| BUCKEYE PARTNERS L P Item 1A Risk Factors In this Item 1A, references to “we”, “us” and “our” mean Buckeye Partners, LP and its consolidated subsidiaries |
| Risks Inherent to our Business Changes in petroleum demand and distribution may adversely affect our business |
| Demand for the services provided by our Operating Subsidiaries depends upon the demand for petroleum products in the regions served |
| Prevailing economic conditions, price and weather affect the demand for petroleum products |
| Changes in transportation and travel patterns in the areas served by our pipelines also affect the demand for petroleum products because a substantial portion of the refined petroleum products transported by our pipelines and throughput at our terminals is ultimately used as fuel for motor vehicles and aircraft |
| If these factors result in a decline in demand for petroleum products, the business of our Operating Subsidiaries would be particularly susceptible to adverse effects because they operate without the benefit of either exclusive franchises from government entities or long term contracts |
| Energy conservation, changing sources of supply, structural changes in the oil industry and new energy technologies also could adversely affect our business |
| We cannot predict or control the effect of each of these factors on us or our Operating Subsidiaries |
| Competition could adversely affect our operating results |
| Generally, pipelines are the lowest cost method for long-haul overland movement of refined petroleum products |
| Therefore, our most significant competitors for large volume shipments are other existing pipelines, many of which are owned and operated by major integrated oil companies |
| In addition, new pipelines (including pipeline segments that connect with existing pipeline systems) could be built to effectively compete with us in particular locations |
| We compete with marine transportation in some areas |
| Tankers and barges on the Great Lakes account for some of the volume to certain Michigan, Ohio and upstate New York locations during the approximately eight non-winter months of the year |
| Barges are presently a competitive factor for deliveries to the New York City area, the Pittsburgh area, Connecticut and locations on the Ohio River such as Mt |
| Vernon, Indiana and Cincinnati, Ohio, and locations on the Mississippi River such as St |
| Louis, Missouri |
| 23 ______________________________________________________________________ Trucks competitively deliver refined products in a number of areas that we serve |
| While their costs may not be competitive for longer hauls or large volume shipments, trucks compete effectively for incremental and marginal volumes in many areas that we serve |
| The availability of truck transportation places a significant competitive constraint on our ability to increase our Operating Subsidiaries’ tariff rates |
| Privately arranged exchanges of refined products between marketers in different locations are an increasing but non-quantified form of competition |
| Generally, these exchanges reduce both parties’ costs by eliminating or reducing transportation charges |
| In addition, consolidation among refiners and marketers that has accelerated in recent years has altered distribution patterns, reducing demand for transportation services in some markets and increasing them in other markets |
| Mergers among our customers and competitors could result in lower volumes being shipped on our pipelines and stored in our terminals, thereby reducing the amount of cash we generate |
| Mergers between existing customers could provide strong economic incentives for the combined entities to utilize their existing pipeline and terminal systems instead of ours |
| As a result, we could lose some or all of the volumes and associated revenues from these customers and we could experience difficulty in replacing those lost volumes and revenues |
| Because most of our operating costs are fixed, a reduction in volumes would result in not only a reduction of revenues, but also a decline in net income and cash flow of a similar magnitude, which would reduce our ability to meet our financial obligations and pay cash distributions |
| We are a holding company and depend entirely on our Operating Subsidiaries’ distributions to service our debt obligations and pay cash distributions to our Unitholders |
| We are a holding company with no material operations |
| If we do not receive cash distributions from our Operating Subsidiaries, we will not be able to meet our debt service obligations or to make cash distributions to our Unitholders |
| Among other things, this would adversely affect the market price of our limited partnership units |
| We are currently bound by the terms of a revolving credit facility which prohibits us from making distributions to our Unitholders if a default under the credit facility exists at the time of the distribution or would result from the distribution |
| Our Operating Subsidiaries may from time to time incur additional indebtedness under agreements that contain restrictions which could further limit each Operating Subsidiary’s ability to make distributions to us |
| We may incur liabilities from assets we have acquired |
| These costs and liabilities may not be covered by indemnification rights we have against the sellers of the assets |
| Releases may have occurred prior to our acquisition from terminals or along pipeline rights-of-way that require remediation |
| In addition, releases may have occurred in the past that have not yet been discovered, which could require costly future remediation |
| If a significant release or event occurred in the past the liability for which was not retained by the seller or for which indemnification from the seller is not available, it could adversely affect our financial position and results of operations |
| A decline in production at the ConocoPhillips Wood River refinery could materially reduce the volume of refined petroleum products we transport |
| A decline in production at the ConocoPhillips Wood River refinery could materially reduce the volume of refined petroleum products we transport on certain of the pipelines owned by Wood River |
| As a result, our revenues and, therefore, our ability to pay cash distributions on our units could be adversely affected |
| The ConocoPhillips Wood River refinery could partially or completely shut down its operations, temporarily or permanently, due to factors affecting its ability to produce refined petroleum products such as: · unscheduled maintenance or catastrophic events, such as a fire, flood, explosion or power outage; 24 ______________________________________________________________________ · labor difficulties that result in a work stoppage or slowdown; · environmental proceedings or other litigation that require the halting of all or a portion of the operations at the refinery; · loss of significant downstream customers; or · legislation or regulation that adversely impacts the economics of refinery operations |
| Potential future acquisitions and expansions, if any, may affect our business by substantially increasing the level of our indebtedness and contingent liabilities and increasing our risks of being unable to effectively integrate these new operations |
| From time to time, we evaluate and acquire assets and businesses that we believe complement our existing assets and businesses |
| Acquisitions may require substantial capital or the incurrence of substantial indebtedness |
| If we consummate any future acquisitions, our capitalization and results of operations may change significantly |
| Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them and new geographic areas and the diversion of management’s attention from other business concerns |
| Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition |
| Following an acquisition, we may discover previously unknown liabilities associated with the acquired business for which we have no recourse under applicable indemnification provisions |
| Debt securities we issue are, and will continue to be, junior to our Operating Subsidiaries’ debt |
| Our outstanding debt securities are structurally subordinated to the claims of our Operating Subsidiaries’ creditors |
| Any debt securities we issue in the future will likewise be so subordinated |
| Holders of the debt securities will not be creditors of our Operating Subsidiaries |
| Our claim to the assets of our Operating Subsidiaries derives from our own ownership interests in those Operating Subsidiaries |
| Claims of our Operating Subsidiaries’ creditors will generally have priority as to the assets of our Operating Subsidiaries over our own ownership interest claims and will therefore have priority over the holders of our debt, including our debt securities |
| Our Operating Subsidiaries’ rate structures are subject to regulation and change by the Federal Energy Regulatory Commission |
| Buckeye, Wood River, BPL Transportation and Norco are interstate common carriers regulated by the FERC, under the Interstate Commerce Act and the Department of Energy Organization Act |
| The FERC’s primary ratemaking methodology is price indexing |
| This methodology is used to establish rates on the pipelines owned by Wood River, BPL Transportation and Norco |
| The indexing method allows a pipeline to increase its rates by a percentage equal to the change in the annual producer price index for finished goods, or PPI If the PPI is negative, we could be required to reduce the rates charged by Wood River, Transportation and Norco if they exceed the new maximum allowable rate |
| In addition, changes in the PPI might not fully reflect actual increases in the costs associated with these pipelines, thus hampering our ability to recover our costs |
| Buckeye presently is authorized to charge rates set by market forces, subject to limitations, rather than by reference to costs historically incurred by the pipeline, in 15 regions and metropolitan areas |
| The Buckeye program is an exception to the generic oil pipeline regulations the FERC issued under the Energy Policy Act of 1992 |
| The generic rules rely primarily on an index methodology that allows a pipeline to change its rates in accordance with an index that the FERC believes reflects cost changes appropriate for 25 ______________________________________________________________________ application to pipeline rates |
| In the alternative, a pipeline is allowed to charge market-based rates if the pipeline establishes that it does not possess significant market power in a particular market |
| The Buckeye rate program was reevaluated by the FERC in July 2000, and was allowed to continue with no material changes |
| We cannot predict the impact, if any, that a change in the FERC’s method of regulating Buckeye would have on our operations, financial condition or results of operations |
| Environmental regulation may impose significant costs and liabilities on us |
| Our Operating Subsidiaries are subject to federal, state and local laws and regulations relating to the protection of the environment |
| Risks of substantial environmental liabilities are inherent in the Partnership’s operations, and we cannot assure you that the Operating Subsidiaries will not incur material environmental liabilities |
| Additionally, our costs could increase significantly and we could face substantial liabilities, if, among other developments: · environmental laws, regulations and enforcement policies become more rigorous; or · claims for property damage or personal injury resulting from the operations of the Operating Subsidiaries are filed |
| Existing or future state or federal government regulations relating to certain chemicals or additives in gasoline or diesel fuel could require capital expenditures or result in lower pipeline volumes and thereby adversely affect our results of operations |
| Changes made to governmental regulations governing the components of refined petroleum products may necessitate changes to our pipelines and terminals which may require significant capital expenditures or result in lower pipeline volumes |
| For example, new requirements for the use of ultra low-sulfur diesel fuel, which will be phased in commencing in 2006 through 2010 |
| The Partnership expects to spend dlra15–18 million in capital expenditures in 2006 at certain locations in order to permit our facilities to handle this new product grade |
| We may not be able to recover all of our costs related to these expenditures from our pipeline shippers |
| In addition, the introduction of ultra low sulfur diesel fuel may cause other dislocations in the refined product distribution chain that we cannot predict at this time |
| Department of Transportation regulations may impose significant costs and liabilities on us |
| The Operating Subsidiaries’ pipeline operations are subject to regulation by the Department of Transportation |
| These regulations require, among other things, that pipeline operators engage in a regular program of pipeline integrity testing to assess, evaluate, repair and validate the integrity of their pipelines, which, in the event of a leak or failure, could affect populated areas, unusually sensitive environmental areas, or commercially navigable waterways |
| In response to these regulations, the Operating Subsidiaries conduct pipeline integrity tests on an ongoing and regular basis |
| Depending on the results of these integrity tests, the Operating Subsidiaries could incur significant and unexpected capital and operating expenditures, not accounted for in anticipated capital or operating budgets, in order to repair such pipelines to ensure their continued safe and reliable operation |
| Terrorist attacks could adversely affect our business |
| Since the attacks of September 11, 2001, the United States government has issued warnings that energy assets, specifically our nation’s pipeline infrastructure, may be the future target of terrorist organizations |
| These developments have subjected our operations to increased risks |
| Any future terrorist attack on our facilities, those of our customers and, in some cases, those of other pipelines, refineries or terminals, could have a material adverse effect on our business |
| 26 ______________________________________________________________________ Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured |
| Our operations are subject to operational hazards and unforeseen interruptions such as natural disasters, adverse weather, accidents, fires, explosions, hazardous materials releases, and other events beyond our control |
| These events might result in a loss of equipment or life, injury, or extensive property damage, as well as an interruption in our operations |
| Our Operating Subsidiaries’ operations are currently covered by property, casualty, workers’ compensation and environmental insurance policies |
| In the future, however, we may not be able to maintain or obtain insurance of the type and amount desired at reasonable rates |
| As a result of market conditions, premiums and deductibles for certain insurance policies have increased substantially, and could escalate further |
| In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage |
| For example, insurance carriers are now requiring broad exclusions for losses due to war risk and terrorist acts |
| If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position, thereby reducing our ability to make distributions to Unitholders, or payments to debt holders |
| Risks Relating to Partnership Structure Our partnership status may be a disadvantage to us in calculating cost of service for rate-making purposes |
| In the past, the FERC ruled that pass-through entities, like us, may not claim an income tax allowance for income attributable to non-corporate limited partners in justifying the reasonableness of their rates |
| Further, in a July 2004 decision involving an unrelated pipeline limited partnership, the United States Court of Appeals for the District of Columbia Circuit overruled a prior FERC decision allowing a limited partnership to claim a partial income tax allowance |
| This opinion suggested that in the future a limited partnership may not be able to claim any income tax allowance despite being partially owned by a corporation |
| In December 2004, the FERC issued a Notice of Inquiry seeking comments regarding whether the July 2004 Appeals Court decision applies only to the specific facts of that case, or whether it applies more broadly, and, if the latter, what effect that ruling might have on energy infrastructure investments |
| On May 4, 2005, the FERC adopted a Policy Statement providing that all entities owning public utility assets—oil and gas pipelines and electric utilities—would be permitted to include an income tax allowance in their cost-of-service rates to reflect the actual or potential income tax liability attributable to their public utility income, regardless of the form of ownership |
| FERC determined that any pass-through entity seeking an income tax allowance in a rate proceeding must establish that its partners have an actual or potential income tax obligation on the entity’s public utility income |
| The amount of any income tax allowance will be reduced accordingly to the extent that any of the partners do not have an actual or potential income tax obligation |
| This reduction will be reflected in the weighted income tax liability of the entity’s partners |
| Whether a pipeline’s ultimate owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis |
| Although this new policy is generally favorable for pipelines that are organized as pass-through entities, it still entails risk due to the case-by-case review requirement |
| This policy was applied by FERC in June 2005 with an order involving SFPP, LP FERC found that SFPP, LP should be afforded an income tax allowance on all of its partnership interests to the extent that the owners of those interests had an actual or potential income tax obligation during the periods at issue for the income of a jurisdictional pass-through entity |
| In December 2005, FERC reaffirmed its new income tax allowance policy as it applies to SFPP, LP FERC directed SFPP, LP to provide certain evidence necessary for determination of its income tax allowance |
| Requests for rehearing of the December 2005 order have been filed |
| In addition, FERC’s remand decision of the July 2004 opinion and the new tax allowance policy have been appealed to the United States Court of Appeals for the District of Columbia Circuit |
| The ultimate outcome of these proceedings is not certain and could result in changes to the FERC’s treatment of income tax allowances in cost of service |
| We expect the final 27 ______________________________________________________________________ adoption and implementation by FERC of the Policy Statement in individual cases will be subject to review by the United States Court of Appeals |
| A shipper or FERC could cite these decisions in a protest or complaint challenging indexed rates maintained by certain of our Operating Subsidiaries |
| If a challenge were brought and FERC were to find that some of the indexed rates exceed levels justified by the cost of service, FERC could order a reduction in the indexed rates and could require reparations |
| As a result, our results of operations could be adversely affected |
| We may sell additional limited partnership units, diluting existing interests of Unitholders |
| Our partnership agreement allows us to issue additional limited partnership units and certain other equity securities without Unitholder approval |
| There is no limit on the total number of limited partnership units and other equity securities we may issue |
| When we issue additional limited partnership units or other equity securities, the proportionate partnership interest of our existing Unitholders will decrease |
| The issuance could negatively affect the amount of cash distributed to Unitholders and the market price of the limited partnership units |
| Issuance of additional units will also diminish the relative voting strength of the previously outstanding units |
| Our General Partner and its affiliates may have conflicts with the Partnership |
| The directors and officers of our General Partner and its affiliates have fiduciary duties to manage the General Partner in a manner that is beneficial to its sole member |
| At the same time, the General Partner has fiduciary duties to manage the Partnership in a manner that is beneficial to our partners |
| Therefore, the General Partner’s duties to us may conflict with the duties of its officers and directors to its sole member |
| Such conflicts may arise from, among others, the following factors: · decisions by our General Partner regarding the amount and timing of our cash expenditures, borrowings and issuances of additional limited partnership units or other securities can affect the amount of incentive compensation payments we make to the parent company of our General Partner; · under our partnership agreement we reimburse the General Partner for the costs of managing and operating the Partnership; and · under our partnership agreement, it is not a breach of our General Partner’s fiduciary duties for affiliates of our General Partner to engage in activities that compete with us |
| Specifically, our General Partner is owned by certain members of our General Partner’s management and by an affiliate of the Carlyle/Riverstone Global Energy and Power Fund II, LP, which also owns, through affiliates, an interest in the General Partner of Magellan Midstream Partners, LP, and an interest in the General Partner of SemGroup, LP Although neither the Partnership nor Magellan Midstream Partners has extensive operations in the geographic areas primarily served by the other entity, the Partnership will compete directly with Magellan Midstream Partners, SemGroup LP, and perhaps other entities in which Carlyle/Riverstone or its affiliates have an interest for acquisition opportunities throughout the United States and potentially will compete with Magellan Midstream Partners and these other entities for new business or extensions of the existing services provided by our Operating Subsidiaries, creating actual and potential conflicts of interest between the Partnership and affiliates of our General Partner |
| 28 ______________________________________________________________________ The owner of our General Partner has a substantial amount of debt |
| A default under such debt could result in a change of control of our General Partner which would be an event of default under our revolving credit facility |
| MainLine LP, or MainLine, the indirect owner of our General Partner, financed its purchase of MainLine Sub LLC, or MainLine Sub, the direct owner of our General Partner, through a combination of equity capital and the proceeds from a senior secured credit and guaranty agreement |
| MainLine’s existing credit and guaranty agreement is secured by pledges of substantially all of the assets of MainLine and MainLine Sub, including the interest in our General Partner |
| MainLine’s indebtedness under its credit and guaranty agreement is rated BB- by S&P and Ba3 by Moody’s |
| If MainLine were to default on its obligations under its credit and guaranty agreement, its lenders could exercise their rights under these pledges which could result in a change of control of our General Partner and a change of control of us |
| A change of control would constitute an event of default under our revolving credit facility and require the administrative agent, upon request of the lenders providing a majority of the loan commitments or outstanding loan amounts, to declare all amounts payable by us under our revolving credit facility immediately due and payable |
| Unitholders have limited voting rights and control of management |
| Our General Partner manages and controls our activities and the activities of our Operating Subsidiaries |
| Unitholders have no right to elect the General Partner or the directors of the General Partner on an annual or other ongoing basis |
| However, if the General Partner resigns or is removed, its successor must be elected by holders of a majority of the limited partnership units |
| Unitholders may remove the General Partner only by a vote of the holders of at least 80prca of the limited partnership units and only after receiving certain state regulatory approvals required for the transfer of control of a public utility |
| As a result, Unitholders will have limited influence on matters affecting our operations, and third parties may find it difficult to gain control of us or influence our actions |
| Our partnership agreement limits the liability of our General Partner |
| Our General Partner owes fiduciary duties to our Unitholders |
| Provisions of our partnership agreement and the partnership agreements for each of our operating partnerships, however, contain language limiting the liability of the General Partner to the Unitholders for actions or omissions taken in good faith which do not involve gross negligence or willful misconduct |
| In addition, the partnership agreements grant broad rights of indemnification to the general partner and its directors, officers, employees and affiliates |
| Unitholders may not have limited liability in some circumstances |
| The limitations on the liability of holders of limited partnership interests for the obligations of a limited partnership have not been clearly established in some states |
| If it were determined that we had been conducting business in any state without compliance with the applicable limited partnership statute, or that the Unitholders as a group took any action pursuant to our partnership agreement that constituted participation in the “control” of our business, then the Unitholders could be held liable under some circumstances for our obligations to the same extent as a general partner |
| Under applicable state law, our general partner has unlimited liability for our obligations, including our debts and environmental liabilities, if any, except for our contractual obligations that are expressly made without recourse to the general partner |
| In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that under some circumstances a Unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution |
| 29 ______________________________________________________________________ Cost reimbursements for management fees and certain other expenses due to MainLine Sub and our general partner may be substantial and could reduce our cash available for distributions |
| Prior to making any distribution to Unitholders, we will reimburse our general partner for certain expenses incurred in connection with its general partner duties and MainLine Sub for certain expenses incurred while performing services for our general partner |
| MainLine Sub is entitled to receive an annual management fee for functions it provides to our general partner pursuant to a management agreement between MainLine Sub and our general partner |
| This management fee includes a senior administrative charge and reimbursement for certain costs and expenses |
| The disinterested directors of our general partner approve the amount of the management fee on an annual basis |
| In recognition of increased services from MainLine Sub in the form of assistance with business development opportunities, financing strategies, insurance, investment banking and corporate development advice, the disinterested directors of our general partner have approved a senior administrative charge for 2005 of dlra1dtta9 million, and MainLine Sub has agreed not to request an additional increase in the senior administrative charge for calendar year 2006 (other than adjustments for inflation capped at the Consumer Price Index) unless there is a material change in the nature of the services rendered to our general partner by MainLine Sub |
| The payment of management fees and the reimbursement of expenses could adversely affect our ability to pay cash distributions |
| Tax Risks to Unitholders Unitholders are urged to read the section above entitled “Tax Considerations for Unitholders” beginning on page 16 for a more complete discussion of the expected material federal income tax consequences of owning and disposing of limited partnership units |
| The IRS could treat us as a corporation for tax purposes or changes in law could subject us to entity-level taxation, which would substantially reduce the cash available for distribution to Unitholders |
| The availability to a Unitholder of the anticipated federal income tax benefits of an investment in limited partnership units depends, in large part, on our classification as a partnership for federal income tax purposes |
| No ruling from the Internal Revenue Service, or the IRS, as to this status has been or is expected to be requested |
| If we were classified as a corporation for federal income tax purposes, we would be required to pay tax on our income at corporate tax rates (currently a 35prca federal rate), and distributions received by the Unitholders would generally be taxed a second time as corporate distributions |
| Because a tax would be imposed upon us as an entity, the cash available for distribution to the Unitholders would be substantially reduced |
| Treatment of us as a corporation would cause a material reduction in the anticipated cash flow and after-tax return to the Unitholders, likely causing a substantial reduction in the value of the limited partnership units |
| The law could be changed so as to cause us to be treated as a corporation for federal income tax purposes or otherwise to be subject to entity-level taxation |
| Further, because of budgetary considerations, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation |
| If any state were to impose a tax on us, the cash available for distribution to you would be reduced |
| A successful IRS contest of the federal income tax positions that we take may adversely affect the market for limited partnership units |
| We have not requested a ruling from the IRS with respect to our classification as a partnership for federal income tax purposes, the classification of any of the revenue from our operations as “qualifying income” under Section 7704 of the Internal Revenue Code (which is necessary to prevent entity level taxation of our income at corporate tax rates), or any other matter affecting us |
| Accordingly, the IRS may 30 ______________________________________________________________________ adopt positions that differ from the conclusions expressed in this report or the positions taken by us |
| It may be necessary to resort to administrative or court proceedings in an effort to sustain some or all of such conclusions or the positions taken by us |
| A court may not concur with some or all of our positions |
| Any contest with the IRS may materially and adversely impact the market for the limited partnership units and the prices at which they trade |
| In addition, the costs of any contest with the IRS will be borne directly or indirectly by the Unitholders and our general partner |
| Unitholders may be required to pay taxes even if they do not receive any cash distributions |
| A Unitholder will be required to pay federal income taxes and, in some cases, state and local income taxes on the Unitholder’s allocable share of our income, even if the Unitholder receives no cash distributions from us |
| We cannot guarantee that a Unitholder will receive cash distributions equal to the Unitholder’s allocable share of our taxable income or even the tax liability to the Unitholder resulting from that income |
| Further, if we incur a large amount of nonrecourse indebtedness, a Unitholder may incur a tax liability upon the sale of the Unitholder’s limited partnership units in excess of the amount of cash received in the sale |
| Ownership of limited partnership units may have adverse tax consequences for tax-exempt organizations and certain other investors |
| Investment in limited partnership units by certain tax-exempt entities, regulated investment companies and foreign persons raises issues unique to them |
| For example, virtually all of our taxable income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and thus will be taxable to the Unitholder |
| Distributions to foreign persons will be reduced by withholding taxes |
| Further, Unitholders who are nonresident aliens, foreign corporations or other foreign persons will be required to file a federal income tax return and pay tax on their respective allocable shares of our taxable income because they will be regarded as being engaged in a trade or business in the United States as a result of their ownership of limited partnership units |
| There are limits on the deductibility of our losses that may adversely affect Unitholders |
| There are a number of limitations that may prevent Unitholders from using their allocable share of our losses as a deduction against unrelated income |
| In the case of taxpayers subject to the passive loss rules (generally, individuals and closely-held corporations), any losses generated by us will only be available to offset our future income and cannot be used to offset income from other activities, including other passive activities or investments |
| Unused losses may be deducted when the unitholder disposes of the Unitholder’s entire investment in us in a fully taxable transaction with an unrelated party |
| A Unitholder’s share of our net passive income may be offset by unused losses from us carried over from prior years, but not by losses from other passive activities, including losses from other publicly traded partnerships |
| Other limitations that may further restrict the deductibility of our losses include the at-risk rules and the prohibition against loss allocations in excess of limited partnership unit tax basis |
| Tax gain or loss on disposition of limited partnership units could be different than expected |
| A Unitholder who sells limited partnership units will recognize gain or loss equal to the difference between the amount realized from the sale (which will include the Unitholder’s share of our liabilities to the extent deemed relieved in the sale) and the Unitholder’s adjusted tax basis in the sold limited partnership units (which will include the Unitholder’s share of our liabilities only if not previously used to support loss allocations or to defer tax on our distributions) |
| Prior distributions in excess of cumulative net taxable income allocated to a Unitholder with respect to a limited partnership unit which decreased such Unitholder’s tax basis in that limited partnership unit will, in effect, become taxable income if the limited partnership unit is sold at a price greater than the Unitholder’s tax basis in that limited partnership unit, 31 ______________________________________________________________________ even if the price is less than the unit’s original cost |
| A substantial portion of the amount realized, whether or not representing gain, may be ordinary income |
| The reporting of partnership tax information is complicated and subject to audits |
| We will furnish each Unitholder with a Schedule K-1 that sets forth the Unitholder’s share of our income, gains, losses and deductions |
| We cannot guarantee that these schedules will be prepared in a manner that conforms in all respects to statutory or regulatory requirements or to administrative pronouncements of the IRS Further, our tax return may be audited, which could result in an audit of a Unitholder’s individual tax return and increased liabilities for taxes because of adjustments resulting from the audit |
| There is a possibility of loss of tax benefits relating to nonconformity of limited partnership units and nonconforming depreciation conventions |
| Because we cannot match transferors and transferees of limited partnership units, uniformity of the tax characteristics of the limited partnership units to a purchaser of limited partnership units of the same class must be maintained |
| To maintain uniformity and for other reasons, we have adopted certain depreciation and amortization conventions that may not conform with all aspects of applicable Treasury regulations |
| A successful challenge to those conventions by the IRS could adversely affect the amount and timing of tax benefits available to a purchaser of limited partnership units, as well as the amount of gain recognized from a sale of the limited partnership units, and could have a negative impact on the value of the limited partnership units |
| Unitholders will likely be subject to state, local and other taxes in states where they or as a result of an investment in the limited partnership units |
| In addition to United States federal income taxes, Unitholders will likely be subject to other taxes, such as state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which the Unitholder resides or in which we do business or own property |
| A Unitholder will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of the various jurisdictions in which we do business or own property and may be subject to penalties for failure to comply with those requirements |
| It is the responsibility of each Unitholder to file all applicable United States federal, state, local and foreign tax returns |
| Unitholders may have negative tax consequences if we default on our debt or sell assets |
| If we default on any of our debt, the lenders will have the right to sue us for non-payment |
| This could cause an investment loss and negative tax consequences for Unitholders through the realization of taxable income by Unitholders without a corresponding cash distribution |
| Likewise, if we were to dispose of assets and realize a taxable gain while there is substantial debt outstanding and proceeds of the sale were applied to the debt, our Unitholders could have increased taxable income without a corresponding cash distribution |