| NORTHERN BORDER PARTNERS LP Item 1A Risk Factors |
| 19 ITEM 1A RISK FACTORS Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those faced by corporations engaged in a similar business |
| The following risk factors should be carefully considered together with all of the other information included in this annual report when evaluating our business |
| If any of the following risks were to actually occur, our business, results of operations and financial condition could be materially adversely affected |
| In that case, we may not be able to pay distributions to our common unitholders and the trading price of our common units could decline |
| RISKS INHERENT IN OUR BUSINESS IF PRODUCTION FROM THE WESTERN CANADA SEDIMENTARY BASIN REMAINS FLAT OR DECLINES AND DEMAND FOR NATURAL GAS FROM THE WESTERN CANADA SEDIMENTARY BASIN IS GREATER IN MARKET AREAS OTHER THAN THE MIDWESTERN US, DEMAND FOR OUR TRANSPORTATION SERVICES COULD SIGNIFICANTLY DECREASE We depend on natural gas supply from the Western Canada Sedimentary Basin because our interstate natural gas pipeline segment transports primarily Canadian natural gas from the Western Canada Sedimentary Basin to the Midwestern US market area |
| If demand for natural gas increases in Canada or other markets not served by our pipelines and production remains flat or declines, demand for transportation service on our interstate natural gas pipelines could decrease significantly, which could adversely impact our results of operations |
| THE VOLATILITY OF NATURAL GAS AND NATURAL GAS LIQUIDS PRICES COULD ADVERSELY AFFECT OUR CASH FLOW A significant portion of our natural gas gathering and processing revenue is derived from the sale of commodities we retain for our gathering and processing services |
| As a result, we are sensitive to natural gas and natural gas liquids price fluctuations |
| Natural gas and natural gas liquids prices have been and are likely to continue to be volatile in the future |
| The recent record high natural gas and natural gas liquids prices may not continue and could drop precipitously in a short period of time |
| The prices of natural gas and natural gas liquids are subject to wide fluctuations in response to a variety of factors beyond our control, including the following: - relatively minor changes in the supply of, and demand for, domestic and foreign natural gas and natural gas liquids; - market uncertainty; - availability and cost of transportation capacity; - the level of consumer product demand; - political conditions in international natural gas-producing regions; - weather conditions; - domestic and foreign governmental regulations and taxes; 19 - the price and availability of alternative fuels; - speculation in the commodity futures markets; - overall domestic and global economic conditions; - the price of natural gas and natural gas liquids imports; and - the effect of worldwide energy conservation measures |
| These external factors and the volatile nature of the energy markets make it difficult to reliably estimate future prices of natural gas and natural gas liquids |
| As natural gas and natural gas liquids prices decline, we are paid less for our commodities, thereby reducing our cash flow |
| In addition, production and related volumes could also decline |
| OUR INTERSTATE NATURAL GAS PIPELINES &apos TRANSPORTATION RATES ARE SUBJECT TO REVIEW AND POSSIBLE ADJUSTMENT BY FEDERAL REGULATORS Our interstate natural gas pipelines are subject to extensive regulation by the FERC, which regulates most aspects of our pipeline business, including our transportation rates |
| Under the Natural Gas Act, interstate transportation rates must be just and reasonable and not unduly discriminatory |
| In November 2005, Northern Border Pipeline filed a rate case with the FERC as required by the provisions of the settlement of its last rate case |
| If the increased rates that Northern Border Pipeline is seeking to collect are ultimately lowered by the FERC, on its own initiative, or as a result of challenges raised by Northern Border Pipelineapstas customers or third parties, the FERC could require refunds of amounts collected under rates that it finds unlawful |
| In addition, an adverse decision by the FERC in Northern Border Pipelineapstas rate case could result in reductions to Northern Border Pipelineapstas regulated rates on a prospective basis, which could adversely affect our cash flow |
| IF WE ARE UNABLE TO COMPETE FOR CUSTOMERS, WE MAY HAVE SIGNIFICANT LEVELS OF UNCONTRACTED OR DISCOUNTED TRANSPORTATION CAPACITY ON OUR INTERSTATE NATURAL GAS PIPELINES Our interstate natural gas pipeline segment competes with other pipelines for Canadian natural gas supplies delivered to US markets |
| If we do not successfully compete with the other natural gas pipelines, we may have significant levels of uncontracted or discounted capacity on our pipelines, which could adversely impact our results of operations |
| OUR INTERSTATE NATURAL GAS PIPELINES HAVE RECORDED CERTAIN ASSETS THAT MAY NOT BE RECOVERABLE FROM OUR CUSTOMERS Accounting policies for FERC-regulated companies permit certain assets to be recorded that result from the regulated ratemaking process that would not be recorded under GAAP for nonregulated entities |
| We consider factors such as regulatory changes and the impact of competition to determine the probability of future recovery of these assets |
| If we determine future recovery is no longer probable, we would be required to write off the regulatory assets at that time |
| IF THE LEVEL OF DRILLING AND PRODUCTION IN THE WILLISTON, POWDER RIVER AND WIND RIVER BASINS SUBSTANTIALLY DECLINES, OUR GATHERING AND PROCESSING VOLUMES AND REVENUE COULD DECLINE Our ability to maintain or expand our natural gas gathering and processing business depends largely on the level of drilling and production in the Williston, Powder River and Wind River Basins |
| Drilling and production in the Williston and Wind River Basins are impacted by factors beyond our control, including: - demand for natural gas and refinery-grade crude oil; - producers &apos desire and ability to obtain necessary permits in a timely and economic manner; - natural gas field characteristics and production performance; - surface access and infrastructure issues; and - capacity constraints on natural gas, crude oil and natural gas liquids pipelines that transport gas from the producing areas and our facilities |
| In addition, drilling and production in the Powder River Basin are impacted by environmental regulations governing water discharge associated with coalbed methane production |
| If the level of drilling and production in these 20 areas substantially declines, our gathering and processing volumes and revenue could be reduced |
| THE COMPOSITION OF NATURAL GAS RECEIVED BY OUR PIPELINES OR GATHERED BY OUR GATHERING AND PROCESSING OPERATIONS COULD REDUCE OUR AVAILABLE TRANSPORTATION CAPACITY AND INCREASE OUR OPERATING EXPENSES If the energy content of the natural gas received by our pipelines is below the energy equivalent specified under our transportation contracts, we must transport additional natural gas to meet our contractual commitments |
| The transportation of this additional natural gas reduces the available transportation capacity on our pipelines and would negatively impact our operating revenue |
| In addition, if the energy content of the natural gas gathered by our natural gas gathering and processing operations is below pipeline quality standards and we are unable to blend the gas, we would incur higher operating expenses related to the additional processing required to avoid curtailment |
| OUR OPERATIONS ARE SUBJECT TO FEDERAL AND STATE LAWS AND REGULATIONS RELATING TO THE PROTECTION OF THE ENVIRONMENT, WHICH MAY EXPOSE US TO SIGNIFICANT COSTS AND LIABILITIES The risk of incurring substantial environmental costs and liabilities is inherent in the performance of our operations |
| Our operations are subject to extensive federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to the protection of the environment |
| These laws include, for example: - the federal Clean Air Act and analogous state laws, which impose obligations related to air emissions; - the federal Water Pollution Control Act of 1972, as renamed and amended as the Clean Water Act and analogous state laws, which regulate discharge of wastewaters from our facilities to state and federal waters; - the federal Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations to which we have sent wastes for disposal; and - the federal Resource Conservation and Recovery Act and analogous state laws that impose requirements for the handling and discharge of solid and hazardous waste from our facilities |
| Various governmental authorities, including the US EPA, have the power to enforce compliance with these laws and regulations and the permits issued under them |
| Violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both |
| Joint and several, strict liability may be incurred without regard to fault under the Comprehensive Environmental Response, Compensation and Liability Act, Resource Conservation and Recovery Act and analogous state laws for the remediation of contaminated areas |
| There is inherent risk of the incurrence of environmental costs and liabilities in our business due to our handling of the products we gather, transport and process, air emissions related to our operations, historical industry operations and waste disposal practices, some of which may be material |
| Private parties, including the owners of properties through which our pipeline systems pass, may have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage arising from our operations |
| Some sites we operate are located near current or former third-party hydrocarbon storage and processing operations and there is a risk that contamination has migrated from those sites to ours |
| In addition, increasingly strict laws, regulations and enforcement policies could significantly increase our compliance costs and the cost of any remediation that may become necessary, some of which may be material |
| Additional information is included under Item 1, "e Business-Environmental and Safety Matters "e |
| Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage in the event an environmental claim is made against us |
| Our business may be adversely affected by increased costs due to stricter pollution control requirements or liabilities resulting from non-compliance with required operating or other regulatory permits |
| New environmental regulations might also adversely affect our products and activities and federal and state agencies could impose additional safety requirements, all of which could materially affect our profitability |
| 21 PIPELINE INTEGRITY PROGRAMS AND REPAIRS MAY IMPOSE SIGNIFICANT COSTS AND LIABILITIES In December 2003, the US Department of Transportation issued a final rule requiring pipeline operators to develop integrity management programs for pipelines located near "e high consequence areas, "e where a leak or rupture could do the most harm |
| The final rule requires operators to perform ongoing assessments of pipeline integrity; identify and characterize applicable threats to pipeline segments that could impact a high consequence area; improve data collection, integration and analysis; repair and remediate the pipeline as necessary; and implement preventive and mitigating actions |
| The final rule incorporates the requirements of the Pipeline Safety Improvement Act of 2002 and became effective in January 2004 |
| The results of these testing programs could cause us to incur significant capital and operating expenditures in response to repair, remediation, preventative or mitigating actions that are determined to be necessary |
| WE ARE EXPOSED TO THE CREDIT RISK OF OUR CUSTOMERS AND OUR CREDIT RISK MANAGEMENT MAY NOT BE ADEQUATE TO PROTECT AGAINST SUCH RISK We are subject to the risk of loss resulting from nonpayment and/or nonperformance by our customers |
| Our customers are predominantly natural gas producers and marketers that may experience deterioration of their financial condition as a result of changing market conditions or financial difficulties that could impact their creditworthiness or ability to pay us for our services |
| We have obtained the maximum security allowed under the FERC creditworthiness policy |
| If we fail to adequately assess the creditworthiness of existing or future customers, unanticipated deterioration in their creditworthiness and any resulting nonpayment and/or nonperformance could adversely impact our results of operations |
| In addition, if any of our customers filed for bankruptcy protection, we may not be able to recover amounts owed or resell the capacity held by such customer, which would negatively impact our results of operations |
| PERMANENT SHUT DOWN OF OUR COAL SLURRY OPERATION COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS Our coal slurry pipeline is the sole source of fuel for the Mohave Generating Station and was fully contracted to Peabody Western Coal until December 31, 2005 |
| The water used by our coal slurry pipeline was supplied from an aquifer in the Navajo Nation and Hopi Tribe joint use area until December 31, 2005 |
| The Mohave Generating Station co-owners, the Navajo Nation, Hopi Tribe, Peabody Western Coal Company and other interested parties continue to negotiate water source and coal supply issues and we are working to resolve coal slurry transportation issues so that operations may resume in the future |
| If the Mohave Generating Station is permanently closed, we expect to incur pipeline removal and remediation costs and a non-cash impairment charge related to the remaining undepreciated cost of the pipeline assets and goodwill |
| We may be required to take an impairment charge in accordance with GAAP prior to final resolution of the issues concerning the Mohave Generating Station even though the project may ultimately proceed |
| Each quarter, we will take into consideration our assumptions and estimates about economic conditions and the probability of Black Mesaapstas future profitability |
| If an event or change in circumstance occurs that potentially impacts our assumptions and estimates, we will be required to test the assets for impairment |
| If our testing indicates that the carrying amount of Black Mesaapstas assets exceeds their fair value, we would recognize an impairment charge |
| OUR USE OF FINANCIAL INSTRUMENTS TO HEDGE MARKET RISK MAY RESULT IN REDUCED INCOME We utilize financial instruments to mitigate our exposure to interest rate and commodity price fluctuations |
| Hedging instruments that are used to reduce our exposure to interest rate fluctuations could expose us to risk of financial loss where we have contracted for variable-rate swap instruments to hedge fixed-rate instruments and the variable rate exceeds the fixed rate |
| In addition, these hedging arrangements may limit the benefit we would otherwise receive if we have contracted for fixed-rate swap agreements to hedge variable-rate instruments and the variable rate falls below the fixed rate |
| Hedging arrangements that are used to reduce our exposure to commodity price fluctuations may limit the benefit we would otherwise receive if market prices for natural gas and natural gas liquids exceed the stated price in the hedge instrument for these commodities |
| A DOWNGRADE OF OUR CREDIT RATING MAY REQUIRE US TO OFFER TO REPURCHASE OUR SENIOR NOTES OR IMPAIR OUR ABILITY TO ACCESS CAPITAL 22 We could be required to offer to repurchase certain of our senior notes at par value, plus any associated penalties and premiums, if Moodyapstas Investor Services or Standard & Poorapstas Rating Services rate our senior notes below investment grade |
| We may not have sufficient cash on hand to repurchase the senior notes at par value, which may cause us to borrow money under our credit facilities or seek alternative financing sources to finance the repurchase |
| We could also face difficulties accessing capital or our borrowing costs could increase, impacting our ability to obtain financing for acquisitions or capital expenditures and to refinance indebtedness |
| OUR INABILITY TO EXECUTE GROWTH AND DEVELOPMENT PROJECTS AND ACQUIRE NEW ASSETS COULD REDUCE CASH DISTRIBUTIONS TO UNITHOLDERS Our interstate natural gas pipelines are generally allowed to collect a return on their assets &apos recorded book value, generally referred to as rate base, in their transportation rates |
| Our interstate pipelines must maintain or increase the book value of their assets through growth projects in order to maintain or increase the return collected on our rate base |
| Accordingly, if we are unable to implement business development opportunities and finance such activities on economically acceptable terms, our future growth will be limited, which could adversely impact our results of operations |
| RISKS RELATED TO PROPOSED TRANSACTIONS WE MAY NOT BE ABLE TO CONSUMMATE THE ACQUISITION OF THE ONEOK SUBSIDIARIES The agreements with ONEOK to acquire certain subsidiaries of ONEOK contain customary and other closing conditions that, if not satisfied or waived, would result in the acquisition not occurring |
| These conditions include, among others: - expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; - continued accuracy of the representations and warranties contained in the agreements; - performance by each party of its obligations under the agreements; - consummation of ONEOKapstas purchase of Northwest Border; - consummation of our sale of a 20prca interest in Northern Border Pipeline to TC PipeLines; - amendments to certain debt agreements of ONEOK, us and Northern Border Pipeline; - lender approvals; and - absence of any decree, order, injunction or law that prohibits, restricts or substantially delays the transaction or makes the transaction unlawful |
| If we are unable to consummate the acquisition, we would be subject to a number of risks, including the following: - we would not realize the anticipated benefits of the proposed acquisition; - we will incur and will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the acquisition whether or not it is consummated; and - our business and operations may be harmed to the extent that customers, suppliers and others believe that we cannot effectively compete in the marketplace without the acquisition or there is customer or employee uncertainty surrounding the future direction of our service offerings and strategy |
| The occurrence of any of these events individually or in combination could have an adverse effect on our results of operations |
| WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF ONEOK WITH OUR CURRENT OPERATIONS If we consummate the acquisition of certain ONEOK subsidiaries, the integration of their operations with our current operations will be a complex, time-consuming and costly process |
| Failure to timely and successfully integrate the operations of the ONEOK subsidiaries may have a material adverse effect on our business, financial condition and results of operations |
| The difficulties of integrating the ONEOK operations will present challenges to our management including: - operating a significantly larger combined company with operations in geographic areas in which we have not previously operated; 23 - managing relationships with new customers for whom we have not previously provided services; - integrating personnel with diverse backgrounds and organizational cultures; - experiencing operational interruptions or the loss of key employees, customers or suppliers; - inefficiencies and complexities that may arise due to the unfamiliarity with the new operations and the businesses associated with them, including with their markets; - assimilating the operations, technologies, services and products of the acquired operations; - assessing the internal controls and procedures for the combined entity that we are required to maintain under the Sarbanes-Oxley Act of 2002; and - consolidating other corporate and administrative functions |
| We will also be exposed to risks that are commonly associated with transactions similar to this acquisition, such as unanticipated liabilities and costs, some of which may be material, and diversion of managementapstas attention |
| As a result, the anticipated benefits of the acquisition may not be fully realized, if at all |
| THE ISSUANCE OF UNITS TO ONEOK IN CONNECTION WITH THE ACQUISITION WILL DILUTE OUR CURRENT UNITHOLDERS &apos OWNERSHIP INTERESTS UPON THEIR CONVERSION TO COMMON UNITS In connection with the acquisition of the ONEOK subsidiaries, we will issue approximately 36dtta5 million Class B units representing limited partner interests in us to ONEOK The Class B units will convert to common units on a one-for-one basis at the holderapstas option upon the requisite approval of such conversion by our unitholders at a special meeting of unitholders or automatically, upon the requisite approval of both the conversion and certain amendments to our partnership agreement by our unitholders at a special meeting of unitholders |
| The conversion of the Class B units will have the following effects: - our unitholders &apos proportionate ownership interest in us will decrease; - the amount of cash available to pay distributions on each common unit may decrease; - the relative voting strength of each previously outstanding common unit may be diminished; and - the market price of the common units may decline |
| Sales of substantial amounts of their common units, or the anticipation of such sales, could lower the market price of our common units and may make it more difficult for us to sell our equity securities in the future at a time and at a price that we deem appropriate |
| RISKS INHERENT IN AN INVESTMENT IN US WE DO NOT OPERATE ALL OF OUR ASSETS NOR DO WE DIRECTLY EMPLOY ANY OF THE PERSONS RESPONSIBLE FOR PROVIDING US WITH ADMINISTRATIVE, OPERATING AND MANAGEMENT SERVICES THIS RELIANCE ON OTHERS TO OPERATE OUR ASSETS AND TO PROVIDE OTHER SERVICES COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS We rely on Northern Plains and NBP Services to provide us with administrative, operating and management services |
| We have a limited ability to control our operations or the associated costs of such operations |
| The success of these operations depends on a number of factors that are outside our control, including the competence and financial resources of the operator |
| Northern Plains and NBP Services may outsource some or all of these services to third parties, and a failure to perform by these third-party providers could lead to delays in or interruptions of these services |
| Should Northern Plains or NBP Services not perform their respective contractual obligations, we may have to contract elsewhere for these services, which may cost more than we are currently paying |
| In addition, we may not be able to obtain the same level or kind of service or retain or receive the services in a timely manner, which may impact our ability to perform under our transportation contracts and negatively affect our business and operating results |
| Our reliance on Northern Plains, NBP Services and the third-party providers with which they contract, together with our limited ability to control certain costs, could harm our business and results of operations |
| THE PARTNERSHIP POLICY COMMITTEE, OUR GENERAL PARTNERS AND THEIR AFFILIATES HAVE CONFLICTS OF INTEREST AND LIMITED FIDUCIARY DUTIES, WHICH MAY PERMIT THEM TO FAVOR THEIR OWN INTERESTS 24 Our general partners collectively own a 2prca general partner interest and a 1dtta06prca limited partner interest in us |
| Although our general partners, through the Partnership Policy Committee, have a fiduciary duty to manage us in a manner beneficial to us and our unitholders, the boards of directors of the general partners have a fiduciary duty to manage our general partners in a manner beneficial to their respective owners |
| Some members of our Partnership Policy Committee are also members of their respective general partnerapstas board of directors |
| Conflicts of interest may arise between our general partners and their affiliates and us and our unitholders |
| In resolving these conflicts, our general partners may favor their own interests and the interests of their respective affiliates over the interests of our unitholders |
| These conflicts include, among others, the following situations: - the Partnership Policy Committee and our general partners are allowed to take into account the interests of parties other than us, such as ONEOK and TransCanada, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders; - the respective affiliates of our general partners may engage in competition with us; - the Partnership Policy Committee and our general partners have limited their liability and reduced their fiduciary duties, and have also restricted the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty; - the Partnership Policy Committee determines the amount and timing of our cash reserves, asset purchases and sales, capital expenditures, borrowings and issuances of additional partnership securities, each of which can affect the amount of cash that is distributed to our unitholders; - the Partnership Policy Committee approves the amount and timing of any capital expenditures |
| The nature of the capital expenditure, whether it is a maintenance capital expenditure or a growth capital expenditure, can affect the amount of cash that is distributed to our unitholders; - the Partnership Policy Committee may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make incentive distributions; - the Partnership Policy Committee determines which costs incurred by them, our general partners and their respective affiliates are reimbursable by us; - our partnership agreement does not restrict the Partnership Policy Committee from causing us to pay them, our general partners or their respective affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf; - our general partners may exercise their limited right to call and purchase common units if they and their respective affiliates own more than 80prca of the units; and - the Partnership Policy Committee decides whether to retain separate counsel, accountants or others to perform services for us |
| OUR PARTNERSHIP AGREEMENT LIMITS OUR GENERAL PARTNERS &apos FIDUCIARY DUTIES TO OUR UNITHOLDERS AND RESTRICTS THE REMEDIES AVAILABLE TO UNITHOLDERS FOR ACTIONS TAKEN BY OUR GENERAL PARTNERS THAT MIGHT OTHERWISE CONSTITUTE BREACHES OF FIDUCIARY DUTY Our partnership agreement contains provisions that reduce the standards to which our general partners would otherwise be held by state fiduciary duty law |
| For example, our partnership agreement: - permits our general partners to make a number of decisions in their individual capacities, as opposed to in their capacity as our general partners |
| This entitles our general partners to consider only the interests and factors that they desire, and they have no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner |
| Examples include the exercise of their limited call right, their voting rights with respect to the units they own, their registration rights and their determination (through the Partnership Policy Committee) whether or not to consent to any merger or consolidation of the partnership; - provides that our general partners will not have any liability to us or our unitholders for decisions made in their capacity as a general partner so long as they acted in good faith, meaning they believed the decision was in the best interests of our partnership; - provides that our general partners are entitled to make other decisions in "e good faith "e if they reasonably believe that the decision is in our best interests; - provides generally that affiliated transactions and resolutions of conflicts of interest not approved by the Audit Committee and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be "e fair and reasonable "e to us, as determined by our general partners in good faith, and that, in determining whether a transaction or 25 resolution is "e fair and reasonable, "e our general partners may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and - provides that our general partners, their respective affiliates and their officers and directors will not be liable for monetary damages to us or our limited partners for any acts or omissions so long as such person acted in good faith and in a manner believed to be in, or not opposed to, the best interest of the partnership and, with respect to any criminal proceeding, had no reasonable cause to believe its conduct was unlawful |
| By purchasing a common unit, a common unitholder will be bound by the provisions in the partnership agreement, including the provisions discussed above |
| THE CONTROL OF OUR GENERAL PARTNERS MAY BE TRANSFERRED TO A THIRD PARTY WITHOUT UNITHOLDER CONSENT Our general partners may transfer their respective general partner interests to a third party without the consent of the unitholders |
| Furthermore, our partnership agreement does not restrict the ability of the members of our general partners from transferring their interests in our general partners to a third party |
| The new members or stockholders, as the case may be, of our general partners would then be in a position to replace the members of the Partnership Policy Committee with their own choices and to control the decisions taken by the Partnership Policy Committee |
| INCREASES IN INTEREST RATES MAY CAUSE THE MARKET PRICE OF OUR COMMON UNITS TO DECLINE An increase in interest rates may cause a corresponding decline in demand for equity investments in general, and in particular for yield-based equity investments such as our common units |
| Any such increase in interest rates or reduction in demand for our common units resulting from other more attractive investment opportunities may cause the trading price of our common units to decline |
| WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT UNITHOLDER APPROVAL, WHICH WOULD DILUTE UNITHOLDERS &apos OWNERSHIP INTERESTS Our general partners, without the approval of our unitholders, may cause us to issue an unlimited number of additional units, subject to the limitations imposed by the NYSE The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects: - our unitholders &apos proportionate ownership interest in us will decrease; - the amount of cash available to pay distributions on each unit may decrease; - the relative voting strength of each previously outstanding unit may be diminished; and - the market price of the common units may decline |
| OUR GENERAL PARTNERS AND THEIR AFFILIATES MAY COMPETE DIRECTLY WITH US AND HAVE NO OBLIGATION TO PRESENT BUSINESS OPPORTUNITIES TO US Our general partners and their affiliates are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with us |
| ONEOK may acquire, construct or dispose of additional midstream or other assets in the future without any obligation to offer us the opportunity to purchase or construct any of those assets |
| In addition, under our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, will not apply to ONEOK and its affiliates |
| As a result, neither ONEOK nor any of its affiliates has any obligation to present business opportunities to us |
| OUR GENERAL PARTNERS HAVE A LIMITED CALL RIGHT THAT MAY REQUIRE UNITHOLDERS TO SELL THEIR COMMON UNITS AT AN UNDESIRABLE TIME OR PRICE If at any time our general partners and their respective affiliates own more than 80prca of the common units, our general partners will have the right, but not the obligation, which they may assign to any of their respective affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price |
| As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return on their investment |
| Unitholders may also incur a tax liability upon the sale of their units |
| Our general partners are not obligated to obtain a fairness opinion regarding the value of the 26 common units to be repurchased by them upon exercise of the limited call right |
| There is no restriction in our partnership agreement that prevents our general partners from issuing additional common units and exercising their call right |
| If our general partners exercised their limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would not longer be subject to the reporting requirements of the Exchange Act |
| OUR PARTNERSHIP AGREEMENT RESTRICTS THE VOTING RIGHTS OF UNITHOLDERS OWNING 20prca OR MORE OF OUR COMMON UNITS Our partnership agreement restricts unitholders &apos voting rights by providing that any units held by a person that owns 20prca or more of any class of units then outstanding, other than our general partners and their respective affiliates, cannot vote on any matter |
| The partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders ability to influence the manner or direction of management |
| COST REIMBURSEMENTS DUE TO OUR GENERAL PARTNERS AND THEIR RESPECTIVE AFFILIATES WILL REDUCE CASH AVAILABLE TO PAY DISTRIBUTIONS TO UNITHOLDERS Prior to making any distribution on the common units, we will reimburse our general partners and their respective affiliates for all expenses they incur on our behalf, which will be determined by our general partners |
| These expenses will include all costs incurred by the general partners and their respective affiliates in managing and operating us, including costs for rendering corporate staff and support services to us |
| The reimbursement of expenses and payment of fees, if any, to our general partners and their respective affiliates, could adversely affect our ability to pay cash distributions to our unitholders |
| UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IF A COURT FINDS THAT UNITHOLDER ACTION CONSTITUTES CONTROL OF OUR BUSINESS UNITHOLDERS MAY ALSO HAVE LIABILITY TO REPAY DISTRIBUTIONS As a limited partner in a partnership organized under Delaware law, unitholders could be held liable for our obligations to the same extent as a general partner if they participate in the "e control "e of our business |
| Our general partners generally have unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to our general partners |
| In addition, 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 |
| The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business |
| TAX RISKS 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 IRS WERE TO TREAT US AS A CORPORATION OR IF WE WERE TO BECOME SUBJECT TO ENTITY-LEVEL TAXATION FOR STATE TAX PURPOSES, THEN OUR CASH AVAILABLE TO PAY DISTRIBUTIONS TO UNITHOLDERS WOULD BE SUBSTANTIALLY REDUCED The anticipated after-tax benefit of an investment in common units depends largely on our being treated as a partnership for federal income tax purposes |
| We have not requested a ruling from the IRS with respect our classification 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 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, if we should fail, we would be treated as if we were a newly formed corporation |
| 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 |
| In addition, the entire amount of cash received by each unitholder would generally be taxed again as a corporate distribution when received, and no income, gains, losses, deductions or credits would flow through to our unitholders |
| Because a tax would be imposed upon us as a corporation, the cash available for distribution to our unitholders would be substantially reduced |
| Thus, treatment of us as a corporation would result in a material 27 reduction in the anticipated cash flow and after-tax return to unitholders, likely causing a substantial reduction in the value of the common units |
| Current law may change, causing us to be treated as a corporation for federal income tax purposes or otherwise subjecting us to entity-level taxation |
| For example, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, use, franchise or other forms of taxation |
| If any state were to impose a tax upon us as an entity, the cash available to pay distributions would be reduced |
| Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, then the minimum quarterly distribution amount and the target distribution levels will be decreased to reflect that impact on us |
| A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY ADVERSELY IMPACT THE MARKET FOR OUR COMMON UNITS, AND THE COSTS OF ANY CONTEST WILL BE BORNE BY OUR UNITHOLDERS AND GENERAL PARTNERS We have not requested any ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes |
| The IRS may adopt positions that differ from the federal income tax positions we take |
| It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take |
| A court may not agree with some or all of the positions we take |
| Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade |
| In addition, the costs of any contest with the IRS will result in a reduction in cash available to pay distributions to our unitholders and our general partners and thus will be borne indirectly by our unitholders and our general partners |
| A UNITHOLDER MAY BE REQUIRED TO PAY TAXES ON A SHARE OF OUR INCOME EVEN IF THE UNITHOLDER DOES NOT RECEIVE ANY CASH DISTRIBUTIONS FROM US A unitholder will be required to pay federal income taxes and, in some cases, state and local income taxes on the unitholderapstas share of our taxable income, whether or not the unitholder receives cash distributions from us |
| A unitholder may not receive cash distributions from us equal to the unitholderapstas share of our taxable income or even equal to the actual tax liability that results from that share of our taxable income |
| THE TAXABLE GAIN OR LOSS ON THE DISPOSITION OF OUR COMMON UNITS COULD BE DIFFERENT THAN EXPECTED A unitholder will recognize gain or loss on the sale of common units equal to the difference between the amount realized and the unitholderapstas tax basis in those common units |
| A unitholderapstas amount realized will be measured by the sum of the cash or the fair market value of other property received plus the unitholderapstas share of our nonrecourse liabilities |
| Because the amount realized includes a unitholderapstas share of our nonrecourse liabilities, the gain recognized on the sale of common units could result in a tax liability in excess of any cash received from the sale |
| Prior distributions to a unitholder in excess of the total net taxable income allocated to a unitholder for a common unit, which decreased the tax basis in that common unit, will, in effect, become taxable income to a unitholder if the common unit is sold at a price greater than the tax basis in that common unit, even if the price received is less than the original cost |
| A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to a unitholder |
| TAX-EXEMPT ENTITIES AND FOREIGN PERSONS FACE UNIQUE TAX ISSUES FROM OWNING COMMON UNITS THAT MAY RESULT IN ADVERSE TAX CONSEQUENCES TO THEM Investment in common units by tax-exempt entities, such as individual retirement accounts, regulated investment companies known as mutual funds, and non-US persons raises issues unique to them |
| For example, virtually all of our income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to them |
| Distributions to non-US persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-US persons will be required to file US federal income tax returns and pay tax on their share of our taxable income |
| WE WILL TREAT EACH PURCHASER OF UNITS AS HAVING THE SAME TAX BENEFITS WITHOUT REGARD TO THE UNITS PURCHASED THE IRS MAY CHALLENGE THIS TREATMENT, WHICH COULD ADVERSELY AFFECT THE VALUE OF THE COMMON UNITS 28 Because we cannot match transferors and transferees of common units, we have adopted depreciation and amortization positions that may not conform to all aspects of existing Treasury regulations |
| A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to unitholders |
| It also could affect the timing of these tax benefits or the amount of gain from a unitholderapstas sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to a unitholderapstas tax returns |
| UNITHOLDERS WILL BE SUBJECT TO STATE AND LOCAL TAXES AND RETURN FILING REQUIREMENTS AS A RESULT OF INVESTING IN OUR COMMON UNITS In addition to federal income taxes, unitholders will be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance, or intangible taxes that are imposed by the various jurisdictions in which we do business or own property |
| Unitholders will be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions and may be subject to penalties for failure to comply with those requirements |
| We may own property or conduct business in other states or foreign countries in the future |
| It is each unitholderapstas responsibility to file all federal, state and local tax returns |
| Some of the states in which we do business or own property may require us, or we may elect to withhold a percentage of income from amounts to be distributed to a unitholder who is not a resident of the state |
| Withholding, the amount of which may be greater or less than a particular unitholderapstas income tax liability to the state, generally does not relieve the non-resident unitholder from the obligation to file an income tax return |
| Amounts withheld may be treated as if distributed to unitholders for purposes of determining the amounts distributed by us |
| Our counsel has not rendered an opinion on the state and local tax consequences of an investment in our units |
| THE SALE OR EXCHANGE OF 50prca OR MORE OF OUR CAPITAL AND PROFITS INTERESTS WILL RESULT IN THE TERMINATION OF OUR PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50prca or more of the total interests in our capital and profits within a 12-month period |
| Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income |