UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-A/A
(Amendment
No. 2)
FOR
REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT
TO SECTION 12(B) OR (G) OF THE
SECURITIES
EXCHANGE ACT OF 1934
TC
PipeLines, LP
(Exact
name of registrant as specified in its charter)
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Delaware
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52-2135448
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(State
of incorporation or organization)
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(IRS
Employer Identification No.)
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13710
FNB Parkway
Omaha,
Nebraska
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68154-5200
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(Address
of principal executive offices)
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(Zip
Code)
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Securities
to be registered pursuant to Section 12(b) of the Act:
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Title
of each class
to
be so registered
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Name
of each exchange on which
each
class is to be registered
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Common
Units representing limited partner interests
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The
NASDAQ Stock Market
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If this
form relates to the registration of a class of securities pursuant to Section
12(b) of the Exchange Act and is effective pursuant to General Instruction
A.(c), check the following box. x
If this
form relates to the registration of a class of securities pursuant to 12(g) of
the Exchange Act and is effective pursuant to General Instruction A.(d), check
the following box. p
Securities
Act registration statement file number to which this form relates (if
applicable): 333-69947
Securities
to be registered pursuant to Section 12(g) of the Act:
None
EXPLANATORY
NOTE
This Amendment No. 2 is being filed to correct a typographical error on
page 6 of Amendment No. 1 filed on July 7, 2009. No other changes have
been made.
INFORMATION
REQUIRED IN REGISTRATION STATEMENT
This
Amendment No. 2 amends and restates Amendment No. 1 to the Registration
Statement on Form 8-A/A filed by the registrant with the Securities and Exchange
Commission on July 7, 2009 relating to the Registrant’s units representing
limited partner interests, which amended and restated the Registration Statement
on Form 8-A filed on May 14, 1999.
Item
1. Description of
Registrant’s Securities to Be Registered.
DESCRIPTION
OF COMMON UNITS
Units
The units registered hereunder
represent limited partner interests in TC PipeLines, LP (the “Partnership,” “we”
or “us”) and entitle holders thereof to the rights and privileges specified in
the Partnership’s Second Amended and Restated Agreement of Limited Partnership
dated July 1, 2009 (which we refer to as our "Partnership
Agreement"). A description of the units is set forth below. The
following summary does not purport to be complete, and reference is made to the
more detailed provisions of the Partnership’s Certificate of Limited Partnership
and the Partnership Agreement, which are filed as exhibits to this Registration
Statement on Form 8-A/A.
We have the following subsidiary
limited partnerships which are collectively referred to herein as our
"intermediate partnerships": TC PipeLines Intermediate Limited
Partnership, TC Tuscarora Intermediate Limited Partnership and TC GL
Intermediate Limited Partnership. We have investments, through the
intermediate partnerships, in the operating pipelines. These
intermediate partnerships are collectively referred to herein as our "operating
partnerships":
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a
100 percent interest in Tuscarora Gas Transmission
Company;
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a
46.45 percent interest in Great Lakes Gas Transmission Limited
Partnership;
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a
50 percent interest in Northern Border Pipeline Company;
and
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a
100 percent interest in North Baja Pipeline,
LLC.
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Number
of Units
As of July 1, 2009, we had 41,227,766
common units outstanding, of which 23,960,935 were held by the public,
11,287,725 were held by TransCan Northern Ltd. and 5,797,106 were held by TC
PipeLines GP, Inc., the sole general partner of TC PipeLines, LP, both of which
are indirect wholly-owned subsidiaries of TransCanada Corporation
("TransCanada"). TransCanada, through its indirect ownership of our
general partner, holds a 2% general partner interest in the Partnership
(including a 1.0101% partner interest in our intermediate
partnerships).
Subject to the incentive distribution
rights described below under "Cash Distribution Policy—Quarterly Distributions
of Available Cash", the common units represent an aggregate 98% limited partner
interest and the general partner interest represents an aggregate 2% general
partner interest in the Partnership and the intermediate
partnerships.
Under the Partnership Agreement, we may
issue, without further unitholder action, an unlimited number of additional
limited partner interests and other equity securities with such rights,
preferences and privileges as may be established by the general partner in its
sole discretion.
Distributions
For a description of distributions to
our partners, see "Cash Distribution Policy—Quarterly Distributions of Available
Cash" below.
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; provided that, if at any time any person or group (other than our
general partner and its affiliates) owns beneficially 20% or more of all common
units, such common units so owned may not be voted on any matter and may not be
considered to be outstanding when sending notices of a meeting of unitholders
(unless otherwise required by law), calculating required votes, determining the
presence of a quorum or for other similar purposes under the Partnership
Agreement.
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Listing
Our outstanding common units are listed
on the Nasdaq Global Select Market under the symbol "TCLP." Any additional
common units we issue will also be listed on the Nasdaq Global Select
Market.
Transfer
Agent and Registrar Duties
Our transfer agent and registrar for
the common units is BNY Mellon Shareowner Services. All fees charged
by the transfer agent for transfers of common units will be borne by us, except
that the following fees shall be paid by unitholders:
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surety
bond premiums to replace lost or stolen certificates, taxes and other
governmental charges;
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special
charges for services requested by a holder of a common unit;
and
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other
similar fees or charges.
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There is no charge to holders for
disbursements of our cash distributions. We will indemnify the
transfer agent, its agents and each of their shareholders, directors, officers
and employees against all claims and losses that may arise out of acts performed
or omitted in respect of its activities in that capacity, except for any
liability due to any negligence or intentional misconduct of the indemnified
person or entity.
The transfer agent may at any time
resign, by notice to us, or be removed by us. The resignation or removal of the
transfer agent shall become effective upon the appointment by the Partnership of
a successor transfer agent and registrar and its acceptance of the appointment.
If no successor has been appointed and accepted the appointment within 30 days
after notice of the resignation or removal, the general partner is authorized to
act as the transfer agent and registrar until a successor is
appointed.
Transfer
of Common Units
Any transfers of a common unit will not
be recorded by the transfer agent or recognized by us unless the transferee
executes and delivers a transfer application. The form of transfer
application is set forth on the reverse side of the certificates representing
the common units. By executing and delivering a transfer application,
the transferee of common units:
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(1)
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becomes
the record holder of the common units and is an assignee until admitted
into the Partnership as a substitute limited
partner;
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(2)
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automatically
requests admission as a substituted limited partner in the
Partnership;
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(3)
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agrees
to be bound by the terms and conditions of, and executes, the Partnership
Agreement;
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(4)
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represents
that the transferee has the capacity, power and authority to enter into
the Partnership Agreement;
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(5)
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grants
powers of attorney to officers of the general partner and any liquidator
of the Partnership as specified in the Partnership Agreement;
and
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(6)
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makes
the consents and waivers contained in the Partnership
Agreement.
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An assignee will become a substituted
limited partner of the Partnership in respect of the transferred common units
upon the consent of the general partner and the recordation of the name of the
assignee on the books and records of the Partnership. The general
partner may withhold its consent in its sole discretion.
Transfer applications may be completed,
executed and delivered by a transferee's broker, agent or
nominee. The Partnership is entitled to treat the nominee holder of a
common unit as the absolute owner. In that case, the beneficial
holder's rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder. Common units are securities and are transferable according to
the laws governing transfer of securities. In addition to other
rights acquired upon transfer, the transferor gives the transferee the right to
request admission as a substituted limited partner in the Partnership in respect
of the transferred common units. A purchaser or transferee of common
units who does not execute and deliver a transfer application obtains
only:
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the
right to assign the common units to a purchaser or other transferee;
and
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the
right to transfer the right to seek admission as a substituted limited
partner in the Partnership.
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Thus, a
purchaser or transferee of common units who does not execute and deliver a
transfer application will not receive
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cash
distributions or federal income tax allocations unless the common units
are held in a nominee or "street name" account and the nominee or broker
has executed and delivered a transfer application;
and
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may
not receive federal income tax information or reports furnished to record
holders of common units.
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The transferor of common units will
have a duty to provide the transferee with all information that may be necessary
to transfer the common units. The transferor will not have a duty to
insure the execution of the transfer application by the transferee and will have
no liability or responsibility if the transferee neglects to or chooses not to
execute and forward the transfer application to the transfer
agent. See "The Partnership Agreement--Status as Limited Partner or
Assignee" below.
Until a common unit has been
transferred on the books of the Partnership, the Partnership and the transfer
agent, notwithstanding any notice to the contrary, may treat the record holder
of the unit as the absolute owner for all purposes, except as otherwise required
by law or stock exchange regulations.
CASH
DISTRIBUTION POLICY
QUARTERLY
DISTRIBUTIONS OF AVAILABLE CASH
General
We will make distributions to our
partners for each of our fiscal quarters before liquidation in an amount equal
to all of our Available Cash for that quarter. Available Cash is
defined in the Partnership Agreement and generally means, with respect to any
quarter of the Partnership, all cash on hand at the end of such quarter less the
amount of cash reserves that is necessary or appropriate in the reasonable
discretion of the general partner to:
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provide
for the proper conduct of our business (including reserves for future
capital expenditures and for anticipated
credit needs);
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comply
with applicable laws or any of our debt instruments or agreements;
or
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provide
funds for cash distributions to unitholders and the general partner in
respect of any one or more of the next four
quarters.
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We expect
to make distributions of all Available Cash within approximately 45 days after
the end of each calendar quarter to holders of record on the applicable record
date.
Operating
Surplus and Capital Surplus
Cash distributions will be
characterized as distributions from either Operating Surplus or Capital
Surplus. This distinction affects the amounts distributed to
unitholders relative to the general partner. See "--Distributions
from Capital Surplus" below.
Operating Surplus generally
means:
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(1)
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our
cash balance on the date we began operations, plus $20 million, plus all
of our cash receipts from our operations, excluding cash constituting
Capital Surplus; less
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(2)
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all
of our operating expenses, debt service payments, maintenance, capital
expenditures and reserves established for future
operations.
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Capital Surplus will generally be
generated only by:
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(1)
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borrowings
other than Working Capital
Borrowings;
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(2)
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sales
of debt and equity securities; and
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(3)
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sales
or other dispositions of assets for cash, other than inventory, accounts
receivable and other current assets sold in the ordinary course of
business or as part of normal retirements or replacements of
assets.
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All Available Cash distributed from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since we began operations equals the Operating
Surplus as of the end of the quarter before that distribution. This
method of cash distribution avoids the difficulty of trying to determine whether
Available Cash is distributed from Operating Surplus or Capital Surplus. Any
excess of Available Cash over Operating Surplus, irrespective of its source,
will be treated as Capital Surplus.
Capital Surplus is first distributed
98% to all common units, pro rata, and 2% to the general partner until each
common unit that was issued in our initial public offering has received
distributions from Capital Surplus in an aggregate amount equal to the initial
public offering price of the common units. After these distributions
have been made the distinction between Operating Surplus and Capital Surplus
will cease. All subsequent distributions will be treated as from
Operating Surplus. See "--Distributions from Capital Surplus"
below. We do not anticipate that there will be significant
distributions of Capital Surplus.
Distributions
of Available Cash from Operating Surplus
Distributions of Available Cash from
Operating Surplus for any quarter will be made in the following
manner:
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First,
98% to the common units, pro rata, and 2% to the general partner, until
there has been distributed for each outstanding common unit an amount
equal to $0.81 per unit for that quarter (the "First Target
Distribution"); and
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Thereafter,
in the manner described in "--Incentive Distribution Rights"
below.
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The above reference to 2% of Available
Cash from Operating Surplus distributed to the general partner is a reference to
the percentage interest of the general partner in distributions from TC
PipeLines, LP and our intermediate partnerships, exclusive of the general
partner's or any of its affiliates' interest as holders of the units or
incentive distribution rights. The general partner owns a 1% general
partner interest in TC PipeLines, LP and a 1.0101% general partner interest in
our intermediate partnerships.
Incentive
Distribution Rights
Incentive distribution rights represent
the right to receive an increasing percentage of quarterly distributions of
Available Cash from Operating Surplus after the First Target Distribution and
the related 2% distribution to the general partner have been made for any
quarter.
Any Available Cash from Operating
Surplus for a quarter in excess of the First Target Distribution and the related
2% distribution to the general partner will be distributed among the unitholders
and the general partner in the following manner:
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First,
85% to all units, pro rata, and 15% to the general partner, until each
unitholder has received a total of $0.88 for that quarter (the "Second
Target Distribution"); and
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Thereafter,
75% to all units, pro rata, and 25% to the general
partner.
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The distributions to the general
partner described above, other than in its capacity as a holder of units, that
are in excess of its aggregate 2% general partner interest represent the
incentive distribution rights. The right to receive incentive
distributions is not part of the general partner interest and may be transferred
separately from that interest.
The general partner may at any time
transfer its common units and its incentive distribution rights to one or more
persons without unitholder approval. Furthermore, the general partner
may transfer all or any part of its general partner interest in any of the
intermediate partnerships to another person,
subject to compliance with any transfer restrictions and/or right of first
refusal obligations, if any, in the applicable intermediate partnership
agreement. As a condition to the transfer, the transferee must assume
the rights and duties of the general partner to whose interest that transferee
has succeeded, agree to be bound by the provisions of the Partnership Agreement,
furnish an opinion of counsel regarding limited liability and tax matters, agree
to acquire all (or the appropriate portion) of the general partner's interest in
the intermediate partnerships and agree to be bound by the provisions of the
intermediate partnership agreements.
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Distributions
from Capital Surplus
Distributions of Available Cash from
Capital Surplus will be made in the following manner:
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First,
98% to all units, pro rata, and 2% to the general partner, until each
common unit that was issued in our initial public offering has received
distributions from Capital Surplus equal to the initial public offering
price; and
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Thereafter,
all distributions of Available Cash from Capital Surplus will be
distributed as if they were from Operating
Surplus.
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When a distribution is made from
Capital Surplus, it is treated as if it were a repayment of the unit price from
our initial public offering. To reflect this repayment, the minimum
quarterly distribution ($0.45 per quarter) and the target distribution levels
will be adjusted downward by multiplying each amount by a
fraction. This fraction is determined as follows:
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the
numerator is the initial public offering price, less distributions of
Capital Surplus (the "Unrecovered Capital") with respect to the common
units immediately after giving effect to the repayment;
and
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the
denominator is the Unrecovered Capital of the common units immediately
before the repayment.
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A "payback" of the unit price from our
initial public offering occurs when the Unrecovered Capital of the common units
is zero. At that time the minimum quarterly distribution and the
target distribution levels will have been reduced to zero. All
distributions of Available Cash from all sources after that time will be treated
as if they were from Operating Surplus. Because the target
distribution levels will have been reduced to zero, the general partner will
then be entitled to receive 25% of all distributions of Available Cash in its
capacities as general partner and as holder of the incentive distribution
rights, in addition to any distributions to which it may be entitled as a holder
of units.
Distributions from Capital Surplus will
not reduce the target distribution levels for the quarter in which they are
distributed.
We do not anticipate that there will be
significant distributions from Capital Surplus.
Adjustment
of Minimum Quarterly Distribution and Target Distribution Levels
In addition to adjustments made upon a
distribution of Available Cash from Capital Surplus, the following will each be
proportionately adjusted upward or downward, as appropriate, if any combination
or subdivision of units should occur:
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(1)
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the
minimum quarterly distribution;
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(2)
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the
target distribution levels;
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(3)
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the
Unrecovered Capital of a common unit;
and
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(4)
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other
amounts calculated on a per unit
basis.
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For example, if a two-for-one split of
the common units should occur, the minimum quarterly distribution, the target
distribution levels and the Unrecovered Capital of the common units would each
be reduced to 50% of its initial level.
No adjustment will be made by reason of
the issuance of additional common units for cash or property.
The minimum quarterly distribution and
the target distribution levels may also be adjusted if legislation is enacted or
if existing law is modified or interpreted in a manner that causes us, any of
the intermediate partnerships or Northern Border Pipeline to become taxable as a
corporation or otherwise subject to taxation as an entity for federal, state or
local income tax purposes. In this event, the minimum quarterly distribution and
the target distribution levels for each quarter after that time would be reduced
to amounts equal to the product of:
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(1)
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the
minimum quarterly distribution and each of the target distribution
levels;
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multiplied
by
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(2)
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one
minus the sum of:
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(x)
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the
highest marginal federal income tax rate which could apply to the
Partnership that is taxed as an entity;
plus
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(y)
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any
increase in the effective overall state and local income tax rate that
would have been applicable to the Partnership, any of the intermediate
partnerships or Northern Border Pipeline in the preceding calendar year as
a result of the new imposition of the entity level tax, after taking into
account the benefit of any deduction allowable for federal income tax
purposes for the payment of state and local income taxes, but only to the
extent of the increase in rates resulting from that legislation or
interpretation.
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For example, assuming we are not
previously subject to state and local income tax, if we were to become taxable
as an entity for federal income tax purposes and we 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 before the adjustment.
Distributions
of Cash Upon Liquidation
Following the beginning of our
dissolution and liquidation, assets will be sold or otherwise disposed of and
the partners' capital account balances will be adjusted to reflect any resulting
gain or loss. The manner of the adjustment is as provided in the
Partnership Agreement. The proceeds of liquidation will first be
applied to the payment of our creditors in the order of priority provided in the
Partnership Agreement and by law. After that, the proceeds will be distributed
to the unitholders and the general partner in accordance with their capital
account balances, as so adjusted.
Net gains recognized upon liquidation
will be allocated first to restore negative balances in the capital account of
the general partner and the unitholders. Then net gains will be
allocated 98% to the unitholders and 2% to the general partner until the capital
account balances of the unitholders are equal to their Unrecovered Capital plus
any First Target Distribution for the quarter during which the liquidation date
occurs. However, no assurance can be given that there will be sufficient gain
upon liquidation of the Partnership to enable the holders of common units to
fully recover all of these amounts. Any further net gains recognized
upon liquidation will be allocated in a manner that takes into account the
incentive distribution rights of the general partner.
Any unrealized gain attributable to
assets distributed in kind will be allocated in a manner consistent with the
allocation of net recognized gains described above.
Upon our liquidation, any loss will
generally be allocated to the general partner and the unitholders in the
following manner:
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First,
98% to the holders of common units in proportion to the positive balances
in their capital accounts and 2% to the general partner, until the capital
accounts of the common unitholders have been reduced to zero;
and
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Thereafter,
100% to the general partner.
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Interim adjustments to capital
accounts will be made at the time we issue additional interests in the
Partnership or make distributions of property. These adjustments will
be based on the fair market value of the interests issued or the property
distributed and any gain or loss resulting from the adjustments will be
allocated to the unitholders and the general partner (including with respect to
its incentive distribution rights) in the same manner as gain or loss would be
allocated upon liquidation. In the event that positive interim adjustments are
made to the capital accounts, any later negative adjustments to the capital
accounts resulting from the issuance of additional Partnership interests, our
distributions of property, or losses upon sales of assets in our liquidation,
will be allocated in a manner, as reasonably determined by the general partner,
that to the extent possible result in the capital counts of the partners being
equal the capital accounts of the partners if no earlier positive adjustments to
the capital accounts had been made.
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OUR
PARTNERSHIP AGREEMENT
The following is a summary of the
material provisions of our Partnership Agreement. We summarize the following
provisions of the Partnership Agreement elsewhere in this Form
8-A/A:
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with
regard to distributions of available cash, please read “Cash Distribution
Policy—Quarterly Distributions of Available
Cash”;
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with
regard to the transfer of units, please read “Description of the Common
Units—Transfer of Common Units”;
and
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with
regard to allocations of taxable income and taxable loss, please read “Tax
Considerations.”
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Organization
and Duration
We were organized in December
1998. We will dissolve on December 31, 2097, unless sooner dissolved
under the terms of the Partnership Agreement.
Purpose
Our purpose under the Partnership
Agreement is limited to serving as a partner of our intermediate partnerships
and engaging in any business activity (either directly or through other
entities) that may be engaged in by the intermediate partnerships or that is
approved by the general partner; provided that the general partner reasonably
determines, as of the date of acquisition or commencement of such activity, that
such activity generates "qualifying income" (as such term is defined in Section
7704 of the Internal Revenue Code) or enhances the operations of an activity of
the Partnership or the intermediate partnerships.
Although the general partner has the
ability to cause the Partnership and the intermediate partnerships to engage in
activities other than the transportation of natural gas, the general partner has
no current plans to do so. The general partner is authorized in general to
perform all acts deemed necessary or appropriate to carry out the purposes and
to conduct our business.
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 the general partner and, if appointed, a liquidator, a
power of attorney to, among other things, execute and file documents required
for the qualification, continuance or dissolution of the Partnership. The power
of attorney also grants the authority for the amendment of, and to make consents
and waivers under, the Partnership Agreement.
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 and that he otherwise acts in
conformity with the provisions of the Partnership Agreement, his liability under
the Delaware Act will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common units plus his
share of any undistributed profits and assets. If it were determined, however,
that the right or exercise of the right by the limited partners as a
group:
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to
remove or replace the general
partner;
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to
approve some amendments to the Partnership Agreement;
or
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to
take other action under the Partnership
Agreement
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constituted
"participation in control" of our business for purposes of the Delaware Act,
then the limited partners could be held personally liable for our obligations
under the laws of Delaware to the same extent as the general partner. This
liability would extend to persons who transact business with us who reasonably
believe that the limited partner is a general partner.
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Under the Delaware Act, a limited
partnership may not make a distribution to a partner if, after the distribution,
all liabilities of the limited partnership, other than liabilities to partners
on account of their partnership interests and liabilities for which the recourse
of creditors is limited to specific property of the Partnership, exceed the fair
value of the assets of the limited partnership. For the purpose of determining
the fair value of the assets of a limited partnership, the Delaware Act provides
that the fair value of property subject to liability for which recourse of
creditors is limited shall be included in the assets of the limited partnership
only to the extent that the fair value of that property exceeds the nonrecourse
liability. The Delaware Act provides that a limited partner who receives a
distribution and knew at the time of the distribution that the distribution was
in violation of the Delaware Act shall be liable to the limited partnership for
the amount of the distribution for three years. Under the Delaware Act, an
assignee who becomes a substituted limited partner of a limited partnership is
liable for the obligations of his assignor to make contributions to the
Partnership, except the assignee is not obligated for liabilities unknown to him
at the time he became a limited partner and which could not be ascertained from
the Partnership Agreement.
As a general partner of the operating
partnerships, the respective intermediate partnerships will be liable for the
debts and obligations of the operating partnerships, although the partnership
agreements of the operating partnerships provide that, except as otherwise
specifically agreed in accordance with the terms of the partnership agreements,
the operating partnerships may not enter into any contract or other obligation
unless recourse by the parties is limited to the assets of the operating
partnerships.
The intermediate partnerships
currently conduct business in at least 13 states and may conduct business in
other states. Maintenance of limited liability for the Partnership, as the
limited partner in the intermediate partnerships, may require compliance with
legal requirements in the jurisdictions in which intermediate partnerships
conduct business, including qualifying the intermediate partnerships to do
business there. Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly established in many
jurisdictions. If it were determined that we were, by virtue of our limited
partner interest in the intermediate partnership or otherwise, conducting
business in any state without compliance with the applicable limited partnership
statute, or that the right or exercise of the right by the limited partners as a
group to remove or replace the general partner, to approve some amendments to
the Partnership Agreement, or to take other action under the Partnership
Agreement constituted "participation in the control" of our business for
purposes of the statutes of any relevant jurisdiction, then the limited partners
could be held personally liable for our obligations under the law of that
jurisdiction to the same extent as the general partner under the circumstances.
We will operate in a manner as the general partner considers reasonable and
necessary or appropriate to preserve the limited liability of the limited
partners.
Issuance
of Additional Securities
The Partnership Agreement authorizes
us to issue an unlimited number of additional limited partner interests and
other equity securities for the consideration and on the terms and conditions
established by the general partner in its sole discretion without the approval
of any limited partners.
We may issue an unlimited number of
common units as follows:
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(1)
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issuance
under employee and director benefit plans (subject to any approval
requirements of the Nasdaq Stock
Market);
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(2)
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upon
conversion of the general partner interests and incentive distribution
rights as a result of a withdrawal of the general partner;
or
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(3)
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in
the event of a combination or subdivision of common
units.
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It is possible that we will fund
acquisitions through the issuance of additional common units or other equity
securities. Holders of any additional common units we issue will be entitled to
share equally with the then-existing holders of common units in our
distributions of Available Cash. In addition, the issuance of additional
partnership interests may dilute the value of the interests of the then-existing
holders of common units in our net assets.
In accordance with Delaware law and
the provisions of the Partnership Agreement, we may also issue additional
partnership securities that, in the sole discretion of the general partner, may
have special voting rights to which the common units are not
entitled.
9
Upon issuance of additional
partnership securities in exchange for cash or property, the general partner
will be required to make additional capital contributions to the extent
necessary to maintain its combined 2% general partner interest in us and in the
intermediate partnerships. Moreover, the general partner will have the right,
which it may from time to time assign in whole or in part to any of its
affiliates, to purchase common units or other equity securities whenever, and on
the same terms that, we issue those securities to persons other than the general
partner and its affiliates, to the extent necessary to maintain their percentage
interest, including their interest represented by common units, that existed
immediately prior to each issuance. The holders of common units will not have
preemptive rights to acquire additional common units or other partnership
interests.
Amendment
of Partnership Agreement
Amendments to the Partnership
Agreement may be proposed only by or with the consent of the general partner,
which consent may be given or withheld in its sole discretion. In order to adopt
a proposed amendment, other than the amendments discussed below, the general
partner is required to seek written approval of the holders of the number of
units required to approve the amendment or call a meeting of the limited
partners to consider and vote upon the proposed amendment except as described
below.
Prohibited
Amendments. No amendment may be
made that would:
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(1)
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enlarge
the obligations of any limited partner without its consent, unless
approved by at least a majority of the type or class of limited partner
interests so affected;
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(2)
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enlarge
the obligations of, restrict in any way any action by or rights of, or
reduce in any way the amounts distributable, reimbursable or otherwise
payable by the Partnership to the general partner or any of its affiliates
without its consent, which may be given or withheld in its sole
discretion;
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(3)
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change
the term of the Partnership;
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(4)
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provide
that the Partnership is not dissolved upon the expiration of its term or
upon an election to dissolve the Partnership by the general partner that
is approved by the holders of a majority of the outstanding common units;
or
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(5)
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give
any person the right to dissolve the Partnership other than the general
partner's right to dissolve the Partnership with the approval of the
holders of a majority of the outstanding common
units.
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The provision of the Partnership
Agreement preventing the amendments having the effects described in clauses
(1)-(5) above can be amended upon the approval of the holders of at least 90% of
the outstanding units.
No Unitholder
Approval. The general partner may
generally make amendments to the Partnership Agreement without the approval of
any limited partner or assignee to reflect:
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(1)
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a
change in the name of the Partnership, the location of the principal place
of business of the Partnership, the registered agent or the registered
office of the Partnership;
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(2)
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the
admission, substitution, withdrawal or removal of partners in accordance
with the Partnership Agreement;
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(3)
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a
change that, in the sole discretion of the general partner, is necessary
or advisable to qualify or continue the qualification of the Partnership
as a limited partnership or a partnership in which the limited partners
have limited liability under the laws of any state or to ensure that
neither the Partnership nor any intermediate partnership will be treated
as an association taxable as a corporation or otherwise taxed as an entity
for federal income tax purposes;
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(4)
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an
amendment that is necessary, in the opinion of counsel to the Partnership,
to prevent the Partnership or the general partner or its directors,
officers, agents or trustees, from in any manner being subjected to the
provisions of the Investment Company Act of 1940, the Investment Advisors
Act of 1940, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, whether or not substantially
similar to plan asset regulations currently applied or
proposed;
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(5)
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an
amendment that in the discretion of the general partner is necessary or
advisable for the authorization or issuance of additional limited or
general partner interests;
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10
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(6)
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any
amendment expressly permitted in the Partnership Agreement to be made by
the general partner acting alone;
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(7)
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an
amendment effected, necessitated or contemplated by a merger agreement
that has been approved under the terms of the Partnership
Agreement;
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(8)
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any
amendment that, in the discretion of the general partner, is necessary or
advisable for the formation by the Partnership of, or its investment in,
any corporation, partnership or other entity, as otherwise permitted by
the Partnership Agreement;
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(9)
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a
change in the fiscal year or taxable year of the Partnership and related
changes; and
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(10)
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any
other amendments substantially similar to any of the matters described in
(1)-(9) above.
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In addition, the general partner may
make amendments to the Partnership Agreement without the approval of any limited
partner or assignee if those amendments, in the discretion of the general
partner:
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(1)
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do
not adversely affect the limited partners in any material
respect;
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(2)
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are
necessary or advisable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state
statute;
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(3)
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are
necessary or advisable to facilitate the trading of limited partner
interests or to comply with any rule, regulation, guideline or requirement
of any securities exchange on which the limited partner interests are or
will be listed for trading, compliance with any of which the general
partner deems to be in the best interests of the Partnership and the
limited partners;
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(4)
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are
necessary or advisable for any action taken by the general partner
relating to splits or combinations of units under the provisions of the
Partnership Agreement; or
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(5)
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are
required to effect the intent of the provisions of the Partnership
Agreement or are otherwise contemplated by the Partnership
Agreement.
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Opinion of
Counsel and Unitholder Approval. The general partner will not be required
to obtain an opinion of counsel that an amendment will not result in a loss of
limited liability to the limited partners or result in the Partnership being
treated as an entity for federal income tax purposes if one of the amendments
described above under "-- No Unitholder Approval" should occur. No other
amendments to the Partnership Agreement will become effective without the
approval of holders of at least 90% of the units unless the Partnership obtains
an opinion of counsel to the effect that the amendment will not adversely affect
the limited liability under applicable law of any limited partner in the
Partnership or cause the Partnership or the intermediate partnerships to be
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously taxed as such).
Any amendment that would have a
material adverse effect on the rights or preferences of any type or class of
outstanding units in relation to other classes of units will require the
approval of at least a majority of the type or class of units so affected. Any
amendment that reduces the voting percentage required to take any action is
required to be approved by the affirmative vote of limited partners constituting
not less than the voting requirement sought to be reduced.
Merger,
Sale or Other Disposition of Assets
The general partner is generally
prohibited, without the prior approval of holders of a majority of the
outstanding common units from causing the Partnership to, among other things,
sell, exchange or otherwise dispose of all or substantially all of its assets in
a single transaction or a series of related transactions, including by way of
merger, consolidation or other combination, or approving on behalf of the
Partnership the sale, exchange or other disposition of all or substantially all
of the assets of any intermediate partnership; provided that the general partner
may mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Partnership's assets without that approval. The general
partner may also sell all or substantially all of the Partnership's assets under
a foreclosure or other realization upon the encumbrances above without that
approval. Furthermore, provided that conditions specified in the Partnership
Agreement are satisfied, the general partner may merge the Partnership or any of
its subsidiaries into, or convey some or all of their assets to, a newly formed
entity if the sole purpose of that merger or conveyance is to effect solely a
change in the legal form of the Partnership into another limited liability
entity.
11
The unitholders are not entitled to
dissenters' rights of appraisal under the Partnership Agreement or applicable
Delaware law in the event of a merger or consolidation, a sale of substantially
all of the Partnership's assets or any other transaction or event.
Termination
and Dissolution
We will continue until December 31,
2097, unless terminated sooner under the Partnership Agreement. We will dissolve
upon:
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(1)
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the
election of the general partner to dissolve us, if approved by the holders
of a majority of the outstanding common
units;
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(2)
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the
sale, exchange or other disposition of all or substantially all of the
assets and properties of the Partnership and the intermediate
partnerships;
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(3)
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the
entry of a decree of judicial dissolution of the Partnership;
or
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(4)
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the
withdrawal or removal of the general partner or any other event that
results in its ceasing to be the general partner other than by reason of a
transfer of its general partner interest in accordance with the
Partnership Agreement or withdrawal or removal following approval and
admission of a successor.
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Upon a dissolution under clause (4),
the holders of a majority of the outstanding common units may also elect, within
specific time limitations, to reconstitute the Partnership and continue its
business on the same terms and conditions described in the Partnership Agreement
by forming a new limited partnership on terms identical to those in the
Partnership Agreement and having as general partner an entity approved by the
holders of units who elected to reconstitute the Partnership subject to receipt
by the Partnership of an opinion of counsel to the effect that:
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(1)
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the
action would not result in the loss of limited liability of any limited
partner; and
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(2)
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neither
the Partnership, the reconstituted limited partnership, nor any
intermediate partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of that right to
continue.
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Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are
reconstituted and continued as a new limited partnership, the liquidator
authorized to wind up our affairs will, acting with all of the powers of the
general partner that the liquidator deems necessary or desirable in its good
faith judgment, liquidate our assets and apply the proceeds of the liquidation
as provided in "Cash Distribution Policy—Quarterly Distributions of Available
Cash—Distributions of Cash Upon Liquidation". The liquidator may defer
liquidation or distribution of our assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
Withdrawal
or Removal of the General Partner
The general partner of the
Partnership may withdraw as the general partner without first obtaining approval
from any unitholder by giving 90 days' written notice, and that withdrawal will
not constitute a violation of the Partnership Agreement. In addition,
the Partnership Agreement permits the general partner in some instances to sell
or otherwise transfer all of its general partner interests in the Partnership
without the approval of the unitholders. See "--Transfer of General Partner
Interest and Incentive Distribution Rights".
Upon the withdrawal of the general
partner under any circumstances, other than as a result of a transfer by the
general partner of all or a part of its general partner interests in the
Partnership, the holders of a majority of the outstanding common units may
select a successor to that withdrawing general partner. If a successor is not
elected, or is elected but an opinion of counsel regarding limited liability and
tax matters cannot be obtained, the Partnership will be dissolved, wound up and
liquidated, unless within 180 days after that withdrawal the holders of a
majority of the outstanding common units agree in writing to continue the
business of the Partnership and to appoint a successor general partner. See
"--Termination and Dissolution" below.
12
The general partner may not be
removed unless that removal is approved by the vote of the holders of not less
than 66 2/3% of the outstanding units, including units held by the general
partner and its affiliates, and the Partnership receives 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 the outstanding common units.
The Partnership Agreement also
provides that if the general partner is removed as general partner of the
Partnership under circumstances where cause does not exis the general partner
will have the right to convert its general partner interests and all the
incentive distribution rights into common units or to receive cash in exchange
for those interests from the successor general partner.
Withdrawal or removal of the general
partner as a general partner of the Partnership also constitutes withdrawal or
removal, as the case may be, of the general partner as a general partner of the
intermediate partnerships.
In the event of removal of the
general partner under circumstances where cause exists or withdrawal of the
general partner where that withdrawal violates the Partnership Agreement or any
intermediate partnership agreement, a successor general partner will have the
option to purchase the general partner interests and incentive distribution
rights of the departing general partner for a cash payment equal to the fair
market value of those interests. Under all other circumstances where the general
partner withdraws or is removed by the limited partners, the departing general
partner will have the option to require the successor general partner to
purchase the general partner interests of the departing general partner and its
incentive distribution rights for a cash payment equal to the fair market value
of those interests. In each case, this fair market value will be determined by
agreement between the departing general partner and the successor general
partner. If no agreement is reached, an independent investment banking firm or
other independent expert selected by the departing general partner and the
successor general partner will determine the fair market value. If
the departing general partner and the successor general partner cannot agree
upon an expert to determine the fair market value, then an expert chosen by
agreement of experts selected by each of them will determine the fair market
value.
If the above-described option is not
exercised by either the departing general partner or the successor general
partner, the departing general partner's general partner interests and its
incentive distribution rights will automatically convert into common units equal
to the fair market value of those interests, as determined by an investment
banking firm or other independent expert selected in the manner described in the
preceding paragraph.
In addition, the Partnership will be
required to reimburse the departing general partner for all amounts due the
departing general partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the termination of
any employees employed by the departing general partner for the benefit of the
Partnership.
Transfer
of General Partner Interest and Incentive Distribution Rights
The general partner may at any time
transfer its common units and its incentive distribution rights to one or more
persons without unitholder approval. Furthermore, the general partner
may transfer all or any part of its general partner interest in any of the
intermediate partnerships to another person, subject to compliance with any
transfer restrictions and/or right of first refusal obligations, if any, in the
applicable intermediate partnership agreement. As a condition to the
transfer, the transferee must assume the rights and duties of the general
partner to whose interest that transferee has succeeded, agree to be bound by
the provisions of the Partnership Agreement, furnish an opinion of counsel
regarding limited liability and tax matters, agree to acquire all (or the
appropriate portion) of the general partner's interest in the intermediate
partnerships and agree to be bound by the provisions of the intermediate
partnership agreements.
TransCanada
Ownership of General Partner
TransCanada has agreed with the
underwriters of our initial public offering that it will retain beneficial
ownership of our general partner until six months after the date when there are
no officers of our general partner who are also directors, officers or employees
of TransCanada or its other affiliates.
13
Change
of Management Provisions
The Partnership Agreement contains
specific provisions that are intended to discourage a person or group from
attempting to remove the general partner of the Partnership as general partner
of the Partnership or otherwise change management. If any person or group other
than the general partner and its affiliates acquires beneficial ownership of 20%
or more of any class of units, that person or group loses voting rights on all
of its units. This loss of voting rights does not apply to any person or group
that acquires the units from our general partner or its affiliates and any
transferees of that person or group approved by our general
partner.
The Partnership Agreement also
provides that if the general partner is removed under circumstances where cause
does not exist and units held by the general partner and its affiliates are not
voted in favor of that removal, the general partner will have the right to
convert its general partner interests and all of its incentive distribution
rights into common units or to receive cash in exchange for those
interests.
Limited
Call Right
If at any time the general partner
and its affiliates hold at least 80% of the then-issued and outstanding
partnership securities of any class, the general partner will have the right,
but not the obligation, which it may assign in whole or in part to any of its
affiliates or to the Partnership, to acquire all, but not less than all, of the
remaining partnership securities of the class held by unaffiliated persons as of
a record date to be selected by the general partner, on at least 10 but not more
than 60 days notice. The purchase price in the event of this purchase is the
greater of: (i) the highest price paid by either of the general partner or any
of its affiliates for any partnership securities of the class purchased within
the 90 days preceding the date on which the general partner first mails notice
of its election to purchase those partnership securities; and (ii) the current
market price as of the date three days before the date the notice is
mailed. For this purpose, the "current market price" of any publicly
traded class of securities listed or admitted to trading on a national
securities exchange is the average of the daily closing prices for the 20
consecutive trading days immediately prior to such date.
As a result of the general partner's
right to purchase outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests purchased at an
undesireable time or price. The tax consequences to a unitholder of the exercise
of this call right are the same as a sale by that unitholder of his common units
in the market. See "Tax Considerations--Disposition of Common Units"
below.
Meetings;
Voting
Except as described below regarding a
person or group owning 20% or more of any class of units then outstanding,
unitholders or assignees who are record holders of units on the record date will
be entitled to notice of, and to vote at, meetings of limited partners of the
Partnership and to act upon matters for which approvals may be solicited. Common
units that are owned by an assignee who is a record holder, but who has not yet
been admitted as a limited partner, shall be voted by the general partner at the
written direction of the record holder. Absent direction of this kind, the
common units will not be voted, except that, in the case of common units held by
the general partner on behalf of non-citizen assignees, the general partner
shall distribute the votes on those common units in the same ratios as the votes
of limited partners on other units are cast.
The general partner does not
anticipate that any meeting of unitholders will be called in the foreseeable
future. Any action that is required or permitted to be taken by the unitholders
may be taken either at a meeting of the unitholders or without a meeting if
consents in writing describing the action so taken are signed by holders of the
number of units as would be necessary to authorize or take that action at a
meeting. Meetings of the unitholders may be called by the general partner or by
unitholders owning at least 20% of the outstanding units of the class for which
a meeting is proposed. Unitholders may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding units of the class or
classes for which a meeting has been called represented in person or by proxy
shall constitute a quorum unless any action by the unitholders requires approval
by holders of a greater percentage of the units, in which case the quorum shall
be the greater percentage.
Each record holder of a unit has a
vote according to his percentage interest in the Partnership, although
additional limited partner interests having special voting rights could be
issued. See "--Issuance of Additional Securities". However, if at any
time any person or group, other than the general partner and its affiliates, or
a direct or subsequently approved transferee of the general partner or its
affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of
any class of units then outstanding, the person or group will lose voting rights
on all of its units and the units may not be voted on any matter and will not be
considered to be outstanding when sending notices of a meeting of unitholders,
calculating required votes, determining the presence of a quorum or for other
similar purposes. Common units held in nominee or street name account will be
voted by the broker or other nominee in accordance with the instruction of the
beneficial owner unless the arrangement between the beneficial owner and his
nominee provides otherwise.
14
Any notice, demand, request, report
or proxy material required or permitted to be given or made to record holders of
common units under the Partnership Agreement will be delivered to the record
holder by the Partnership or by the transfer agent.
Status
as Limited Partner or Assignee
Except as described above under
"--Limited Liability", the common units will be fully paid, and unitholders will
not be required to make additional contributions.
An assignee of a common unit, after
executing and delivering a transfer application, but pending its admission as a
substituted limited partner, is entitled to an interest equivalent to that of a
limited partner for the right to share in allocations and distributions from the
Partnership, including liquidating distributions. The general partner will vote
and exercise other powers attributable to common units owned by an assignee who
has not become a substitute limited partner at the written direction of the
assignee. See "--Meetings; Voting". Transferees who do not execute and deliver a
transfer application will be treated neither as assignees nor as record holders
of common units, and will not receive cash distributions, federal income tax
allocations or reports furnished to record holders of common units. See
"Description of the Common Units--Transfer of Common Units".
Non-Citizen
Assignees; Redemption
If we are or become subject to
federal, state or local laws or regulations that, in the reasonable
determination of the general partner, create a substantial risk of cancellation
or forfeiture of any property that we have an interest in because of the
nationality, citizenship or other related status of any limited partner or
assignee, we may redeem the units held by the limited partner or assignee at
their current market price. In order to avoid any cancellation or forfeiture,
the general partner may require each limited partner or assignee to furnish
information about his nationality, citizenship or related status. If a limited
partner or assignee fails to furnish information about this nationality,
citizenship or other related status within 30 days after a request for the
information or the general partner determines after receipt of the information
that the limited partner or assignee is not an eligible citizen, the limited
partner or assignee may be treated as a non-citizen assignee. In addition to
other limitations on the rights of an assignee who is not a substituted limited
partner, a non-citizen assignee does not have the right to direct the voting of
his units and may not receive distributions in kind upon our
liquidation.
Indemnification
Under the Partnership Agreement, in
most circumstances, we will indemnify the following persons, to the fullest
extent permitted by law, from and against all losses, claims, damages or similar
events:
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(1)
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the
general partner;
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(2)
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any
departing general partner;
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(3)
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any
person who is or was an affiliate of a general partner or any departing
general partner;
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(4)
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any
person who is or was a member, partner, officer, director, employee, agent
or trustee of a general partner or any departing general partner or any
affiliate of a general partner or any departing general partner;
or
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(5)
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any
person who is or was serving at the request of a general partner or any
departing general partner or any affiliate of a general partner or any
departing general partner as an officer, director, employee, member,
partner, agent or trustee of another
person.
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Any indemnification under these
provisions will be only out of our assets. The 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 indemnification. We are authorized to
purchase insurance against liabilities asserted against and expenses incurred by
persons for our activities, regardless of whether we would have the power to
indemnify the person against liabilities under the Partnership
Agreement.
15
Books
and Reports
The general partner is required to
keep appropriate books of our business at our principal offices. The books will
be maintained for both tax and financial reporting purposes on an accrual basis.
For tax and financial reporting purposes, our fiscal year is the calendar
year.
We will furnish or make available to
record holders of common units, within 120 days after the close of each fiscal
year, an annual report containing audited financial statements and a report on
those financial statements by our independent public accountants. Except for our
fourth quarter, we will also furnish or make available summary financial
information within 90 days after the close of each quarter to the extent
required by applicable law, rule or regulation or as the general partner deems
to be necessary or appropriate.
We will furnish each record holder of
a unit information reasonably required for tax reporting purposes within 90 days
after the close of each calendar year. This information is expected
to be furnished in summary form so that some complex calculations normally
required of partners can be avoided. Our ability to furnish this summary
information to unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will receive
information to assist him in determining his federal and state tax liability and
filing his federal and state income tax returns, regardless of whether he
supplies us with information.
Right
to Inspect Books And Records
The Partnership Agreement provides
that a limited partner can, for a purpose reasonably related to his interest as
a limited partner, upon reasonable demand and at his own expense, have furnished
to him:
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(1)
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a
current list of the name and last known address of each
partner;
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(2)
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a
copy of our tax returns;
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(3)
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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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(4)
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copies
of the Partnership Agreement, the certificate of limited partnership of
the Partnership, related amendments and powers of attorney under which
they have been executed;
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(5)
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information
regarding the status of our business and financial condition;
and
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(6)
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other
information regarding our affairs that is just and
reasonable.
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The general partner may, and intends
to, keep confidential from the limited partners trade secrets or other
information the disclosure of which the general partner believes in good faith
is not in our best interest or which we are is required by law or by agreements
with third parties to keep confidential.
Registration
Rights
Under the Partnership Agreement, we
have agreed to register for resale under the Securities Act and applicable state
securities laws any common units or other partnership securities proposed to be
sold by the general partner or any of its affiliates or their assignees if an
exemption from the registration requirements is not otherwise available. These
registration rights continue for two years following any withdrawal or removal
of the general partner as the general partner of the Partnership. We are
obligated to pay all expenses incidental to the registration, excluding
underwriting discounts and commissions.
TAX
CONSIDERATIONS
This section is a summary of material
federal income tax considerations that may be relevant to an investment in our
common units. This section is based upon current provisions of the Internal
Revenue Code, existing and proposed regulations thereunder 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.
The following discussion does not
address all federal income tax matters affecting us or the unitholders.
Moreover, the discussion focuses on unitholders who are individual citizens or
residents of the United States and has only limited application to
corporations, partnerships, estates, trusts, non-resident aliens or other
unitholders subject to specialized tax treatment, such as tax-exempt
institutions, foreign persons, individual retirement accounts, real estate
investment trusts or mutual funds. Accordingly, we recommend that you consult
and depend on your own tax advisor in analyzing the federal, state, local and
foreign tax consequences to you of an investment in
our securities.
16
No ruling from the IRS or opinion of
counsel has been or will be received regarding any matter affecting us or
prospective unitholders. The statements and conclusions made herein may not be
sustained by a court if contested by the IRS. Any contest of this sort with the
IRS may materially and adversely impact the market for the common units and the
prices at which the 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 tax treatment of us, or of an investment in
us, may be significantly modified by future legislative or administrative
changes or court decisions. Any modifications may or may not be retroactively
applied.
For the reasons described below, the
following specific federal income tax issues are subject to particular
uncertainty:
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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");
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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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whether
our method for depreciating Section 743 adjustments is sustainable in
certain cases (please read "— Tax Consequences of Unit
Ownership — Section 754 Election").
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Partnership
Status
A partnership is not a taxable entity
and incurs no federal income tax liability. Instead, each partner of a
partnership is required to take into account his allocable 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 to a partner is in excess of
the partner's adjusted tax basis in his partnership interest.
No ruling from the IRS and no opinion
of counsel has been or will be sought with respect to our classification as a
partnership for federal income tax purposes or as to the classification as
partnerships of the intermediate partnerships or the operating partnerships,
whether our operations generate "qualifying income" under Section 7704 of
the Internal Revenue Code or any other matter affecting us or prospective
unitholders. However, based upon the Internal Revenue Code, Treasury
Regulations, published revenue rulings and court decisions, we believe that we,
our intermediate partnerships and our operating partnerships will each be
classified as a partnership for federal income tax purposes.
In this regard:
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Neither
we nor any of our intermediate partnerships or our operating partnerships
has elected or will elect to be treated as an association or corporation,
and none of the intermediate partnerships or the operating partnerships
has ever been a publicly-traded
partnership;
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For
each taxable year, more than 90% of our gross income has been and will be
derived from the exploration, development, production, processing,
refining, transportation or marketing of any mineral or natural resource,
including oil, gas, its products and naturally occurring carbon dioxide,
or other items of income as to which counsel has or will opine are
"qualifying income" within the meaning of Section 7704(d) of the
Internal Revenue Code; and
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Neither
we nor any intermediate partnership or operating partnership has engaged
or will engage in any significant activity other than the transportation
(within the meaning of Section 7704(d) of the Internal Revenue Code)
of natural gas without first receiving an opinion of counsel to the effect
that such activity will not cause the Partnership or any intermediate
partnership or operating partnership to have income that is not qualifying
income.
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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 natural gas. Other types of qualifying income
include interest from other than a financial business, dividends, gains from the
sale of real property, and gains from the sale or other disposition of capital
assets held for the production of income that otherwise constitutes qualifying
income. We have satisfied the qualifying income test in each taxable year to
date. We estimate that less than 1% of our current gross income is not
qualifying income. The percentage of our gross income that constitutes
qualifying income could change from time to time, but we project that the amount
of non-qualifying gross income will not approach 10% of our gross income in any
year.
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If any of the Partnership, an
intermediate partnership or an operating partnership were treated as an
association taxable as a corporation in any taxable year, its items of income,
gain, loss and deduction would be reflected only on its tax return rather than
being passed through to its equity holders, and its net income would be taxed to
it at corporate rates. In addition, any distributions by the affected entity to
its equity holders would be treated as either taxable dividend income, to the
extent of its current or accumulated earnings and profits, or, in the absence of
earnings and profits, as a nontaxable return of capital, to the extent of the
holder's tax basis in its equity interest in the entity, or as taxable capital
gain, after the holder's tax basis in the equity interest is reduced to zero.
Accordingly, treatment of the Partnership or any of the intermediate
partnerships or the operating partnerships as an association taxable as a
corporation would result in a material reduction in a unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the common units.
The discussion below is based on the
assumption that we, the intermediate partnerships and the operating partnerships
will each be classified as a partnership for federal income tax
purposes.
Limited
Partner Status
Unitholders who have become limited
partners of the Partnership will be treated as partners of the Partnership for
federal income tax purposes. Assignees who have executed and delivered transfer
applications and are awaiting admission as limited partners and unitholders
whose common units are held in street name or by a nominee and who have the
right to direct the nominee in the exercise of all substantive rights attendant
to the ownership of their common units will also be treated as partners of the
Partnership for federal income tax purposes. Because there is no direct or
indirect controlling authority addressing assignees of common units who are
entitled to execute and deliver transfer applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, this discussion is not addressed to such persons.
Furthermore, a purchaser or other transferee of common units who does not
execute and deliver a transfer application may not receive certain 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 common 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 such common
units for federal income tax purposes. Please read "— Tax Consequences of
Unit Ownership — Treatment of Short Sales."
Income, gain, deductions or losses
would not appear to be reportable by a unitholder who is not a partner for
federal income tax purposes, and any cash distributions received by a unitholder
who is not a partner for federal income tax purposes would therefore appear to
be fully taxable as ordinary income. Such holders are urged to consult their own
tax advisors with respect to their status as partners of the Partnership 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
allocable share of our income, gains, losses and deductions without regard to
whether we make cash distributions to him. Consequently, a unitholder may be
allocated a share of our income even if he has not received a cash distribution.
Each unitholder must include in income his allocable share of our income, gain,
loss and deduction for our taxable year ending with or within his taxable year.
Our taxable year ends on December 31.
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Treatment of
Distributions. Our distributions to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "— Disposition of Common Units"
below. Any reduction in a unitholder's share of our liabilities for which no
partner, including the general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. To the extent that our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he must recapture
any losses deducted in previous years. Please read "— Limitations on the
Deductibility of Our Losses."
A decrease in a unitholder's
percentage interest in us because of our issuance of additional common units
will decrease his share of our nonrecourse liabilities, and thus will result in
a corresponding deemed distribution of cash. A non-pro rata distribution of
money or property may result in ordinary income to a unitholder, regardless of
his tax basis in his common units, if the distribution reduces the unitholder's
share of our "unrealized receivables," including depreciation recapture, and/or
substantially appreciated "inventory items," both as defined in the Internal
Revenue Code, and collectively, "Section 751 Assets." To that extent, the
unitholder will be treated as having been distributed his proportionate share of
the Section 751 Assets and then having exchanged those assets with us in
return for the non-pro rata portion of the actual distribution made to him.
This latter deemed exchange will generally result in the unitholder's
realization of ordinary income which will equal the excess of the
non-pro rata portion of the distribution over the unitholder's tax basis
for the share of the Section 751 Assets deemed relinquished in
the exchange.
Basis of Common
Units. A unitholder will have an initial tax basis for his
common units equal to 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 his
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 our taxable income and are not required to be capitalized. A
unitholder will have no share of our debt that is recourse to our general
partner, but will have a share, generally based on his share of profits, of our
nonrecourse liabilities.
Limitations on
Deductibility of Our Losses. The deduction by a unitholder of
his share of our losses will be limited to his tax basis in his common units
and, in the case of an individual unitholder or a corporate unitholder who is
subject to the "at risk" rules, to the amount for which the unitholder is
considered to be "at risk" with respect to our activities, if that is less than
the unitholder's tax basis. A unitholder must recapture losses deducted in
previous years to the extent that our distributions cause the unitholder's at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable as a deduction in the future to the extent
that his at risk amount is subsequently increased, provided such losses do not
exceed his tax basis in his common units. Upon the taxable disposition of a
common unit, any gain recognized by a unitholder can be offset by losses that
were previously suspended by the at risk limitation
but may not be offset by losses suspended by the basis limitation. Any loss
previously suspended by the at-risk limitations in excess of that gain would no
longer be utilizable.
In general, a unitholder will be at
risk to the extent of his tax basis in his common units, excluding any portion
of that basis attributable to his share of our nonrecourse liabilities, reduced
by any amount of money the unitholder borrows to acquire or hold his common
units if the lender of such borrowed funds owns an interest in us, is related to
the unitholder or can look only to common units for repayment. A unitholder's at
risk amount will increase or decrease as the tax basis of the unitholder's
common units increases or decreases, other than tax basis increases or decreases
attributable to increases or decreases in his share of our nonrecourse
liabilities.
In addition to the basis and at-risk
limitations on the deductibility of losses, the passive loss limitations
generally provide that individuals, estates, trusts and certain closely-held
corporations and personal service corporations can deduct losses from passive
activities, which are generally trade or business activities in which the
taxpayer does not materially participate, only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses we generate will only be available to offset future income we
generate and will not be available to offset income from other passive
activities or investments, including other publicly-traded partnerships, or
salary or active business income. Passive losses that are not deductible because
they exceed a unitholder's share of our income may be deducted in full when he
disposes of his entire investment in us in a fully taxable transaction to an
unrelated party. The passive activity loss limitations are applied after other
applicable limitations on deductions, including the at risk rules and the basis
limitation.
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A unitholder's share of our net
income may be offset by any of our suspended passive losses we generate, but it
may not be offset by any other current or carryover losses from other passive
activities, including those attributable to other publicly-traded
partnerships.
Limitations on
Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." 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 unitholder's
investment interest expense will take into account interest on any margin
account borrowing or other loan incurred to purchase or carry a common 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 earned by a publicly-traded partnership will be treated as
investment income to unitholders. In addition, a unitholder's share of our
portfolio income will be treated as investment income.
Allocation of
Income, Gain, Loss and Deduction. In general, if we have a net
profit, our items of income, gain, loss and deduction are allocated among the
general partner and the unitholders in accordance with their respective
percentage interests in us. At any time that incentive distributions are made to
the general partner, gross income is allocated to the general partner to the
extent of these distributions. If we have a net loss, that loss is generally
allocated first, to our general partner and the unitholders in accordance with
their respective percentage interests to the extent of their positive capital
accounts, as maintained under the Partnership Agreement, and second, to our
general partner.
An allocation of items of our income,
gain, loss or deduction, other than an allocation required by the Internal
Revenue Code to eliminate the difference between a partner's "book" capital
account and "tax" capital account, will generally be given effect for federal
income tax purposes in determining a partner's share of an item of income, gain,
loss or deduction only if the allocation has substantial economic effect. In any
other case, a partner's share of an item will be determined on the basis of the
partner's interest in us, which will be determined by taking into account all
the facts and circumstances, including the partners' relative contributions to
us, the interests of the partners in economic profits and losses, the interest
of the partners in cash flow and other nonliquidating distributions and rights
of the partners to distributions of capital upon liquidation. We
believe that, subject to the issues described in "— Tax Consequences of
Unit Ownership — Section 754 Election" and "— Disposition of
Common Units — Allocations Between Transferors and Transferees," the
allocations under our Partnership Agreement will be given effect for federal
income tax purposes in determining a partner's share of an item of income, gain,
loss or deduction.
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Entity-Level
Collections. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or 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 current unitholders. We are authorized to
amend our Partnership Agreement in the manner necessary to maintain uniformity
of intrinsic tax characteristics of common units and to adjust subsequent
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.
Treatment of
Short Sales. A unitholder whose common units are loaned to a
"short seller" to cover a short sale of common units may be considered as having
disposed of ownership of those common units. If so, he would no longer be
treated for tax purposes as a partner with respect to those common 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, deduction or loss with respect to those common units
would not be reportable by
the unitholder;
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any
cash distributions received by the unitholder with respect to those common
units would be fully
taxable; and
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all
of these distributions would appear to be treated as ordinary
income.
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The tax treament of a unitholder
whose common units are loaned to a short seller to cover a short sale of common
units is unclear; therefore, unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a short seller
are urged to modify any applicable brokerage account agreements to prohibit
their brokers from loaning their common units. The IRS has announced that it is
actively studying issues relating to the tax treatment of short sales of
partnership interests. Please also read "— Disposition of Common
Units — Recognition of Gain or Loss."
Alternative
Minimum Tax. Each unitholder will be required to take into
account his distributive share of any of our items of income, gain, deduction or
loss for purposes of the alternative minimum tax. Prospective unitholders are
urged to consult with their tax advisors as to the impact of an investment in
common units on their liability for the alternative
minimum tax.
Section 754
Election. We have made the election permitted by
Section 754 of the Internal Revenue Code. The election is irrevocable
without the consent of the IRS. The election generally permits us to adjust a
common unit purchaser's tax basis in our assets ("inside basis") under
Section 743(b) of the Internal Revenue Code to reflect his purchase price.
This election does not apply to a person who purchases units directly from us.
The Section 743(b) adjustment belongs to the purchaser and not to other
partners. For purposes of this discussion, a partner's inside basis in our
assets will be considered to have two components: (1) his share of our tax
basis in our assets ("common basis") and (2) his Section 743(b)
adjustment to that basis.
Treasury Regulations under
Section 743 of the Internal Revenue Code require a partnership that adopts
the remedial allocation method (which we have adopted) to depreciate any portion
of the Section 743(b) adjustment attributable to Section 704(c)
built-in gain on recovery property under Section 168 of the Internal
Revenue Code over the remaining recovery period for such Section 704(c)
built-in gain. Treasury Regulations under Section 197 similarly require any
portion of the Section 743(b) adjustment attributable to
Section 704(c) built-in gain on amortizable Section 197 intangibles to
be amortized over the remaining amortization period for such Section 704(c)
built-in gain. Under Treasury Regulation Section 1.167(c)-1(a)(6), a
Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Internal Revenue Code rather than cost recovery
deductions under Section 168 of the Internal Revenue Code is generally
required to be depreciated using either the straight-line method or the 150%
declining balance method. Under our Partnership Agreement, we have adopted a
convention to preserve the uniformity of common units even if that convention is
not consistent with specified Treasury Regulations. Please read
"— Uniformity of Common Units."
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Although there is no direct or
indirect controlling authority on this issue, we depreciate the portion of a
Section 743(b) adjustment attributable to unrealized appreciation in the
value of property contributed to us, to the extent of any unamortized
Section 704(c) built-in gain, 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). To the extent this Section 743(b) adjustment
is attributable to appreciation in value in excess of the unamortized
Section 704(c) built-in gain, 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 or amortization
convention under which all purchasers acquiring common units in the same month
would receive depreciation or amortization, whether attributable to common basis
or 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 specified unitholders. Please read
"— Uniformity of Common Units."
The calculations involved in the
Section 754 election are complex and we will make them on the basis of
assumptions as to the value of our assets and other matters. The allocation of
the Section 743(b) adjustment must be made in accordance with the Internal
Revenue Code. The IRS may seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to tangible assets to goodwill
instead. Goodwill, as an intangible asset, is generally nonamortizable or
amortizable over a longer period of time or under a less accelerated method than
our tangible assets.. We cannot assure you that the determinations we make will
not be successfully challenged by the IRS and the deductions resulting from them
reduced or disallowed altogether. Should the IRS require a different basis
adjustment to be made, and should, in our view, 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
common 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 currently use the year ending
December 31 as our taxable year and we have adopted the accrual method of
accounting for federal income tax purposes. Each unitholder will be required to
include in income his allocable 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 allocable 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."
Tax Basis,
Depreciation and Amortization. The adjusted tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately adjusted 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 any
offering will be borne by the general partner and other unitholders as of that
time. Please read "— Tax Treatment of Unitholders — Allocation of
Income, Gain, Loss and Deduction."
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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. If we dispose of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain, determined by reference to the amount
of depreciation previously deducted and the nature of the property, may be
subject to the recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a unitholder who has taken cost recovery or depreciation
deductions with respect to property we own may be required to recapture 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
common units (called "syndication expenses") must be capitalized and cannot be
deducted currently, ratably or upon our termination. Uncertainties exist
regarding the classification of costs as organization expenses, which may be
amortized by us, and as syndication expenses, which may not be amortized. The
underwriting discounts and commissions we incur are treated as syndication
expenses.
Valuation and Tax
Basis of Our Properties. The federal income tax consequences
of the ownership and disposition of common units will depend in part on our
estimates as to the relative fair market values, and determinations of the
initial tax bases, of our assets. Although we may from time to time consult with
professional appraisers with respect to valuation matters, we will make many of
the relative fair market value estimates ourselves. These estimates and
determinations of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or determinations of
basis are later found to be incorrect, the character and amount of items of
income, gain, loss or deductions previously reported by unitholders might
change, and unitholders might be required to adjust their tax liability for
prior years and incur interest and penalties with respect to these
adjustments.
Disposition
of Common Units
Recognition of
Gain or Loss. A unitholder will recognize gain or loss on a
sale of common units equal to the difference between the amount realized and the
unitholder's tax basis for the common units sold. A unitholder's amount realized
will be measured by the sum of the cash or the fair market value of other
property received plus his share of our nonrecourse liabilities. Because the
amount realized includes a unitholder's share of our nonrecourse liabilities,
the gain recognized on the sale of common units could result in a tax liability
in excess of any cash received from the sale.
Prior distributions from us in excess
of cumulative net taxable income for a common unit that decreased a unitholder's
tax basis in that common unit will, in effect, become taxable income if the
common unit is sold at a price greater than the unitholder's tax basis in that
common unit, even if the price is less than his original cost.
Except as noted below, gain or loss
recognized by a unitholder, other than a "dealer" in common units, on the sale
or exchange of a common unit will generally be taxable as capital gain or loss.
Gain or loss recognized on the sale of common units held for more than
12 months will generally be taxed as long-term capital gain or loss.
However, a portion of this gain or loss, which could be substantial, 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 the common unit and may be recognized even if
there is a net taxable loss realized on the sale of the common unit. Thus, a
unitholder may recognize both ordinary income and a capital loss upon a
disposition of common units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of corporations.
The IRS has ruled that a partner who
acquires interests in a partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those interests. Upon
a sale or other disposition of less than all of those interests, a portion of
that tax basis must be allocated to the interests sold using an "equitable
apportionment" method, which generally means that the tax basis allocated to the
interest sold equals the amount that bears the same relation to the partner's
tax basis in his entire interest in the partnership as the value of the interest
sold bears to the value of the partner's entire interest in the partnership.
Treasury Regulations under Section 1223 of the Internal Revenue Code allow
a selling unitholder who can identify common units transferred with an
ascertainable holding period to elect to use the actual holding period of the
common 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 common units or a sale of common units purchased in
separate transactions is urged to consult with his tax advisor as to the
possible consequences of the application of this ruling and the Treasury
Regulations.
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Specific provisions of the Internal
Revenue Code affect the taxation of some financial products and securities,
including partnership interests, by treating a taxpayer as having sold an
"appreciated" partnership interest, one in which gain would be recognized if it
were sold, assigned or terminated at its fair market value, if the taxpayer or a
related person enters into a short sale, an offsetting notional principal
contract or a futures or forward contract with respect to the partnership
interest or substantially identical property.
Moreover, if a taxpayer has
previously entered into a short sale, an offsetting notional principal contract
or a futures or forward contract with respect to a partnership interest, the
taxpayer will be treated as having sold that position if the taxpayer or a
related person then acquires the partnership interest or substantially identical
property. The Secretary of the Treasury is also authorized to issue regulations
that treat a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as having
constructively sold the financial position.
Allocations
Between Transferors and Transferees. In general, our taxable
income and losses are determined annually, are prorated on a monthly basis and
are subsequently apportioned among the unitholders in proportion to the number
of common units owned by each of them as of the opening of the NASDAQ National
Market 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 is 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 common units in the open market may be
allocated income, gain, loss and deduction accrued after the date
of transfer.
The use of this method may not be
permitted under existing Treasury Regulations. If this method is not allowed
under the Treasury Regulations, or only applies to transfers of less than all of
the unitholder's interest, our taxable income or losses might be reallocated
among the unitholders. We are authorized to revise our method of allocation
between transferors and transferees, as well as among partners whose interests
otherwise vary during a taxable period, to conform to a method permitted under
future Treasury Regulations.
A unitholder who owns common units at
any time during a quarter and who disposes of these common units prior to the
record date set for a cash distribution with respect to 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 common units
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 purchaser of units from another unitholder is also
generally required to notify us in writing of that purchase within 30 days
after the purchase. We are required to notify the IRS of that transaction and to
furnish specified information to the transferor and transferee. However, these
reporting requirements do not apply with respect to a sale by an individual who
is a citizen of the United States and who effects the sale or exchange
through a broker who will satisfy such requirements. Additionally, a transferee
of a common unit will be required to furnish a statement to the IRS, filed with
its income tax return for the taxable year in which the sale or exchange
occurred, that sets forth the amount of the consideration paid for the common
unit. Failure to satisfy these reporting obligations may lead to the imposition
of substantial penalties.
Constructive
Termination. We will be considered to have been terminated if
there is a sale or exchange of 50% or more of the total interests in our capital
and profits within a 12-month period. Our termination would result in the
closing of our taxable year for all unitholders. In the case of a unitholder
reporting on a taxable year other than a fiscal year ending December 31,
the closing of our taxable year 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 could result in a deferral of our deductions for depreciation.
A termination could also result in penalties if we were unable to determine that
the termination had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation enacted before to the
termination.
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Uniformity
of Common Units
Because we cannot match transferors
and transferees of common units, we must maintain uniformity of the economic and
tax characteristics of the common units to a purchaser of these common units. In
the absence of uniformity, compliance with a number of federal income tax
requirements, both statutory and regulatory, could be substantially diminished.
A lack of uniformity can result from a literal application of Treasury
Regulations dealing with Section 743 adjustments. Any non-uniformity could
have a negative impact on the value of the common units. Please read "— Tax
Consequences of Unit
Ownership — Section 754 Election."
Consistent with the regulations under
Section 743, we 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 Section 704(c) built-in gain, 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. 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 apply with
respect to a material portion of our assets. To the extent that the
Section 743(b) adjustment is attributable to appreciation in value in
excess of the unamortized Section 704(c) built-in gain, we 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 convention under which all purchasers acquiring common units in the
same month would receive depreciation and amortization deductions, whether
attributable to 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 approach 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 approach 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 convention to preserve the uniformity of the
intrinsic tax characteristics of any common 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 type of challenge were sustained, the uniformity of common units might be
affected, and the gain from the sale of common 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 common units by employee
benefit plans, other tax-exempt organizations, nonresident aliens and foreign
corporations and other foreign persons raises issues unique to those investors
and, as described below, may have substantially adverse tax consequences
to them.
Employee benefit plans and most other
organizations exempt from federal income tax, including individual retirement
accounts and other retirement plans, are subject to federal income tax on
unrelated business taxable income. Virtually all of our taxable income allocated
to a unitholder which is a tax-exempt organization will be unrelated business
taxable income and will be taxable to that unitholder.
Non-resident aliens and foreign
corporations, trusts or estates which hold common units will be considered to be
engaged in business in the United States because of ownership of common
units. As a consequence they will be required to file federal tax returns in
respect of their share of our income, gain, loss or deduction and pay federal
income tax at regular rates on any net income or gain. Generally, a partnership
is required to pay a withholding tax on the portion of the partnership's income
which is effectively connected with the conduct of a United States trade or
business and which is allocable to the foreign partners, regardless of whether
any actual distributions have been made to such partners. However, under rules
applicable to publicly-traded partnerships, we will withhold at applicable rates
on actual 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 other
applicable form) in order to obtain credit for the taxes withheld. A change in
applicable law may require us to change these procedures.
Because a foreign corporation which
owns common 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
allocable share of our income and gain, as adjusted for changes in the foreign
corporation's "U.S. net equity," which is effectively connected with the
conduct of a United States trade or business. An income tax treaty between
the United States and the country in which the foreign corporate unitholder
is a "qualified resident" may reduce or eliminate this tax. In addition, such a
unitholder is subject to special information reporting requirements under
Section 6038C of the Internal Revenue Code.
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The IRS has ruled that a foreign
partner who sells or otherwise disposes of an interest in a partnership will be
subject to federal income tax on gain realized on the disposition of that
partnership interest to the extent that the gain is deemed to be effectively
connected with a United States trade or business of the foreign partner.
Apart from this ruling, a foreign partner would not be taxed upon the
disposition of a common unit if that foreign unitholder has held less than 5% in
value of the common units during the five-year period ending on the date of the
disposition and if the common 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 each
unitholder's share of our income, gain, loss and deduction for our preceding
taxable year. In preparing this information, which will generally not be
reviewed by counsel, we will use various accounting and reporting conventions,
some of which have been mentioned in the previous discussion, to determine the
unitholder's share of income, gain, loss and deduction. Any of these conventions
may not yield a result which conforms to the requirements of the Internal
Revenue Code, Treasury Regulations or administrative interpretations of the
IRS. We cannot assure prospective unitholders that the IRS will not
successfully contend in court that those accounting and reporting conventions are impermissible. Any challenge by the IRS
could negatively affect the value of the common units.
The IRS may audit our federal income
tax information returns. Adjustments resulting from an audit of this kind may
require each unitholder to adjust a prior year's tax liability, and possibly may
result in an audit of the unitholder's own return. Any audit of a unitholder's
return could result in adjustments not related to our returns as well as those
related to our returns.
Partnerships generally are treated as
separate entities for purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement proceedings. The tax
treatment of partnership items of income, gain, loss and deduction are
determined in a partnership proceeding rather than in separate proceedings with
the partners. The Internal Revenue Code provides for one partner to be
designated as the "tax matters partner" for these purposes. Our Partnership
Agreement appoints the general partner as our tax matters partner.
The tax matters partner will make
some elections on our behalf and on behalf of the unitholders and can extend the
statute of limitations for assessment of tax deficiencies against unitholders
with respect to 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 our profits and by the unitholders having in the aggregate at least
a 5% profits interest. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may
participate.
A unitholder must file a
statement with the IRS identifying the treatment of any item on his federal
income tax return that is not consistent with the treatment of the item on our
return. Intentional or negligent disregard of the consistency requirement may
subject a unitholder to substantial penalties.
Nominee
Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
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•
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the
name, address and taxpayer identification number of the beneficial owner
and the nominee;
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•
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whether
the beneficial owner is
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•
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a
person that is not a United States
person,
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•
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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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•
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a
tax-exempt entity;
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•
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the
amount and description of common units held, acquired or transferred for
the beneficial owner; and
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•
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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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26
Brokers and financial institutions
are required to furnish additional information, including whether they are
United States persons and specific information on common 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 such information to us. The nominee is
required to supply the beneficial owner of the common units with the information
furnished to us.
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 Code:
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accuracy-related
penalties with a broader scope, significantly narrower exceptions, and
potentially greater amounts than described below at
"— Accuracy-Related
Penalties,"
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•
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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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•
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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."
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, with
respect to 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 with
respect to that portion.
For individuals, a substantial
understatement of income tax in any taxable year exists if the amount of the
understatement exceeds the greater of 10% of the tax required to be shown on the
return for the taxable year or $5,000. The amount of any understatement subject
to penalty generally is reduced if any portion is attributable to a position
adopted on the return:
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•
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for
which there is, or was, "substantial authority";
or
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•
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as
to which there is a reasonable basis and the pertinent facts of such
position are disclosed on
the return.
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If any item of our income, gain, loss
or deduction included in the distributive shares of unitholders might result in
that kind of "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," a term that in this context does
not appear to include us.
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A substantial valuation misstatement
exists if the value of any property, or the adjusted basis of any property,
claimed on a tax return is 150% or more of the amount determined to be the
correct amount of such valuation or adjusted basis. No penalty is imposed unless
the portion of the underpayment attributable to a substantial valuation
misstatement exceeds $5,000 ($10,000 for most corporations). If the valuation
claimed on a return is 200% or more than the correct valuation, the penalty
imposed increases to 40%.
In addition to federal income taxes,
a unitholder will be subject to other taxes, including state and local income
taxes, unincorporated business taxes, and estate, inheritance or intangible
taxes that may be imposed by the various jurisdictions in which he resides or in
which we do business or own property. Although an analysis of those various
taxes is not presented here, each prospective unitholder should consider their
potential impact on his investment in us. A unitholder will be required to file
state income tax returns and to pay state income taxes in some or all of the
states in which we do business or own property and may be subject to penalties
for failure to comply with those requirements. In some states, tax losses may
not produce a tax benefit in the year incurred and also may not be available to
offset income in subsequent taxable years. Some of the states may require us, or
we may elect, to withhold a percentage of income from amounts to be distributed
to a unitholder who is not a resident of the state. Withholding, the amount of
which may be greater or less than a particular unitholder's income tax liability
to the state, generally does not relieve the nonresident unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the amounts distributed
by us. Please read "— Tax Consequences of Unit
Ownership — Entity-Level Collections."
It is the
responsibility of each unitholder to investigate the legal and tax consequences
under the laws of pertinent jurisdictions of his investment in us. Accordingly,
we recommend that each prospective unitholder consult, and 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 state and local, as well as
U.S. federal and non-U.S., tax returns that may be required of him. We have
not obtained an opinion of counsel with regard to any state or local tax
consequences of an investment in us.
Item
2. Exhibits.
The documents listed
below are filed as exhibits to this Registration Statement.
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Exhibit
Number
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Description
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1
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Second
Amended and Restated Agreement of Limited Partnership of TC PipeLines, LP,
dated July 1, 2009 (incorporated by reference to Exhibit 3.1 to the
registrant’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 1, 2009).
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2
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Certificate
of Limited Partnership of TC PipeLines, LP (incorporated by reference to
Exhibit 3.2 to TC PipeLines, LP’s Form S-1 Registration Statement,
Registration No. 333-69947 filed on December 30, 1998).
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3
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Form
of Certificate Evidencing Common Units (incorporated by reference to
Exhibit A to the Second Amended and Restated Agreement of Limited
Partnership of TC PipeLines, LP filed as Exhibit 3.1 to the registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 1, 2009).
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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TC
PipeLines, LP
By: TC
PipeLines GP, Inc.,
Its
general partner
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Date: November
12, 2009
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By:
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/s/ Annie C. Belecki |
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Annie
C. Belecki
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Assistant
Secretary
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