| MAGELLAN MIDSTREAM PARTNERS LP ITEM 1A Risk Factors Risks Related to Our Business We may not be able to generate sufficient cash from operations to allow us to pay quarterly distributions at current levels following establishment of cash reserves and payment of fees and expenses, including payments to our affiliates |
| The amount of cash we can distribute on our common units principally depends upon the cash we generate from our operations |
| Because the cash we generate from operations will fluctuate from quarter to quarter, we may not be able to pay quarterly distributions at the current level for each quarter |
| Our ability to pay quarterly distributions depends primarily on cash flow, including cash flow from financial reserves and working capital borrowings, and not solely on profitability, which is affected by non-cash items |
| As a result, we may pay cash distributions during periods when we record losses and may be unable to pay cash distributions during periods when we record net income |
| Our financial results depend on the demand for the petroleum products that we transport, store and distribute |
| Any sustained decrease in demand for petroleum products in the markets served by our pipeline and terminals could result in a significant reduction in the volume of products that we transport in our pipeline, store 16 ______________________________________________________________________ at our marine terminals and distribute through our inland terminals, and thereby reduce our cash flow and our ability to pay cash distributions |
| Factors that could lead to a decrease in market demand include: • an increase in the market price of petroleum products, which may reduce demand for gasoline and other petroleum products |
| Market prices for petroleum products are subject to wide fluctuation in response to changes in global and regional supply over which we have no control; • a recession or other adverse economic condition that results in lower spending by consumers and businesses on transportation fuels such as gasoline, aviation fuel and diesel; • higher fuel taxes or other governmental or regulatory actions that increase the cost of gasoline; • an increase in fuel economy, whether as a result of a shift by consumers to more fuel-efficient vehicles, technological advances by manufacturers or federal or state regulations; and • the government–mandated increase in the use of alternative fuel sources, such as fuel cells and solar, electric and battery-powered engines |
| Our business involves many hazards and operational risks, some of which may not be covered by insurance |
| Our operations are subject to many hazards inherent in the transportation and distribution of petroleum products and ammonia, including weather-related or other natural causes, ruptures, leaks and fires |
| These risks could result in substantial losses due to personal injury or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in curtailment or suspension of our related operations |
| We are not fully insured against all risks incident to our business |
| In addition, as a result of market conditions, premiums for our insurance policies could increase significantly |
| In some instances, 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 and sabotage acts |
| If a significant accident or event occurs that is not fully insured, it could adversely affect our financial position, results of operations or cash flows and our ability to pay cash distributions |
| Fluctuations in prices of refined petroleum products and natural gas liquids could materially affect our earnings |
| A third-party supply agreement we assumed in connection with the acquisition of certain pipeline and terminal assets during October 2004 requires that we purchase and maintain certain inventories of petroleum products |
| In addition, we maintain product inventory related to our petroleum products blending and fractionation operations |
| Significant fluctuations in market prices of petroleum products could result in losses from these operations, thereby reducing the amount of cash we generate and our ability to pay cash distributions |
| Rate regulation or a successful challenge to the rates we charge on our petroleum products pipeline system may reduce the amount of cash we generate |
| The FERC regulates the tariff rates for interstate movements on our petroleum products pipeline system |
| Shippers may protest our pipeline tariff filings, and the FERC may investigate new or changed tariff rates |
| Further, other than for rates set under market-based rate authority, the FERC may order refunds of amounts collected under rates that were in excess of a just and reasonable level when taking into consideration our pipeline system’s cost of service |
| In addition, shippers may challenge the lawfulness of tariff rates that have become final and effective |
| The FERC may also investigate such rates absent shipper complaint |
| The FERC’s ratemaking methodologies may limit our ability to set rates based on our true costs or may delay the use of rates that reflect increased costs |
| The FERC’s primary ratemaking methodology is price indexing |
| We use this methodology to establish our rates in approximately 40prca of our interstate markets |
| If the PPI-FG falls, we could be required to reduce our rates that are based on the FERC’s price indexing methodology if they exceed the new maximum allowable rate |
| The FERC’s indexing methodology is 17 ______________________________________________________________________ subject to a five-year review, and in July 2005, the FERC issued a Notice of Inquiry proposing to continue using the PPI-FG, without adjustment, as the index for oil pipeline rate changes in the next five year period, commencing July 1, 2006 |
| If the FERC continues its policy of using the PPI-FG, changes in the PPI-FG might not fully reflect actual increases in the costs associated with the pipelines subject to indexing, which would impair our ability to recover costs associated with our cost-of-service based rates |
| The potential for a challenge to our indexed rates creates the risk that the FERC might find some of our indexed rates to be in excess of a just and reasonable level—that is, a level justified by our cost of service |
| In such an event, the FERC would order us to reduce any such rates and could require the payment of reparations to complaining shippers for up to two years prior to the complaint |
| In July 2004, the DC Circuit issued its opinion in BP West Coast Products, LLC v |
| FERC, which upheld, among other things, the FERC’s determination that certain rates of an interstate petroleum products pipeline, SFPP, were grandfathered rates under the Energy Policy Act of 1992 and that SFPP’s shippers had not demonstrated substantially changed circumstances that would justify modification of those rates |
| The court also vacated the portion of the FERC’s decision applying the Lakehead policy |
| In the Lakehead decision, the FERC allowed an oil pipeline publicly traded partnership to include in its cost-of-service an income tax allowance to the extent that its unitholders were corporations subject to income tax |
| In May and June 2005, the FERC issued a statement of general policy, as well as an order on remand of BP West Coast, respectively, in which the FERC stated it will permit pipelines to include in cost of service a tax allowance to reflect actual or potential tax liability on their public utility income attributable to all partnership or limited liability company interests, if the ultimate owner of the interest has an actual or potential income tax liability on such 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 |
| In December 2005, the FERC issued its first case-specific oil pipeline review of the income tax allowance issues 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 allowance |
| Further, in the December 2005 order, the FERC concluded that for tax allowance purposes, the 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 rate of 28prca |
| The FERC indicated that it would address the income tax allowance issues further in the context of SFPP’s compliance filing due February 28, 2006 |
| The FERC’s BP West Coast remand decision, the new tax allowance policy and the December 2005 order have been appealed to the DC Circuit |
| As a result, 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 establish rates in approximately 60prca of our interstate markets using the FERC’s market-based ratemaking regulations |
| These regulations allow us to establish rates based on conditions in individual markets without regard to the index or our cost of service |
| If successfully challenged, the FERC could take away our ability to establish market-based rates |
| We would then be required to establish rates that would be justified on some other basis such as our cost of service |
| Any reduction in the indexed rates, removal of our ability to establish market-based rates, change in the treatment of income tax allowances or payment of reparations could have a material adverse effect on our results of operations and reduce the amount of cash we generate |
| Competition could lead to lower levels of profits and reduce the amount of cash we generate |
| We face competition from other pipelines and terminals in the same markets as our assets, as well as from other means of transporting, storing and distributing petroleum products, including from other pipeline systems, terminal operators and integrated refining and marketing companies that own their own terminal facilities |
| Our customers demand delivery of products on tight time schedules and in a number of geographic markets |
| If our quality of service declines or we cannot meet the demands of our customers, they may utilize the services of our competitors |
| 18 ______________________________________________________________________ When prices for the future delivery of petroleum products that we store in our marine terminals fall below current prices, customers may be less likely to store these products, thereby reducing our storage revenues |
| This market condition is commonly referred to as “backwardation |
| ” When the petroleum products market is in backwardation, the demand for storage capacity at our facilities may decrease |
| If the market becomes strongly backwardated for an extended period of time, the cash flows generated by our marine terminal facilities may be reduced, impacting our ability to pay cash distributions |
| Our business is subject to federal, state and local laws and regulations that govern the environmental and operational safety aspects of our operations |
| Each of our operating segments is subject to the risk of incurring substantial costs and liabilities under environmental and safety laws and regulations |
| These costs and liabilities arise under increasingly stringent environmental and safety laws, including regulations and governmental enforcement policies, and as a result of claims for damages to property or persons arising from our operations |
| Failure to comply with these laws and regulations may result in assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens and, to a lesser extent, issuance of injunctions to limit or cease operations |
| If we were unable to recover these costs through increased revenues, our ability to meet our financial obligations and pay cash distributions could be adversely affected |
| The terminal and pipeline facilities that comprise our petroleum products pipeline system have been used for many years to transport, distribute or store petroleum products |
| Over time our operations, or operations by our predecessors or third parties not under our control, may have resulted in the disposal or release of hydrocarbons or solid wastes at or from these terminal properties and along such pipeline rights-of-way |
| In addition, some of our terminals and pipelines are located on or near current or former refining and terminal sites, and there is a risk that contamination is present on those sites |
| We may be subject to strict, joint and several liability under a number of these environmental laws and regulations for such disposal and releases of hydrocarbons or solid wastes or the existence of contamination, even in circumstances where such activities or conditions were caused by third parties not under our control or were otherwise lawful at the time they occurred |
| In addition, we own or lease a number of properties that have been used for many years to distribute or store petroleum products by third parties not under our control |
| In some cases, predecessor owners, tenants or other users of these properties have disposed of or released hydrocarbons or solid wastes on or under these properties |
| Further, the transportation of ammonia by our pipeline is hazardous and may result in environmental damage, including accidental releases that may cause death or injuries to humans and farm animals and damage to crops |
| We depend on refineries and petroleum products pipelines owned and operated by others to supply our pipeline and terminals |
| We depend on connections with refineries and petroleum products pipelines owned and operated by third parties as a significant source of supply for our facilities |
| Outages at these refineries or reduced or interrupted throughput on these pipelines because of weather-related or other natural causes, testing, line repair, damage, reduced operating pressures or other causes could result in our being unable to deliver products to our customers from our terminals or receive products for storage or reduce shipments on our pipelines and could adversely affect our cash flow and ability to pay cash distributions |
| The closure of mid-continent refineries that supply our petroleum products pipeline system could result in disruptions or reductions in the volumes we transport and the amount of cash we generate |
| The EPA has adopted requirements that require refineries to install equipment to lower the sulfur content of gasoline and some diesel fuel they produce |
| The requirements relating to gasoline took effect in 2004, and the requirements relating to diesel fuel will take effect in 2006 and be implemented through 2010 |
| If refinery owners that use our petroleum pipeline system determine that compliance with these new requirements is too costly, they 19 ______________________________________________________________________ may close some of these refineries, which could reduce the volumes transported on our petroleum products pipelines and the amount of cash we generate |
| Mergers among our customers and competitors could result in lower volumes being shipped on our pipelines or products stored in or distributed through our terminals, thereby reducing the amount of cash we generate |
| Mergers between our existing customers and our competitors could provide strong economic incentives for the combined entities to utilize their existing systems instead of ours in those markets where the systems compete |
| 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 not only in less revenue, but also a decline in cash flow of a similar magnitude, which would reduce our ability to pay cash distributions |
| The pipeline and terminal assets we acquired in October 2004 are subject to a consent decree with the EPA and we could incur substantial costs and liabilities to comply with this decree that are not covered by the seller’s indemnification of us |
| In 2003, the seller of the pipeline and terminal assets we acquired in October 2004 entered into a consent decree with the EPA arising out of a June 1999 incident unrelated to the assets we acquired |
| In order to resolve its civil liability for the incident, the seller agreed to pay civil penalties and to comply with certain terms set out in the consent decree |
| These terms include requirements for testing and maintenance of a number of the seller’s pipelines, including certain of the pipelines we acquired, the creation of a damage prevention program, submission to independent monitoring and various reporting requirements |
| The consent decree imposes penalties for non-compliance for a period of at least five years from the date of the consent decree |
| Under our purchase agreement, we agreed, at our own expense, to complete any remaining remediation work required under the consent decree with respect to these pipelines and assumed a liability of approximately dlra8dtta6 million at the time of the acquisition for this remediation work |
| The seller has agreed to retain responsibility under the consent decree for any ongoing independent monitoring obligations with respect to one of these pipelines |
| Potential future acquisitions and expansions, if any, may affect our business by substantially increasing the level of our indebtedness and liabilities and increasing our risk 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 |
| Our business is subject to federal, state and local laws and regulations that govern the product quality specifications of the petroleum products that we store and transport |
| Petroleum products that we store and transport are sold by our customers for consumption into the public market |
| Various federal, state and local agencies have the authority to prescribe specific product quality 20 ______________________________________________________________________ specifications to commodities sold into the public market |
| Changes in product quality specifications could reduce our throughput volume, require us to incur additional handling costs or require capital expenditures |
| For instance, different product specifications for different markets impact the fungibility of the products in our system and could require the construction of additional storage |
| If we are unable to recover these costs through increased revenues, our cash flows and ability to pay cash distributions could be adversely affected |
| Our business is subject to federal EPA requirements that will lower the level of sulfur in diesel fuels beginning in June 2006 |
| Beginning in June 2006, the allowable level of sulfur in on-road and off-road diesel fuel will begin to be lowered to levels substantially below current specifications |
| This transition will require us to invest substantial amounts of capital and incur new operating costs that we may not be able to recover through increased revenues |
| This transition may require us to transfer low sulfur products to higher sulfur products within our system as a result of product contaminations, which could also lead to higher costs |
| To date, limited testing opportunities have been available for us to ensure that our transition plan will be successful due to the lack of product meeting the new low sulfur specifications |
| Terrorist attacks aimed at our facilities could adversely affect our business |
| Since the September 11, 2001 terrorist attacks, the United States government has issued warnings that energy assets in general, and the nation’s pipeline and terminal infrastructure in particular, may be future targets of terrorist organizations |
| The threat of terrorist attacks has 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, could have a material adverse effect on our business |
| Our ammonia pipeline system is dependent on three customers |
| Three customers ship all of the ammonia on our pipeline and utilize our six terminals |
| We have contracts with these three shippers that expire on June 30, 2008 and obligate them to ship-or-pay for specified minimum quantities of ammonia |
| The loss of any one of these three customers or their failure or inability to pay us could adversely affect our cash flows |
| High natural gas prices can increase ammonia production costs and reduce the amount of ammonia transported through our ammonia pipeline system |
| The profitability of our ammonia customers partially depends on the price of natural gas, which is the principal raw material used in the production of ammonia |
| An extended period of high natural gas prices may cause our customers to produce and ship lower volumes of ammonia, which could adversely affect our cash flows |
| Rising short-term interest rates could increase our financing costs and reduce the amount of cash we generate |
| As of December 31, 2005, we had fixed-rate debt of dlra786dtta9 million outstanding, excluding unaccreted discounts and fair value adjustments for interest rate hedges |
| In addition, we had dlra13dtta0 million of floating rate borrowings outstanding on our revolving credit facility as of December 31, 2005 |
| As a result of these swap agreements and revolver borrowings, we have exposure to changes in short-term interest rates |
| Based on the amounts outstanding on December 31, 2005, if LIBOR were to change by 0dtta25prca, our annual interest expense would change by dlra0dtta9 million |
| Rising short-term rates could reduce the amount of cash we generate and adversely affect our ability to pay cash distributions |
| 21 ______________________________________________________________________ The terms of our indemnification settlement agreement require Williams to make payments to us over the next two years, exposing us to credit risk |
| In May 2004, our general partner entered into an agreement with Williams under which Williams agreed to pay us dlra117dtta5 million to release Williams from its environmental and certain other indemnification obligations to us, consisting primarily of costs related to environmental remediation matters related to assets that were contributed to us by Williams or which we acquired from Williams |
| We have received dlra62dtta5 million from Williams as of December 31, 2005, and we expect to receive the remaining balance in annual installments of dlra20dtta0 million and dlra35dtta0 million in July of 2006 and 2007, respectively |
| As of December 31, 2005, known liabilities that would have been covered by these indemnifications were dlra43dtta1 million |
| Williams’ credit ratings are below investment grade |
| Failure of Williams to perform on its payment obligations under the settlement agreement could adversely affect our ability to meet these obligations and pay cash distributions |
| Restrictions contained in our debt instruments and the debt instruments of Magellan Pipeline may limit our financial flexibility |
| We and our subsidiary, Magellan Pipeline, are subject to restrictions with respect to our debt that may limit our flexibility in structuring or refinancing existing or future debt and prevent us from engaging in certain beneficial transactions |
| These restrictions include, among other provisions, the maintenance of certain financial ratios, as well as limitations on our ability to incur additional indebtedness, to grant liens, to sell assets or to repay existing debt without penalties |
| These restrictions could result in higher costs of borrowing and impair our ability to generate additional cash |
| In addition, a change in control of our general partner could, under certain circumstances, result in our debt or the debt of Magellan Pipeline becoming due and payable |
| Risks Related to Our Partnership Structure In connection with its acquisition of our general partner in June 2003, MGG entered into a new omnibus agreement, which, among other things, caps our cash G&A expenses |
| We are a third-party beneficiary of an omnibus agreement with MGG There are limitations on the amount of G&A expenses for which we are required to reimburse MGG and certain of its affiliates, which operate as follows: • for expenses below a lower cap amount, MGG and its affiliates are not required to make any reimbursements to us; • for expenses above the lower cap amount and below an upper cap amount, MGG or its affiliates are required to reimburse us |
| During 2005, we were reimbursed dlra3dtta3 million for G&A expenses; and • for expenses above the upper cap amount, MGG and its affiliates are not required to make any reimbursements to us |
| The lower cap amount escalates annually at 7dtta0prca (or, if greater, the percentage increases in the consumer price index) |
| The upper cap amount escalates annually at the lesser of 2dtta5prca or the percentage increase in the consumer price index |
| The upper and lower caps are further adjusted for incremental G&A expenses associated with acquisitions we consummate |
| These limitations on our obligation to reimburse MGG and certain of its affiliates for G&A expenses will terminate upon a change in control of MGG or our general partner |
| A change in control of our general partner will be deemed to occur if, among other things, directors are elected whose nomination for election to our general partner’s board of directors was not approved by our general partner or its board of directors or any nominating committee thereof at a time when the board was comprised of only such approved directors or the current directors |
| In the event of a change in control, the amount of cash we generate will be reduced by any G&A expenses we incur above the lower cap as a result of our becoming liable for the full amount of G&A expenses |
| 22 ______________________________________________________________________ Termination of our services agreement with MGG GP could result in increased costs and limit our ability to meet our obligations and pay cash distributions |
| We have entered into a services agreement with MGG GP, the general partner of MGG The services provided under that agreement include the personnel necessary to perform our operations as well as accounting, building administration, human resources, information technology, legal, security and others |
| MGG GP has the right to terminate its obligations under this services agreement upon 90 days notice |
| To the extent that neither MGG GP nor any of its subsidiaries, including MGG and our general partner, provides these services to us, the limitations under the new omnibus agreement on our reimbursement of G&A expenses relating to these services would no longer apply and we may incur increased G&A expenses, which could increase our costs and limit our ability to meet our obligations and pay cash distributions |
| Cost reimbursements due our general partner may be substantial and could reduce our cash available for distribution |
| Prior to making any distribution on our common units, we will reimburse our general partner and its affiliates, including officers and directors of our general partner, for expenses they incur on our behalf |
| The reimbursement of expenses could adversely affect our ability to pay cash distributions |
| Our general partner has sole discretion to determine the amount of its expenses which must be reimbursed, subject to certain annual limits |
| In addition, our general partner and its affiliates may provide us other services for which we will be charged fees as determined by our general partner |
| Our general partner’s absolute discretion in determining the level of cash reserves may adversely affect our ability to make cash distributions to our unitholders |
| Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that in its reasonable discretion are necessary to fund our future operating expenditures |
| In addition, the partnership agreement permits our general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party or to provide funds for future distributions to partners |
| These cash reserves will affect the amount of cash available for distribution to our unitholders |
| Potential conflicts of interest may arise among our general partner, its affiliates and us |
| Our general partner and its affiliates have limited fiduciary duties to us and our unitholders, which may permit them to favor their own interests to the detriment of us and our unitholders |
| Conflicts of interest may arise among our general partner and it affiliates, including MGG, on the one hand, and us and our unitholders, on the other hand |
| The directors and officers of our general partner have fiduciary duties to manage us in a manner beneficial to us and our limited partners |
| At the same time, our general partner has a fiduciary duty to manage us in a manner beneficial to MGG, the owner of our general partner, and its affiliates |
| The board of directors of our general partner will resolve any such conflict and has broad latitude to consider the interests of all parties to the conflict |
| As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders |
| These conflicts may include, among others, the following: • our general partner is allowed to take into account the interests of parties other than us, including MGG, and their respective affiliates, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders; • our general partner determines whether or not we incur debt and that decision may affect our credit ratings; 23 ______________________________________________________________________ • our general partner has limited its liability and reduced its fiduciary duties under the partnership agreement, while also restricting the remedies available to our unitholders for actions that, without these limitations, might constitute breaches of fiduciary duty; • our general partner determines the amount and timing of our investment transactions, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders; • our general partner determines which costs incurred by it and its affiliates are reimbursable by us; • our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered, or from entering into additional contractual arrangements with any of these entities on our behalf, so long as the terms of any such additional contractual arrangements are fair and reasonable to us; • our general partner controls the enforcement of obligations owned to us by it and its affiliates; • our general partner decides whether to retain separate counsel, accountants or others to perform services for us; • our general partner determines the allocation of shared overhead expenses to MGG and us; and • our general partner interprets and enforces contractual obligations between us and our affiliates, on the one hand, and MGG, on the other hand |
| Certain executive officers of our general partner own interests in MGG Midstream Holdings, LP amounting to approximately 6prca of its total ownership |
| MGG Midstream Holdings, LP currently owns the general partner interest and 65prca of the limited partner interests in MGG As a result, these officers could experience additional conflicts between our interests and the interests of MGG Affiliates of our general partner may compete with us |
| 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 |
| For example, both MGG, which owns our general partner, and MGG’s general partner are partially owned by an affiliate of Carlyle/Riverstone Global Energy and Power Fund II, LP (“CRF”), which also owns, through affiliates, an interest in the general partner of Buckeye Partners, LP (“Buckeye Partners”), and the general partner of SemGroup, LP (“SemGroup”), both of which are engaged in the transportation, storage and distribution of refined petroleum products and may acquire other entities that compete with us |
| Although we do not have extensive operations in the geographic areas primarily served by Buckeye Partners, we will compete directly with Buckeye Partners, SemGroup and perhaps other entities in which CRF has an interest for acquisition opportunities throughout the United States and potentially will compete with Buckeye Partners, SemGroup and these other entities for new business or extensions of the existing services provided by our operating partnerships, creating actual and potential conflicts of interest between us and affiliates of our general partner |
| In addition, an affiliate of SemGroup is a significant customer of ours |
| All of our executive officers face conflicts in the allocation of their time to our business |
| Our general partner shares officers and administrative personnel with MGG’s general partner to operate both our business and MGG’s business |
| Our general partner’s officers, several of whom are also officers of MGG’s general partner, will allocate the time they and the other employees of MGG’s general partner spend on our behalf and on behalf of MGG These officers face conflicts regarding the allocation of their and other employees’ time, which may adversely affect our results of operations, cash flows and financial condition |
| These allocations may not necessarily be the result of arms-length negotiations between our general partner and MGG’s general partner |
| 24 ______________________________________________________________________ Tax Risks to Common Unitholders Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to entity-level taxation by states |
| If the Internal Revenue Service (“IRS”) treats us as a corporation or we become subject to entity-level taxation for state tax purposes, it would reduce the amount of cash available for distribution to our unitholders |
| The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes |
| We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter affecting us |
| If we were 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 likely pay state income tax at varying rates |
| Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to our unitholders |
| Because a tax would be imposed upon us as a corporation, our cash available for distribution would be substantially reduced |
| Therefore, our treatment as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units |
| Current law may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation |
| In addition, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation |
| If any of these states were to impose a tax on us, the cash available for distribution to our unitholders would be reduced |
| The partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the target distribution amounts will be adjusted to reflect the impact of that law on us |
| The sale or exchange of 50prca or more of our capital and profit interests will result in the termination of our partnership for federal income tax purposes |
| Our partnership will be considered to have been terminated for federal income tax purposes if, within a 12-month period, there is a sale or exchange of 50prca or more of the total interests in our capital and profits |
| We believe, and will take the position, that a sale of our limited partner units by MGG in April 2005 resulted in our termination and immediate reconstitution as a new partnership for federal income tax purposes |
| Our termination for tax purposes results in a significant deferral of the depreciation deductions allowable in computing our taxable income for 2005, which will impact unitholders of record at April 2005 |