| ENBRIDGE ENERGY PARTNERS LP Item 1A Risk Factors We encourage you to read the risk factors below in connection with the other sections of this Annual Report on Form 10-K Risks Related to Our Business Our financial performance could be adversely affected if our pipeline systems are used less |
| Our financial performance depends to a large extent on the volumes transported on our pipeline systems |
| Decreases in the volumes transported by our systems, whether caused by supply or demand factors in the markets these systems serve, competition or otherwise, can directly and adversely affect our revenues and results of operations |
| The volume of shipments on our Lakehead system depends heavily on the supplies of western Canadian crude oil |
| Insufficient supplies of western Canadian crude oil will adversely affect our business by limiting shipments on our Lakehead system |
| Crude oil deliveries on our Lakehead system have declined from the prior year in each of the last three calendar years, because of decreases in conventional crude oil exploration and production activities in western Canada and other factors including supply disruption and competition |
| In January 2005, deliveries on our Lakehead system were impacted by a fire at a Suncor facility |
| The volume of crude oil that we transport on the Lakehead system also depends on the demand for crude oil in the Great Lakes and Midwest regions of the United States and the delivery by others of crude oil and refined products into these regions and the Province of Ontario |
| Pipeline capacity for the delivery of crude oil to the Great Lakes and Midwest regions of the United States currently exceeds refining capacity |
| In addition, our ability to increase deliveries to expand the Lakehead system in the future depends on increased supplies of western Canadian crude oil |
| We expect that growth in future supplies of western Canadian crude oil will come from oil sands projects in Alberta, Canada |
| Furthermore, full utilization of additional capacity as a result of our current and future expansions of the Lakehead system, including the Terrace expansion program, will largely depend on these anticipated increases in crude oil production from oil sands projects |
| 30 ______________________________________________________________________ The volume of shipments on natural gas systems depends on the supply of natural gas and NGLs available for shipment on those systems from the producing regions that supply these systems |
| Volumes shipped on these systems also are affected by the demand for natural gas and NGLs in the markets these systems serve |
| Existing customers may not extend their contracts if the availability of natural gas from the Mid-Continent, Gulf Coast and East Texas producing regions was to decline or if the cost of transporting natural gas from other producing regions through other pipelines into the markets served by the natural gas systems was to render the delivered cost of natural gas on our systems uneconomical |
| We may be unable to find additional customers to replace the lost demand or transportation fees |
| Changes in our tariff rates or challenges to our tariff rates could have a material adverse effect on our financial condition and results of operations; a recent FERC Policy Statement that limited allowances for income tax in an unrelated pipeline’s cost of service, if applied to our FERC-regulated systems, could adversely affect our rates |
| The tariff rates charged by several of our existing pipeline systems are regulated by the FERC, or various state regulatory agencies |
| If one of these regulatory agencies, on its own initiative or due to challenges by third parties, were to lower our tariff rates, the profitability of our pipeline businesses might suffer |
| If we were permitted to raise our tariff rates for a particular pipeline, there might be significant delay between the time the tariff rate increase is approved and the time that the rate increase actually goes into effect, which delay could further reduce our cash flow |
| Furthermore, competition from other pipeline systems may prevent us from raising our tariff rates even if regulatory agencies permit us to do so |
| The regulatory agencies that regulate our systems periodically propose and implement new rules and regulations, terms and conditions of services subject to their jurisdiction |
| New initiatives or orders may adversely affect the tariff rates charged for our services |
| Several states, including Oklahoma and Texas, are taking a more active role in the rate and service regulation of gathering and intrastate transmission natural gas systems |
| Increased state regulation could adversely impact our natural gas systems |
| The question of whether and to what extent an income tax allowance should be included in a regulated utility’s cost of service for rate-making purposes was a matter of uncertainty for a number of years |
| In a 2004 decision involving an oil pipeline limited partnership, BP West Coast, LLC v |
| FERC, a United States Court of Appeals for the District of Columbia Circuit vacated the FERC’s policy that allowed an oil pipeline limited partnership to include in its costs of service an income tax allowance to the extent that its unitholders were corporations subject to income tax |
| In its Policy Statement on Income Tax Allowances issued on May 4, 2005, the FERC concluded that it would permit an income tax allowance for all entities or individuals owning public utility assets, provided that such entities or individuals have an actual or potential income tax liability on the public utility income |
| The burden is on the entity seeking the income tax allowance in a specific rate proceeding to establish that its partners have an actual or potential income tax obligation on the entity’s public utility income |
| Whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis |
| Although the new policy is generally favorable for pipelines that are organized as pass-through entities, it still entails rate risk due to the case-by-case review requirement |
| On December 16, 2005, FERC issued its first case-specific oil pipeline review of the income tax allowance issue in the SFPP proceeding, reaffirming its new income tax allowance policy and directing SFPP to provide certain evidence necessary for the pipeline to determine its income tax allowance |
| Further, in the December 16 order, FERC concluded that for tax allowance purposes, FERC would apply a rebuttable presumption that corporate partners of pass-through entities pay the maximum marginal tax rate of 35prca and that non-corporate partners of pass-through entities pay a marginal tax rate of 28prca |
| The new tax allowance policy as applied to the BP West Coast decision is subject to rehearing and possible further action by the United States Court of Appeals for the District of Columbia Circuit or another court on appeal |
| Further, application of the FERC’s policy statement in individual cases may be subject to further FERC action or review in the appropriate Court of Appeals |
| The ultimate outcome of these proceedings, therefore, is not certain and could result in changes to the FERC’s 31 ______________________________________________________________________ treatment of income tax allowances in cost of service |
| If we were to file for a cost of service-based rate increase, we would be subject to FERC’s new policy and potential challenges of that policy |
| On our Lakehead system, base rates are subject to the FERC indexing mechanism consistent with our expired settlement agreement and are not currently affected by the tax allowance policy |
| However, the original base rates calculated in accordance with the Settlement Agreement employed a lower tax allowance than provided for by the new policy |
| Were the Lakehead system, or any of our FERC regulated systems, subject to a cost-of-service regulatory proceeding in the future, the tax allowance issue would be one of the many factors which would affect the resulting rates |
| Competition may reduce our revenues |
| Our Lakehead system faces current, and potentially further competition for transporting western Canadian crude oil from other pipelines, which may reduce its revenues |
| Our Lakehead system competes with other crude oil and refined product pipelines and other methods of delivering crude oil and refined products to the refining centers of Minneapolis-St |
| Paul, Minnesota; Chicago, Illinois; Detroit, Michigan; Toledo, Ohio; Buffalo, New York; and Sarnia, Ontario and the refinery market and pipeline hub located in the Patoka/Wood River area of southern Illinois |
| Refineries in the markets served by our Lakehead system compete with refineries in western Canada, the Province of Ontario and the Rocky Mountain region of the United States for supplies of western Canadian crude oil |
| Our Ozark pipeline system could face a significant increase in competition if a proposed new pipeline from Hardisty, Alberta to Patoka is completed in 2009 |
| However, if that situation occurs, we would consider potential alternative uses for our Ozark system |
| We also encounter competition in our natural gas gathering, treating, processing and transmission businesses |
| Many of the large wholesale customers served by our systems’ transmission and wholesale customer pipelines have multiple pipelines connected or adjacent to their facilities |
| Thus, many of these wholesale customers have the ability to purchase natural gas directly from a number of pipelines and/or from third parties that may hold capacity on other pipelines |
| Likewise, most natural gas producers and owners have alternate gathering and processing facilities available to them |
| In addition, they have other alternatives, such as building their own gathering facilities or, in some cases, selling their natural gas supplies without processing |
| Some of our natural gas marketing competitors have greater financial resources and access to larger supplies of natural gas than those available to us, which could allow those competitors to price their services more aggressively than we do |
| Competition with Enbridge may reduce our revenues |
| Enbridge has agreed with us that, so long as an affiliate of Enbridge is our general partner, Enbridge and its subsidiaries may not engage in or acquire any business that is in direct material competition with our businesses, subject to the following exceptions: · Enbridge and its subsidiaries are not restricted from continuing to engage in businesses, including the normal development of such businesses, in which they were engaged at the time of our initial public offering in December 1991; · such restriction is limited geographically only to those routes and products for which we provided transportation at the time of our initial public offering; · Enbridge and its subsidiaries are not prohibited from acquiring any competitive business as part of a larger acquisition, so long as the majority of the value of the business or assets acquired, in Enbridge’s reasonable judgment, is not attributable to the competitive business; and 32 ______________________________________________________________________ · Enbridge and its subsidiaries are not prohibited from acquiring any competitive business if that business is first offered for acquisition to us and we fail to approve, after submission to a vote of unitholders, the making of the acquisition |
| Since we were not engaged in any aspect of the natural gas business at the time of our initial public offering, Enbridge and its subsidiaries are not restricted from competing with us in any aspect of the natural gas business |
| In addition, Enbridge and its subsidiaries would be permitted to transport crude oil and liquid petroleum over routes that are not the same as our Lakehead system even if such transportation is in direct material competition with our business |
| This agreement also expressly permitted the reversal by Enbridge in 1999 of one of its pipelines that extends from Sarnia, Ontario to Montreal, Quebec |
| As a result of this reversal, Enbridge competes with us to supply crude oil to the Ontario, Canada market |
| This competition from Enbridge has reduced our deliveries of crude oil to Ontario |
| Our gas marketing operations involve market and certain regulatory risks |
| As part of our natural gas marketing activities, we purchase natural gas at prices determined by prevailing market conditions |
| Following our purchase of natural gas, we generally resell natural gas at a higher price under a sales contract that is generally comparable in terms to our purchase contract, including any price escalation provisions |
| The profitability of our natural gas operations may be affected by the following factors: · our ability to negotiate on a timely basis natural gas purchase and sales agreements in changing markets; · reluctance of wholesale customers to enter into long-term purchase contracts; · consumers’ willingness to use other fuels when natural gas prices increase significantly; · timing of imbalance or volume discrepancy corrections and their impact on financial results; · the ability of our customers to make timely payment; · inability to match purchase and sale of natural gas on comparable terms; and · changes in, limitiations upon, or elimination of the regulatory authorization required for our wholesale sales of natural gas in interstate commerce |
| Our results may be adversely affected by commodity price volatility and risks associated with our hedging activities |
| We buy and sell natural gas and NGLs in connection with our marketing activities |
| Commodity price exposure is also inherent in gas purchase and resale activities and in gas processing |
| To the extent that we engage in hedging activities to reduce our commodity price exposure, we may be prevented from realizing the full benefits of price increases above the level of the hedges |
| Further, hedging contracts are subject to the credit risk that the other party may prove unable or unwilling to perform its obligations under such contracts |
| In addition certain of the financial instruments we use to hedge our commodity risk exposures must be accounted for on a mark-to-market basis |
| This causes periodic earning volatility due to turbulent commodity prices |
| Compliance with environmental and operational safety regulations, including any remediation of soil or water pollution or hydrostatic testing of our pipeline systems, may increase our costs and/or reduce our revenues |
| Our pipeline, gathering, processing and trucking operations are subject to federal, state and local laws and regulations relating to environmental protection and operational and worker safety |
| Liquid petroleum and natural gas transportation and processing operations always involve the risk of costs or liabilities or operational modifications related to regulatory compliance as well as resulting from historical 33 ______________________________________________________________________ environmental contamination, accidental releases or upsets, regulatory enforcement, litigation or safety and health incidents |
| As a result, we may incur costs or liabilities of this type, or experience a reduction in revenues, in the future |
| We may also incur costs in the future due to changes in environmental and safety laws and regulations, enforcement policies or claims for personal, property or environmental damage |
| We may not be able to recover these costs from insurance or through higher tariffs |
| Failure of pipeline operations due to unforeseen interruptions or catastrophic events may adversely affect our business and financial condition |
| Operation of complex pipeline systems, gathering, treating, processing and trucking operations involves many risks, hazards and uncertainties, such as operational hazards and unforeseen interruptions caused by events beyond our control |
| These events include adverse weather conditions, accidents, the breakdown or failure of equipment or processes, the performance of the facilities below expected levels of capacity and efficiency and catastrophic events such as explosions, fires, earthquakes, hurricanes, floods, landslides or other similar events beyond our control |
| A casualty occurrence might result in injury or loss of life or extensive property or environmental damage for which we may bear a part or all of the cost |
| Our acquisition strategy may be unsuccessful if we incorrectly predict operating results, are unable to identify and complete future acquisitions and integrate acquired assets or businesses or are unable to raise financing on acceptable terms |
| The acquisition of complementary energy delivery assets is a component of our strategy |
| Acquisitions present various risks and challenges, including: · the risk of incorrect assumptions regarding the future results of the acquired operations or expected cost reductions or other synergies expected to be realized as a result of acquiring such operations; · the risk of failing to effectively integrate the operations or management of acquired assets or businesses or a significant delay in such integration; and · diversion of management’s attention from existing operations |
| In addition, we may be unable to identify acquisition targets and consummate acquisitions in the future or be unable to raise, on terms we find acceptable, any debt or equity financing that may be required for any such acquisition |
| Our actual construction and development costs could exceed our forecast and our cash flow from construction and development projects may not be immediate which may limit our ability to increase cash distributions |
| Our strategy contemplates significant expenditures for the development, construction or other acquisitions of energy infrastructure assets |
| Increased demand for the steel used to fabricate the pipe needed for our construction projects and increased competition for labor has resulted in increased costs for these resources |
| If we experience material cost overruns, we will have to finance these overruns using one or more of the following methods: · using cash from operations; · delaying other planned projects; · incurring additional indebtedness; or · issuing additional debt or equity |
| Any or all of these methods may not be available when needed or may adversely affect our future results operations and cash flows |
| 34 ______________________________________________________________________ Our revenues and cash flows may not increase immediately on our expenditure of funds on a particular project |
| For example, if we build a new pipeline or expand an existing facility, the design, construction, development and installation may occur over an extended period of time and we may not receive any material increase in revenue or cash flow from that project until after it is placed in service and customers begin using the systems |
| If our revenues and cash flow do not increase at projected levels because of substantial unanticipated delays, or other factors, we may not meet our obligations as they become due and we may need to reduce or reprioritize our capital budget, sell non-strategic assets, access the capital markets or reassess our level of distributions to unitholders to meet our capital requirements |
| Oil measurement losses on the Lakehead system can be materially impacted by changes in estimation, commodity prices and other factors |
| Oil measurement losses occur as part of the normal operating conditions associated with our liquid petroleum pipelines |
| The three types of oil measurement losses include: · physical losses, which occur through evaporation, shrinkage, differences in measurement between receipt and delivery locations and other operational incidents; · degradation losses, which result from mixing at the interface between higher quality light crude oil and lower quality heavy crude oil in pipelines; and · revaluation losses, which are a function of crude oil prices and the level of the carrier’s inventory |
| There are inherent difficulties in quantifying oil measurement losses because physical measurements of volumes are not practical due to the fact that products constantly move through the pipeline and virtually all of the pipeline system is located underground |
| In our case, measuring and quantifying oil measurement losses is especially difficult because of the length of the Lakehead system and the number of different grades of crude oil and types of crude oil products it carries |
| Accordingly, we utilize engineering-based models and operational assumptions to estimate product volumes in our system and associated oil measurement losses |
| The interests of Enbridge may differ from our interests and the interests of our securityholders, and the board of directors of Enbridge Management may consider the interests of all parties to a conflict, not just the interests of our securityholders, in making important business decisions |
| Enbridge indirectly owns all of the stock of our general partner and all of the voting stock of Enbridge Management, and elects all of the directors of both companies |
| Furthermore, some of the directors and officers of our general partners and Enbridge Management are also directors and officers of Enbridge |
| Consequently, conflicts of interest could arise between our unitholders and Enbridge |
| Our partnership agreement limits the fiduciary duties of our general partner to our unitholders |
| These restrictions allow our general partner to resolve conflicts of interest by considering the interests of all of the parties to the conflict, including Enbridge Management’s interests, our interests and those of our general partner |
| In addition, these limitations reduce the rights of our unitholders under our partnership agreement to sue our general partner or Enbridge Management, its delegee, should its directors or officers act in a way that, were it not for these limitations of liability, would constitute breaches of their fiduciary duties |
| In managing our business and affairs, we will rely on employees of Enbridge, and its affiliates, who will act on behalf of and as agents for us |
| A decrease in the availability of employees from Enbridge could adversely affect us |
| 35 ______________________________________________________________________ We are exposed to credit risks of some of our customers Our Bamagas system has agreements to provide transportation of up to 276cmam000 MMBtu/d of natural gas for a remaining period of 17 years to two utility plants that are indirectly owned by Calpine Corporation |
| The Bamagas system receives a fixed demand charge of dlra0dtta07 per MMBtu of natural gas for 200cmam000 MMBtu/d, regardless of whether the capacity is used |
| Calpine has recently declared bankruptcy and is in reorganization |
| Although we fully expect our customer to continue to meet its obligations to us under the terms of the transportation agreements, we are exposed to a potential asset impairment of up to dlra55 million, representing the book value of the pipeline, if the customer is unable to fulfill its commitments |
| We are actively monitoring Calpine’s bankruptcy and are evaluating alternate uses for the system |
| As a result of the widespread damage caused by hurricanes Katrina and Rita, the major credit rating agencies have issued negative credit implications for several of our industrial and utility customers |
| Although we do not anticipate any significant deterioration in the credit standing of these customers, we continue to monitor their financial condition and expect improvement in their credit standing as system outages are restored and property damage repaired |
| Canada’s ratification of the Kyoto Protocol may adversely impact our operations |
| In December 2002, Canada ratified the Kyoto Protocol, a 1997 treaty designed to reduce greenhouse gas emissions to 6prca below 1990 levels |
| We and Enbridge are monitoring the Canadian federal government’s approach to implementation |
| While the United States is not a signatory to the Kyoto Protocol, other environmental protection initiatives have been implemented regulating certain priority pollutants |
| During 2005, a proposed revision to the US Energy Act was offered that would have, if it had passed, expanded the regulation of certain greenhouse gas emissions requiring a cap and establishing a trade to facilitate compliance |
| The provision would have made natural gas pipelines the segment of the gas industry regulated by such an amendment |
| While this legislation did not pass in 2005, another proposal has been offered by the US Congress early in 2006 |
| While the outcome is uncertain at this time, if the provision passes, the Partnership could be subject to additional costs to monitor and control emissions above and beyond current practices and permits |
| Risks arising from Our Partnership Structure and Relationships with Our General Partner and Enbridge Management We can issue additional common or other classes of units, including additional i-units to Enbridge Management when it issues additional shares, which would dilute your ownership interest |
| The issuance of additional common or other classes of units by us, including the issuance of additional i-units to Enbridge Management when it issues additional shares, other than our quarterly distributions to you, may have the following effects: · the amount available for distributions on each unit may decrease; · the relative voting power of each previously outstanding unit may decrease; and · the market price of the Class A common units may decline |
| Additionally, the public sale by our general partner of a significant portion of the Class B common units that it currently owns could reduce the market price of the Class A common units |
| Our partnership agreement allows the general partner to cause us to register for public sale any units held by the general partner or its affiliates |
| A public or private sale of the Class B common units currently held by our general partner could absorb some of the trading market demand for the outstanding Class A common units |
| 36 ______________________________________________________________________ We are a holding company and depend entirely on our operating subsidiaries’ distributions to service our debt obligations |
| We are a holding company with no material operations |
| If we cannot receive cash distributions from our operating subsidiaries, we will not be able to meet our debt service obligations |
| 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 |
| The debt securities we issue and any guarantees issued by the Subsidiary Guarantors will be structurally subordinated to the claims of the creditors of any of our operating subsidiaries who are not guarantors of the debt securities |
| Holders of the debt securities will not be creditors of our operating subsidiaries who have not guaranteed the debt securities |
| The claims to the assets of these non-guarantor operating subsidiaries derive from our own ownership interest in those operating subsidiaries |
| Claims of our non-guarantor operating subsidiaries’ creditors will generally have priority as to the assets of such operating subsidiaries over our own ownership interest claims and will therefore have priority over the holders of our debt, including the debt securities |
| Our non-guarantor operating subsidiaries’ creditors may include: · general creditors; · trade creditors; · secured creditors; · taxing authorities; and · creditors holding guarantees |
| Enbridge Management’s discretion in establishing our cash reserves gives it the ability to reduce the amount of cash available for distribution to our unitholders |
| Enbridge Management may establish cash reserves for us that in its reasonable discretion are necessary to fund our future operating and capital expenditures, provide for the proper conduct of business, comply with applicable law or agreements to which we are a party or to provide funds for future distributions to partners |
| These cash reserves affect the amount of cash available for distribution to our holders of common units |
| Risks Related to Our Debt and Our Ability to Distribute Cash Agreements relating to our debt restrict our ability to make distributions, which could adversely affect the value of our Class A Common Units, and our ability to incur additional debt and otherwise maintain financial and operating flexibility |
| Our primary operating subsidiary is prohibited by its first mortgage notes from making distributions to us, and we are prohibited by our credit facility from making distributions to our unitholders, if a default exists under the respective governing agreements |
| In addition, the agreements governing our credit facility and our subsidiary’s first mortgage notes may prevent us from engaging in transactions or capitalizing on business opportunities that we believe could be beneficial to us by requiring us to comply with various covenants, including the maintenance of certain financial ratios and restrictions on: · incurring additional debt; · entering into mergers or consolidations or sales of assets; and · granting liens |
| Although the indentures governing our senior notes do not limit our ability to incur additional debt, they impose restrictions on our ability to enter into mergers or consolidations and sales of assets and to 37 ______________________________________________________________________ incur liens to secure debt |
| A breach of any restriction under our credit facility or our indentures or our subsidiary’s first mortgage notes could permit the holders of the related debt to declare all amounts outstanding under those agreements immediately due and payable and, in the case of the credit facility, terminate all commitments to extend further credit |
| Any subsequent refinancing of our current debt or any new indebtedness incurred by us or our subsidiaries could have similar or greater restrictions |
| Tax Risks to Common Unitholders We may be classified as an association taxable as a corporation rather than as a partnership, which would substantially reduce the value of our Class A common units |
| We could be treated as a corporation for United States income tax purposes |
| Our treatment as a corporation would substantially reduce the cash distributions on the common units that we distribute quarterly |
| Moreover, treatment of us as a corporation would materially and adversely affect our ability to make payments on our debt securities |
| The anticipated benefit of an investment in our common units depends largely on the treatment of us as a partnership for federal income tax purposes |
| Under current law, we are treated as a partnership for federal income tax purposes and do not pay any federal income tax at the entity level |
| In order to qualify for this treatment, we must derive more than 90prca of our annual gross income from specified investments and activities |
| While we believe that we currently do qualify and intend to meet this income requirement, we may not find it possible, regardless of our efforts, to meet this income requirement or may inadvertently fail to meet this income requirement |
| Current law may change so as to cause us to be treated as a corporation for federal income tax purposes without regard to our sources of income or otherwise subject us to entity-level taxation |
| If we were to be treated as a corporation for federal income tax purposes, we would pay federal income tax on our income at the corporate tax rate, which is currently a maximum of 35prca and would pay state income taxes at varying rates |
| Under current law, distributions to unitholders would generally be taxed as a corporate distribution |
| Because a tax would be imposed upon us as a corporation, the cash available for distribution to a unitholder would be substantially reduced |
| Treatment of us as a corporation would cause a substantial reduction in the value of our units |
| In addition, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise, or other forms of taxation |
| State tax legislation resulting in the imposition of a partnership-level income tax on us would reduce the cash distributions on the common units and the value of the i-units that we will distribute quarterly to Enbridge Management |
| The enactment of significant legislation imposing partnership-level income taxes could cause a reduction in the value of our units |
| If the Internal Revenue Service does not respect our curative tax allocations, the after-tax return to our unitholders on their investment in our Class A common units would be adversely affected |
| Our partnership agreement allows curative allocations of income, deduction, gain and loss by us to account for differences between the tax basis and fair market value of property at the time the property is contributed or deemed contributed to us and to account for differences between the fair market value and book basis of our assets existing at the time of issuance of any Class A common units |
| If the Internal Revenue Service, which we refer to as the IRS, does not respect our curative allocations, ratios of taxable income to cash distributions received by the holders of Class A common units will be materially higher than previously estimated The tax liability of our unitholders could exceed their distributions or proceeds from sales of Class A common units |
| The holders of our Class A common units will be required to pay United States federal income tax and, in some cases, state and local income taxes on their allocable share of our income, even if they do not receive cash distributions from us |
| They will not necessarily receive cash distributions equal to the tax on 38 ______________________________________________________________________ their allocable share of our taxable income |
| Further, if we have a large amount of nonrecourse liabilities, they may incur a tax liability that is greater than the money they receive when they sell their Class A common units |
| A unitholder may be required to file tax returns with and pay income taxes to the states where we or our subsidiaries own property and conduct business |
| In some cases, a unitholder may be required to file income tax returns with and pay income taxes to the states in which we or our subsidiaries own property and conduct business, which are currently Alabama, Alaska, Arkansas, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, New York, South Carolina, North Carolina, North Dakota, Oklahoma, Tennessee, Texas and Wisconsin |
| In the future, we may acquire property or do business in other states or in foreign jurisdictions |
| In addition to tax liabilities to such state and foreign jurisdictions, the owner of a Class A common unit may also incur tax and filing responsibilities to localities within such jurisdictions |
| Ownership of Class A common units raises issues for tax-exempt entities and other investors |
| An investment in our Class A common units by tax-exempt entities, including employee benefit plans, individual retirement accounts, Keogh plans and other retirement plans, regulated investment companies and foreign persons raises issues unique to them |
| Virtually all of the income derived from our Class A common units by a tax-exempt entity will be “unrelated business taxable income” and will be taxable to the tax-exempt entity |
| Additionally, no significant part of our gross income will be considered qualifying income for purposes of determining whether a unitholder qualifies as a regulated investment company for its tax years beginning on or prior to October 22, 2004 (before the American Jobs Creation Act of 2004) |
| Further, a unitholder who is a nonresident alien, a foreign corporation or other foreign person will be required to file a federal income tax return and pay tax on his share of our taxable income because he will be regarded as being engaged in a trade or business in the United States as a result of his ownership of a Class A common unit |
| Our registration with the Secretary of the Treasury as a “tax shelter” may increase your risk of an IRS audit |
| Because we are a registered “tax shelter” with the Secretary of the Treasury, a unitholder may face an increased risk of an IRS audit resulting in taxes payable on our income as well as income not related to us |
| We could be audited by the IRS and adjustments to our income or losses could be made |
| Any unitholder owning less than a 1prca profit interest in us has very limited rights to participate in the income tax and audit process |
| Further, any adjustments in our tax returns will lead to adjustments in the unitholders’ tax returns and may lead to audits of unitholders’ tax returns and adjustments of items unrelated to us |
| Each unitholder is responsible for any tax owed as the result of an examination of their personal tax return |
| Our treatment of a purchaser of Class A common units as having the same tax benefits as the seller could be challenged, resulting in a reduction in value of the Class A common units |
| Because we cannot match transferors and transferees of Class A common units, we are required to maintain the uniformity of the economic and tax characteristics of these units in the hands of the purchasers and sellers of these units |
| We do so by adopting certain depreciation conventions that do not conform with all aspects of the United States Treasury regulations |
| An IRS challenge to these conventions could adversely affect the tax benefits to a unitholder of ownership of the Class A common units and could have a negative impact on their value |