| PLAINS ALL AMERICAN PIPELINE LP Item 1A Risk Factors Risks Related to Our Business Our trading policies cannot eliminate all price risks |
| In addition, any non-compliance with our trading policies could result in significant financial losses |
| Generally, it is our policy that we establish a margin for crude oil purchased by selling crude oil for physical delivery to third party users, such as independent refiners or major oil companies, or by entering into a future delivery obligation under futures contracts on the NYMEX, IPE and over-the-counter |
| Through these transactions, we seek to maintain a position that is substantially balanced between purchases, on the one hand, and sales or future delivery obligations, on the other hand |
| Our policy is generally not to acquire and hold crude oil, futures contracts or derivative products for the purpose of speculating on price changes |
| These policies and practices cannot, however, eliminate all price risks |
| For example, any event that disrupts our anticipated physical supply of crude oil could expose us to risk of loss resulting from price changes |
| We are also exposed to basis risk when crude oil is purchased against one pricing index and sold against a different index |
| Moreover, we are exposed to some risks that are not hedged, including price risks on certain of our inventory, such as pipeline linefill, which must be maintained in order to transport crude oil on our pipelines |
| In addition, we engage in a controlled trading program for up to an aggregate of 500cmam000 barrels of crude oil |
| Although this activity is monitored independently by our risk management function, it exposes us to price risks within predefined limits and authorizations |
| In addition, our trading operations involve the risk of non-compliance with our trading policies |
| For example, we discovered in November 1999 that our trading policy was violated by one of our former employees, which resulted in aggregate losses of approximately dlra181dtta0 million |
| We have taken steps within our organization to enhance our processes and procedures to detect future unauthorized trading |
| We cannot assure you, however, that these steps will detect and prevent all violations of our trading policies and procedures, particularly if deception or other intentional misconduct is involved |
| The nature of our business and assets exposes us to significant compliance costs and liabilities |
| Our asset base has more than doubled within the last two years |
| We have experienced a corresponding increase in the relative number of releases of crude oil to the environment |
| Substantial expenditures may be required to maintain the integrity of aged and aging pipelines at acceptable levels |
| Our operations involving the storage, treatment, processing, and transportation of liquid hydrocarbons, including crude oil, are subject to stringent federal, state, and local laws and regulations governing the discharge of materials into the environment |
| Our segment operations are also subject to laws and regulations relating to protection of the environment, operational safety and related matters |
| Compliance with all of these laws and regulations increases our overall cost of doing business, including our capital costs to construct, maintain and upgrade equipment and facilities |
| Failure to comply with these laws and regulations may result in the assessment of administrative, civil, and criminal penalties, the imposition of investigatory and remedial liabilities, the issuance of injunctions that may restrict or prohibit our operations, or claims of damages to property or persons resulting from our operations |
| 35 ______________________________________________________________________ Today we own more than twice the miles of pipeline we owned two years ago |
| As we have expanded our pipeline assets, we have observed a corresponding increase in the number of releases of crude oil to the environment |
| These releases expose us to potentially substantial expense, including clean-up and remediation costs, fines and penalties, and third party claims for personal injury or property damage |
| We currently spend substantial amounts to comply with DOT-mandated pipeline integrity rules |
| The DOT is currently in the process of expanding the scope of its pipeline regulation to include the establishment of additional pipeline integrity management programs for certain gathering pipeline systems that are not currently subject to regulation |
| During 2006, we are expanding an internal review process started in 2004 in which we are reviewing various aspects of our pipeline and gathering systems that are not subject to the DOT pipeline integrity management rules |
| The purpose of this process is to review the surrounding environment, condition and operating history of these pipeline and gathering assets to determine if such assets warrant additional investment or replacement |
| Accordingly, we could be required (as a result of additional DOT regulation) or we may elect (as a result of our own internal initiatives) to spend substantial sums to ensure the integrity of and upgrade our pipeline systems to maintain environmental compliance, and in some cases, we may take pipelines out of service if we believe the cost of upgrades will exceed the value of the pipelines |
| We cannot provide any assurance as to the ultimate amount or timing of future pipeline integrity expenditures for environmental compliance |
| Loss of credit rating or the ability to receive open credit could negatively affect our ability to capitalize on a volatile market We believe that, because of our strategic asset base and complementary business model, we will continue to benefit from swings in market prices and shifts in market structure during periods of volatility in the crude oil market |
| Our ability to capture that benefit, however, is subject to numerous risks and uncertainties, including our maintaining an attractive credit rating and continuing to receive open credit from our suppliers and trade counter-parties |
| The level of our profitability is dependent upon an adequate supply of crude oil from fields located offshore and onshore California |
| Production from these offshore fields has experienced substantial production declines since 1995 |
| A significant portion of our segment profit is derived from pipeline transportation margins associated with the Santa Ynez and Point Arguello fields located offshore California |
| We expect that there will continue to be natural production declines from each of these fields as the underlying reservoirs are depleted |
| We estimate that a 5cmam000 barrel per day decline in volumes shipped from these fields would result in a decrease in annual pipeline segment profit of approximately dlra3dtta5 million |
| In addition, any significant production disruption from the Santa Ynez field due to production problems, transportation problems or other reasons could have a material adverse effect on our business |
| The profitability of our pipeline and gathering, marketing, terminalling and storage operations depends on the volume of crude oil shipped, purchased and gathered |
| Third party shippers generally do not have long-term contractual commitments to ship crude oil on our pipelines |
| A decision by a shipper to substantially reduce or cease to ship volumes of crude oil on our pipelines could cause a significant decline in our revenues |
| For example, we estimate that an average 20cmam000 barrel per day variance in the Basin Pipeline System within the current operating window, equivalent to an approximate 7prca volume variance on that system, would change annualized segment profit by approximately dlra1dtta4 million |
| In addition, we estimate that an average 10cmam000 barrel per day variance on 36 ______________________________________________________________________ the Capline Pipeline System, equivalent to an approximate 8prca volume variance on that system, would change annualized segment profit by approximately dlra1dtta3 million |
| To maintain the volumes of crude oil we purchase in connection with our gathering, marketing, terminalling and storage operations, we must continue to contract for new supplies of crude oil to offset volumes lost because of natural declines in crude oil production from depleting wells or volumes lost to competitors |
| Replacement of lost volumes of crude oil is particularly difficult in an environment where production is low and competition to gather available production is intense |
| Generally, because producers experience inconveniences in switching crude oil purchasers, such as delays in receipt of proceeds while awaiting the preparation of new division orders, producers typically do not change purchasers on the basis of minor variations in price |
| Thus, we may experience difficulty acquiring crude oil at the wellhead in areas where relationships already exist between producers and other gatherers and purchasers of crude oil |
| This impact assumes a reasonable margin throughout various market conditions |
| Actual margins vary based on the location of the crude oil, the strength or weakness of the market and the grade or quality of crude oil |
| The success of our business strategy to increase and optimize throughput on our pipeline and gathering assets is dependent upon our securing additional supplies of crude oil |
| Our operating results are dependent upon securing additional supplies of crude oil from increased production by oil companies and aggressive lease gathering efforts |
| The ability of producers to increase production is dependent on the prevailing market price of oil, the exploration and production budgets of the major and independent oil companies, the depletion rate of existing reservoirs, the success of new wells drilled, environmental concerns, regulatory initiatives and other matters beyond our control |
| There can be no assurance that production of crude oil will rise to sufficient levels to cause an increase in the throughput on our pipeline and gathering assets |
| Fluctuations in demand can negatively affect our operating results |
| Demand for crude oil is dependent upon the impact of future economic conditions, fuel conservation measures, alternative fuel requirements, governmental regulation or technological advances in fuel economy and energy generation devices, all of which could reduce demand |
| Demand also depends on the ability and willingness of shippers having access to our transportation assets to satisfy their demand by deliveries through those assets |
| Fluctuations in demand for crude oil, such as caused by refinery downtime or shutdown, can have a negative effect on our operating results |
| Specifically, reduced demand in an area serviced by our transmission systems will negatively affect the throughput on such systems |
| Although the negative impact may be mitigated or overcome by our ability to capture differentials created by demand fluctuations, this ability is dependent on location and grade of crude oil, and thus is unpredictable |
| If we do not make acquisitions on economically acceptable terms our future growth may be limited |
| Our ability to grow depends in part on our ability to make acquisitions that result in an increase in adjusted operating surplus per unit |
| If we are unable to make such accretive acquisitions either because we are (i) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them, (ii) unable to raise financing for such acquisitions on economically acceptable terms or (iii) outbid by competitors, our future growth will be limited |
| In particular, competition for midstream assets and businesses has intensified substantially and as a consequence such assets and businesses have become more 37 ______________________________________________________________________ costly |
| As a result, we may not be able to complete the number or size of acquisitions that we have targeted internally or to continue to grow as quickly as we have historically |
| Our acquisition strategy requires access to new capital |
| Tightened capital markets or other factors that increase our cost of capital could impair our ability to grow |
| We continuously consider and enter into discussions regarding potential acquisitions |
| These transactions can be effected quickly, may occur at any time and may be significant in size relative to our existing assets and operations |
| Any material acquisition will require access to capital |
| Any limitations on our access to capital or increase in the cost of that capital could significantly impair our ability to execute our acquisition strategy |
| Our ability to maintain our targeted credit profile, including maintaining our credit ratings, could affect our cost of capital as well as our ability to execute our acquisition strategy |
| Our acquisition strategy involves risks that may adversely affect our business |
| Any acquisition involves potential risks, including: · performance from the acquired assets and businesses that is below the forecasts we used in evaluating the acquisition; · a significant increase in our indebtedness and working capital requirements; · the inability to timely and effectively integrate the operations of recently acquired businesses or assets; · the incurrence of substantial unforeseen environmental and other liabilities arising out of the acquired businesses or assets, including liabilities arising from the operation of the acquired businesses or assets prior to our acquisition; · risks associated with operating in lines of business that are distinct and separate from our historical operations · customer or key employee loss from the acquired businesses; and · the diversion of management’s attention from other business concerns |
| Any of these factors could adversely affect our ability to achieve anticipated levels of cash flows from our acquisitions, realize other anticipated benefits and our ability to pay distributions or meet our debt service requirements |
| Our pipeline assets are subject to federal, state and provincial regulation |
| Our domestic interstate common carrier pipelines are subject to regulation by the FERC under the Interstate Commerce Act |
| The Interstate Commerce Act requires that tariff rates for petroleum pipelines be just and reasonable and non-discriminatory |
| We are also subject to the Pipeline Safety Regulations of the DOT Our intrastate pipeline transportation activities are subject to various state laws and regulations as well as orders of regulatory bodies |
| Such laws and regulations are subject to change and interpretation by the relevant governmental agency |
| Any such change or interpretation adverse to us could have a material adverse effect on us |
| Similarly, our Canadian pipeline assets are subject to regulation by the NEB and by provincial agencies |
| With respect to a pipeline over which it has jurisdiction, each of these Canadian agencies has the power to determine the rates we are allowed to charge for transportation on such pipeline |
| The extent to which regulatory agencies can override existing transportation contracts has not been fully decided |
| 38 ______________________________________________________________________ Rate regulation or a successful challenge to the rates we charge on our domestic interstate pipeline system may reduce the amount of cash we generate |
| The EPAct, among other things, deems “just and reasonable” within the meaning of the Interstate Commerce Act any oil pipeline rate in effect for the 365-day period ending on the date of the enactment of EPAct if the rate in effect was not subject to protest, investigation, or complaint during such 365-day period |
| (That is, the EPAct “grandfathers” any such rates |
| ) EPAct further protects any rate meeting this requirement from complaint unless the complainant can show that a substantial change occurred after the enactment of EPAct in the economic circumstances of the oil pipeline which were the basis for the rate or in the nature of the services provided which were a basis for the rate |
| This grandfathering protection does not apply, under certain specified circumstances, when the person filing the complaint was under a contractual prohibition against the filing of a complaint |
| For our domestic interstate common carrier pipelines subject to FERC regulation under the Interstate Commerce Act, 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 and for rates that remain grandfathered under EPAct, the FERC may order refunds of amounts collected under rates that were in excess of a just and reasonable level when taking into consideration the 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 potential for a challenge to the status of our grandfathered rates under EPAct (by showing a substantial change in circumstances) or a challenge to our indexed rates creates the risk that the FERC might find some of our 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 could 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 |
| We face competition in our pipeline and gathering, marketing, terminalling and storage activities |
| Our competitors include other crude oil pipelines, the major integrated oil companies, their marketing affiliates, and independent gatherers, brokers and marketers of widely varying sizes, financial resources and experience |
| Some of these competitors have capital resources many times greater than ours and control greater supplies of crude oil |
| We are exposed to the credit risk of our customers in the ordinary course of our gathering and marketing activities |
| There can be no assurance that we have adequately assessed the credit worthiness of our existing or future counterparties or that there will not be an unanticipated deterioration in their credit worthiness, which could have an adverse impact on us |
| In those cases in which we provide division order services for crude oil purchased at the wellhead, we may be responsible for distribution of proceeds to all parties |
| In other cases, we pay all of or a portion of the production proceeds to an operator who distributes these proceeds to the various interest owners |
| These arrangements expose us to operator credit risk, and there can be no assurance that we will not experience losses in dealings with other parties |
| 39 ______________________________________________________________________ Our pipeline systems are dependent upon their interconnections with other crude oil pipelines to reach end markets |
| In many cases, the crude oil carried on our pipeline system must be routed onto third party pipelines to reach the refinery or other end market |
| Reduced throughput on these interconnecting pipelines as a result of testing, line repair, reduced operating pressures or other causes could result in reduced throughput on our pipeline systems that would adversely affect our profitability |
| We may in the future encounter increased costs and lack of availability of insurance |
| Over the last several years, as the scale and scope of our business activities has expanded, the breadth and depth of available insurance markets has contracted |
| Some of this may be attributable to the events of September 11, 2001, which adversely impacted the availability and costs of certain types of coverage |
| We anticipate that the effects of hurricanes along the Gulf Coast during 2005 may also have an adverse effect on the availability and cost of coverage |
| We can give no assurance that we will be able to maintain adequate insurance in the future at rates we consider reasonable |
| The occurrence of a significant event not fully insured could materially and adversely affect our operations and financial condition |
| Marine transportation of crude oil has inherent operating risks |
| Our gathering and marketing operations include purchasing crude oil that is carried on third party tankers |
| Our water borne cargoes of crude oil are at risk of being damaged or lost because of events such as marine disaster, bad weather, mechanical failures, grounding or collision, fire, explosion, environmental accidents, piracy, terrorism and political instability |
| Such occurrences could result in death or injury to persons, loss of property or environmental damage, delays in the delivery of cargo, loss of revenues from or termination of charter contracts, governmental fines, penalties or restrictions on conducting business, higher insurance rates and damage to our reputation and customer relationships generally |
| While certain of these risks may be covered under our insurance program, any of these circumstances or events could increase our costs or lower our revenues, which could result in a reduction in the market price of our equity or debt securities |
| In instances in which cargoes are purchased FOB (title transfers when the oil is loaded onto a vessel chartered by the purchaser) the contract to purchase is typically made prior to the vessel being chartered |
| In such circumstances we take the risk of higher than anticipated charter costs |
| We are also exposed to increased transit time and unanticipated demurrage charges, which involve extra payment to the owner of a vessel for delays in offloading, circumstances that we may not control |
| Maritime claimants could arrest the vessels carrying our cargoes |
| Crew members, suppliers of goods and services to a vessel, other shippers of cargo and other parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages |
| In many jurisdictions, a maritime lienholder may enforce its lien by arresting a vessel through foreclosure proceedings |
| The arrest or attachment of a vessel carrying a cargo of our oil could substantially delay our shipment |
| In addition, in some jurisdictions, under the “sister ship” theory of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner |
| Claimants could try to assert “sister ship” liability against one vessel carrying our cargo for claims relating to a vessel with which we have no relation |
| 40 ______________________________________________________________________ The terms of our indebtedness may limit our ability to borrow additional funds or capitalize on business opportunities |
| As of December 31, 2005, our total outstanding long-term debt was approximately dlra951dtta7 million |
| Various limitations in our debt instruments may reduce our ability to incur additional debt, to engage in some transactions and to capitalize on business opportunities |
| Any subsequent refinancing of our current indebtedness or any new indebtedness could have similar or greater restrictions |
| Changes in currency exchange rates could adversely affect our operating results |
| Because we conduct operations in Canada, we are exposed to currency fluctuations and exchange rate risks that may adversely affect our results of operations |
| Risks Related to Our Investment in the Natural Gas Storage Business Our facilities are new and have limited operating history |
| Although we believe that our operating facilities are designed substantially to meet our contractual obligations with respect to injection and withdrawal volumes and specifications, the facilities are new and have a limited operating history |
| If we fail to receive or deliver natural gas at contracted rates, or cannot deliver natural gas consistent with contractual quality specifications, we could incur significant costs to maintain compliance with our contracts |
| We have no history operating natural gas storage facilities |
| Although many aspects of the natural gas storage industry are similar in many respects to our crude oil gathering, marketing, terminalling and storage operations, our current management does not have any experience in operating natural gas storage facilities |
| There are significant risks and costs inherent in our efforts to undertake entering into natural gas storage operations, including the risk that our new line of business may not be profitable and that we might not be able to operate the natural gas storage business or implement our operating policies and strategies successfully |
| The devotion of capital, management time and other resources to natural gas storage operations could adversely affect our existing business |
| Entering into the natural gas storage industry may require substantial changes, including acquisition costs, capital development expenditures, adding management and employees who possess the skills we believe we will need to operate a natural gas storage business, and realigning our current organization to reflect this new line of business |
| Entering into the natural gas storage industry will require an investment in personnel and assets and the assumption of risks that may be greater than we have previously assumed |
| Federal, state or local regulatory measures could adversely affect our business |
| Our natural gas storage operations are subject to federal, state and local regulation |
| Specifically, our natural gas storage facilities and related assets are or will be subject to regulation by the FERC or the Michigan Public Service Commission |
| Our facilities essentially have market-based rate authority from such agencies |
| Any loss of market-based rate authority could have an adverse impact on our revenues associated with providing storage services |
| In addition, failure to comply with applicable regulations under the Natural Gas Act, and certain other state laws could result in the imposition of administrative, civil and criminal remedies |
| Our gas storage business depends on third party pipelines to transport natural gas |
| We depend on third party pipelines to move natural gas for our customers to and from our facilities |
| Any interruption of service on the pipelines or lateral connections or adverse change in the terms and 41 ______________________________________________________________________ conditions of service could have a material adverse effect on our ability, and the ability of our customers, to transport natural gas to and from our facilities, and could have a corresponding material adverse effect on our storage revenues |
| In addition, the rates charged by the interconnected pipeline for transportation to and from our facilities could affect the utilization and value of our storage services |
| Significant changes in the rates charged by the pipeline or the rates charged by other pipelines with which the interconnected pipelines compete could also have a material adverse effect on our storage revenues |
| We encounter competition from a variety of sources |
| We compete with other storage providers, including local distribution companies (“LDCs”), utilities and affiliates of LDCs and utilities |
| Certain major pipeline companies have existing storage facilities connected to their systems that compete with certain of our facilities |
| Construction of new capacity could have an adverse impact on our competitive position |
| Expanding our business by constructing new storage facilities subjects us to construction risks; there is no guarantee that Pine Prairie will be developed in the expected time frame or at the expected cost or generate the expected returns |
| One of the ways we intend to grow our business is through the construction and development of new storage facilities or additions to our existing facilities |
| The construction of additional storage facilities or new pipeline interconnects involves numerous regulatory, environmental, political and legal uncertainties beyond our control, and requires the expenditure of significant amounts of capital |
| As we undertake these projects, they may be completed behind schedule or over the budgeted cost |
| Because of continuing increased demand for materials, equipment and services in the wake of Hurricanes Katrina and Rita, there could be shortages and cost increases associated with construction projects |
| Moreover, our revenues will not increase immediately upon the expenditure of funds on a particular project |
| We may also construct facilities in anticipation of market growth that may never materialize |
| For example, Pine Prairie is currently under development and there is no guarantee that it will be fully developed in the expected time frame or at the expected cost or generate the expected returns |
| We may not be able to retain existing customers or acquire new customers, which would reduce our revenues and limit our future profitability |
| The renewal or replacement of existing contracts with our customers at rates sufficient to maintain or exceed current or anticipated revenues and cash flows depends on a number of factors beyond our control, including competition from other storage providers and the supply of and demand for natural gas in the markets we serve |
| The inability to renew or replace our current contracts as they expire and to respond appropriately to changing market conditions could have a negative effect on our profitability |
| Third parties’ obligations under storage agreements may be suspended in some circumstances |
| Some third parties’ obligations under their agreements with us may be permanently or temporarily reduced upon the occurrence of certain events, some of which are beyond our control, including force majeure |
| Force majeure events include (but are not limited to) revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions and mechanical or physical failures of our equipment or facilities or the equipment or facilities of third parties |
| The nature of our investment in natural gas storage assets and business could expose us to significant compliance costs and liabilities |
| Our operations involving the storage of natural gas are subject to stringent federal, state and local laws and regulations governing the discharge of materials into the environment |
| Our natural gas storage 42 ______________________________________________________________________ operations are also subject to laws and regulations otherwise relating to protection of the environment, operational safety and related matters |
| Compliance with all of these laws and regulations increases our overall cost of business, including our capital costs to construct, maintain and upgrade equipment and facilities |
| Failure to comply with these laws and regulations may result in the assessment of administrative, civil, and criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of injunctions that may restrict or prohibit our operations or even claims of damages to property or persons resulting from our operations |
| The laws and regulations applicable to our operations are subject to change, and we cannot provide any assurance that compliance with current and future laws and regulations will not have a material effect on our results of operations or earnings |
| A discharge of hazardous materials into the environment could, to the extent such event is not insured, subject us to substantial expense, including both the cost to comply with applicable laws and regulations and liability to private parties for personal injury or property damage |
| Joint venture structures can create operational difficulties |
| Our natural gas storage operations are conducted through PAA/Vulcan, a joint venture between us and a subsidiary of Vulcan Capital, with each of us owning 50prca |
| The board of directors of PAA/Vulcan, which includes an equal number of representatives from us and Vulcan Gas Storage, will be responsible for providing strategic direction and policy making, and we are responsible for the day-to-day operations |
| As with any such joint venture arrangements, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major matters, potentially adversely affecting the business and operations of the joint ventures and in turn our business and operations |
| Risks Inherent in an Investment in Plains All American Pipeline, LP Cost reimbursements due to our general partner may be substantial and will reduce our cash available for distribution to unitholders |
| Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates, including officers and directors of the general partner, for all expenses incurred on our behalf |
| The reimbursement of expenses and the payment of fees could adversely affect our ability to make distributions |
| The general partner has sole discretion to determine the amount of these expenses |
| In addition, our general partner and its affiliates may provide us services for which we will be charged reasonable fees as determined by the general partner |
| Cash distributions are not guaranteed and may fluctuate with our performance and the establishment of financial reserves |
| Because distributions on the common units are dependent on the amount of cash we generate, distributions may fluctuate based on our performance |
| The actual amount of cash that is available to be distributed each quarter will depend on numerous factors, some of which are beyond our control and the control of the general partner |
| Cash distributions are dependent 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 |
| Therefore, cash distributions might be made during periods when we record losses and might not be made during periods when we record profits |
| Unitholders may not be able to remove our general partner even if they wish to do so |
| Our general partner manages and operates Plains All American Pipeline, LP Unlike the holders of common stock in a corporation, unitholders will have only limited voting rights on matters affecting our business |
| Unitholders have no right to elect the general partner or the directors of the general partner on an annual or other continuing basis |
| 43 ______________________________________________________________________ In addition, the following provisions of our partnership agreement may discourage a person or group from attempting to remove our general partner or otherwise change our management: · generally, if a person acquires 20prca or more of any class of units then outstanding other than from our general partner or its affiliates, the units owned by such person cannot be voted on any matter; and · limitations upon the ability of unitholders to call meetings or to acquire information about our operations, as well as other limitations upon the unitholders’ ability to influence the manner or direction of management |
| As a result of these provisions, the price at which the common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price |
| We may issue additional common units without unitholder approval, which would dilute a unitholder’s existing ownership interests |
| Our general partner may cause us to issue an unlimited number of common units, without unitholder approval |
| We may also issue at any time an unlimited number of equity securities ranking junior or senior to the common units without unitholder approval |
| The issuance of additional common units or other equity securities of equal or senior rank will have the following effects: · an existing unitholder’s proportionate ownership interest in Plains All American Pipeline, LP will decrease; · the amount of cash available for distribution 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 partner has a limited call right that may require unitholders to sell their units at an undesirable time or price |
| If at any time our general partner and its affiliates own 80prca or more of the common units, the general partner will have the right, but not the obligation, which it may assign to any of its affiliates, to acquire all, but not less than all, of the remaining common units held by unaffiliated persons at a price generally equal to the then current market price of the common units |
| As a result, unitholders may be required to sell their common units at a time when they may not desire to sell them or at a price that is less than the price they would like to receive |
| They may also incur a tax liability upon a sale of their common units |
| Unitholders may not have limited liability if a court finds that unitholder actions constitute control of our business |
| Under Delaware law, a unitholder could be held liable for our obligations to the same extent as a general partner if a court determined that the right of unitholders to remove our general partner or to take other action under our partnership agreement constituted participation in the “control” of our business |
| Our general partner generally has unlimited liability for our obligations, such as our debts and environmental liabilities, except for those contractual obligations that are expressly made without recourse to our general partner |
| In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that under some circumstances, a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution |
| 44 ______________________________________________________________________ Conflicts of interest could arise among our general partner and us or the unitholders |
| These conflicts may include the following: · we do not have any employees and we rely solely on employees of the general partner or, in the case of Plains Marketing Canada, employees of PMC (Nova Scotia) Company; · under our partnership agreement, we reimburse the general partner for the costs of managing and for operating the partnership; · the amount of cash expenditures, borrowings and reserves in any quarter may affect available cash to pay quarterly distributions to unitholders; · the general partner tries to avoid being liable for partnership obligations |
| The general partner is permitted to protect its assets in this manner by our partnership agreement |
| Under our partnership agreement the general partner would not breach its fiduciary duty by avoiding liability for partnership obligations even if we can obtain more favorable terms without limiting the general partner’s liability; under our partnership agreement, the general partner may pay its affiliates for any services rendered on terms fair and reasonable to us |
| The general partner may also enter into additional contracts with any of its affiliates on behalf of us |
| Agreements or contracts between us and our general partner (and its affiliates) are not necessarily the result of arms length negotiations; and · the general partner would not breach our partnership agreement by exercising its call rights to purchase limited partnership interests or by assigning its call rights to one of its affiliates or to us |
| Risks Related to an Investment in Our Debt Securities The right to receive payments on our outstanding debt securities and subsidiary guarantees is unsecured and will be effectively subordinated to our existing and future secured indebtedness as well as to any existing and future indebtedness of our subsidiaries that do not guarantee the notes |
| Our debt securities are effectively subordinated to claims of our secured creditors and the guarantees are effectively subordinated to the claims of our secured creditors as well as the secured creditors of our subsidiary guarantors |
| Although substantially all of our subsidiaries, other than PAA Finance Corp, the co-issuer of our debt securities, have guaranteed such debt securities, the guarantees are subject to release under certain circumstances, and we may have subsidiaries that are not guarantors |
| In that case, the debt securities would be effectively subordinated to the claims of all creditors, including trade creditors and tort claimants, of our subsidiaries that are not guarantors |
| In the event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up of the business of a subsidiary that is not a guarantor, creditors of that subsidiary would generally have the right to be paid in full before any distribution is made to us or the holders of the debt securities |
| Our leverage may limit our ability to borrow additional funds, comply with the terms of our indebtedness or capitalize on business opportunities |
| Our leverage is significant in relation to our partners’ capital |
| At December 31, 2005, our total outstanding long-term debt and short-term debt under our revolving credit facility were approximately dlra1dtta1 billion |
| We will be prohibited from making cash distributions during an event of default under any of our indebtedness |
| Various limitations in our credit facilities may reduce our ability to incur additional debt, to engage in some transactions and to capitalize on business opportunities |
| Our leverage could have important consequences to investors in our debt securities |
| We will require substantial cash flow to meet our principal and interest obligations with respect to the notes and our other consolidated indebtedness |
| Our ability to make scheduled payments, to refinance our obligations with 45 ______________________________________________________________________ respect to our indebtedness or our ability to obtain additional financing in the future will depend on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors |
| We believe that we will have sufficient cash flow from operations and available borrowings under our bank credit facility to service our indebtedness, although the principal amount of the notes will likely need to be refinanced at maturity in whole or in part |
| However, a significant downturn in the hydrocarbon industry or other development adversely affecting our cash flow could materially impair our ability to service our indebtedness |
| If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to refinance all or portion of our debt or sell assets |
| We can give no assurance that we would be able to refinance our existing indebtedness or sell assets on terms that are commercially reasonable |
| In addition, if one or more rating agencies were to lower our debt ratings, we could be required by some of our counterparties to post additional collateral, which would reduce our available liquidity and cash flow |
| Our leverage may adversely affect our ability to fund future working capital, capital expenditures and other general partnership requirements, future acquisition, construction or development activities, or to otherwise fully realize the value of our assets and opportunities because of the need to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness or to comply with any restrictive terms of our indebtedness |
| Our leverage may also make our results of operations more susceptible to adverse economic and industry conditions by limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate and may place us at a competitive disadvantage as compared to our competitors that have less debt |
| A court may use fraudulent conveyance considerations to avoid or subordinate the subsidiary guarantees |
| Various applicable fraudulent conveyance laws have been enacted for the protection of creditors |
| A court may use fraudulent conveyance laws to subordinate or avoid the subsidiary guarantees of our debt securities issued by any of our subsidiary guarantors |
| It is also possible that under certain circumstances a court could hold that the direct obligations of a subsidiary guaranteeing our debt securities could be superior to the obligations under that guarantee |
| A court could avoid or subordinate the guarantee of our debt securities by any of our subsidiaries in favor of that subsidiary’s other debts or liabilities to the extent that the court determined either of the following were true at the time the subsidiary issued the guarantee: · that subsidiary incurred the guarantee with the intent to hinder, delay or defraud any of its present or future creditors or that subsidiary contemplated insolvency with a design to favor one or more creditors to the total or partial exclusion of others; or · that subsidiary did not receive fair consideration or reasonable equivalent value for issuing the guarantee and, at the time it issued the guarantee, that subsidiary: — was insolvent or rendered insolvent by reason of the issuance of the guarantee; — was engaged or about to engage in a business or transaction for which the remaining assets of that subsidiary constituted unreasonably small capital; or — intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured |
| The measure of insolvency for purposes of the foregoing will vary depending upon the law of the relevant jurisdiction |
| Generally, however, an entity would be considered insolvent for purposes of the foregoing if the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets at a fair valuation, or if the present fair saleable value of its assets were less than the amount 46 ______________________________________________________________________ that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and matured |
| Among other things, a legal challenge of a subsidiary’s guarantee of our debt securities on fraudulent conveyance grounds may focus on the benefits, if any, realized by that subsidiary as a result of our issuance of our debt securities |
| To the extent a subsidiary’s guarantee of our debt securities is avoided as a result of fraudulent conveyance or held unenforceable for any other reason, the holders of our debt securities would cease to have any claim in respect of that guarantee |
| The ability to transfer our debt securities may be limited by the absence of a trading market |
| We do not currently intend to apply for listing of our debt securities on any securities exchange or stock market |
| The liquidity of any market for our debt securities will depend on the number of holders of those debt securities, the interest of securities dealers in making a market in those debt securities and other factors |
| Accordingly, we can give no assurance as to the development or liquidity of any market for the debt securities |
| We have a holding company structure in which our subsidiaries conduct our operations and own our operating assets |
| We are a holding company, and our subsidiaries conduct all of our operations and own all of our operating assets |
| We have no significant assets other than the ownership interests in our subsidiaries |
| As a result, our ability to make required payments on our debt securities depends on the performance of our subsidiaries and their ability to distribute funds to us |
| The ability of our subsidiaries to make distributions to us may be restricted by, among other things, credit facilities and applicable state partnership laws and other laws and regulations |
| Pursuant to the credit facilities, we may be required to establish cash reserves for the future payment of principal and interest on the amounts outstanding under our credit facilities |
| If we are unable to obtain the funds necessary to pay the principal amount at maturity of the debt securities, or to repurchase the debt securities upon the occurrence of a change of control, we may be required to adopt one or more alternatives, such as a refinancing of the debt securities |
| We cannot assure you that we would be able to refinance the debt securities |
| We do not have the same flexibility as other types of organizations to accumulate cash, which may limit cash available to service our debt securities or to repay them at maturity |
| Unlike a corporation, our partnership agreement requires us to distribute, on a quarterly basis, 100prca of our available cash to our unitholders of record and our general partner |
| Available cash is generally all of our cash receipts adjusted for cash distributions and net changes to reserves |
| Our general partner will determine the amount and timing of such distributions and has broad discretion to establish and make additions to our reserves or the reserves of our operating partnerships in amounts the general partner determines in its reasonable discretion to be necessary or appropriate: · to provide for the proper conduct of our business and the businesses of our operating partnerships (including reserves for future capital expenditures and for our anticipated future credit needs); · to provide funds for distributions to our unitholders and the general partner for any one or more of the next four calendar quarters; or · to comply with applicable law or any of our loan or other agreements |
| Although our payment obligations to our unitholders are subordinate to our payment obligations to debtholders, the value of our units will decrease in direct correlation with decreases in the amount we distribute per unit |
| Accordingly, if we experience a liquidity problem in the future, we may not be able to issue equity to recapitalize |
| 47 ______________________________________________________________________ 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 individual states |
| If the IRS were to treat us as a corporation or if 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 the 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 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 to them as corporate distributions, and no income, gains, losses, deductions or credits would flow through to them |
| Because a tax would be imposed upon us as a corporation, the cash available for distribution to our unitholders would be substantially reduced |
| Treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of the common units |
| Moreover, treatment of us as a corporation could materially and adversely affect our ability to make cash distributions to our unitholders or to make payments on our debt securities |
| 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 or other forms of taxation |
| If any state were to impose a tax upon us as an entity, the cash available for distribution to our unitholders 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 and the target distribution levels will be adjusted to reflect the impact of that law on us |
| If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution or debt service |
| We have not requested a ruling from the IRS with respect to any matter affecting us |
| The IRS may adopt positions that differ from the conclusions of our counsel or from the positions we take |
| It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take |
| A court may not concur with our counsel’s conclusions or the positions we take |
| Any contest with the IRS may materially and adversely impact the market for common units and the price at which they trade |
| In addition, the costs of any contest with the IRS, principally legal, accounting and related fees, will be borne by us and directly or indirectly by the unitholders and the general partner because the costs will reduce our cash available for distribution or debt service |
| Our unitholders may be required to pay taxes even if they do not receive any cash distributions from us |
| Because our unitholders will be treated as partners to whom we will allocate taxable income which could be different in amount than the cash we distribute, they will be required to pay any federal income taxes and, in some cases, state and local income taxes on their share of our taxable income even if they do not receive any cash distributions from us |
| Unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from their share of our taxable income |
| 48 ______________________________________________________________________ Tax gain or loss on disposition of common units could be different than expected |
| If our unitholders sell their common units, they will recognize gain or loss equal to the difference between the amount realized and their tax basis in those common units |
| Prior distributions in excess of the total net taxable income allocated to a unitholder for a common unit, which decreased the unitholder’s tax basis in that common unit, will, in effect, become taxable income to the unitholder if the common unit is sold at a price greater than the unitholder’s tax basis in that common unit, even if the price the unitholder receives is less than the unitholder’s original cost |
| A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to the unitholder |
| Should the IRS successfully contest some positions we take, the unitholder could recognize more gain on the sale of units than would be the case under those positions, without the benefit of decreased income in prior years |
| Also, if a unitholder sells units, the unitholder may incur a tax liability in excess of the amount of cash received from the sale |
| Tax-exempt entities and foreign persons face unique tax issues from owning our common units that may result in adverse tax consequences to them |
| Investment in common units by tax-exempt entities, such as individual retirement accounts (IRAs), and non-US persons raises issues unique to them |
| For example, virtually all of our income allocated to organizations that are 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 United States federal tax returns and pay tax on their share of our taxable income |
| We treat each purchaser of common units as having the same tax benefits without regard to the actual units purchased |
| The IRS may challenge this treatment, which could adversely affect the value of the units |
| Because we cannot match transferors and transferees of common units and because of other reasons, we have adopted depreciation and amortization positions that do not conform with all aspects of the Treasury Regulations |
| A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders |
| It also could affect the timing of these tax benefits or the amount of gain from a unitholder’s sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to a unitholder’s tax return |
| Our unitholders will likely be subject to foreign, state and local taxes and return filing requirements in jurisdictions where they do not live as a result of an investment in our units |
| In addition to federal income taxes, our unitholders will likely be subject to other taxes, including foreign taxes, state and local 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 and in which they do not reside |
| We own property and conduct business in Canada and in most states in the United States |
| Unitholders may be required to file Canadian federal income tax returns and to pay Canadian federal and provincial income taxes and to file state and local income tax returns and pay state and local income taxes in many or all of the jurisdictions in which we do business or own property |
| Further, unitholders may be subject to penalties for failure to comply with those requirements |
| It is our unitholders’ responsibility to file all United States federal, state, local and foreign tax returns |
| Our counsel has not rendered an opinion on the foreign, state or local tax consequences of an investment in the common units |