e424b3
The
information in this preliminary prospectus supplement is not
complete and may be changed. This preliminary prospectus
supplement and the attached prospectus are not an offer to sell
and do not seek an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-126447
SUBJECT TO COMPLETION, DATED
DECEMBER 13, 2006
PROSPECTUS SUPPLEMENT
(To Prospectus Dated July 22, 2005)
6,163,960 Common Units
Representing Limited Partner
Interests
We are offering 6,163,960 common units directly to certain
purchasers (the Purchasers) in a privately
negotiated transaction at a price of $48.67 per unit. We
expect to receive net proceeds of approximately
$306 million, including our general partners
proportionate capital contribution after deducting offering
expenses, from this sale of our common units.
Our common units are listed on The New York Stock Exchange under
the symbol PAA. The last reported sale price of our
common units on the New York Stock Exchange on December 12,
2006 was $51.40 per share.
Investing in our common units involves risks. See Risk
Factors beginning on
page S-1
of this prospectus supplement and on page 5 of the
accompanying prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus supplement is
December , 2006.
This document is in two parts. The first part is the prospectus
supplement, which describes our business and the specific terms
of this offering. The second part, the base prospectus, gives
more general information, some of which may not apply to this
offering. Generally, when we refer only to the
prospectus, we are referring to both parts combined.
If the description of the offering varies between the prospectus
supplement and the base prospectus, you should rely on the
information in the prospectus supplement.
You should rely only on the information contained in or
incorporated by reference in this prospectus. We have not
authorized anyone to provide you with different information. We
are not making an offer of the common units in any jurisdiction
where the offer is not permitted. You should not assume that the
information contained in this prospectus or in the documents
incorporated by reference in this prospectus is accurate as of
any date other than the date on the front of those documents.
The information in this prospectus supplement is not complete.
You should review carefully all of the detailed information
appearing in this prospectus supplement, the accompanying
prospectus and the documents we have incorporated by reference
before making any investment decision.
TABLE OF
CONTENTS
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Prospectus Supplement
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S-1
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S-1
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S-2
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S-3
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S-4
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S-5
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S-7
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S-8
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Prospectus
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1
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5
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13
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13
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21
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42
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43
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PLAINS
ALL AMERICAN PIPELINE, L.P.
We are a Delaware limited partnership formed in September 1998.
Our operations are conducted directly and indirectly through our
primary operating subsidiaries, Plains Marketing, L.P., Plains
Pipeline, L.P. and Plains Marketing Canada, L.P. Giving effect
to the Pacific Merger (defined below), we also operate through
Pacific Energy Group LLC and PEG Canada L.P. We are engaged in
the transportation, storage, terminalling and marketing of crude
oil, refined products and liquefied petroleum gas and other
natural gas related petroleum products. We own an extensive
network of pipeline transportation, terminalling, storage and
gathering assets in key oil producing basins, transportation
corridors and at major market hubs in the United States and
Canada. In addition, through our 50% equity ownership in
PAA/Vulcan Gas Storage, LLC, we develop and operate natural gas
storage facilities.
On November 15, 2006, we completed our acquisition of
Pacific Energy Partners, L.P. (Pacific Energy)
pursuant to an Agreement and Plan of Merger dated June 11,
2006 (the Pacific Merger).
Our executive offices are located at 333 Clay Street,
Suite 1600, Houston, Texas 77002 and our telephone number
is
(713) 646-4100.
RISK
FACTORS
You should carefully consider the risk factors discussed in our
2005 annual report on
Form 10-K
and our quarterly reports on
Form 10-Q
for the quarters ended June 30, 2006 and September 30,
2006, as amended, together with all of the other information
included in this prospectus supplement, the accompanying
prospectus and the documents we have incorporated by reference
into this prospectus in evaluating an investment in our common
units. If any of the described risks actually were to occur, our
business, financial condition or results of operations could be
materially adversely affected.
S-1
USE OF
PROCEEDS
The net proceeds of this offering will be approximately
$306 million, including our general partners
proportionate capital contribution after deducting estimated
offering expenses. We intend to use the net proceeds of this
offering (i) to repay indebtedness; (ii) to fund
capital expenditures; and (iii) for general corporate
purposes.
Indebtedness under our senior unsecured credit facility was
approximately $473 million as of December 11, 2006,
and had an annual interest rate of 5.5% and a final maturity in
July 2011. Substantially all of the outstanding indebtedness
under the facility was incurred to fund acquisitions (including
the Pacific Merger), capital expansion projects, working capital
requirements and the purchase of hedged inventory.
S-2
PRICE
RANGE OF COMMON UNITS AND DISTRIBUTIONS
As of December 11, 2006, we had 103,241,218 common units
outstanding, held by approximately 400 holders of record. Our
common units are traded on the New York Stock Exchange under the
symbol PAA.
The following table sets forth, for the periods indicated, the
high and low sales prices for the common units, as reported on
the New York Stock Exchange Composite Transactions Tape, and
quarterly cash distributions declared per common unit and
subordinated unit. The last reported sale price of common units
on the New York Stock Exchange on December 12, 2006 was
$51.40 per common unit.
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Price Range
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Cash
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High
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Low
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Distributions(1)
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2004
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First Quarter
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$
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35.23
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$
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31.18
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$
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0.5625
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Second Quarter
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36.13
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27.25
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0.5775
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Third Quarter
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35.98
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31.63
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0.6000
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Fourth Quarter
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37.99
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34.51
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0.6125
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2005
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First Quarter
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$
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40.98
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$
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36.50
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$
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0.6375
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Second Quarter
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45.08
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38.00
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0.6500
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Third Quarter
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48.20
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42.01
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0.6750
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Fourth Quarter
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42.82
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38.51
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0.6875
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2006
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First Quarter
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$
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47.00
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$
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39.81
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$
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0.7075
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Second Quarter
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48.92
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42.81
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0.7250
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Third Quarter
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47.35
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43.21
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0.7500
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Fourth Quarter (through
December 12, 2006)
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53.23
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45.20
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Represents cash distributions per common unit declared with
respect to the quarter and paid in the following quarter. |
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The distribution attributable to the fourth quarter of 2006 has
not yet been declared or paid. Following completion of the
Pacific Merger, Plains management announced its intention
to recommend that the board of directors of Plains general
partner increase the annual distribution rate to $3.20 effective
with Plains next distribution in February 2007. |
S-3
PLAN OF
DISTRIBUTION
We are selling the common units offered pursuant to this
prospectus directly to the following purchasers in a privately
negotiated transaction in which no party is acting as an
underwriter:
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Purchaser
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Common Units
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Total
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6,163,960
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Subject to the terms of a purchase agreement to be entered into,
the purchasers are expected to agree to purchase, and we intend
to sell to the purchasers, 6,163,960 common units at a
price of $48.67 per unit. We will determine the per unit
price through negotiations with the purchasers.
The purchasers have agreed not to offer, sell, contract to sell,
pledge or otherwise dispose of (or enter into any transaction
which is designed to, or might reasonably be expected to, result
in the disposition (whether by actual disposition or effective
economic disposition due to cash settlement or otherwise)),
directly or indirectly, including the filing (or participation
in the filing) of a registration statement with the Securities
and Exchange Commission (the SEC) in respect of, or
establish or increase a put equivalent position or liquidate or
decrease a call equivalent position within the meaning of
Section 16 of the Securities Exchange Act of 1934, as
amended, with respect to the purchased common units for a period
of 90 days after the closing date of this transaction
without our prior written consent; however, a purchaser
may enter into a total return swap or similar transaction as
long as the swap counterparty agrees to be bound by the terms of
the lock-up.
We expect to deliver the units through the book entry facilities
of The Depository Trust Company against payment of the aggregate
purchase price for the units purchased on or about
December , 2006; provided, however, that
we and certain of the purchasers may agree to close the offering
with respect to the common units being offered to such purchaser
on a later date as mutually agreed upon by us and such purchaser
in accordance with the purchase agreement.
S-4
WHERE YOU
CAN FIND MORE INFORMATION
The SEC allows us to incorporate by reference
information we file with it. This procedure means that we can
disclose important information to you by referring you to
documents filed with the SEC. The information we incorporate by
reference (excluding any information furnished and not filed
with the SEC) is part of this prospectus supplement and later
information that we file with the SEC (excluding any information
furnished and not filed with the SEC) will automatically update
and supersede this information. We incorporate by reference the
documents listed below:
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Annual Report on
Form 10-K
for the year ended December 31, 2005;
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Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006;
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Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006, as amended;
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Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006;
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Current Report on
Form 8-K
filed with the SEC on March 16, 2006 (announcement of
Andrews acquisition);
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Current Report on
Form 8-K
filed (other than Item 7.01, which was furnished) with the
SEC on March 21, 2006 (entry into direct placement unit
purchase agreement);
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Current Report on
Form 8-K
filed with the SEC on March 21, 2006 (audited balance sheet
of Plains AAP, L.P. as of December 31, 2005);
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Current Report on
Form 8-K
filed with the SEC on May 9, 2006 (announcement of private
placement offering of $250 million of notes);
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Current Report on
Form 8-K
filed (other than Item 7.01, which was furnished) with the
SEC on May 12, 2006 (entry into note purchase agreement,
registration rights agreement and supplemental indentures);
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Current Report on
Form 8-K
filed with the SEC on May 15, 2006 (amendment to PAA/Vulcan
limited liability company agreement);
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Current Report on
Form 8-K
filed with the SEC on June 12, 2006 (entry into Pacific
merger agreement and purchase agreement with LB Pacific);
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Current Report on
Form 8-K
filed with the SEC on June 30, 2006 (unaudited balance
sheet of Plains AAP, L.P. as of March 31, 2006);
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Current Report on
Form 8-K
filed with the SEC on July 14, 2006 (pro forma financial
statements);
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Current Report on
Form 8-K
filed with the SEC on July 20, 2006 (amendment to Pacific
merger agreement);
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Current Report on
Form 8-K
filed (other than Item 7.01, which was furnished) with the
SEC on July 25, 2006 (entry into direct placement unit
purchase agreement);
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Current Report on
Form 8-K
filed with the SEC on August 4, 2006 (entry into amended
and restated credit agreement and bridge loan agreement);
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Current Report on
Form 8-K
filed with the SEC on August 23, 2006 (LTIP grants to audit
committee members);
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Current Report on
Form 8-K
filed with the SEC on August 24, 2006 (pro forma financial
statements);
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Current Report on
Form 8-K
filed with the SEC on August 25, 2006 (execution of eighth
supplemental indenture);
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Current Report on
Form 8-K
filed with the SEC on August 28, 2006 (unaudited balance
sheet of Plains AAP, L.P. as of June 30, 2006);
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S-5
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Current Report on
Form 8-K
filed with the SEC on October 23, 2006 (announcement of
private placement offering of $1.0 billion of senior notes);
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Current Report on
Form 8-K
filed with the SEC on October 27, 2006 (entry into note
purchase agreement);
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Current Report on
Form 8-K
filed with the SEC on October 30, 2006 (entry into
registration rights agreements and ninth and tenth supplemental
indentures);
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Current Report on
Form 8-K
filed with the SEC on November 13, 2006 (announcement of
unitholder approval of Pacific merger);
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Current report on
Form 8-K
filed (other than Item 7.01, which was furnished) with the
SEC on November 21, 2006 (completion of Pacific Merger,
entry into supplemental indentures, amendment to partnership
agreement and pro forma and historical financial statements);
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Current Report on
Form 8-K
filed with the SEC on November 29, 2006 (unaudited
consolidated balance sheet of Plains AAP, L.P. as of
September 30, 2006); and
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Current Report on
Form 8-K
filed with the SEC on December 11, 2006 (announcement of
potential fine at Pyramid Lake).
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You may request a copy of these filings at no cost by making
written or telephone requests for copies to:
Plains All American Pipeline, L.P.
333 Clay Street, Suite 1600
Houston, Texas 77002
Attention: Tim Moore
Telephone:
(713) 646-4100
Additionally, you may read and copy any materials that we have
filed with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Room 1580, Washington, D.C. 20549.
You may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements, and other information regarding us.
The SECs website address is www.sec.gov.
You should rely only on the information incorporated by
reference or provided in this prospectus supplement and the
accompanying base prospectus. We have not authorized anyone else
to provide you with any information. You should not assume that
the information incorporated by reference or provided in this
prospectus supplement or the accompanying base prospectus is
accurate as of any date other than its date.
S-6
FORWARD-LOOKING
STATEMENTS
All statements included or incorporated by reference in this
prospectus or any prospectus supplement, other than statements
of historical fact, are forward-looking statements, including
but not limited to statements identified by the words
anticipate, believe,
estimate, expect, plan,
intend and forecast, and similar
expressions and statements regarding our business strategy,
plans and objectives of our management for future operations.
However, the absence of these words does not mean that the
statements are not forward looking. These statements reflect our
current views with respect to future events, based on what we
believe are reasonable assumptions. Certain factors could cause
actual results to differ materially from results anticipated in
the forward-looking statements. These factors include, but are
not limited to:
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our failure to successfully integrate the respective business
operations of Pacific Energy or our failure to successfully
integrate any future acquisitions;
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the failure to realize the anticipated cost savings, synergies
and other benefits of the merger with Pacific Energy;
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the success of our risk management activities;
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environmental liabilities or events that are not covered by an
indemnity, insurance or existing reserves;
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maintenance of our credit rating and ability to receive open
credit from our suppliers and trade counterparties;
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abrupt or severe declines or interruptions in outer continental
shelf production located offshore California and transported on
our pipeline system;
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declines in volumes shipped on the Basin Pipeline, Capline
Pipeline and our other pipelines by us and third party shippers;
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the availability of adequate third party production volumes for
transportation and marketing in the areas in which we operate;
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demand for natural gas or various grades of crude oil and
resulting changes in pricing conditions or transmission
throughput requirements;
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fluctuations in refinery capacity in areas supplied by our main
lines;
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the availability of, and our ability to consummate, acquisition
or combination opportunities;
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our access to capital to fund additional acquisitions and our
ability to obtain debt or equity financing on satisfactory terms;
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successful integration and future performance of acquired assets
or businesses and the risks associated with operating in lines
of business that are distinct and separate from our historical
operations;
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unanticipated changes in crude oil market structure and
volatility (or lack thereof);
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the impact of current and future laws, rulings and governmental
regulations;
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the effects of competition;
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continued creditworthiness of, and performance by, our
counterparties;
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interruptions in service and fluctuations in tariffs or volumes
on third party pipelines;
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increased costs or lack of availability of insurance;
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fluctuations in the debt and equity markets, including the price
of our units at the time of vesting under our long-term
incentive plans;
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the currency exchange rate of the Canadian dollar;
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shortages or cost increases of power supplies, materials or
labor;
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weather interference with business operations or project
construction;
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general economic, market or business conditions;
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S-7
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risks related to the development and operation of natural gas
storage facilities; and
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other factors and uncertainties inherent in the marketing,
transportation, terminalling, gathering and storage of crude oil
and liquefied petroleum gas.
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Other factors described herein or incorporated by reference, or
factors that are unknown or unpredictable, could also have a
material adverse effect on future results. Please read
Risk Factors beginning on
page S-1
of this prospectus, in Item 1A. Risk Factors in
our annual report on
Form 10-K
for the year ended December 31, 2005 and in Item 1A.
Risk Factors in our quarterly reports on
Form 10-Q
for the quarters ended June 30, 2006 and September 30,
2006, as amended. Except as required by securities laws
applicable to the documents incorporated by reference, we do not
intend to update these forward-looking statements and
information.
EXPERTS
The financial statements of Plains All American Pipeline, L.P.
and managements assessment of the effectiveness of
internal control over financial reporting (which is included in
Managements Report on Internal Control over Financial
Reporting) incorporated in this prospectus supplement by
reference to the Annual Report on
Form 10-K
of Plains All American Pipeline, L.P. for the year ended
December 31, 2005 have been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of
said firm as experts in auditing and accounting.
The balance sheet of Plains AAP, L.P. incorporated in this
prospectus supplement by reference to Plains All American
Pipeline, L.P.s Current Report on
Form 8-K
filed on March 21, 2006 has been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Pacific Energy
Partners, L.P. as of December 31, 2005 and 2004, and for
each of the years in the three-year period ended
December 31, 2005 and managements assessment of the
effectiveness of internal control over financial reporting as of
December 31, 2005, have been incorporated by reference
herein in reliance upon the reports of KPMG LLP, an independent
registered public accounting firm, and upon the authority of
said firm as experts in accounting and auditing.
S-8
PROSPECTUS
$2,000,000,000
Plains All American Pipeline,
L.P.
PAA Finance Corp.
Common Units
Debt Securities
We may from time to time offer the following securities under
this prospectus:
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common units representing limited partner interests in Plains
All American Pipeline, L.P.; and
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debt securities of Plains All American Pipeline, L.P.
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PAA Finance Corp. may act as co-issuer of the debt securities,
and all other subsidiaries of Plains All American Pipeline,
L.P., other than minor subsidiaries as such item is
interpreted in securities regulations governing financial
reporting for guarantors, may guarantee the debt securities.
Our common units are traded on the New York Stock Exchange under
the symbol PAA.
Each time we sell securities we will provide a prospectus
supplement that will contain specific information about the
terms of that offering. The prospectus supplement may also add,
update or change information contained in this prospectus. You
should read this prospectus and any prospectus supplement
carefully before you invest. You should also read the documents
we have referred you to in the Where You Can Find More
Information section of this prospectus for information on
us and for our financial statements.
Limited partnerships are
inherently different from corporations. You should consider each
of the factors described under Risk Factors, which
begin on page 5, in deciding whether or not to buy any of
our securities.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of our
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is July 22, 2005.
Table of
Contents
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ABOUT THIS PROSPECTUS
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WHERE YOU CAN FIND MORE INFORMATION
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1
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FORWARD-LOOKING STATEMENTS
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2
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WHO WE ARE
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RISK FACTORS
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5
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USE OF PROCEEDS
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RATIO OF EARNINGS TO FIXED CHARGES
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DESCRIPTION OF OUR DEBT SECURITIES
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13
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DESCRIPTION OF OUR COMMON UNITS
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CASH DISTRIBUTION POLICY
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DESCRIPTION OF OUR PARTNERSHIP
AGREEMENT
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26
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TAX CONSIDERATIONS
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29
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PLAN OF DISTRIBUTION
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42
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LEGAL MATTERS
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43
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EXPERTS
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43
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ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement on
Form S-3
that we filed with the Securities and Exchange Commission, or
SEC, using a shelf registration process. Under
this shelf process, we may offer from time to time up to
$2,000,000,000 of our securities. Each time we offer securities,
we will provide you with a prospectus supplement that will
describe, among other things, the specific amounts and prices of
the securities being offered and the terms of the offering,
including, in the case of debt securities, the specific terms of
the securities. The prospectus supplement may also add, update
or change information contained in this prospectus. Therefore,
before you invest in our securities, you should read this
prospectus and any attached prospectus supplements.
In this registration statement, the terms we,
our, ours, and us refer to
Plains All American Pipeline, L.P. and its subsidiaries, unless
otherwise indicated or the context requires otherwise.
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WHERE YOU
CAN FIND MORE INFORMATION
We are incorporating by reference into this
prospectus information we file with the SEC. This procedure
means that we can disclose important information to you by
referring you to documents filed with the SEC. The information
we incorporate by reference is part of this prospectus and later
information that we file with the SEC will automatically update
and supersede this information. We incorporate by reference the
documents listed below and any future filings made by Plains All
American Pipeline, L.P. with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934
(excluding any information furnished and not filed with the SEC)
until all offerings under this shelf registration statement are
completed or after the date on which the registration statement
that includes this prospectus was initially filed with the SEC
and before the effectiveness of such registration statement:
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Annual Report on
Form 10-K
for the year ended December 31, 2004;
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Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005;
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Current Reports on
Forms 8-K
filed on January 26, 2005; February 23, 2005;
March 8, 2005; April 1, 2005; April 8, 2005;
April 21, 2005; April 25, 2005; May 12, 2005;
May 25, 2005; and May 31, 2005; and
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the description of our common units contained in our
Form 8-A/A
dated November 3, 1998.
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You may request a copy of these filings at no cost by making
written or telephone requests for copies to:
Plains All American Pipeline, L.P.
333 Clay Street, Suite 1600
Houston, Texas 77002
Attention: Tim Moore
Telephone:
(713) 646-4100
Additionally, you may read and copy any materials that we have
filed with the SEC at the SECs Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements, and other information regarding us.
The SECs website address is www.sec.gov.
You should rely only on the information incorporated by
reference or provided in this prospectus or any prospectus
supplement. We have not authorized anyone else to provide you
with any information. You should not assume that the information
incorporated by reference or provided in this prospectus or any
prospectus supplement is accurate as of any date other than the
date on the front of each document.
1
FORWARD-LOOKING
STATEMENTS
All statements, other than statements of historical fact,
included or incorporated by reference in this prospectus or the
accompanying prospectus supplement are forward-looking
statements, including, but not limited to, statements identified
by the words anticipate, believe,
estimate, expect, plan,
intend and forecast, and similar
expressions and statements regarding our business strategy,
plans and objectives of our management for future operations.
These statements reflect our current views with respect to
future events, based on what we believe are reasonable
assumptions. Certain factors could cause actual results to
differ materially from results anticipated in the
forward-looking statements. These factors include, but are not
limited to:
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abrupt or severe production declines or production interruptions
in outer continental shelf production located offshore
California and transported on our pipeline system;
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the success of our risk management activities;
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the availability of, and our ability to consummate, acquisition
or combination opportunities;
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our access to capital to fund additional acquisitions and our
ability to obtain debt or equity financing on satisfactory terms;
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successful integration and future performance of acquired assets
or businesses;
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environmental liabilities or events that are not covered by an
indemnity, insurance or existing reserves;
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maintenance of our credit rating and ability to receive open
credit from our suppliers and trade counter-parties;
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declines in volumes shipped on the Basin Pipeline, Capline
Pipeline and our other pipelines by third party shippers;
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the availability of adequate third party production volumes for
transportation and marketing in the areas in which we operate;
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successful third party drilling efforts in areas in which we
operate pipelines or gather crude oil;
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demand for various grades of crude oil and resulting changes in
pricing conditions or transmission throughput requirements;
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fluctuations in refinery capacity in areas supplied by our
transmission lines;
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the effects of competition;
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continued creditworthiness of, and performance by,
counter-parties;
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the impact of crude oil price fluctuations;
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the impact of current and future laws, rulings and governmental
regulations;
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shortages or cost increases of power supplies, materials or
labor;
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weather interference with business operations or project
construction;
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the currency exchange rate of the Canadian dollar;
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fluctuations in the debt and equity markets, including the price
of our units at the time of vesting under our Long-Term
Incentive Plan; and
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general economic, market or business conditions.
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Other factors described herein or incorporated by reference, or
factors that are unknown or unpredictable, could also have a
material adverse effect on future results. Please read
Risk Factors beginning on page 5 of this
prospectus. Except as required by securities laws applicable to
the documents incorporated by reference, we do not intend to
update these forward-looking statements and information.
2
WHO WE
ARE
We are engaged in interstate and intrastate crude oil
transportation, and crude oil gathering, marketing, terminalling
and storage, as well as the marketing and storage of liquefied
petroleum gas and natural gas related petroleum products. We
refer to liquefied petroleum gas and natural gas related
petroleum products collectively as LPG. We have an
extensive network of pipeline transportation, storage and
gathering assets in key oil producing basins and at major market
hubs in the United States and Canada. Our operations can be
categorized into two primary business activities: crude oil
pipeline transportation operations and gathering, marketing,
terminalling and storage operations.
Our principal business strategy is to efficiently and
competitively provide services to our customers, while
capitalizing on the regional crude oil supply and demand
imbalances that exist in the United States and Canada by
combining the strategic location and distinctive capabilities of
our transportation and terminalling assets with our extensive
marketing and distribution expertise to generate sustainable
earnings and cash flow.
We intend to execute our business strategy by:
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increasing and optimizing throughput on our existing pipeline
and gathering assets and realizing cost efficiencies through
operational improvements;
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utilizing our Cushing Terminal and our other assets to service
the needs of refiners and to profit from merchant activities
that take advantage of crude oil pricing and quality
differentials;
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utilizing assets we have recently acquired along the Gulf Coast
and our Cushing Terminal to increase our presence in the
importation of foreign crude through Gulf of Mexico receipt
facilities to U.S. refiners;
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selectively pursuing strategic and accretive acquisitions of
crude oil transportation assets, including pipelines, gathering
systems, terminalling and storage facilities and other assets
that complement our existing asset base and distribution
capabilities;
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optimizing and expanding our Canadian operations and our
presence in certain areas of the U.S. to take advantage of
anticipated increases in the volume and qualities of crude oil
produced in these areas as well as increased foreign crude
import activities in the Gulf Coast area; and
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prudently and economically leveraging our asset base, knowledge
base and skill sets to participate in energy businesses that are
closely related to, or significantly intertwined with, the crude
oil business.
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To a lesser degree, we also engage in a similar business
strategy with respect to the wholesale marketing and storage of
LPG, which we began as a result of an acquisition in mid-2001.
Plains All American Pipeline, L.P. is a Delaware limited
partnership. PAA Finance was incorporated under the laws of the
State of Delaware in February 2001, is indirectly wholly owned
by Plains All American Pipeline, and has no material assets or
any liabilities other than as a co-issuer of debt securities.
Its activities will be limited to co-issuing debt securities and
engaging in other activities incidental thereto. Plains AAP,
L.P., a Delaware limited partnership, serves as our general
partner. Plains All American GP LLC is the general partner of
Plains AAP, L.P. Our U.S. operations are conducted through,
and our operating assets are owned by, Plains Marketing, L.P., a
Delaware limited partnership, and Plains Pipeline, L.P., a Texas
limited partnership. Our Canadian operations are conducted
through, and our Canadian operating assets are owned by, Plains
Marketing Canada, L.P., a Canadian limited partnership.
Our principal executive offices are located at 333 Clay Street,
Suite 1600, Houston, Texas 77002, and our phone number is
(713) 646-4100.
Recent
Developments
Capital
Expenditures
We estimate that capital expenditures for expansion projects
will be approximately $180 million during 2005, an
$80 million increase over the estimate provided in our
Annual Report on
Form 10-K
for the year
3
ended December 31, 2004. This increase results primarily
from additional organic growth projects, including the recently
announced construction of a St. James, Louisiana crude oil
storage facility. We estimate the total project cost for the St.
James facility will be approximately $70 million, of which
approximately $21 million will be spent in 2005.
4
RISK
FACTORS
You should carefully consider the following risk factors
together with all of the other information included or
incorporated by reference in this prospectus in evaluating an
investment in Plains All American Pipeline. If any of the
following risks were actually to occur, our business, financial
condition or results of operations could be materially adversely
affected. When we offer and sell any securities pursuant to a
prospectus supplement, we may include additional risk factors
relevant to such securities in the prospectus supplement.
Risks
Related to Our Business
The
level of our profitability is dependent upon an adequate supply
of crude oil from fields located offshore and onshore
California. Production from these offshore fields has
experienced substantial production declines since
1995.
A significant portion of our segment profit is derived from
pipeline transportation margins associated with the Santa Ynez
and Point Arguello fields located offshore California. We expect
that there will continue to be natural production declines from
each of these fields as the underlying reservoirs are depleted.
We estimate that a 5,000 barrel per day decline in volumes
shipped from these fields would result in a decrease in annual
pipeline segment profit of approximately $3.2 million. In
addition, any significant production disruption from the Santa
Ynez field due to production problems, transportation problems
or other reasons could have a material adverse effect on our
business.
Our
trading policies cannot eliminate all price risks. In
addition, any non-compliance with our trading policies could
result in significant financial losses.
Generally, it is our policy that we establish a margin for crude
oil purchased by selling crude oil for physical delivery to
third party users, such as independent refiners or major oil
companies, or by entering into a future delivery obligation
under futures contracts on the NYMEX and over the counter.
Through these transactions, we seek to maintain a position that
is substantially balanced between purchases, on the one hand,
and sales or future delivery obligations, on the other hand. Our
policy is generally not to acquire and hold crude oil, futures
contracts or derivative products for the purpose of speculating
on price changes. These policies and practices cannot, however,
eliminate all price risks. For example, any event that disrupts
our anticipated physical supply of crude oil could expose us to
risk of loss resulting from price changes. Moreover, we are
exposed to some risks that are not hedged, including certain
basis risks and price risks on certain of our inventory, such as
pipeline linefill, which must be maintained in order to
transport crude oil on our pipelines. In addition, we engage in
a controlled trading program for up to an aggregate of
500,000 barrels of crude oil. Although this activity is
monitored independently by our risk management function, it
exposes us to price risks within predefined limits and
authorizations.
In addition, our trading operations involve the risk of
non-compliance with our trading policies. For example, we
discovered in November 1999 that our trading policy was violated
by one of our former employees, which resulted in aggregate
losses of approximately $181.0 million. We have taken steps
within our organization to enhance our processes and procedures
to detect future unauthorized trading. We cannot assure you,
however, that these steps will detect and prevent all violations
of our trading policies and procedures, particularly if
deception or other intentional misconduct is involved.
If we
do not make acquisitions on economically acceptable terms our
future growth may be limited.
Our ability to grow is substantially dependent on our ability to
make acquisitions that result in an increase in adjusted
operating surplus per unit. If we are unable to make such
accretive acquisitions either because (i) we are unable to
identify attractive acquisition candidates or negotiate
acceptable purchase contracts with them, (ii) we are unable
to raise financing for such acquisitions on economically
acceptable terms or (iii) we are outbid by competitors, our
future growth will be limited.
In particular, competition for midstream assets and businesses
has intensified substantially and as a result such assets and
businesses have become more costly. As a result, we may not be
able to complete the number
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or size of acquisitions that we have targeted internally or to
continue to grow as quickly as we have historically.
Our
acquisition strategy requires access to new capital. Tightened
capital markets or other factors which increase our cost of
capital could impair our ability to grow.
Our business strategy is substantially dependent on acquiring
additional assets or operations. We continuously consider and
enter into discussions regarding potential acquisitions. These
transactions can be effected quickly, may occur at any time and
may be significant in size relative to our existing assets and
operations. Any material acquisition will require access to
capital. Any limitations on our access to capital or increase in
the cost of that capital could significantly impair our ability
to execute our acquisition strategy. Our ability to maintain our
targeted credit profile, including maintaining our credit
ratings, could impact our cost of capital as well as our ability
to execute our acquisition strategy.
Our
acquisition strategy involves risks that may adversely affect
our business.
Any acquisition involves potential risks, including:
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performance from the acquired assets and businesses that is
below the forecasts we used in evaluating the acquisition;
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a significant increase in our indebtedness and working capital
requirements;
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the inability to timely and effectively integrate the operations
of recently acquired businesses or assets;
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the incurrence of substantial unforeseen environmental and other
liabilities arising out of the acquired businesses or assets,
including liabilities arising from the operation of the acquired
businesses or assets prior to our acquisition;
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customer or key employee loss from the acquired
businesses; and
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the diversion of managements attention from other business
concerns.
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Any of these factors could adversely affect our ability to
achieve anticipated levels of cash flows from our acquisitions,
realize other anticipated benefits and our ability to pay
distributions or meet our debt service requirements.
The
nature of our assets and business could expose us to significant
compliance costs and liabilities.
Our operations involving the storage, treatment, processing, and
transportation of liquid hydrocarbons including crude oil are
subject to stringent federal, state, and local laws and
regulations governing the discharge of materials into the
environment, and otherwise relating to protection of the
environment, operational safety and related matters. Compliance
with these laws and regulations increases our overall cost of
business, including our capital costs to construct, maintain and
upgrade equipment and facilities, or claims for damages to
property or persons resulting from our operations. Failure to
comply with these laws and regulations may result in the
assessment of administrative, civil, and criminal penalties, the
imposition of investigatory and remedial liabilities, the
issuance of injunctions that may restrict or prohibit our
operations, or claims of damages to property or persons
resulting from our operations. The laws and regulations
applicable to our operations are subject to change, and we
cannot provide any assurance that compliance with current and
future laws and regulations will not have a material effect on
our results of operations or earnings. A discharge of hazardous
liquids into the environment could, to the extent such event is
not insured, subject us to substantial expense, including both
the cost to comply with applicable laws and regulations and
liability to private parties for personal injury or property
damage.
The
profitability of our pipeline operations depends on the volume
of crude oil shipped.
Third party shippers generally do not have long term contractual
commitments to ship crude oil on our pipelines. A decision by a
shipper to substantially reduce or cease to ship volumes of
crude oil on our
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pipelines could cause a significant decline in our revenues. For
example, we estimate that an average 20,000 barrel per day
variance in the Basin Pipeline System within the current
operating window, equivalent to an approximate 7% volume
variance on that system, would change annualized segment profit
by approximately $1.7 million. In addition, we estimate
that an average 10,000 barrel per day variance on the
Capline Pipeline System, equivalent to an approximate 7% volume
variance on that system, would change annualized segment profit
by approximately $1.5 million.
The
success of our business strategy to increase and optimize
throughput on our pipeline and gathering assets is dependent
upon our securing additional supplies of crude
oil.
Our operating results are dependent upon securing additional
supplies of crude oil from increased production by oil companies
and aggressive lease gathering efforts. The ability of producers
to increase production is dependent on the prevailing market
price of oil, the exploration and production budgets of the
major and independent oil companies, the depletion rate of
existing reservoirs, the success of new wells drilled,
environmental concerns, regulatory initiatives and other matters
beyond our control. There can be no assurance that production of
crude oil will rise to sufficient levels to cause an increase in
the throughput on our pipeline and gathering assets.
Our
operations are dependent upon demand for crude oil by refiners
in the Midwest and on the Gulf Coast. Any decrease in this
demand could adversely affect our business.
Demand for crude oil is dependent upon the impact of future
economic conditions, fuel conservation measures, alternative
fuel requirements, governmental regulation or technological
advances in fuel economy and energy generation devices, all of
which could reduce demand. Demand also depends on the ability
and willingness of shippers having access to our transportation
assets to satisfy their demand by deliveries through those
assets, and any decrease in this demand could adversely affect
our business.
We
face intense competition in our gathering, marketing,
terminalling and storage activities.
Our competitors include other crude oil pipelines, the major
integrated oil companies, their marketing affiliates, and
independent gatherers, brokers and marketers of widely varying
sizes, financial resources and experience. Some of these
competitors have capital resources many times greater than ours
and control greater supplies of crude oil. We estimate that a
$0.01 variance in the average segment profit per barrel would
have an approximate $2.5 million annual effect on segment
profit.
The
profitability of our gathering and marketing activities is
generally dependent on the volumes of crude oil we purchase and
gather.
To maintain the volumes of crude oil we purchase, we must
continue to contract for new supplies of crude oil to offset
volumes lost because of natural declines in crude oil production
from depleting wells or volumes lost to competitors. Replacement
of lost volumes of crude oil is particularly difficult in an
environment where production is low and competition to gather
available production is intense. Generally, because producers
experience inconveniences in switching crude oil purchasers,
such as delays in receipt of proceeds while awaiting the
preparation of new division orders, producers typically do not
change purchasers on the basis of minor variations in price.
Thus, we may experience difficulty acquiring crude oil at the
wellhead in areas where there are existing relationships between
producers and other gatherers and purchasers of crude oil. We
estimate that a 15,000 barrel per day decrease in barrels
gathered by us would have an approximate $2.8 million per
year negative impact on segment profit. This impact is based on
a reasonable margin throughout various market conditions. Actual
margins vary based on the location of the crude oil, the
strength or weakness of the market and the grade or quality of
crude oil.
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Loss
of credit rating or the ability to receive open credit could
negatively affect our ability to capitalize on a volatile
market
We believe that, because of our strategic asset base and
complementary business model, we will continue to benefit from
swings in market prices and shifts in market structure during
periods of volatility in the crude oil market. Our ability to
capture that benefit, however, is subject to numerous risks and
uncertainties, including our maintaining an attractive credit
rating and continuing to receive open credit from our suppliers
and trade counter-parties.
We are
exposed to the credit risk of our customers in the ordinary
course of our gathering and marketing activities.
There can be no assurance that we have adequately assessed the
credit worthiness of our existing or future counterparties or
that there will not be an unanticipated deterioration in their
credit worthiness, which could have an adverse impact on us.
In those cases in which we provide division order services for
crude oil purchased at the wellhead, we may be responsible for
distribution of proceeds to all parties. In other cases, we pay
all of or a portion of the production proceeds to an operator
who distributes these proceeds to the various interest owners.
These arrangements expose us to operator credit risk, and there
can be no assurance that we will not experience losses in
dealings with other parties.
Our
pipeline assets are subject to federal, state and provincial
regulation.
Our domestic interstate common carrier pipelines are subject to
regulation by the Federal Energy Regulatory Commission (FERC)
under the Interstate Commerce Act. The Interstate Commerce Act
requires that tariff rates for petroleum pipelines be just and
reasonable and non-discriminatory. We are also subject to the
Pipeline Safety Regulations of the U.S. Department of
Transportation. Our intrastate pipeline transportation
activities are subject to various state laws and regulations as
well as orders of regulatory bodies.
Our Canadian pipeline assets are subject to regulation by the
National Energy Board and by provincial agencies. With respect
to a pipeline over which it has jurisdiction, each of these
Canadian agencies has the power to determine the rates we are
allowed to charge for transportation on such pipeline. The
extent to which regulatory agencies can override existing
transportation contracts has not been fully decided.
Our
pipeline systems are dependent upon their interconnections with
other crude oil pipelines to reach end markets.
Reduced throughput on these interconnecting pipelines as a
result of testing, line repair, reduced operating pressures or
other causes could result in reduced throughput on our pipeline
systems that would adversely affect our profitability.
Fluctuations
in demand can negatively affect our operating
results.
Fluctuations in demand for crude oil, such as caused by refinery
downtime or shutdown, can have a negative effect on our
operating results. Specifically, reduced demand in an area
serviced by our transmission systems will negatively affect the
throughput on such systems. Although the negative impact may be
mitigated or overcome by our ability to capture differentials
created by demand fluctuations, this ability is dependent on
location and grade of crude oil, and thus is unpredictable.
The
terms of our indebtedness may limit our ability to borrow
additional funds or capitalize on business
opportunities.
As of March 31, 2005, our total outstanding long-term debt
was approximately $930 million. Various limitations in our
indebtedness may reduce our ability to incur additional debt, to
engage in some transactions and to capitalize on business
opportunities. Any subsequent refinancing of our current
indebtedness or any new indebtedness could have similar or
greater restrictions.
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Changes
in currency exchange rates could adversely affect our operating
results.
Because we conduct operations in Canada, we are exposed to
currency fluctuations and exchange rate risks that may adversely
affect our results of operations.
Cash
distributions are not guaranteed and may fluctuate with our
performance and the establishment of financial
reserves.
Because distributions on the common units are dependent on the
amount of cash we generate, distributions may fluctuate based on
our performance. The actual amount of cash that is available to
be distributed each quarter will depend on numerous factors,
some of which are beyond our control and the control of the
general partner. Cash distributions are dependent primarily on
cash flow, including cash flow from financial reserves and
working capital borrowings, and not solely on profitability,
which is affected by non-cash items. Therefore, cash
distributions might be made during periods when we record losses
and might not be made during periods when we record profits.
Risks
Inherent in an Investment in Plains All American
Pipeline
Cost
reimbursements due to our general partner may be substantial and
will reduce our cash available for distribution to
you.
Prior to making any distribution on the common units, we will
reimburse our general partner and its affiliates, including
officers and directors of the general partner, for all expenses
incurred on our behalf. The reimbursement of expenses and the
payment of fees could adversely affect our ability to make
distributions. The general partner has sole discretion to
determine the amount of these expenses. In addition, our general
partner and its affiliates may provide us services for which we
will be charged reasonable fees as determined by the general
partner.
You
may not be able to remove our general partner even if you wish
to do so.
Our general partner manages and operates Plains All American
Pipeline. Unlike the holders of common stock in a corporation,
you will have only limited voting rights on matters affecting
our business. You will have no right to elect the general
partner or the directors of the general partner on an annual or
other continuing basis.
In addition, the following provisions of our partnership
agreement may discourage a person or group from attempting to
remove our general partner or otherwise change our management:
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generally, if a person acquires 20% or more of any class of
units then outstanding other than from our general partner or
its affiliates, the units owned by such person cannot be voted
on any matter; and
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limitations upon the ability of unitholders to call meetings or
to acquire information about our operations, as well as other
limitations upon the unitholders ability to influence the
manner or direction of management.
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As a result of these provisions, the price at which the common
units will trade may be lower because of the absence or
reduction of a takeover premium in the trading price.
We may
issue additional common units without your approval, which would
dilute your existing ownership interests.
Our general partner may cause us to issue an unlimited number of
common units, without your approval. We may also issue at any
time an unlimited number of equity securities ranking junior or
senior to the common units without your approval. The issuance
of additional common units or other equity securities of equal
or senior rank will have the following effects:
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your proportionate ownership interest in Plains All American
Pipeline will decrease;
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the amount of cash available for distribution on each unit may
decrease;
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the relative voting strength of each previously outstanding unit
may be diminished; and
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the market price of the common units may decline.
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Our
general partner has a limited call right that may require you to
sell your units at an undesirable time or price.
If at any time our general partner and its affiliates own 80% or
more of the common units, the general partner will have the
right, but not the obligation, which it may assign to any of its
affiliates, to acquire all, but not less than all, of the
remaining common units held by unaffiliated persons at a price
generally equal to the then current market price of the common
units. As a result, you may be required to sell your common
units at a time when you may not desire to sell them or at a
price that is less than the price you would like to receive. You
may also incur a tax liability upon a sale of your common units.
You
may not have limited liability if a court finds that unitholder
actions constitute control of our business.
Under Delaware law, you could be held liable for our obligations
to the same extent as a general partner if a court determined
that the right of unitholders to remove our general partner or
to take other action under our partnership agreement constituted
participation in the control of our business.
Our general partner generally has unlimited liability for our
obligations, such as our debts and environmental liabilities,
except for those contractual obligations that are expressly made
without recourse to our general partner.
In addition,
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act provides
that under some circumstances, a unitholder may be liable to us
for the amount of a distribution for a period of three years
from the date of the distribution.
Conflicts
of interest could arise among our general partner and us or the
unitholders.
These conflicts may include the following:
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we do not have any employees and we rely solely on employees of
the general partner or, in the case of Plains Marketing Canada,
employees of PMC (Nova Scotia) Company;
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under our partnership agreement, we reimburse the general
partner for the costs of managing and for operating the
partnership;
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the amount of cash expenditures, borrowings and reserves in any
quarter may affect available cash to pay quarterly distributions
to unitholders;
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the general partner tries to avoid being liable for partnership
obligations. The general partner is permitted to protect its
assets in this manner by our partnership agreement. Under our
partnership agreement the general partner would not breach its
fiduciary duty by avoiding liability for partnership obligations
even if we can obtain more favorable terms without limiting the
general partners liability;
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under our partnership agreement, the general partner may pay its
affiliates for any services rendered on terms fair and
reasonable to us. The general partner may also enter into
additional contracts with any of its affiliates on behalf of us.
Agreements or contracts between us and our general partner (and
its affiliates) are not the result of arms length negotiations;
and
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the general partner would not breach our partnership agreement
by exercising its call rights to purchase limited partnership
interests or by assigning its call rights to one of its
affiliates or to us.
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Risks
Related to the Debt Securities
We
have a holding company structure in which our subsidiaries
conduct our operations and own our operating
assets.
We have a holding company structure, and our subsidiaries
conduct all of our operations and own all of our operating
assets. We have no significant assets other than the ownership
interests in our subsidiaries. As a result, our ability to make
required payments on the debt securities depends on the
performance of our subsidiaries and their ability to distribute
funds to us. The ability of our subsidiaries to make
distributions to us may be restricted by, among other things,
credit facilities and applicable state partnership laws and
other laws and regulations. Pursuant to the credit facilities,
we may be required to establish cash reserves for the future
payment of principal and interest on the amounts outstanding
under the credit facilities. If we are unable to obtain the
funds necessary to pay the principal amount at maturity of the
debt securities, or to repurchase the debt securities upon the
occurrence of a change of control, we may be required to adopt
one or more alternatives, such as a refinancing of the debt
securities. We cannot assure you that we would be able to
refinance the debt securities.
We do
not have the same flexibility as other types of organizations to
accumulate cash, which may limit cash available to service the
debt securities or to repay them at maturity.
Unlike a corporation, our partnership agreement requires us to
distribute, on a quarterly basis, 100% of our available cash to
our unitholders of record and our general partner. Available
cash is generally all of our cash receipts adjusted for cash
distributions and net changes to reserves. Our general partner
will determine the amount and timing of such distributions and
has broad discretion to establish and make additions to our
reserves or the reserves of our operating partnerships in
amounts the general partner determines in its reasonable
discretion to be necessary or appropriate:
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to provide for the proper conduct of our business and the
businesses of our operating partnerships (including reserves for
future capital expenditures and for our anticipated future
credit needs),
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to provide funds for distributions to our unitholders and the
general partner for any one or more of the next four calendar
quarters, or
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to comply with applicable law or any of our loan or other
agreements.
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Although our payment obligations to our unitholders are
subordinate to our payment obligations to debtholders, the value
of our units will decrease in direct correlation with decreases
in the amount we distribute per unit. Accordingly, if we
experience a liquidity problem in the future, we may not be able
to issue equity to recapitalize.
Tax Risks
to Common Unitholders
You should read Tax Considerations for a more
complete discussion of the following expected material federal
income tax consequences of owning and disposing of common units.
The
IRS could treat us as a corporation for tax purposes, which
would substantially reduce the cash available for distribution
to you.
The anticipated after-tax benefit of an investment in the common
units depends largely on our being treated as a partnership for
federal income tax purposes. We have not requested, and do not
plan to request, a ruling from the IRS on this or any other
matter affecting us.
If we were classified as a corporation for federal income tax
purposes, we would pay federal income tax on our income at the
corporate tax rate, which is currently a maximum of 35%.
Distributions to you would generally be taxed again to you as
corporate distributions, and no income, gains, losses,
deductions or credits would flow through to you. Because a tax
would be imposed upon us as a corporation, the cash available
for distribution to you would be substantially reduced.
Treatment of us as a corporation would result in a material
11
reduction in the after-tax return to the unitholders, likely
causing a substantial reduction in the value of the common units.
Current law may change so as to cause us to be taxed as a
corporation for federal income tax purposes or otherwise subject
us to entity-level taxation. In addition, because of widespread
state budget deficits, several states are evaluating ways to
subject partnerships to entity-level taxation through the
imposition of state income, franchise or other forms of
taxation. If any state were to impose a tax upon us as an
entity, the cash available for distribution to you would be
reduced. Our partnership agreement provides that, if a law is
enacted or existing law is modified or interpreted in a manner
that subjects us to taxation as a corporation or otherwise
subjects us to entity-level taxation for federal, state or local
income tax purposes, then the minimum quarterly distribution and
the target distribution levels will be decreased to reflect that
impact on us.
A
successful IRS contest of the federal income tax positions we
take may adversely impact the market for common
units.
We have not requested a ruling from the IRS with respect to any
matter affecting us. The IRS may adopt positions that differ
from the conclusions of our counsel expressed in this
registration statement or from the positions we take. It may be
necessary to resort to administrative or court proceedings to
sustain our counsels conclusions or the positions we take.
A court may not concur with our counsels conclusions or
the positions we take. Any contest with the IRS may materially
and adversely impact the market for common units and the price
at which they trade. In addition, the costs of any contest with
the IRS, principally legal, accounting and related fees, will be
borne by us and directly or indirectly by the unitholders and
the general partner.
You
may be required to pay taxes even if you do not receive any cash
distributions.
You will be required to pay federal income taxes and, in some
cases, state and local income taxes on your share of our taxable
income even if you do not receive any cash distributions from
us. You may not receive cash distributions from us equal to your
share of our taxable income or even equal to the actual tax
liability that results from your share of our taxable income.
Tax
gain or loss on disposition of common units could be different
than expected.
If you sell your common units, you will recognize gain or loss
equal to the difference between the amount realized and your tax
basis in those common units. Prior distributions in excess of
the total net taxable income you were allocated for a common
unit, which decreased your tax basis in that common unit, will,
in effect, become taxable income to you if the common unit is
sold at a price greater than your tax basis in that common unit,
even if the price you receive is less than your original cost. A
substantial portion of the amount realized, whether or not
representing gain, may be ordinary income to you. Should the IRS
successfully contest some positions we take, you could recognize
more gain on the sale of units than would be the case under
those positions, without the benefit of decreased income in
prior years. Also, if you sell your units, you may incur a tax
liability in excess of the amount of cash you receive from the
sale.
If you
are a tax-exempt entity, a regulated investment company or an
individual not residing in the United States, you may have
adverse tax consequences from owning common units.
Investment in common units by tax-exempt entities, regulated
investment companies or mutual funds and foreign persons raises
issues unique to them. For example, virtually all of our income
allocated to organizations exempt from federal income tax,
including individual retirement accounts and other retirement
plans, will be unrelated business taxable income and will be
taxable to them. Recent legislation treats net income derived
from the ownership of certain publicly traded partnerships
(including us) as qualifying income to a regulated investment
company. However, this legislation is only effective for taxable
years beginning after October 22, 2004, the date of
enactment. For taxable years beginning on or before the date of
enactment, very little of our income will be qualifying income
to a regulated investment company. Distributions to foreign
persons will be reduced by withholding taxes at the highest
effective U.S. federal income tax rate for individuals, and
foreign persons will be required to file federal income tax
returns and pay tax on their share of our taxable income.
12
We
treat a purchaser of units as having the same tax benefits
without regard to the units purchased. The IRS may challenge
this treatment, which could adversely affect the value of the
units.
Because we cannot match transferors and transferees of common
units, we have adopted depreciation and amortization positions
that do not conform with all aspects of the Treasury
regulations. A successful IRS challenge to those positions could
adversely affect the amount of tax benefits available to you. It
also could affect the timing of these tax benefits or the amount
of gain from your sale of common units and could have a negative
impact on the value of the common units or result in audit
adjustments to your tax returns. Please read Tax
Considerations Uniformity of Units in this
prospectus for further discussion of the effect of the
depreciation and amortization positions we have adopted.
You
will likely be subject to foreign, state and local taxes in
jurisdictions where you do not live as a result of an investment
in units.
In addition to federal income taxes, you will likely be subject
to other taxes, including foreign taxes, state and local taxes,
unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we do business or own property and in which you do not
reside. We own property and conduct business in Canada and in
most states in the United States. You may be required to file
Canadian federal income tax returns and to pay Canadian federal
and provincial income taxes and to file state and local income
tax returns and pay state and local income taxes in many or all
of the jurisdictions in which we do business or own property.
Further, you may be subject to penalties for failure to comply
with those requirements. It is your responsibility to file all
federal, state, local and foreign tax returns. Our counsel has
not rendered an opinion on the foreign, state or local tax
consequences of an investment in the common units.
USE OF
PROCEEDS
Unless otherwise indicated to the contrary in an accompanying
prospectus supplement, we will use the net proceeds from the
sale of securities covered by this prospectus for general
partnership purposes, which may include repayment of
indebtedness, the acquisition of businesses and other capital
expenditures and additions to working capital.
RATIO OF
EARNINGS TO FIXED CHARGES
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Three Months
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Ended
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March 31,
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Year Ended December 31,
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2005
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2004
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2003
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2002
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2001
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2000
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Ratio of Earnings to Fixed Charges
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2.93
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3.46
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2.39
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2.77
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2.26
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3.33
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DESCRIPTION
OF OUR DEBT SECURITIES
General
The debt securities will be:
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our direct general obligations;
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either senior debt securities or subordinated debt
securities; and
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issued under separate indentures (which may be existing
indentures) among us and Wachovia Bank, N.A., as Trustee.
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Plains All American Pipeline may issue debt securities in one or
more series, and PAA Finance may be a co-issuer of one or more
series of debt securities. PAA Finance was incorporated under
the laws of the State of Delaware in February 2001, is
indirectly wholly owned by Plains All American Pipeline, and has
no material assets or any liabilities other than as a co-issuer
of debt securities. Its activities will be limited to
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co-issuing
debt securities and engaging in other activities incidental
thereto. When used in this section Description of the Debt
Securities, the terms we, us,
our and issuers refer jointly to Plains
All American Pipeline and PAA Finance, and the terms
Plains All American Pipeline and PAA
Finance refer strictly to Plains All American Pipeline,
L.P. and PAA Finance Corp., respectively.
If we offer senior debt securities, we will issue them under a
senior indenture. If we issue subordinated debt securities, we
will issue them under a subordinated indenture. A form of each
indenture is filed as an exhibit to the latest registration
statement of which this prospectus is a part. We have not
restated either indenture in its entirety in this description.
You should read the relevant indenture because it, and not this
description, controls your rights as holders of the debt
securities. Capitalized terms used in the summary have the
meanings specified in the indentures.
Specific
Terms of Each Series of Debt Securities in the Prospectus
Supplement
A prospectus supplement and a supplemental indenture or
authorizing resolutions relating to any series of debt
securities being offered will include specific terms relating to
the offering. These terms will include some or all of the
following:
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whether PAA Finance will be a co-issuer of the debt securities;
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the guarantors of the debt securities, if any;
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whether the debt securities are senior or subordinated debt
securities;
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the title of the debt securities;
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the total principal amount of the debt securities;
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the assets, if any, that are pledged as security for the payment
of the debt securities;
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whether we will issue the debt securities in individual
certificates to each holder in registered form, or in the form
of temporary or permanent global securities held by a depository
on behalf of holders;
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the prices at which we will issue the debt securities;
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the portion of the principal amount that will be payable if the
maturity of the debt securities is accelerated;
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the currency or currency unit in which the debt securities will
be payable, if not U.S. dollars;
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the dates on which the principal of the debt securities will be
payable;
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the interest rate that the debt securities will bear and the
interest payment dates for the debt securities;
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any conversion or exchange provisions;
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any optional redemption provisions;
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any sinking fund or other provisions that would obligate us to
repurchase or otherwise redeem the debt securities;
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any changes to or additional events of default or
covenants; and
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any other terms of the debt securities.
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We may offer and sell debt securities, including original issue
discount debt securities, at a substantial discount below their
principal amount. The prospectus supplement will describe
special U.S. federal income tax and any other
considerations applicable to those securities. In addition, the
prospectus supplement may describe certain special
U.S. federal income tax or other considerations applicable
to any debt securities that are denominated in a currency other
than U.S. dollars.
14
Guarantees
If specified in the prospectus supplement respecting a series of
debt securities, the subsidiaries of Plains All American
Pipeline specified in the prospectus supplement will
unconditionally guarantee to each holder and the Trustee, on a
joint and several basis, the full and prompt payment of
principal of, premium, if any, and interest on the debt
securities of that series when and as the same become due and
payable, whether at maturity, upon redemption or repurchase, by
declaration of acceleration or otherwise. If a series of debt
securities is guaranteed, such series will be guaranteed by all
subsidiaries other than minor subsidiaries as such
term is interpreted in securities regulation governing financial
reporting for guarantors. The prospectus supplement will
describe any limitation on the maximum amount of any particular
guarantee and the conditions under which guarantees may be
released.
The guarantees will be general obligations of the guarantors.
Guarantees of subordinated debt securities will be subordinated
to the Senior Indebtedness of the guarantors on the same basis
as the subordinated debt securities are subordinated to the
Senior Indebtedness of Plains All American Pipeline.
Consolidation,
Merger or Asset Sale
Each indenture will, in general, allow us to consolidate or
merge with or into another domestic entity. It will also allow
each issuer to sell, lease, transfer or otherwise dispose of all
or substantially all of its assets to another domestic entity.
If this happens, the remaining or acquiring entity must assume
all of the issuers responsibilities and liabilities under
the indenture including the payment of all amounts due on the
debt securities and performance of the issuers covenants
in the indenture.
However, each indenture will impose certain requirements with
respect to any consolidation or merger with or into an entity,
or any sale, lease, transfer or other disposition of all or
substantially all of an issuers assets, including:
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the remaining or acquiring entity must be organized under the
laws of the United States, any state or the District of
Columbia; provided that PAA Finance may not merge, amalgamate or
consolidate with or into another entity other than a corporation
satisfying such requirement for so long as Plains All American
Pipeline is not a corporation;
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the remaining or acquiring entity must assume the issuers
obligations under the indenture; and
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immediately after giving effect to the transaction, no Default
or Event of Default (as defined under Events
of Default and Remedies below) may exist.
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The remaining or acquiring entity will be substituted for the
issuer in the indenture with the same effect as if it had been
an original party to the indenture, and the issuer will be
relieved from any further obligations under the indenture.
No
Protection in the Event of a Change of Control
Unless otherwise set forth in the prospectus supplement, the
debt securities will not contain any provisions that protect the
holders of the debt securities in the event of a change of
control of us or in the event of a highly leveraged transaction,
whether or not such transaction results in a change of control
of us.
Modification
of Indentures
We may supplement or amend an indenture if the holders of a
majority in aggregate principal amount of the outstanding debt
securities of all series issued under the indenture affected by
the supplement or amendment consent to it. Further, the holders
of a majority in aggregate principal amount of the outstanding
debt securities of any series may waive past defaults under the
indenture and compliance by us with our covenants with respect
to the debt securities of that series only. Those holders may
not, however, waive any default in any payment on any debt
security of that series or compliance with a provision that
cannot be
15
supplemented or amended without the consent of each holder
affected. Without the consent of each outstanding debt security
affected, no modification of the indenture or waiver may:
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reduce the principal amount of debt securities whose holders
must consent to an amendment, supplement or waiver;
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reduce the principal of or change the fixed maturity of any debt
security;
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reduce or waive the premium payable upon redemption or alter or
waive the provisions with respect to the redemption of the debt
securities (except as may be permitted in the case of a
particular series of debt securities);
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reduce the rate of or change the time for payment of interest on
any debt security;
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waive a Default or an Event of Default in the payment of
principal of or premium, if any, or interest on the debt
securities (except a rescission of acceleration of the debt
securities by the holders of at least a majority in aggregate
principal amount of the debt securities and a waiver of the
payment default that resulted from such acceleration);
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except as otherwise permitted under the indenture, release any
security that may have been granted with respect to the debt
securities;
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make any debt security payable in currency other than that
stated in the debt securities;
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in the case of any subordinated debt security, make any change
in the subordination provisions that adversely affects the
rights of any holder under those provisions;
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make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of debt
securities to receive payments of principal of or premium, if
any, or interest on the debt securities;
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waive a redemption payment with respect to any debt security
(except as may be permitted in the case of a particular series
of debt securities);
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except as otherwise permitted in the indenture, release any
guarantor from its obligations under its guarantee or the
indenture or change any guarantee in any manner that would
adversely affect the rights of holders; or
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make any change in the preceding amendment, supplement and
waiver provisions (except to increase any percentage set forth
therein).
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We may supplement or amend an indenture without the consent of
any holders of the debt securities in certain circumstances,
including:
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to establish the form of terms of any series of debt securities;
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to cure any ambiguity, defect or inconsistency;
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to provide for uncertificated notes in addition to or in place
of certified notes;
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to provide for the assumption of an issuers or
guarantors obligations to holders of debt securities in
the case of a merger or consolidation or disposition of all or
substantially all of such issuers or guarantors
assets;
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in the case of any subordinated debt security, to make any
change in the subordination provisions that limits or terminates
the benefits applicable to any holder of Senior Indebtedness of
Plains All American Pipeline;
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to add or release guarantors pursuant to the terms of the
indenture;
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to make any changes that would provide any additional rights or
benefits to the holders of debt securities or that do not, taken
as a whole, adversely affect the rights under the indenture of
any holder of debt securities;
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to comply with requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust
Indenture Act;
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to evidence or provide for the acceptance of appointment under
the indenture of a successor Trustee;
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to add any additional Events of Default; or
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to secure the debt securities
and/or the
guarantees.
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Events of
Default and Remedies
Event of Default, when used in an indenture, will
mean any of the following with respect to the debt securities of
any series:
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failure to pay when due the principal of or any premium on any
debt security of that series;
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failure to pay, within 60 days of the due date, interest on
any debt security of that series;
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failure to pay when due any sinking fund payment with respect to
any debt securities of that series;
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failure on the part of the issuers to comply with the covenant
described under Consolidation, Merger or Asset
Sale;
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failure to perform any other covenant in the indenture that
continues for 30 days after written notice is given to the
issuers;
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certain events of bankruptcy, insolvency or reorganization of an
issuer; or
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any other Event of Default provided under the terms of the debt
securities of that series.
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An Event of Default for a particular series of debt securities
will not necessarily constitute an Event of Default for any
other series of debt securities issued under an indenture. The
Trustee may withhold notice to the holders of debt securities of
any default (except in the payment of principal, premium, if
any, or interest) if it considers such withholding of notice to
be in the best interests of the holders.
If an Event of Default for any series of debt securities occurs
and continues, the Trustee or the holders of at least 25% in
aggregate principal amount of the debt securities of the series
may declare the entire principal of, and accrued interest on,
all the debt securities of that series to be due and payable
immediately. If this happens, subject to certain conditions, the
holders of a majority in the aggregate principal amount of the
debt securities of that series can rescind the declaration.
Other than its duties in case of a default, a Trustee is not
obligated to exercise any of its rights or powers under either
indenture at the request, order or direction of any holders,
unless the holders offer the Trustee reasonable security or
indemnity. If they provide this reasonable security or
indemnification, the holders of a majority in aggregate
principal amount of any series of debt securities may direct the
time, method and place of conducting any proceeding or any
remedy available to the Trustee, or exercising any power
conferred upon the Trustee, for that series of debt securities.
No Limit
on Amount of Debt Securities
The indenture will not limit the amount of debt securities that
we may issue, unless we indicate otherwise in a prospectus
supplement. The indenture will allow us to issue debt securities
of any series up to the aggregate principal amount that we
authorize.
Registration
of Notes
We will issue debt securities of a series only in registered
form, without coupons, unless otherwise indicated in the
prospectus supplement.
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Minimum
Denominations
Unless the prospectus supplement states otherwise, the debt
securities will be issued only in principal amounts of $1,000
each or integral multiples of $1,000.
No
Personal Liability
None of the past, present or future partners, incorporators,
managers, members, directors, officers, employees, unitholders
or stockholders of either issuer, the general partner of Plains
All American Pipeline or any guarantor will have any liability
for the obligations of the issuers or any guarantors under the
indenture or the debt securities or for any claim based on such
obligations or their creation. Each holder of debt securities by
accepting a debt security waives and releases all such
liability. The waiver and release are part of the consideration
for the issuance of the debt securities. The waiver may not be
effective under federal securities laws, however, and it is the
view of the SEC that such a waiver is against public policy.
Payment
and Transfer
The Trustee will initially act as paying agent and registrar
under each indenture. The issuers may change the paying agent or
registrar without prior notice to the holders of debt
securities, and the issuers or any of their subsidiaries may act
as paying agent or registrar.
If a holder of debt securities has given wire transfer
instructions to the issuers, the issuers will make all payments
on the debt securities in accordance with those instructions.
All other payments on the debt securities will be made at the
corporate trust office of the Trustee, unless the issuers elect
to make interest payments by check mailed to the holders at
their addresses set forth in the debt security register.
The Trustee and any paying agent will repay to us upon request
any funds held by them for payments on the debt securities that
remain unclaimed for two years after the date upon which that
payment has become due. After payment to us, holders entitled to
the money must look to us for payment as general creditors.
Exchange,
Registration and Transfer
Debt securities of any series will be exchangeable for other
debt securities of the same series, the same total principal
amount and the same terms but in different authorized
denominations in accordance with the indenture. Holders may
present debt securities for exchange or registration of transfer
at the office of the registrar. The registrar will effect the
transfer or exchange when it is satisfied with the documents of
title and identity of the person making the request. We will not
charge a service charge for any registration of transfer or
exchange of the debt securities. We may, however, require the
payment of any tax or other governmental charge payable for that
registration.
We will not be required:
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to issue, register the transfer of, or exchange debt securities
of a series either during a period beginning 15 business days
prior to the selection of debt securities of that series for
redemption and ending on the close of business on the day of
mailing of the relevant notice of redemption or repurchase, or
between a record date and the next succeeding interest payment
date; or
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to register the transfer of or exchange any debt security called
for redemption or repurchase, except the unredeemed portion of
any debt security we are redeeming or repurchasing in part.
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Provisions
Relating only to the Senior Debt Securities
The senior debt securities will rank equally in right of payment
with all of our other senior and unsubordinated debt. The senior
debt securities will be effectively subordinated, however, to
all of our secured debt to the extent of the value of the
collateral for that debt. We will disclose the amount of our
secured debt in the prospectus supplement.
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Provisions
Relating only to the Subordinated Debt Securities
Subordinated
Debt Securities Subordinated to Senior
Indebtedness
The subordinated debt securities will rank junior in right of
payment to all of the Senior Indebtedness of Plains All American
Pipeline. Senior Indebtedness will be defined in a
supplemental indenture or authorizing resolutions respecting any
issuance of a series of subordinated debt securities, and the
definition will be set forth in the prospectus supplement.
Payment
Blockages
The subordinated indenture will provide that no payment of
principal, interest and any premium on the subordinated debt
securities may be made in the event:
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we or our property is involved in any voluntary or involuntary
liquidation or bankruptcy;
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we fail to pay the principal, interest, any premium or any other
amounts on any Senior Indebtedness of Plains All American
Pipeline within any applicable grace period or the maturity of
such Senior Indebtedness is accelerated following any other
default, subject to certain limited exceptions set forth in the
subordinated indenture; or
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any other default on any Senior Indebtedness of Plains All
American Pipeline occurs that permits immediate acceleration of
its maturity, in which case a payment blockage on the
subordinated debt securities will be imposed for a maximum of
179 days at any one time.
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No
Limitation on Amount of Senior Debt
The subordinated indenture will not limit the amount of Senior
Indebtedness that Plains All American Pipeline may incur, unless
otherwise indicated in the prospectus supplement.
Book
Entry, Delivery and Form
The debt securities of a particular series may be issued in
whole or in part in the form of one or more global certificates
that will be deposited with the Trustee as custodian for The
Depository Trust Company, New York, New York (DTC)
This means that we will not issue certificates to each holder.
Instead, one or more global debt securities will be issued to
DTC, who will keep a computerized record of its participants
(for example, your broker) whose clients have purchased the debt
securities. The participant will then keep a record of its
clients who purchased the debt securities. Unless it is
exchanged in whole or in part for a certificated debt security,
a global debt security may not be transferred, except that DTC,
its nominees and their successors may transfer a global debt
security as a whole to one another.
Beneficial interests in global debt securities will be shown on,
and transfers of global debt securities will be made only
through, records maintained by DTC and its participants.
DTC has provided us the following information: DTC is a
limited-purpose trust company organized under the New York
Banking Law, a banking organization within the
meaning of the New York Banking Law, a member of the United
States Federal Reserve System, a clearing
corporation within the meaning of the New York Uniform
Commercial Code and a clearing agency registered
under the provisions of Section 17A of the Securities
Exchange Act of 1934. DTC holds securities that its participants
(Direct Participants) deposit with DTC. DTC also
records the settlement among Direct Participants of securities
transactions, such as transfers and pledges, in deposited
securities through computerized records for Direct
Participants accounts. This eliminates the need to
exchange certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations.
DTCs book-entry system is also used by other organizations
such as securities brokers and dealers, banks and trust
companies that work through a Direct Participant. The rules that
apply to DTC and its participants are on file with the SEC.
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DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., The American Stock Exchange, Inc.
and the National Association of Securities Dealers, Inc.
We will wire all payments on the global debt securities to
DTCs nominee. We and the Trustee will treat DTCs
nominee as the owner of the global debt securities for all
purposes. Accordingly, we, the Trustee and any paying agent will
have no direct responsibility or liability to pay amounts due on
the global debt securities to owners of beneficial interests in
the global debt securities.
It is DTCs current practice, upon receipt of any payment
on the global debt securities, to credit Direct
Participants accounts on the payment date according to
their respective holdings of beneficial interests in the global
debt securities as shown on DTCs records. In addition, it
is DTCs current practice to assign any consenting or
voting rights to Direct Participants whose accounts are credited
with debt securities on a record date, by using an omnibus
proxy. Payments by participants to owners of beneficial
interests in the global debt securities, and voting by
participants, will be governed by the customary practices
between the participants and owners of beneficial interests, as
is the case with debt securities held for the account of
customers registered in street name. However,
payments will be the responsibility of the participants and not
of DTC, the Trustee or us.
Debt securities represented by a global debt security will be
exchangeable for certificated debt securities with the same
terms in authorized denominations only if:
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DTC notifies us that it is unwilling or unable to continue as
depositary or if DTC ceases to be a clearing agency registered
under applicable law and in either event a successor depositary
is not appointed by us within 90 days; or
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we determine not to require all of the debt securities of a
series to be represented by a global debt security.
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Satisfaction
and Discharge; Defeasance
Each indenture will be discharged and will cease to be of
further effect as to all outstanding debt securities of any
series issued thereunder, when:
(a) either:
(1) all outstanding debt securities of that series that
have been authenticated (except lost, stolen or destroyed debt
securities that have been replaced or paid and debt securities
for whose payment money has theretofore been deposited in trust
and thereafter repaid to us) have been delivered to the Trustee
for cancellation; or
(2) all outstanding debt securities of that series that
have not been delivered to the Trustee for cancellation have
become due and payable by reason of the giving of a notice of
redemption or otherwise or will become due and payable at their
stated maturity within one year or are to be called for
redemption within one year under arrangements satisfactory to
the Trustee and in any case we have irrevocably deposited or
caused to be irrevocably deposited with the Trustee as trust
funds in trust cash in U.S. dollars, non-callable
U.S. Government Obligations or a combination thereof, in
such amounts as will be sufficient, without consideration of any
reinvestment of interest, to pay and discharge the entire
indebtedness of such debt securities not delivered to the
Trustee for cancellation, for principal, premium, if any, and
accrued interest to the date of such deposit (in the case of
debt securities that have been due and payable) or the stated
maturity or redemption date;
(b) we have paid or caused to be paid all other sums
payable by us under the indenture; and
(c) we have delivered an officers certificate and an
opinion of counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
The debt securities of a particular series will be subject to
legal or covenant defeasance to the extent, and upon the terms
and conditions, set forth in the prospectus supplement.
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The
Trustee
Wachovia Bank N.A. will be the initial Trustee under each
indenture. We maintain a banking relation in the ordinary course
of business with Wachovia Bank N.A. and some of its affiliates.
Limitations
on Trustee if it is a Creditor
Each indenture will limit the right of the Trustee thereunder,
in the event that it becomes a creditor of an issuer or
guarantor, to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such
claim as security or otherwise.
Certificates
and Opinions to be Furnished to Trustee
Each indenture will provide that, in addition to other
certificates or opinions that may be specifically required by
other provisions of the indenture, every application by us for
action by the Trustee must be accompanied by a certificate of
certain of our officers and an opinion of counsel (who may be
our counsel) stating that, in the opinion of the signers, all
conditions precedent to such action have been complied with by
us.
Governing
Law
Each indenture and all of the debt securities will be governed
by the laws of the State of New York.
DESCRIPTION
OF OUR COMMON UNITS
Generally, our common units represent limited partner interests
that entitle the holders to participate in our cash
distributions and to exercise the rights and privileges
available to limited partners under our partnership agreement.
For a description of the relative rights and preferences of
holders of common units and our general partner in and to cash
distributions. See Cash Distribution Policy.
Our outstanding common units are listed on the NYSE under the
symbol PAA. Any additional common units we issue
will also be listed on the NYSE.
The transfer agent and registrar for our common units is
American Stock Transfer & Trust Company.
Meetings/Voting
Each holder of common units is entitled to one vote for each
common unit on all matters submitted to a vote of the
unitholders.
Status as
Limited Partner or Assignee
Except as described below under Limited
Liability, the common units will be fully paid, and
unitholders will not be required to make additional capital
contributions to us.
Each purchaser of common units offered by this prospectus must
execute a transfer application whereby the purchaser requests
admission as a substituted limited partner and makes
representations and agrees to provisions stated in the transfer
application. If this action is not taken, a purchaser will not
be registered as a record holder of common units on the books of
our transfer agent or issued a common unit certificate.
Purchasers may hold common units in nominee accounts.
An assignee, pending its admission as a substituted limited
partner, is entitled to an interest in us equivalent to that of
a limited partner with respect to the right to share in
allocations and distributions, including liquidating
distributions. Our general partner will vote and exercise other
powers attributable to common units owned by an assignee who has
not become a substituted limited partner at the written
direction of the assignee. A nominee or broker who has executed
a transfer application with respect to common units held in
street name or nominee accounts will receive distributions and
reports pertaining to its common units.
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Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware
Revised Uniform Limited Partnership Act (the Delaware
Act) and that he otherwise acts in conformity with the
provisions of our partnership agreement, his liability under the
Delaware Act will be limited, subject to some possible
exceptions, generally to the amount of capital he is obligated
to contribute to us in respect of his units plus his share of
any undistributed profits and assets.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner to the extent that at the time of the
distribution, after giving effect to the distribution, all
liabilities of the partnership, other than liabilities to
partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, exceed the fair value of
the assets of the limited partnership. For the purposes of
determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of
the property subject to liability of which recourse of creditors
is limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was
in violation of the Delaware Act is liable to the limited
partnership for the amount of the distribution for three years
from the date of the distribution.
Reports
and Records
As soon as practicable, but in no event later than 120 days
after the close of each fiscal year, our general partner will
furnish or make available to each unitholder of record (as of a
record date selected by our general partner) an annual report
containing our audited financial statements for the past fiscal
year. These financial statements will be prepared in accordance
with generally accepted accounting principles. In addition, no
later than 45 days after the close of each quarter (except
the fourth quarter), our general partner will furnish or make
available to each unitholder of record (as of a record date
selected by our general partner) a report containing our
unaudited financial statements and any other information
required by law.
Our general partner will use all reasonable efforts to furnish
each unitholder of record information reasonably required for
tax reporting purposes within 90 days after the close of
each fiscal year. Our general partners ability to furnish
this summary tax information will depend on the cooperation of
unitholders in supplying information to our general partner.
Each unitholder will receive information to assist him in
determining his U.S. federal and state and Canadian federal
and provincial tax liability and filing his U.S. federal
and state and Canadian federal and provincial income tax returns.
A limited partner can, for a purpose reasonably related to the
limited partners interest as a limited partner, upon
reasonable demand and at his own expense, have furnished to him:
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a current list of the name and last known address of each
partner;
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a copy of our tax returns;
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information as to the amount of cash and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each became a partner;
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copies of our partnership agreement, our certificate of limited
partnership, amendments to either of them and powers of attorney
which have been executed under our partnership agreement;
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information regarding the status of our business and financial
condition; and
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any other information regarding our affairs as is just and
reasonable.
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Our general partner may, and intends to, keep confidential from
the limited partners trade secrets and other information the
disclosure of which our general partner believes in good faith
is not in our best interest or which we are required by law or
by agreements with third parties to keep confidential.
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CASH
DISTRIBUTION POLICY
Distributions
of Available Cash
General. We will distribute to our
unitholders, on a quarterly basis, all of our available cash in
the manner described below.
Definition of Available Cash. Available cash
generally means, for any quarter ending prior to liquidation,
all cash on hand at the end of that quarter less the amount of
cash reserves that are necessary or appropriate in the
reasonable discretion of the general partner to:
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provide for the proper conduct of our business;
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comply with applicable law or any partnership debt instrument or
other agreement; or
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provide funds for distributions to unitholders and the general
partner in respect of any one or more of the next four quarters.
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Operating
Surplus and Capital Surplus
General. Cash distributions to our unitholders
will be characterized as either operating surplus or capital
surplus. We distribute available cash from operating surplus
differently than available cash from capital surplus. See
Quarterly Distributions of Available
Cash.
Definition of Operating Surplus. Operating
surplus refers generally to:
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our cash balances on the closing date of our initial public
offering; plus
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$25 million; plus
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all of our cash receipts from operations, excluding cash that is
capital surplus; less
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all of our operating expenses, debt service payments, but not
including payments required with the sale of assets or any
refinancing with the proceeds of new indebtedness or an equity
offering, maintenance capital expenditures and reserves
established for future operations.
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Definition of Capital Surplus. Capital surplus
will generally be generated only by:
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borrowings other than working capital borrowings;
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sales of debt and equity securities; and
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sales or other dispositions of assets for cash, other than
inventory, accounts receivable and other assets in the ordinary
course of business.
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We will treat all available cash distributed as coming from
operating surplus until the sum of all available cash
distributed since we began equals the operating surplus as of
the end of the quarter prior to the distribution. Any available
cash in excess of operating surplus, regardless of its source,
will be treated as capital surplus.
If we distribute available cash from capital surplus for each
common unit in an aggregate amount per common unit equal to the
initial public offering price of the common units, there will
not be a distinction between operating surplus and capital
surplus, and all distributions of available cash will be treated
as operating surplus. We do not anticipate that we will make
distributions from capital surplus.
Incentive
Distribution Rights
The incentive distribution rights represent the right to receive
an increasing percentage of quarterly distributions of available
cash from operating surplus after the minimum quarterly
distribution and the target distribution levels have been
achieved. The target distribution levels are based on the
amounts of available cash from operating surplus distributed
above the payments made under the minimum quarterly
distribution, if any, and the related 2% distribution to the
general partner.
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Effect of
Issuance of Additional Units
We can issue additional common units or other equity securities
for consideration and under terms and conditions approved by our
general partner in its sole discretion and without the approval
of our unitholders. We may fund acquisitions through the
issuance of additional common units or other equity securities.
Holders of any additional common units that we issue will be
entitled to share equally with our then-existing unitholders in
distributions of available cash. In addition, the issuance of
additional interests may dilute the value of the interests of
the then-existing unitholders. If we issue additional
partnership interests, our general partner will be required to
make an additional capital contribution to us.
Quarterly
Distributions of Available Cash
We will make quarterly distributions to our partners prior to
our liquidation in an amount equal to 100% of our available cash
for that quarter. We expect to make distributions of all
available cash within approximately 45 days after the end
of each quarter to holders of record on the applicable record
date. The minimum quarterly distribution and the target
distribution levels are also subject to certain other
adjustments as described below under
Distributions from Capital Surplus and
Adjustment to the Minimum Quarterly
Distribution and Target Distribution Levels.
Distributions
From Operating Surplus
We will make distributions of available cash from operating
surplus in the following manner:
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First, 98% to all unitholders, pro rata, and 2% to the general
partner, until we distribute for each unit an amount equal to
the minimum quarterly distribution for that quarter; and
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Thereafter, in the manner described in
Incentive Distributions below.
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Incentive
Distribution Rights
For any quarter that we distribute available cash from operating
surplus to the common unitholders in an amount equal to the
minimum quarterly distribution on all units, then we will
distribute any additional available cash from operating surplus
in that quarter among the unitholders and the general partner in
the following manner:
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First, 85% to all unitholders, pro rata, and 15% to the general
partner, until each unitholder receives a total of $0.495 for
that quarter for each outstanding unit (the first target
distribution);
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Second, 75% to all unitholders, pro rata, and 25% to the general
partner, until each unitholder receives a total of $0.675 for
that quarter for each outstanding unit (the second target
distribution); and
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Thereafter, 50% to all unitholders, pro rata, and 50% to the
general partner.
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Our distributions to the general partner above, other than in
its capacity as holders of units, that are in excess of its
aggregate 2% general partner interest represent the incentive
distribution rights. The right to receive incentive distribution
rights is not part of its general partner interest and may be
transferred separately from that interest, subject to certain
restrictions.
Distributions
from Capital Surplus
How Distributions from Capital Surplus Will Be
Made. We will make distributions of available
cash from capital surplus in the following manner:
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First, 98% to all unitholders, pro rata, and 2% to the general
partner, until we distribute, for each common unit issued in
this offering, available cash from capital surplus in an
aggregate amount per common unit equal to the initial public
offering price; and
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Thereafter, we will make all distributions of available cash
from capital surplus as if they were from operating surplus.
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Effect of a Distribution from Capital
Surplus. Our partnership agreement treats a
distribution of available cash from capital surplus as the
repayment of the initial unit price. To show that repayment, the
minimum quarterly distribution and the target distribution
levels will be reduced by multiplying each amount by a fraction,
the numerator of which is the unrecovered capital of the common
units immediately after giving effect to that repayment and the
denominator of which is the unrecovered capital of the common
units immediately prior to that repayment.
When Payback Occurs. When payback
of the reduced initial unit price has occurred, i.e., when the
unrecovered capital of the common units is zero, then
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the minimum quarterly distribution and the target distribution
levels will be reduced to zero for subsequent quarters;
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all distributions of available cash will be treated as operating
surplus; and
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the general partner will be entitled to receive 50% of
distributions of available cash in its capacities as general
partner and as holder of the incentive distribution rights.
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Distributions of available cash from capital surplus will not
reduce the minimum quarterly distribution or target distribution
levels for the quarter in which they are distributed.
Adjustment
to the Minimum Quarterly Distribution and Target Distribution
Levels
How We Adjust the Minimum Quarterly Distribution and Target
Distribution Levels. In addition to adjusting the
minimum quarterly distribution and target distribution levels to
reflect a distribution of capital surplus, if we combine our
units into fewer units or subdivide our units into a greater
number of units (but not if we issue additional common units for
cash or property), we will proportionately adjust:
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the minimum quarterly distribution;
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the target distribution levels;
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the unrecovered capital; and
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other amounts calculated on a per unit basis.
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For example, in the event of a
two-for-one
split of the common units (assuming no prior adjustments), the
minimum quarterly distribution, each of the target distribution
levels and the unrecovered capital of the common units would
each be reduced to 50% of its initial level.
If We Became Subject to Taxation. If
legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority so that we
become taxable as a corporation or otherwise subject to taxation
as an entity for federal, state or local income tax purposes, we
will adjust the minimum quarterly distribution and each of the
target distribution levels, respectively, to equal the product
obtained by multiplying the amount thereof by:
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one minus the sum of (x) the maximum effective federal
income tax rate to which we as an entity were subject plus
(y) any increase in state and local income taxes to which
we are subject for the taxable year of the event, after
adjusting for any allowable deductions for federal income tax
purposes for the payment of state and local income taxes.
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For example, assuming we were not previously subject to state
and local income tax, if we become taxable as an entity for
federal income tax purposes and became subject to a maximum
marginal federal, and effective state and local, income tax rate
of 38%, then the minimum quarterly distribution and the target
distribution levels would each be reduced to 62% of the amount
immediately prior to that adjustment.
Distribution
of Cash Upon Liquidation
General. If we dissolve and liquidate, we will
sell our assets or otherwise dispose of our assets and we will
adjust the partners capital account balances to show any
resulting gain or loss. We will first apply the
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proceeds of liquidation to the payment of our creditors in the
order of priority provided in our partnership agreement and by
law and, thereafter, distribute to the unitholders and the
general partner in accordance with their adjusted capital
account balances.
Manner of Adjustment. If we liquidate, we
would allocate any loss to the general partner and each
unitholder as follows:
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First, 98% to the holders of common units who have positive
balances in their capital accounts in proportion to those
positive balances and 2% to the general partner, until the
capital accounts of the common unitholders have been reduced to
zero; and
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Thereafter, 100% to the general partner.
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Interim Adjustments to Capital Accounts. If we
issued additional security interests or made distributions of
property, interim adjustments to capital accounts would also be
made. These adjustments would be based on the fair market value
of the interests or the property distributed and any gain or
loss would be allocated to the unitholders and the general
partner in the same way that a gain or loss is allocated upon
liquidation. If positive interim adjustments are made to the
capital accounts, any subsequent negative adjustments to the
capital accounts resulting from our issuance of additional
interests, distributions of property, or upon our liquidation,
would be allocated in a way that, to the extent possible, in the
capital account balances of the general partner equaling the
amount which would have been the general partners capital
account balances if no prior positive adjustments to the capital
accounts had been made.
DESCRIPTION
OF OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement. The following provisions of our
partnership agreement are summarized elsewhere in this
prospectus:
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distributions of our available cash are described under
Cash Distribution Policy;
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allocations of taxable income and other tax matters are
described under Tax Considerations; and
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rights of holders of common units are described under
Description of Our Common Units.
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Purpose
Our purpose under our partnership agreement is to serve as a
partner of our operating partnerships and to engage in any
business activities that may be engaged in by our operating
partnerships or that are approved by our general partner. The
partnership agreements of our operating partnerships provide
that they may engage in any activity that was engaged in by our
predecessors at the time of our initial public offering or
reasonably related thereto and any other activity approved by
our general partner.
Power of
Attorney
Each limited partner, and each person who acquires a unit from a
unitholder and executes and delivers a transfer application,
grants to our general partner and, if appointed, a liquidator, a
power of attorney to, among other things, execute and file
documents required for our qualification, continuance or
dissolution. The power of attorney also grants the authority for
the amendment of, and to make consents and waivers under, our
partnership agreement.
Reimbursements
of Our General Partner
Our general partner does not receive any compensation for its
services as our general partner. It is, however, entitled to be
reimbursed for all of its costs incurred in managing and
operating our business. Our partnership agreement provides that
our general partner will determine the expenses that are
allocable to us in any reasonable manner determined by our
general partner in its sole discretion.
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Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional limited partner interests and other equity
securities that are equal in rank with or junior to our common
units on terms and conditions established by our general partner
in its sole discretion without the approval of any limited
partners.
It is likely that we will fund acquisitions through the issuance
of additional common units or other equity securities. Holders
of any additional common units we issue will be entitled to
share equally with the then-existing holders of common units in
our cash distributions. In addition, the issuance of additional
partnership interests may dilute the value of the interests of
the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
interests that, in the sole discretion of our general partner,
may have special voting rights to which common units are not
entitled.
Our general partner has the right, which it may from time to
time assign in whole or in part to any of its affiliates, to
purchase common units or other equity securities whenever, and
on the same terms that, we issue those securities to persons
other than our general partner and its affiliates, to the extent
necessary to maintain their percentage interests in us that
existed immediately prior to the issuance. The holders of common
units will not have preemptive rights to acquire additional
common units or other partnership interests in us.
Amendments
to Our Partnership Agreement
Amendments to our partnership agreement may be proposed only by
our general partner. Any amendment that materially and adversely
affects the rights or preferences of any type or class of
limited partner interests in relation to other types or classes
of limited partner interests or our general partner interest
will require the approval of at least a majority of the type or
class of limited partner interests or general partner interests
so affected. However, in some circumstances, more particularly
described in our partnership agreement, our general partner may
make amendments to our partnership agreement without the
approval of our limited partners or assignees.
Withdrawal
or Removal of Our General Partner
Our general partner has agreed not to withdraw voluntarily as
our general partner prior to December 31, 2008 without
obtaining the approval of the holders of a majority of our
outstanding common units, excluding those held by our general
partner and its affiliates, and furnishing an opinion of counsel
regarding limited liability and tax matters. On or after
December 31, 2008, our general partner may withdraw as
general partner without first obtaining approval of any
unitholder by giving 90 days written notice, and that
withdrawal will not constitute a violation of our partnership
agreement. In addition, our general partner may withdraw without
unitholder approval upon 90 days notice to our
limited partners if at least 50% of our outstanding common units
are held or controlled by one person and its affiliates other
than our general partner and its affiliates.
Upon the voluntary withdrawal of our general partner, the
holders of a majority of our outstanding common units, excluding
the common units held by the withdrawing general partner and its
affiliates, may elect a successor to the withdrawing general
partner. If a successor is not elected, or is elected but an
opinion of counsel regarding limited liability and tax matters
cannot be obtained, we will be dissolved, wound up and
liquidated, unless within 90 days after that withdrawal,
the holders of a majority of our outstanding units, excluding
the common units held by the withdrawing general partner and its
affiliates, agree to continue our business and to appoint a
successor general partner.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than two-thirds
of our outstanding units, including units held by our general
partner and its affiliates, and we receive an opinion of counsel
regarding limited liability and tax matters. Any removal of this
kind is also subject to the approval of a successor general
partner by the vote of the holders of a majority of our
outstanding common units, including those held by our general
partner and its affiliates.
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While our partnership agreement limits the ability of our
general partner to withdraw, it allows the general partner
interest and incentive distribution rights to be transferred to
an affiliate or to a third party in conjunction with a merger or
sale of all or substantially all of the assets of our general
partner.
In addition, our partnership agreement expressly permits the
sale, in whole or in part, of the ownership of our general
partner. Our general partner may also transfer, in whole or in
part, the common units it owns.
Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are reconstituted and continued
as a new limited partnership, the person authorized to wind up
our affairs (the liquidator) will, acting with all the powers of
our general partner that the liquidator deems necessary or
desirable in its good faith judgment, liquidate our assets. The
proceeds of the liquidation will be applied as follows:
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first, towards the payment of all of our creditors and the
creation of a reserve for contingent liabilities; and
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then, to all partners in accordance with the positive balance in
the respective capital accounts.
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Under some circumstances and subject to some limitations, the
liquidator may defer liquidation or distribution of our assets
for a reasonable period of time. If the liquidator determines
that a sale would be impractical or would cause a loss to our
partners, our general partner may distribute assets in kind to
our partners.
Change of
Management Provisions
Our partnership agreement contains the following specific
provisions that are intended to discourage a person or group
from attempting to remove our general partner or otherwise
change management:
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generally, if a person acquires 20% or more of any class of
units then outstanding other than from our general partner or
its affiliates, the units owned by such person cannot be voted
on any matter; and
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provisions limiting the ability of unitholders to call meetings
or to acquire information about our operations, as well as other
provisions limiting the unitholders ability to influence
the manner or direction of management.
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Limited
Call Right
If at any time our general partner and its affiliates own 80% or
more of the issued and outstanding limited partner interests of
any class, our general partner will have the right to purchase
all, but not less than all, of the outstanding limited partner
interests of that class that are held by non-affiliated persons.
The record date for determining ownership of the limited partner
interests would be selected by our general partner on at least
10 but not more than 60 days notice. The purchase
price in the event of a purchase under these provisions would be
the greater of (1) the current market price (as defined in
our agreement) of the limited partner interests of the class as
of the date three days prior to the date that notice is mailed
to the limited partners as provided in our partnership agreement
and (2) the highest cash price paid by our general partner
or any of its affiliates for any limited partner interest of the
class purchased within the 90 days preceding the date our
general partner mails notice of its election to purchase the
units.
Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify our general partner, its affiliates and their officers
and directors to the fullest extent permitted by law, from and
against all losses, claims or damages any of them may suffer by
reason of their status as general partner, officer or director,
as long as the person seeking indemnity acted in good faith and
in a manner reasonably believed to be in or (in the case of an
indemnitee other than the general partner) not opposed to our
best interest. Any indemnification under these provisions will
only be out of our assets. Our general partner shall not be
personally liable for, or have any obligation to contribute or
loan funds or assets to us to enable us to effectuate any
indemnification.
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We are authorized to purchase insurance against liabilities
asserted against and expenses incurred by persons for our
activities, regardless of whether we would have the power to
indemnify the person against liabilities under our partnership
agreement.
Registration
Rights
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units, or other partnership securities proposed
to be sold by our general partner or any of its affiliates or
their assignees if an exemption from the registration
requirements is not otherwise available. We are obligated to pay
all expenses incidental to the registration, excluding
underwriting discounts and commissions.
TAX
CONSIDERATIONS
This section is a summary of the material tax considerations
that may be relevant to prospective unitholders who are
individual citizens or residents of the United States and,
unless otherwise noted in the following discussion, expresses
the opinion of Vinson & Elkins L.L.P., counsel to the
general partner and us, insofar as it relates to matters of
United States federal income tax law and legal conclusions with
respect to those matters.
This section is based upon current provisions of the Internal
Revenue Code, existing and proposed regulations and current
administrative rulings and court decisions, all of which are
subject to change. Later changes in these authorities may cause
the tax consequences to vary substantially from the consequences
described below.
No attempt has been made in the following discussion to comment
on all federal income tax matters affecting us or our
unitholders. Moreover, the discussion focuses on unitholders who
are individual citizens or residents of the United States and
has only limited application to corporations, estates, trusts,
nonresident aliens or other unitholders subject to specialized
tax treatment, such as tax-exempt institutions, foreign persons,
individual retirement accounts (IRAs), real estate investment
trusts (REITs) or mutual funds. Accordingly, we recommend that
each prospective unitholder consult, and depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax
consequences particular to him of the ownership or disposition
of common units.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of counsel and are based on the
accuracy of the factual representations made by us.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. An opinion
of counsel represents only that counsels best legal
judgment and does not bind the IRS or the courts. Accordingly,
the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the
IRS may materially and adversely impact the market for the
common units and the prices at which common units trade. In
addition, the costs of any contest with the IRS will be borne
directly or indirectly by the unitholders and the general
partner. Furthermore, the treatment of us, or an investment in
us, may be significantly modified by future legislative or
administrative changes or court decisions. Any modifications may
or may not be retroactively applied.
For the reasons described below, counsel has not rendered an
opinion with respect to the following specific federal income
tax issues:
(1) the treatment of a unitholder whose common units are
loaned to a short seller to cover a short sale of common units
(please read Tax Consequences of Unit
Ownership Treatment of Short Sales);
(2) whether our monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations
(please read Disposition of Common
Units Allocations Between Transferors and
Transferees); and
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(3) whether our method for depreciating Section 743
adjustments is sustainable (please read Tax
Consequences of Unit Ownership Section 754
Election).
Partnership
Status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable unless
the amount of cash distributed is in excess of the
partners adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS and the IRS
has made no determination as to our status or the status of the
operating partnerships as partnerships for federal income tax
purposes or whether our operations generate qualifying
income under Section 7704 of the Code. Instead, we
will rely on the opinion of counsel that, based upon the
Internal Revenue Code, its regulations, published revenue
rulings and court decisions and the representations described
below, we and the operating partnerships will be classified as a
partnership for federal income tax purposes.
In rendering its opinion, counsel has relied on factual
representations made by us and the general partner. The
representations made by us and our general partner upon which
counsel has relied are:
(a) neither we nor the operating partnerships will elect to
be treated as a corporation;
(b) for each taxable year, more than 90% of our gross
income will be income from sources that our counsel has opined
or will opine is qualifying income within the
meaning of Section 7704(d) of the Internal Revenue Code.
Section 7704 of the Internal Revenue Code provides that
publicly-traded partnerships will, as a general rule, be taxed
as corporations. However, an exception, referred to as the
Qualifying Income Exception, exists with respect to
publicly-traded partnerships of which 90% or more of the gross
income for every taxable year consists of qualifying
income. Qualifying income includes income and gains
derived from the transportation and marketing of crude oil,
natural gas and products thereof. Other types of qualifying
income include interest (other than from a financial business),
dividends, gains from the sale of real property and gains from
the sale or other disposition of assets held for the production
of income that otherwise constitutes qualifying income. We
estimate that less than 3% of our current income is not
qualifying income; however, this estimate could change from time
to time. Based upon and subject to this estimate, the factual
representations made by us and the general partner and a review
of the applicable legal authorities, counsel is of the opinion
that at least 90% of our current gross income constitutes
qualifying income.
If we fail to meet the Qualifying Income Exception, other than a
failure which is determined by the IRS to be inadvertent and
that is cured within a reasonable time after discovery, we will
be treated as if we had transferred all of our assets, subject
to liabilities, to a newly formed corporation, on the first day
of the year in which we fail to meet the Qualifying Income
Exception, in return for stock in that corporation, and then
distributed that stock to the unitholders in liquidation of
their interests in us. This contribution and liquidation should
be tax-free to unitholders and us so long as we, at that time,
do not have liabilities in excess of the tax basis of our
assets. Thereafter, we would be treated as a corporation for
federal income tax purposes.
If we were taxable as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception
or otherwise, our items of income, gain, loss and deduction
would be reflected only on our tax return rather than being
passed through to our unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution
made to a unitholder would be treated as either taxable dividend
income, to the extent of our current or accumulated earnings and
profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the
unitholders tax basis in his common units, or taxable
capital gain, after the unitholders tax basis in his
common units has been reduced to zero. Accordingly, taxation as
a corporation would result in a material reduction in a
unitholders cash flow and after-tax return and thus would
likely result in a substantial reduction of the value of the
units.
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The discussion below is based on the conclusion that we will be
classified as a partnership for federal income tax purposes.
Limited
Partner Status
Unitholders who have become limited partners of Plains All
American Pipeline will be treated as partners of Plains All
American Pipeline for federal income tax purposes. Also:
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assignees who have executed and delivered transfer applications,
and are awaiting admission as limited partners and
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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,
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will be treated as partners of Plains All American Pipeline for
federal income tax purposes. As there is no direct authority
addressing assignees of common units who are entitled to execute
and deliver transfer applications and become entitled to direct
the exercise of attendant rights, but who fail to execute and
deliver transfer applications, counsels opinion does not
extend to these persons. Furthermore, a purchaser or other
transferee of common units who does not execute and deliver a
transfer application may not receive some federal income tax
information or reports furnished to record holders of common
units unless the common units are held in a nominee or street
name account and the nominee or broker has executed and
delivered a transfer application for those common units.
A beneficial owner of common units whose units have been
transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to those
units for federal income tax purposes. Please read
Tax Consequences of Unit Ownership
Treatment of Short Sales.
Income, gain, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for federal
income tax purposes, and any cash distributions received by a
unitholder who is not a partner for federal income tax purposes
would therefore be fully taxable as ordinary income. These
holders should consult their own tax advisors with respect to
their status as partners in Plains All American Pipeline for
federal income tax purposes.
Tax
Consequences of Unit Ownership
Flow-through of Taxable Income. We will not
pay any federal income tax. Instead, each unitholder will be
required to report on his income tax return his share of our
income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by that
unitholder. Consequently, we may allocate income to a unitholder
even if he has not received a cash distribution. Each unitholder
will be required to include in income his share of our income,
gains, losses and deductions for our taxable year ending with or
within his taxable year.
Treatment of Distributions. Distributions by
us to a unitholder generally will not be taxable to the
unitholder for federal income tax purposes to the extent of his
tax basis in his common units immediately before the
distribution. Our cash distributions in excess of a
unitholders tax basis generally will be considered to be
gain from the sale or exchange of the common units, taxable in
accordance with the rules described under
Disposition of Common Units below. Any
reduction in a unitholders share of our liabilities for
which no partner, including the general partner, bears the
economic risk of loss, known as nonrecourse
liabilities, will be treated as a distribution of cash to
that unitholder. To the extent our distributions cause a
unitholders at risk amount to be less than
zero at the end of any taxable year, he must recapture any
losses deducted in previous years. Please read
Limitations on Deductibility of Losses.
A decrease in a unitholders percentage interest in us
because of our issuance of additional common units will decrease
his share of our nonrecourse liabilities, and thus will result
in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income
to a unitholder, regardless of his tax basis in his common
units, if the distribution reduces the unitholders share
of
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our unrealized receivables, including depreciation
recapture,
and/or
substantially appreciated inventory items, both as
defined in Section 751 of the Internal Revenue Code, and
collectively, Section 751 Assets. To that
extent, he will be treated as having been distributed his
proportionate share of the Section 751 Assets and having
exchanged those assets with us in return for the non-pro rata
portion of the actual distribution made to him. This latter
deemed exchange will generally result in the unitholders
realization of ordinary income. That income will equal the
excess of (1) the non-pro rata portion of that distribution
over (2) the unitholders tax basis for the share of
Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units. A unitholders
initial tax basis for his common units will be the amount he
paid for the common units plus his share of our nonrecourse
liabilities. That basis will be increased by his share of our
income and by any increases in his share of our nonrecourse
liabilities. That basis will be decreased, but not below zero,
by distributions from us, by the unitholders share of our
losses, by any decreases in his share of our nonrecourse
liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to
be capitalized. A limited partner will have no share of our debt
which is recourse to the general partner, but will have a share,
generally based on his share of profits, of our nonrecourse
liabilities. Please read Disposition of Common
Units Recognition of Gain or Loss.
Limitations on Deductibility of Losses. The
deduction by a unitholder of his share of our losses will be
limited to the tax basis in his units and, in the case of an
individual unitholder or a corporate unitholder, if more than
50% of the value of its stock is owned directly or indirectly by
five or fewer individuals or some tax-exempt organizations, to
the amount for which the unitholder is considered to be at
risk with respect to our activities, if that is less than
his tax basis. A unitholder must recapture losses deducted in
previous years to the extent that distributions cause his at
risk amount to be less than zero at the end of any taxable year.
Losses disallowed to a unitholder or recaptured as a result of
these limitations will carry forward and will be allowable to
the extent that his tax basis or at risk amount, whichever is
the limiting factor, is subsequently increased. Upon the taxable
disposition of a unit, any gain recognized by a unitholder can
be offset by losses that were previously suspended by the at
risk limitation but may not be offset by losses suspended by the
basis limitation. Any excess loss above that gain previously
suspended by the at risk or basis limitations will no longer
utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by any amount of money he borrows to acquire or hold his
units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder or can look only to the units
for repayment. A unitholders at risk amount will increase
or decrease as the tax basis of the unitholders units
increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of
our nonrecourse liabilities.
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
taxpayers income from those passive activities. The
passive loss limitations are applied separately with respect to
each publicly-traded partnership. Consequently, any passive
losses we generate will only be available to offset our passive
income generated in the future and will not be available to
offset income from other passive activities or investments,
including our investments or investments in other
publicly-traded partnerships, or salary or active business
income. Passive losses that are not deductible because they
exceed a unitholders share of income we generate may be
deducted in full when he disposes of his entire investment in us
in a fully taxable transaction with an unrelated party. The
passive activity loss rules are applied after other applicable
limitations on deductions, including the at risk rules and the
basis limitation.
A unitholders share of our net income may be offset by any
suspended passive losses, but it may not be offset by any other
current or carryover losses from other passive activities,
including those attributable to other publicly-traded
partnerships.
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Limitations on Interest Deductions. The
deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment. The IRS has
indicated that net passive income from a publicly-traded
partnership will be treated as investment income for purposes of
the limitations on the deductibility of investment interest. In
addition, the unitholders share of our portfolio income
will be treated as investment income.
Entity-Level Collections. If we are
required or elect under applicable law to pay any federal, state
or local income tax on behalf of any unitholder or the general
partner or any former unitholder, we are authorized to pay those
taxes from our funds. That payment, if made, will be treated as
a distribution of cash to the partner on whose behalf the
payment was made. If the payment is made on behalf of a person
whose identity cannot be determined, we are authorized to treat
the payment as a distribution to all current unitholders. We are
authorized to amend our partnership agreement in the manner
necessary to maintain uniformity of intrinsic tax
characteristics of units and to adjust later distributions, so
that after giving effect to these distributions, the priority
and characterization of distributions otherwise applicable under
our partnership agreement is maintained as nearly as is
practicable. Payments by us as described above could give rise
to an overpayment of tax on behalf of an individual partner in
which event the partner would be required to file a claim in
order to obtain a credit or refund.
Allocation of Income, Gain, Loss and
Deduction. In general, if we have a net profit,
our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with
their percentage interests in us. At any time that incentive
distributions are made to the general partner, gross income will
be allocated to the recipients to the extent of these
distributions. If we have a net loss for the entire year, that
loss will be allocated first to the general partner and the
unitholders in accordance with their percentage interests in us
to the extent of their positive capital accounts and, second, to
the general partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for the difference between the tax basis
and fair market value of property contributed to us by the
general partner, referred to in this discussion as
Contributed Property, and to account for the
difference between the fair market value of our assets and their
carrying value on our books at the time of an offering. The
effect of these allocations to a unitholder purchasing common
units in an offering will be essentially the same as if the tax
basis of our assets were equal to their fair market value at the
time of the offering. In addition, items of recapture income
will be allocated to the extent possible to the partner who was
allocated the deduction giving rise to the treatment of that
gain as recapture income in order to minimize the recognition of
ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be
allocated in an amount and manner to eliminate the negative
balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the difference between a partners
book capital account, credited with the fair market
value of Contributed Property, and tax capital
account, credited with the tax basis of Contributed Property
referred to in this discussion as the Book-Tax
Disparity, will generally be given effect for federal
income tax purposes in determining a partners share of an
item of income, gain, loss or deduction
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only if the allocation has substantial economic effect. In any
other case, a partners share of an item will be determined
on the basis of the partners interest in us, which will be
determined by taking into account all the facts and
circumstances, including the partners relative
contributions to us, the interests of all the partners in
profits and losses, the interest of all the partners in cash
flow and other nonliquidating distributions and rights of the
partners to distributions of capital upon liquidation.
Counsel is of the opinion that, with the exception of the issues
described in Tax Consequences of Unit
Ownership Section 754 Election and
Disposition of Common Units
Allocations Between Transferors and Transferees,
respectively, allocations under our partnership agreement will
be given effect for federal income tax purposes in determining a
partners share of an item of income, gain, loss or
deduction.
Treatment of Short Sales. A unitholder whose
units are loaned to a short seller to cover a short
sale of units may be considered as having disposed of those
units. If so, he would no longer be a partner with respect to
those units during the period of the loan and may recognize gain
or loss from the disposition. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder for those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Counsel has not rendered an opinion regarding the treatment of a
unitholder where common units are loaned to a short seller to
cover a short sale of common units; therefore, unitholders
desiring to ensure their status as partners and avoid the risk
of gain recognition from a loan to a short seller should modify
any applicable brokerage account agreements to prohibit their
brokers from borrowing their units. The IRS has announced that
it is actively studying issues relating to the tax treatment of
short sales of partnership interests. Please read
Disposition of Common Units
Recognition of Gain or Loss.
Alternative Minimum Tax. Although it is not
expected that we will generate significant tax preference items
or adjustments, each unitholder will be required to take into
account his distributive share of any items of our income, gain,
loss or deduction for purposes of the alternative minimum tax.
The current minimum tax rate for noncorporate taxpayers is 26%
on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective unitholders
should consult with their tax advisors as to the impact of an
investment in units on their liability for the alternative
minimum tax.
Tax Rates. In general the highest effective
United States federal income tax rate for individuals currently
is 35% and the maximum United States federal income tax rate for
net capital gains of an individual currently is 15% if the asset
disposed of was held for more than 12 months at the time of
disposition.
Section 754 Election. We have made the
election permitted by Section 754 of the Internal Revenue
Code. That election is irrevocable without the consent of the
IRS. The election will generally permit us to adjust a common
unit purchasers tax basis in our assets (inside
basis) under Section 743(b) of the Internal Revenue
Code to reflect his purchase price. This election does not apply
to a person who purchases common units directly from us. The
Section 743(b) adjustment belongs to the purchaser and not
to other partners. For purposes of this discussion, a
partners inside basis in our assets will be considered to
have two components: (1) his share of our tax basis in our
assets (common basis) and (2) his
Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal
Revenue Code require, if the remedial allocation method is
adopted (which we have adopted), a portion of the
Section 743(b) adjustment attributable to recovery property
to be depreciated over the remaining cost recovery period for
the Section 704(c) built-in gain. Under Treasury
Regulation Section 1.167(c)-l(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Internal
Revenue Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. Under our partnership agreement, the general partner is
authorized to take a
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position to preserve the uniformity of units even if that
position is not consistent with these Treasury Regulations.
Please read Tax Treatment of Operations
and Uniformity of Units.
Although counsel is unable to opine as to the validity of this
approach because there is no clear authority on this issue, we
intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the common basis of the property, or treat that
portion as
non-amortizable
to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the
regulations under Section 743 but is arguably inconsistent
with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read
Uniformity of Units.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
units share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have, among other items, a
greater amount of depreciation and depletion deductions and a
smaller share of any gain or loss on a sale of our assets.
Conversely, a Section 754 election is disadvantageous if
the transferees tax basis in his units is lower than those
units share of the aggregate tax basis of our assets
immediately prior to the transfer. Thus, the fair market value
of the units may be affected either favorably or unfavorably by
the election.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. The determinations we
make may be successfully challenged by the IRS and the
deductions resulting from them may be reduced or disallowed
altogether. For example, the allocation of the
Section 743(b) adjustment among our assets must be made in
accordance with the Internal Revenue Code. The IRS could seek to
reallocate some or all of any Section 743(b) adjustment
allocated by us to our tangible assets to goodwill instead.
Goodwill, as an intangible asset, is generally amortizable over
a longer period of time or under a less accelerated method than
our tangible assets. Should the IRS require a different basis
adjustment to be made, and should, in our opinion, the expense
of compliance exceed the benefit of the election, we may seek
permission from the IRS to revoke our Section 754 election.
If permission is granted, a subsequent purchaser of units may be
allocated more income than he would have been allocated had the
election not been revoked.
Tax
Treatment of Operations
Accounting Method and Taxable Year. We use the
year ending December 31 as our taxable year and the accrual
method of accounting for federal income tax purposes. Each
unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending
within or with his taxable year. In addition, a unitholder who
has a taxable year ending on a date other than December 31
and who disposes of all of his units following the close of our
taxable year but before the close of his taxable year must
include his share of our income, gain, loss and deduction in
income for his taxable year, with the result that he will be
required to include in income for his taxable year his share of
more than one year of our income, gain, loss and deduction.
Please read Disposition of Common
Units Allocations Between Transferors and
Transferees.
Initial Tax Basis, Depreciation and
Amortization. The tax basis of our assets will be
used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of
these assets. The federal income tax burden associated with the
difference between the fair market value of our assets and their
tax basis immediately prior to this offering will be borne by
partners holding interests in
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us prior to this offering. Please read Tax
Consequences of Unit Ownership Allocation of Income,
Gain, Loss and Deduction.
To the extent allowable, we may elect to use the depreciation
and cost recovery methods that will result in the largest
deductions being taken in the early years after assets are
placed in service. We are not entitled to any amortization
deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be
depreciated using accelerated methods permitted by the Internal
Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
partner who has taken cost recovery or depreciation deductions
with respect to property we own will likely be required to
recapture some or all of those deductions as ordinary income
upon a sale of his interest in us. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction and
Disposition of Common Units
Recognition of Gain or Loss.
The costs incurred in selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts and commissions we incur will be treated
as syndication expenses.
Valuation and Tax Basis of Our Properties. The
federal income tax consequences of the ownership and disposition
of units will depend in part on our estimates of the relative
fair market values, and the initial tax bases, of our assets.
Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the
relative fair market value estimates ourselves. These estimates
of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or
basis are later found to be incorrect, the character and amount
of items of income, gain, loss or deductions previously reported
by unitholders might change, and unitholders might be required
to adjust their tax liability for prior years and may incur
interest and penalties with respect to those adjustments.
Disposition
of Common Units
Recognition of Gain or Loss. Gain or loss will
be recognized on a sale of units equal to the difference between
the amount realized and the unitholders tax basis for the
units sold. A unitholders amount realized will be measured
by the sum of the cash or the fair market value of other
property received plus his share of our nonrecourse liabilities.
Because the amount realized includes a unitholders share
of our nonrecourse liabilities, the gain recognized on the sale
of units could result in a tax liability in excess of any cash
received from the sale.
Prior distributions from us in excess of cumulative net taxable
income for a common unit that decreased a unitholders tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholders tax basis in that common unit, even if the
price is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a dealer in units, on the sale or
exchange of a unit held for more than one year will generally be
taxable as 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 15%. A portion of this
gain or loss, which will likely be substantial, however, will be
separately computed and taxed as ordinary income or loss under
Section 751 of the Internal Revenue Code to the extent
attributable to assets giving rise to depreciation recapture or
other unrealized receivables or to inventory
items we own. The term unrealized receivables
includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may
exceed net taxable gain realized upon the sale of a unit and may
be recognized even if there is a net taxable loss realized on
the sale of a unit. Thus, a unitholder may recognize both
ordinary
36
income and a capital loss upon a sale of units. Capital losses
may offset capital gains and no more than $3,000 of ordinary
income in the case of individuals, and may only be used to
offset capital gains in the case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an equitable
apportionment method. Although the ruling is unclear as to
how the holding period of these interests is determined once
they are combined, Treasury regulations allow a selling
unitholder who can identify common units transferred with an
ascertainable holding period to elect to use the actual holding
period of the common units transferred. Thus, according to the
ruling, a common unitholder will be unable to select high or low
basis common units to sell as would be the case with corporate
stock, but, according to the regulations, may designate specific
common units sold for purposes of determining the holding period
of units transferred. A unitholder electing to use the actual
holding period of common units transferred must consistently use
that identification method for all subsequent sales or exchanges
of common units. A unitholder considering the purchase of
additional units or a sale of common units purchased in separate
transactions should consult his tax advisor as to the possible
consequences of this ruling and application of the regulations.
Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
appreciated partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
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a short sale;
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a futures or forward contract with respect to the partnership
interest or substantially identical property.
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Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
Treasury is also authorized to issue regulations that treat a
taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and
Transferees. In general, our taxable income and
losses will be determined annually, will be prorated on a
monthly basis and will be subsequently apportioned among the
unitholders in proportion to the number of units owned by each
of them as of the opening of the NYSE on the first business day
of the month (the Allocation Date). However, gain or
loss realized on a sale or other disposition of our assets other
than in the ordinary course of business will be allocated among
the unitholders on the Allocation Date in the month in which
that gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and
deduction realized after the date of transfer.
The use of this method may not be permitted under existing
Treasury regulations. Accordingly, counsel is unable to opine on
the validity of this method of allocating income and deductions
between unitholders. If this method is not allowed under the
Treasury regulations, or only applies to transfers of less than
all of the unitholders interest, our taxable income or
losses might be reallocated among the unitholders. We are
authorized to revise our method of allocation between
unitholders to conform to a method permitted under future
Treasury Regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who
sells or exchanges units, other than through a broker, generally
is required to notify us in writing of that sale or exchange
within 30 days after the sale or exchange (or, if earlier,
January 15 of the year following the sale). A unitholder who
acquires units generally is required
37
to notify us in writing of that acquisition within 30 days
of that purchase, unless a broker or nominee will satisfy such
requirement. We are required to notify the IRS of any such
transfers and to furnish specified information to the transferor
and transferee. Failure to satisfy these reporting obligations
may, in some cases, lead to the imposition of penalties.
Constructive Termination. We will be
considered to have been terminated for tax purposes if there is
a sale or exchange of 50% or more of the total interests in our
capital and profits within a
12-month
period. A constructive termination results in the closing of our
taxable year for all unitholders. In the case of a unitholder
reporting on a taxable year other than a fiscal year ending
December 31, the closing of our taxable year may result in
more than 12 months of our taxable income or loss being
includable in his taxable income for the year of termination. We
would be required to make new tax elections after a termination,
including a new election under Section 754 of the Internal
Revenue Code, and a termination would result in a deferral of
our deductions for depreciation. A termination could also result
in penalties if we were unable to determine that the termination
had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation
enacted before the termination.
Uniformity
of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from a literal
application of Treasury Regulation Section
1.167(c)-1(a)(6).
Any non-uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of
Unit Ownership Section 754 Election.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the common basis of that property, or treat that
portion as nonamortizable, to the extent attributable to
property the common basis of which is not amortizable,
consistent with the regulations under Section 743 even
though that portion may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. Please read Tax Consequences of
Unit Ownership Section 754 Election. To
the extent that the Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may adopt a depreciation and amortization position under
which all purchasers acquiring units in the same month would
receive depreciation and amortization deductions, whether
attributable to a common basis or Section 743(b)
adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our property. If this position is
adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that these
deductions are otherwise allowable. This position will not be
adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on
the unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and
amortization method to preserve the uniformity of the intrinsic
tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any
method of depreciating the Section 743(b) adjustment
described in this paragraph. If this challenge were sustained,
the uniformity of units might be affected, and the gain from the
sale of units might be increased without the benefit of
additional deductions. Please read Disposition
of Common Units Recognition of Gain or Loss.
Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other
foreign persons and regulated investment companies raises issues
unique to those investors and, as described below, may have
substantially adverse tax consequences to them. Employee benefit
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plans and most other organizations exempt from federal income
tax, including individual retirement accounts and other
retirement plans, are subject to federal income tax on unrelated
business taxable income. Virtually all of our income allocated
to a unitholder which is a tax-exempt organization will be
unrelated business taxable income and will be taxable to the
unitholder.
For tax years beginning on or prior to October 22, 2004, a
regulated investment company or mutual fund is
required to derive 90% or more of its gross income from
interest, dividends and gains from the sale of stocks or
securities or foreign currency or specified related sources. It
is not anticipated that any significant amount of our gross
income will include that type of income. Recent legislation adds
net income derived from the ownership of an interest in a
qualified publicly traded partnership to the
categories of qualified income for a regulated investment
company. We expect that we will meet the definition of a
qualified publicly traded partnership. However, this legislation
is only effective for taxable years beginning after
October 22, 2004.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence they will be required to file federal tax returns to
report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
income or gain. And, under rules applicable to publicly traded
partnerships, we will withhold tax at the highest effective
applicable rate from cash distributions made quarterly to
foreign unitholders. Each foreign unitholder must obtain a
taxpayer identification number from the IRS and submit that
number to our transfer agent on a
Form W-8
BEN or applicable substitute form in order to obtain credit for
these withholding taxes.
In addition, because a foreign corporation that owns units will
be treated as engaged in a United States trade or business, that
corporation may be subject to United States branch profits tax
at a rate of 30%, in addition to regular federal income tax, on
its share of our income and gain, as adjusted for changes in the
foreign corporations U.S. net equity,
which is effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated
by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a
qualified resident. In addition, this type of
unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue
Code.
Under a ruling of the IRS, a foreign unitholder who sells or
otherwise disposes of a unit will be subject to federal income
tax on gain realized on the 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
intend to furnish to each unitholder, within 90 days after
the close of each calendar year, specific tax information,
including a
Schedule K-1,
which describes his share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take
various accounting and reporting positions, some of which have
been mentioned earlier, to determine the unitholders share
of income, gain, loss and deduction. We cannot assure you that
those positions will yield a result that conforms to the
requirements of the Internal Revenue Code, regulations or
administrative interpretations of the IRS. Neither we nor
counsel can assure prospective unitholders that the IRS will not
successfully contend in court that those positions are
impermissible. Any challenge by the IRS could negatively affect
the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of that unitholders own
return. Any audit of a unitholders return could result in
adjustments not related to our returns as well as those related
to our returns.
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Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these
purposes. The partnership agreement appoints the general partner
as our Tax Matters Partner.
The Tax Matters Partner has made and will make some elections on
our behalf and on behalf of unitholders. In addition, the Tax
Matters Partner can extend the statute of limitations for
assessment of tax deficiencies against unitholders for items in
our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the
IRS unless that unitholder elects, by filing a statement with
the IRS, not to give that authority to the Tax Matters Partner.
The Tax Matters Partner may seek judicial review, by which all
the unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek
judicial review, judicial review may be sought by any unitholder
having at least a 1% interest in profits or by any group of
unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may
participate. However, if we elect to be treated as a large
partnership, a unitholder will not have the right to participate
in settlement conferences with the IRS or to seek a refund.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return.
Intentional or negligent disregard of the consistency
requirement may subject a unitholder to substantial penalties.
However, if we elect to be treated as a large partnership, the
unitholders would be required to treat all partnership items in
a manner consistent with our return.
Nominee Reporting. Persons who hold an
interest in us as a nominee for another person are required to
furnish to us:
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the name, address and taxpayer identification number of the
beneficial owner and the nominee;
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whether the beneficial owner is a person that is not a United
States person,
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a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the
foregoing, or
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a tax-exempt entity;
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the amount and description of units held, acquired or
transferred for the beneficial owner; and
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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.
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Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on units they acquire, hold or
transfer for their own account. A penalty of $50 per
failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that
information to us. The nominee is required to supply the
beneficial owner of the units with the information furnished to
us.
Accuracy-related Penalties. An additional tax
equal to 20% of the amount of any portion of an underpayment of
tax that is attributable to one or more specified causes,
including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial
valuation misstatements, is imposed by the Internal Revenue
Code. No penalty will be imposed, however, for any portion of an
underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith
regarding that portion.
A substantial understatement of income tax in any taxable year
exists if the amount of the understatement exceeds the greater
of 10% of the tax required to be shown on the return for the
taxable year or $5,000. The
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amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on
the return:
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for which there is, or was, substantial
authority, or
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as to which there is a reasonable basis and the pertinent facts
of that position are disclosed on the return.
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If any item of income, gain, loss or deduction included in the
distributive shares of unitholders might result in that kind of
an understatement of income for which no
substantial authority exists, we must disclose the
pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns to
avoid liability for this penalty. More stringent rules apply to
tax shelters, which we do not believe includes us.
A substantial valuation misstatement exists if the value of any
property, or the adjusted basis of any property, claimed on a
tax return is 200% or more of the amount determined to be the
correct amount of the valuation or adjusted basis. No penalty is
imposed unless the portion of the underpayment attributable to a
substantial valuation misstatement exceeds $5,000. If the
valuation claimed on a return is 400% or more than the correct
valuation, the penalty imposed increases to 40%.
Reportable Transactions. If we were to engage
in a reportable transaction, we (and possibly you
and others) would be required to make a detailed disclosure of
the transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a listed transaction or
that it produces certain kinds of losses in excess of
$2 million. Our participation in a reportable transaction
could increase the likelihood that our federal income tax
information return (and possibly your tax return) would be
audited by the IRS. Please read Information
Returns and Audit Procedures above.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions of the American Jobs Creation Act of 2004:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-related
Penalties,
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
State,
Local and Other Tax Considerations
In addition to federal income taxes, you may be subject to other
taxes, such as state and local and Canadian federal and
provincial taxes, unincorporated business taxes, and estate,
inheritance or intangible taxes that may be imposed by the
various jurisdictions in which we do business or own property.
Although an analysis of those various taxes is not presented
herein, each prospective unitholder should consider their
potential impact on his investment in us. We will own property
or conduct business in Canada and in most states of the United
States. A unitholder may be required to file Canadian federal
income tax returns and to pay Canadian federal and provincial
income taxes and to file state income tax returns and to pay
taxes in various states and may be subject to penalties for
failure to comply with such requirements. In certain states, tax
losses may not produce a tax benefit in the year incurred (if,
for example, we have no income from sources within that state)
and also may not be available to offset income in subsequent
taxable years. Some of the states may require us to withhold a
percentage of income from amounts to be distributed to a
unitholder who is not a resident of the state. Withholding, the
amount of which may be greater or less than a particular
unitholders income tax liability to the state, generally
does not relieve the non-resident unitholder from the obligation
to file an income tax return. Amounts withheld may be treated as
if distributed to unitholders for
41
purposes of determining the amount distributed by us. Please
read Tax Consequences of Unit Ownership.
We may also own additional property or do business in other
states in the future.
Tax
Consequences of Ownership of Debt Securities
A description of the material federal income tax consequences of
the acquisition, ownership and disposition of debt securities
will be set forth in the prospectus supplement relating to the
offering of debt securities.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
states and localities, including the Canadian provinces and
Canada, of his investment in us. Accordingly, each prospective
unitholder should consult, and must depend upon, his own tax
counsel or other advisor with regard to those matters. Further,
it is the responsibility of each unitholder to file all
Canadian, Canadian province, state and local, as well as federal
tax returns that may be required of him. Counsel has not
rendered an opinion on the Canadian federal, Canadian
provincial, state or local tax consequences of an investment in
us.
PLAN OF
DISTRIBUTION
Under this prospectus, we intend to offer our securities to the
public:
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through one or more broker-dealers;
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through underwriters; or
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directly to investors.
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We will fix a price or prices of our securities at:
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at market prices prevailing at the time of any sale under this
registration statement;
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prices related to market prices; or
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negotiated prices.
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We may change the price of the securities offered from time to
time.
We will pay or allow distributors or sellers
commissions that will not exceed those customary in the types of
transactions involved. Broker-dealers may act as agent or may
purchase securities as principal and thereafter resell the
securities from time to time:
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in or through one or more transactions (which may involve
crosses and block transactions) or distributions;
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on the New York Stock Exchange;
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in the
over-the-counter
market; or
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in private transactions.
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Broker-dealers or underwriters may receive compensation in the
form of underwriting discounts or commissions and may receive
commissions from purchasers of the securities for whom they may
act as agents. If any broker-dealer purchases the securities as
principal, it may effect resales of the securities from time to
time to or through other broker-dealers, and other
broker-dealers may receive compensation in the form of
concessions or commissions from the purchasers of securities for
whom they may act as agents.
To the extent required, the names of the specific managing
underwriter or underwriters, if any, as well as other important
information, will be set forth in prospectus supplements. In
that event, the discounts and commissions we will allow or pay
to the underwriters, if any, and the discounts and commissions
the underwriters may allow or pay to dealers or agents, if any,
will be set forth in, or may be calculated from, the prospectus
supplements. Any underwriters, brokers, dealers and agents who
participate in any sale of the
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securities may also engage in transactions with, or perform
services for, us or our affiliates in the ordinary course of
their businesses. We may indemnify underwriters, brokers,
dealers and agents against specific liabilities, including
liabilities under the Securities Act.
To the extent required, this prospectus may be amended or
supplemented from time to time to describe a specific plan of
distribution.
In connection with offerings under this shelf registration and
in compliance with applicable law, underwriters, brokers or
dealers may engage in transactions which stabilize or maintain
the market price of the securities at levels above those which
might otherwise prevail in the open market. Specifically,
underwriters, brokers or dealers may over-allot in connection
with offerings, creating a short position in the securities for
their own accounts. For the purpose of covering a syndicate
short position or stabilizing the price of the securities, the
underwriters, brokers or dealers may place bids for the
securities or effect purchases of the securities in the open
market. Finally, the underwriters may impose a penalty whereby
selling concessions allowed to syndicate members or other
brokers or dealers for distribution the securities in offerings
may be reclaimed by the syndicate if the syndicate repurchases
previously distributed securities in transactions to cover short
positions, in stabilization transactions or otherwise. These
activities may stabilize, maintain or otherwise affect the
market price of the securities, which may be higher than the
price that might otherwise prevail in the open market, and, if
commenced, may be discontinued at any time.
LEGAL
MATTERS
Vinson & Elkins L.L.P., Houston, Texas, will pass upon
the validity of the securities offered in this registration
statement.
EXPERTS
The financial statements and managements assessment of the
effectiveness of internal control over financial reporting
(which is included in Managements Report on Internal
Control over Financial Reporting) incorporated in this
Prospectus by reference to the Annual Report on
Form 10-K
for the year ended December 31, 2004 have been so
incorporated in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
The balance sheet as of December 31, 2004 of Plains AAP,
L.P. incorporated in this Prospectus by reference to Plains All
American Pipeline, L.P.s Current Report on
Form 8-K
filed April 8, 2005 has been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of
said firm as experts in auditing and accounting.
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