various other recorded or disclosed amounts. However, the Partnership
believes that certain accounting policies are of more significance in its
financial statement preparation process than others. With respect to
environmental exposure, the Partnership utilizes both internal and external
experts to assist it in identifying environmental issues.
Property and Equipment
Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to operations over the estimated useful lives of the
assets. Gas gathering and transmission facilities are depreciated over 15 or 20
years using the straight-line and double-declining balance methods. Other
equipment is depreciated over 5 to 10 years using the straight-line method.
F-7
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Impairment of Long-Lived Assets
The Partnership reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If it is determined that an asset's estimated future cash flows
will not be sufficient to recover its carrying amount, an impairment charge will
be recorded to reduce the carrying amount for that asset to its estimated fair
value (see New Accounting Standards).
Goodwill
Goodwill is evaluated for impairment in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142. As of January 1, 2002, the date
of adoption, the Partnership had unamortized goodwill in the amount of $2.3
million. The Partnership completed the transitional impairment and annual tests
required by that standard, which involve the use of estimates related to the
fair market value of the business operations associated with the goodwill. These
tests did not indicate an impairment loss. The Partnership will continue to
evaluate its goodwill at least annually and will reflect the impairment of
goodwill, if any, in operating income in the income statement in the period in
which the impairment is indicated.
Prior to the adoption of SFAS No. 142 on January 1, 2002, the
Partnership amortized goodwill on a straight-line basis over 30 years.
Amortization expense related to goodwill was $88,000 and $80,000 for the years
ended December 31, 2001 and 2000, respectively. Assuming that the Partnership
had applied SFAS No. 142 in 2001 and 2000, pro forma net income for those years
would have been $8,643,600 and $6,704,600, respectively, and pro forma net
income per limited partner unit for the years ended December 31, 2001 and 2000
would have been $2.33 and $2.09, respectively.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and a corresponding increase in
the carrying amount of the related long-lived asset. SFAS 143 will be effective
for fiscal years beginning after June 15, 2002. The Partnership is currently
assessing the impact of the adoption of SFAS 143 on its results of operations
and its financial position.
F-8
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
In May 2002, SFAS 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued.
SFAS 145 rescinds the automatic treatment of gains and losses from
extinguishments of debt as extraordinary unless they meet the criteria for
extraordinary items as outlined in Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 145 also requires sale-leaseback accounting for
certain lease modifications that have economic effects similar to a
sale-leaseback transaction and makes various corrections to existing
pronouncements. The provisions of this statement are effective for financial
statements issued by the Partnership in 2003. The Partnership does not expect
the adoption of SFAS 145 to have a material effect on our consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses
significant issues relating to the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities, and nullifies the guidance in Emerging Issues Task Force Issue
("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". The provisions of this statement are effective for exit
and disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Partnership does not expect SFAS 146 to have a
material impact on its results of operations or its financial position.
Distributions
The Partnership is required to distribute, within 45 days of the end of
each quarter, all of its available cash for that quarter. For each quarter
during the subordination period (through at least December 31, 2004), to the
extent there is sufficient cash available, the original Common Unit holders have
the right to receive a minimum quarterly distribution ("MQD") of $.42 per unit
prior to any distribution to the subordinated units. The General Partner, in
connection with a distribution support agreement, was required to advance the
first distribution due to the normal lag time between transportation of gas
volumes and receipt of cash. Since that time, the Partnership has met all MQD
requirements. The General Partner was subsequently repaid from the second
quarterly distribution. If distributions in any quarter exceed specified target
levels, the General Partner will receive between 15% and 50% of such
distributions in excess of the specified target levels.
Federal Income Taxes
The Partnership is a limited partnership. As a result, the
Partnership's income for federal income tax purposes is reportable on the tax
returns of the individual partners. Accordingly, no recognition has been given
to income taxes in the accompanying financial statements of the Partnership.
Net income, for financial statement purposes, may differ significantly
from taxable income reportable to unitholders as a result of differences between
the tax bases and financial reporting bases of assets and liabilities and the
taxable income allocation requirements under the partnership agreement. These
different allocations can and usually will result in significantly different tax
capital account balances in comparison to the capital accounts per the
consolidated financial statements.
F-9
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Revenue Recognition
Revenues are recognized at the time the natural gas is transported
through the gathering systems. Under the terms of its natural gas gathering
agreements with Atlas and its affiliates, the Partnership receives fees for
gathering natural gas from wells owned by Atlas, by limited partnerships
sponsored by Atlas or by independent third parties whose wells were connected to
the Partnership's gathering systems when operations commenced in 2000. The fees
received for the gathering services are the greater of 16% of the gross sales
price for gas produced from the wells, or $.35 or $.40 per thousand cubic feet
("Mcf"), depending on the ownership of the well. Substantially all gas gathering
revenues are derived under this agreement. Fees for transportation services
provided to independent third parties whose wells are connected to the
Partnership's gathering systems are at separately negotiated prices.
Segment Information
The Partnership has one business segment, the transportation segment,
which derives its revenues primarily from the transportation of natural gas that
it receives from producers. Transportation revenues are, for the most part,
based on contractual arrangements with Atlas and its affiliates.
Fair Value of Financial Instruments
For cash and cash equivalents, receivables and payables, the carrying
amounts approximate fair values because of the short maturity of these
instruments. The carrying value of long-term debt approximates fair market value
since interest rates approximate current market rates.
Net Income Per Unit
There is no difference between basic and diluted net income per limited
partner unit since there are no potentially dilutive units outstanding. Net
income per limited partner unit is determined by dividing net income, after
deducting the General Partner's 2% interest and incentive distributions, by the
weighted average number of outstanding Common Units and Subordinated Units (a
total of 3,262,185, 3,254,543 and 3,141,026 units as of December 31, 2002, 2001
and 2000, respectively).
F-10
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Comprehensive Income
Comprehensive income includes net income and all other changes in
equity of a business during a period from non-owner sources. These changes,
other than net income, are referred to as "other comprehensive income." The
Partnership has no material elements of comprehensive income, other than net
income, to report.
Cash Flow Statements
For purposes of the statements of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less are considered to
be cash equivalents.
Concentration of Credit Risk
Financial instruments, which potentially subject the Partnership to
concentrations of credit risk, consist principally of periodic temporary
investments of cash. The Partnership places its temporary cash investments in
high quality short-term money market instruments and deposits with high quality
financial institutions. At December 31, 2002, the Partnership and its
subsidiaries had $1.9 million in deposits at one bank, of which $1.7 million was
over the insurance limit of the Federal Deposit Insurance Corporation. No losses
have been experienced on such investments.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Partnership is affiliated with RAI and its subsidiaries, including
Atlas, VRC and REI ("Affiliates"). The Partnership is dependent upon the
resources and services provided by RAI and these Affiliates. Accounts
receivable/payable-affiliates represents the net balance due from or due to
these Affiliates for natural gas transported through the gathering systems, net
of reimbursements for Partnership costs and expenses paid by these Affiliates.
Substantially all Partnership revenue is from these Affiliates.
The Partnership does not currently directly employ any persons to
manage or operate its business. These functions are provided by the General
Partner and employees of RAI and/or its Affiliates. The General Partner does not
receive a management fee or other compensation in connection with its management
of the Partnership apart from its interest as general partner and its right to
receive incentive distributions. The Partnership reimburses Atlas and/or its
Affiliates for all direct and indirect costs of services provided, including the
cost of employees, officer and managing board member compensation and benefits
properly allocable to the Partnership and all other expenses necessary or
appropriate to the conduct of the business of, and allocable to, the
Partnership.
The partnership agreement provides that the General Partner will
determine the costs and expenses that are allocable to the Partnership in any
reasonable manner determined by the General Partner at its sole discretion. For
the years ended December 31, 2002, 2001 and 2000, such reimbursements were
approximately $4.4 million, $4.1 million and $3.0 million, respectively,
including costs capitalized by the Partnership.
F-11
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2002
NOTE 3 - RELATED PARTY TRANSACTIONS - (Continued)
Under an agreement with Atlas and its Affiliates, Atlas must construct
up to 2,500 feet of sales lines from its existing wells to a point of connection
to the Partnership's gathering systems. The Partnership must, at its own cost,
extend its system to connect to any such lines extended to within 1,000 feet of
its gathering systems. With respect to wells to be drilled by Atlas that will be
more than 3,500 feet from the Partnership's gathering systems, the Partnership
has various options to connect those wells to its gathering systems at its own
cost.
Atlas has agreed to provide the Partnership with financing for the cost
of constructing new gathering system expansions through February 2, 2005, on a
stand-by basis. If the Partnership chooses to use this stand-by commitment, the
financing will be provided through the issuance of Common Units to Atlas. The
number of Common Units issued will be based upon the construction costs advanced
and the fair value of the Common Units at the time of such advances. The
commitment is for a maximum of $1.5 million in any contract year. As of December
31, 2002, the Partnership had not availed itself of the stand-by financing.
NOTE 4 - DISTRIBUTION DECLARED
On December 23, 2002, the Partnership declared a cash distribution of
$.54 per unit on its outstanding Common Units and Subordinated Units. The
distribution represented the available cash flow for the three months ended
December 31, 2002. The $1,873,800 distribution, which includes a distribution of
$112,200 to the General Partner in respect to its general partner interest, is
scheduled to be paid on February 7, 2003 to unit holders of record on December
31, 2002.
NOTE 5 - CREDIT FACILITY
In December 2002, the Partnership entered into a $7.5 million credit
facility administered by Wachovia Bank, National Association. In January 2003,
Wachovia Bank increased the facility by an additional $2.5 million through June
2003. Borrowings under the facility are secured by a lien on and security
interest in all the property of the Partnership and its subsidiaries, including
pledges by the Partnership of the issued and outstanding equity interests in its
subsidiaries. Up to $3.0 million of the facility may be used for standby letters
of credit. No such letters of credit have been issued under the facility. The
revolving credit facility has a term ending in December 2005 and bears interest
at one of two rates, elected at the Partnership's option:
o the base rate plus the applicable margin; or
o the adjusted LIBOR plus the applicable margin.
The base rate for any day equals the higher of the federal funds rate
plus 1/2 of 1% or the Wachovia Bank prime rate. Adjusted LIBOR is LIBOR divided
by 1.00 minus the percentage prescribed by the Federal Reserve Board for
determining the reserve requirement for euro currency funding. The applicable
margin is as follows:
o where the Partnership's leverage ratio, as defined in the credit
facility agreement, is less than or equal to 1.5, the applicable
margin is 0.00% for base rate loans and 1.50% for LIBOR loans;
o where the Partnership's leverage ratio is greater than 1.5 but less
than or equal to 2.5, the applicable margin is 0.25% for base rate
loans and 1.75% for LIBOR loans; and
o where the Partnership's leverage ratio is greater than 2.5, the
applicable margin is 0.50% for base rate loans and 2.00% for LIBOR
loans.
At December 31, 2002, borrowings under the Wachovia credit facility
bore interest at 2.92%.
F-12
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2002
NOTE 5 - CREDIT FACILITY - (Continued)
The Wachovia credit facility requires the Partnership to maintain
specified net worth and specified ratios of current assets to current
liabilities and debt to EBITDA, and requires it to maintain a specified interest
coverage ratio. The Partnership used this credit facility to pay off our
previous revolving credit facility at PNC Bank. At December 31, 2002, $6.5
million was outstanding under this facility.
NOTE 6 - LEASES AND COMMITMENTS
The Partnership leases certain compressors associated with its
gathering systems under lease agreements which expire in 2003. Rent expense for
the years ended December 31, 2002, 2001 and 2000 was $839,900, $783,700 and
$617,900, respectively. Minimum future lease payments for these leases in 2003
amount to $127,200.
NOTE 7 - ACQUISITIONS
In January 2001, the Partnership acquired the gas gathering system of
Kingston Oil Corporation. The gas gathering system consists of approximately 100
miles of pipeline located in southeastern Ohio. The purchase price was
$2,750,000, consisting of $1.25 million of cash and 88,235 common units valued
at $17.00 per unit.
In March 2001, the Partnership acquired the gas gathering system of
American Refining and Exploration Company. The gas gathering system consists of
approximately 20 miles of pipeline located in Fayette County, Pennsylvania. The
purchase price was $900,000, consisting of $150,000 of cash and 32,924 common
units valued at $22.78 per unit.
These acquisitions were accounted for under the purchase method of
accounting and, accordingly, the purchase prices were allocated to the assets
acquired based on their fair values at the dates of acquisition. The pro forma
effect of these acquisitions on prior operations to the acquisition dates is not
material.
F-13
ATLAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2002
NOTE 8 - TERMINATION OF PROPOSED ACQUISITION
On July 31, 2002, the Partnership terminated its agreement with New
Vulcan Coal Holdings, L.L.C. and Vulcan Intermediary, L.L.C. (collectively,
"Vulcan") to acquire Triton Coal Company ("Triton"). The related purchase
agreement for the sale of the interests held by Atlas in the Partnership's
General Partner also terminated. The Partnership has incurred approximately
$1,456,000 in costs in connection with the Triton transaction. Atlas had
advanced these costs to the Partnership. Such advances, net of reimbursements of
$687,500 from Vulcan referred to in the next paragraph, are included in
"accounts payable--affiliates" at December 31, 2002.
The Partnership and its affiliates have requested reimbursement from
Vulcan under the terms of the acquisition agreement for $1,187,500 of the
transaction costs. The Partnership has expensed transaction costs of $268,500,
the difference between costs incurred and those reimbursable by Vulcan. As of
December 31, 2002, Vulcan has reimbursed the Partnership $687,500 of these
costs, which in turn were reimbursed to Atlas. The remaining costs of $500,000
that are reimbursable by Vulcan are included on the Partnership's consolidated
balance sheet as accounts receivable and are expected to be collected over the
next two quarters. The Partnership anticipates that it will further repay Atlas
from the Vulcan reimbursement.
NOTE 9 - QUARTERLY FINANCIAL DATA (Unaudited)
For the Quarter Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- --------- ------------ -----------
(in thousands, except for unit and per unit data)
Year ended December 31, 2002
Revenues.................................................... $ 2,577 $ 2,618 $ 2,667 $ 2,805
Costs and expenses.......................................... 1,205 1,382 1,276 1,406
Net income.................................................. 1,372 1,236 1,391 1,399
Net income - limited partners............................... 1,292 1,143 1,290 1,297
Net income - general partner................................ 80 93 101 102
Basic and diluted net income per limited partner unit....... .40 .35 .40 .39
Weighted average units outstanding.......................... 3,262,185 3,262,185 3,262,185 3,262,185
Year ended December 31, 2001
Revenues.................................................... $ 4,281 $ 3,424 $ 2,587 $ 2,837
Costs and expenses.......................................... 945 1,225 1,230 1,174
Net income.................................................. 3,336 2,199 1,357 1,663
Net income - limited partners............................... 2,987 1,801 1,195 1,516
Net income - general partner................................ 349 398 162 147
Basic and diluted net income per limited partner unit....... .92 .55 .37 .46
Weighted average units outstanding.......................... 3,231,193 3,262,185 3,262,185 3,262,185
F-14
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................3
RISK FACTORS.....................................................................................................18
USE OF PROCEEDS..................................................................................................26
MARKET PRICE RANGE AND CASH DISTRIBUTIONS ON COMMON UNITS........................................................27
CAPITALIZATION...................................................................................................28
SELECTED FINANCIAL DATA..........................................................................................29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................31
BUSINESS.........................................................................................................39
MANAGEMENT.......................................................................................................49
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES.............................................................53
OUR PARTNERSHIP AGREEMENT........................................................................................58
TAX CONSIDERATIONS...............................................................................................80
EXPERTS..........................................................................................................97
LEGAL MATTERS....................................................................................................97
UNDERWRITING.....................................................................................................98
CONSOLIDATED FINANCIAL STATEMENTS...............................................................................F-1
No person is authorized to give any information or to represent
anything not contained in this prospectus. You must not rely on any unauthorized
representations or information. This prospectus is an offer to sell only the
limited partner interests offered hereby, and 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.
Dealer Prospectus Delivery Obligation
Until _________, 2003, (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
950,000 Common Units
ATLAS PIPELINE PARTNERS, L.P.
Representing Limited
Partner Interests
FRIEDMAN BILLINGS RAMSEY
McDONALD INVESTMENTS INC.
SANDERS MORRIS HARRIS
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Set forth below are the expenses (other than underwriting discounts and
commissions) we expect to pay in connection with the issuance and distribution
of the securities registered hereby. With the exception of the Securities and
Exchange Commission registration fee, the NASD filing fee and the AMEX listing
fee, the amounts set forth below are estimated:
Securities and Exchange Commission registration fee..................$2,394
NASD filing fee ..................................................... 3,231
AMEX listing fee.....................................................21,850
Printing and engraving expenses......................................
Legal fees and expenses..............................................
Accounting fees and expenses.........................................
Transfer agent and registrar ........................................
Miscellaneous........................................................
TOTAL ...............................................................
Item 15. Indemnification of Directors and Officers
The section of the prospectus entitled "Our Partnership
Agreement--Indemnification" is incorporated herein by this reference. Subject to
any terms, conditions or restrictions set forth in the Partnership Agreement,
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act empowers
a Delaware limited partnership to indemnify and hold harmless any partner or
other person from and against all claims and demands whatsoever.
As permitted by Section 102(b)(7) of the Delaware General Corporation
Law, the bylaws of each of Atlas America and Resource America, provide that its
officers and directors (including those who act at its request as officers of
and directors of subsidiaries) shall not be personally liable to the
corporations or its stockholders for monetary damages for breach of fiduciary
duty, except for liability (i) for any breach of their duty of loyalty, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, relating to prohibited dividends or distributions or the
repurchase or redemption of stock, or (iv) for any transaction from which the
director or officer derives an improper personal benefit. In addition, they
provide for indemnification of its officers and directors to the fullest extent
permitted under Delaware law, including indemnification for their service as
officers and directors of subsidiaries.
Substantially the same provisions regarding indemnification are
contained in the limited liability company agreement of Atlas Pipeline Partners
GP, LLC, our general partner.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Atlas
America, Resource America or Atlas Pipeline Partners GP, LLC pursuant to the
foregoing provisions, or otherwise, Atlas America, Resource America, Atlas
Pipeline and Atlas Pipeline Partners GP, LLC have been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
II-1
Resource America, the corporate parent of Atlas America and indirect
corporate parent of Atlas Pipeline Partners GP, LLC, maintains directors' and
officers' liability insurance against any actual or alleged error, misstatement,
misleading statement, act, omission, neglect or breach of duty by any director
or officer of itself or any direct or indirect subsidiary, excluding certain
matters including fraudulent, dishonest or criminal acts or self-dealing.
Item 16. Exhibits and Financial Statements Schedules
(a) Exhibits:
1.1(1) Form of Underwriting Agreement
3.1(2) Amended and Restated Agreement of Limited Partnership of Atlas
Pipeline Partners, L.P.
3.2(2) Certificate of Limited Partnership of Atlas Pipeline Partners,
L.P.
3.2(2) Certificate of Limited Partnership of Atlas Pipeline Operating
Partnership, L.P.
4.1(2) Form of common unit certificate
5.1(1) Opinion of Ledgewood Law Firm, P.C. as to the legality of the
securities being registered
8.1(1) Opinion of Ledgewood Law Firm, P.C. relating to tax matters
10.1(2) Amended and Restated Agreement of Limited Partnership of Atlas
Pipeline Operating Partnership, L.P. dated February 2, 2000.
10.2(2) Omnibus Agreement among Atlas Pipeline Partners, L.P., Atlas
Pipeline Operating Partnership, L.P., Atlas America, Inc.,
Resource Energy, Inc. and Viking Resource Corporation dated
February 2, 2000.
10.3(2) Master Natural Gas Gathering Agreement among Atlas Pipeline
Partners, L.P., Atlas America Operating Pipeline Partnership,
L.P., Atlas America, Inc., Resource Energy, Inc., and Viking
Resources Corporation dated February 2, 2000.
10.4(3) Natural Gas Gathering Agreement among Atlas Pipeline Partners,
L.P., Atlas Pipeline Operating Partnership, L.P., Atlas
Resources, Inc., Atlas Energy Group, Inc., Atlas Noble Corp.,
Resource Energy, Inc. and Viking Resources Corporation dated
January 1, 2002.
10.5(3) Credit Agreement among Atlas Pipeline Partners, L.P., Wachovia
Bank, National Association and certain subsidiaries of Atlas
Pipeline Partners, L.P. as guarantors dated December 27, 2002.
10.6(3) First Amendment to Credit Agreement dated January 31, 2003.
10.7(3) Second Amendment to Credit Agreement dated March 28, 2003.
21.1(3) Subsidiaries of Atlas Pipeline Partners, L.P.
23.1 Consent of Grant Thornton LLP
23.2(1) Consent of Ledgewood Law Firm, P.C. (contained in Exhibits 5.1
and 8.1)
24.1 Powers of Attorney (included as part of signature pages to
this registration statement)
-------------
(1) To be supplied by amendment.
(2) Previously filed as an exhibit to the Registration Statement on Form S-1
(Registration No. 333-85193)
(3) Previously filed as an exhibit to our Annual Report on Form 10-K for the
year ended December 31, 2002.
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information is not
required, is not material or is otherwise included in the financial statements
or related notes thereto.
II-2
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
o For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared
effective.
o For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Moon Township, Pennsylvania, on April 2, 2003.
ATLAS PIPELINE PARTNERS, L.P.
By: Atlas Pipeline Partners GP, LLC, its General Partner
By: /s/ Michael L. Staines
--------------------------------------------
Michael L. Staines
President, Chief Operating Officer and Secretary
KNOWN ALL PERSONS BY THESE PRESENTS, that the persons whose signatures
appear below, constitute and appoint Jonathan Z. Cohen and Michael L. Staines,
and each of them, as their true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for them and in their names,
places and steads, in any and all capacities, to sign the registration statement
to be filed in connection with the public offering of limited partnership
interests of Atlas Pipeline Partners, L.P. and any and all amendments (including
post-effective amendments) to the registration statement, and any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and the other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and conforming
all that said attorneys-in-fact and agents, or any of them, or their or his or
her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities for Atlas Pipeline Partners GP, LLC on
April 2, 2003.
Signature Title
--------- -----
/s/ Edward E. Cohen Chairman of the Managing Board (Chief Executive Officer)
------------------------------------
Edward E. Cohen
/s/ Jonathan Z. Cohen Vice Chairman of the Managing Board
------------------------------------
Jonathan Z. Cohen
/s/ Michael L. Staines President, Chief Operating Officer, Secretary and
------------------------------------
Michael L. Staines Managing Board Member
/s/ Steven J. Kessler Chief Financial Officer
------------------------------------
Steven J. Kessler
/s/ Nancy J. McGurk Chief Accounting Officer
------------------------------------
Nancy J. McGurk
/s/ Murray S. Levin Managing Board Member
------------------------------------
Murray S. Levin
/s/ George C. Beyer, Jr. Managing Board Member
------------------------------------
George C. Beyer, Jr.
/s/ William R. Bagnell Managing Board Member
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William R. Bagnell
/s/ Tony C. Banks Managing Board Member
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Tony C. Banks
II-4