We will amend and complete the information in this preliminary prospectus
supplement. This preliminary prospectus supplement and the prospectus are part
of an effective registration statement filed with the Securities and Exchange
Commission. This preliminary prospectus supplement and the prospectus are not
offers to sell nor solicitations of offers to buy these securities in any
jurisdiction where such offers or sale are not permitted.
Subject to Completion, dated July 12, 2004
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 5, 2004)
[GRAPHIC OMITTED]
ATLAS PIPELINE PARTNERS, L.P.
2,100,000 Common Units
Representing Limited Partner Interests
We are offering to sell 2,100,000 of our common units representing limited
partner interests. Our common units trade on the New York Stock Exchange under
the symbol "APL." The last reported sales price of our common units on the New
York Stock Exchange on July 8, 2004 was $37.05 per common unit.
Investing in our common units involves risks. See "Risk Factors" beginning on
page S-9 of this prospectus supplement and on page 12 of the accompanying
prospectus.
Per Common Unit Total
--------------- ---------
Public offering price ........................... $ $
Underwriting discount ........................... $ $
Proceeds to us (before expenses) ................ $ $
We have granted the underwriters a 30-day option to purchase up to an
additional 315,000 common units on the same terms and conditions as set forth
above to cover over-allotments of common units, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the common
units on or about July , 2004.
LEHMAN BROTHERS
A.G. EDWARDS
FRIEDMAN BILLINGS RAMSEY
KEYBANC CAPITAL MARKETS
SANDERS MORRIS HARRIS
July , 2004
This document is in two parts. The first part is this prospectus supplement,
which describes our business and the terms of this offering of common units.
The second part is the accompanying prospectus, which gives more general
information, some of which may not apply to this offering of common units. If
information varies between this prospectus supplement and the accompanying
prospectus, you should rely on the information in this prospectus supplement.
You should rely only on the information contained in or incorporated by
reference into this prospectus supplement or the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not making an offer of these securities in any state where the offer
is not permitted. You should not assume that the information contained in this
prospectus supplement or the accompanying prospectus is accurate as of any
date other than the dates shown in these documents or that any information we
have incorporated by reference is accurate as of any date other than the date
of the document incorporated by reference. Our business, financial condition,
results of operations and prospects may have changed since those dates.
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY ................................................................. S-1
RISK FACTORS ............................................................ S-9
USE OF PROCEEDS ......................................................... S-17
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS ........................... S-18
CAPITALIZATION .......................................................... S-19
OUR SELECTED HISTORICAL FINANCIAL DATA .................................. S-20
SPECTRUM'S SELECTED HISTORICAL FINANCIAL DATA ........................... S-22
PRO FORMA FINANCIAL DATA ................................................ S-24
BUSINESS ................................................................ S-29
MANAGEMENT .............................................................. S-41
TAX CONSIDERATIONS ...................................................... S-44
UNDERWRITING ............................................................ S-59
LEGAL MATTERS ........................................................... S-62
EXPERTS ................................................................. S-62
WHERE YOU CAN FIND MORE INFORMATION ..................................... S-62
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ......................... S-62
Prospectus
PROSPECTUS SUMMARY ....................................................... 2
RISK FACTORS ............................................................. 12
USE OF PROCEEDS .......................................................... 15
RATIO OF EARNINGS TO FIXED CHARGES ....................................... 15
PRO FORMA FINANCIAL DATA ................................................. 15
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES ..................... 19
GENERAL DESCRIPTION OF SECURITIES THAT WE MAY SELL ....................... 23
DESCRIPTION OF COMMON UNITS .............................................. 23
DESCRIPTION OF SUBORDINATED UNITS ........................................ 23
DESCRIPTION OF DEBT SECURITIES ........................................... 23
DESCRIPTION OF WARRANTS .................................................. 33
OUR PARTNERSHIP AGREEMENT ................................................ 34
EXPERTS .................................................................. 51
LEGAL MATTERS ............................................................ 51
WHERE YOU CAN FIND MORE INFORMATION ...................................... 51
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE .......................... 51
PLAN OF DISTRIBUTION ..................................................... 52
ALASKA PIPELINE COMPANY CONSOLIDATED FINANCIAL STATEMENTS ................ F-1
i
SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement and in the accompanying prospectus. You should read the entire
prospectus supplement, the accompanying prospectus, the documents incorporated
by reference and the other documents to which we refer for a more complete
understanding of this offering. You should read "Risk Factors" beginning on
page S-9 of this prospectus supplement and on page 12 of the accompanying
prospectus for more information about important factors that you should
consider before buying common units in this offering. Unless otherwise
indicated, the information presented in this prospectus supplement assumes
that the underwriters do not exercise their over-allotment option. Throughout
this prospectus supplement and the accompanying prospectus, we refer to Atlas
Pipeline Partners, L.P. as "we," "us," "our" or "Atlas Pipeline."
Atlas Pipeline
We own and operate natural gas pipeline gathering systems through our
operating partnership and its operating subsidiaries. Our pipeline systems
currently consist of approximately 1,380 miles of intrastate gathering systems
located in the Appalachian Basin in eastern Ohio, western New York and western
Pennsylvania. We have grown our gathering systems both through extensions to
connect new natural gas supplies and through acquisitions.
Recent Developments
Pending Acquisition of Spectrum Field Services, Inc. In June 2004, we
agreed to acquire Spectrum Field Services, Inc., which we refer to as
Spectrum, for approximately $140 million, including the payment of anticipated
taxes due as a result of the transaction, and subject to adjustment based on
the amount of working capital Spectrum has at closing. We expect to complete
the acquisition on July 16, 2004, subject to receipt of approvals for
necessary permits and satisfaction of customary closing conditions. This
acquisition will significantly increase our size as well as diversify the
natural gas supply basins in which we operate and the natural gas midstream
services we provide to our customers. We expect the Spectrum acquisition to be
accretive to our cash distributions per common unit.
We intend to finance the Spectrum acquisition, including approximately $7
million of transaction costs, as follows:
o We will borrow $100 million under a new $135 million senior secured
credit facility, which will close at the same time as the Spectrum
acquisition.
o We will use the $25 million of net proceeds from our April 2004 common
unit offering.
o We will use the $22 million we receive from the sale to Resource
America, Inc. and Atlas America, Inc. of preferred units of our
operating subsidiary, Atlas Pipeline Operating Partnership, L.P.
We intend to use the net proceeds of this offering to repay a portion of the
borrowings under our new credit facility and to repurchase the preferred units
from Resource America and Atlas America. The closing of this offering is
contingent on our completion of the Spectrum acquisition.
Spectrum is a privately owned natural gas gathering and processing company
headquartered in Tulsa, Oklahoma. Spectrum's business includes gathering
natural gas from oil and gas wells and processing this raw natural gas into
merchantable natural gas, or residue gas, by extracting natural gas liquids,
or NGLs, and removing impurities. Spectrum's principal assets consist of a gas
processing plant in Velma, Oklahoma and approximately 1,100 miles of active
and 760 miles of inactive natural gas gathering pipelines in south central
Oklahoma and north Texas. During 2003, Spectrum processed an average of 47
million cubic feet, or mmcf, per day of natural gas and produced an average of
5,100
S-1
barrels, or bbls, per day of NGLs. During the three months ended March 31,
2001, Spectrum processed an average of 48 mmcf per day of natural gas and
produced an average of 5,400 bbls per day of NGLs. The majority of Spectrum's
natural gas supply is from relatively long-lived, mid-continent casinghead gas
production.
Spectrum has approximately 600 active purchase and gathering contracts. Of
these, approximately 80% (by volume) are percentage of proceeds, or POP,
contracts and the remaining 20% are fixed-fee contracts. Under its POP
purchasing arrangements, Spectrum purchases natural gas at the wellhead,
processes the natural gas by extracting NGLs and removing impurities and sells
the residue gas and NGLs at market-based prices, remitting to producers a
contractually-determined percentage of the sale proceeds. Unlike "keep whole"
contracts, which require the processor to bear the economic risk (called the
processing margin risk) that the aggregate proceeds from the sale of the
processed natural gas and NGLs will be less than the amount that the processor
paid for the unprocessed natural gas, POP contracts protect the processor
against processing margin risk. Spectrum currently retains an average of
approximately 26% of the NGL revenue and an average of approximately 11% of
the residue gas revenue.
Transfer to the New York Stock Exchange. On May 14, 2004, our common units
began trading on the New York Stock Exchange. Our trading symbol, "APL,"
remains the same as it was previously when we traded on the American Stock
Exchange.
Termination of Alaska Pipeline Company Acquisition. In September 2003, we
entered into an agreement with SEMCO Energy, Inc. to purchase all of the stock
of Alaska Pipeline Company. In order to complete the acquisition, we needed
the approval of the Regulatory Commission of Alaska. The Regulatory Commission
initially approved the transaction, but on June 4, 2004 it vacated its order
of approval based upon a motion for clarification or reconsideration filed by
SEMCO. On July 1, 2004, SEMCO sent us a notice purporting to terminate the
transaction. While the acquisition agreement was terminable by either of us or
SEMCO beginning on June 16, 2004, we believe SEMCO caused the delay in closing
the transaction and breached its obligations under the acquisition agreement.
We intend to vigorously pursue our remedies under the acquisition agreement.
Common Unit Offering. On April 8, 2004, we completed an offering of 750,000
common units at $36.00 per common unit. We received net proceeds, after
deducting underwriting discounts and commissions, of $25.4 million. We
originally intended to use these proceeds to acquire Alaska Pipeline. However,
because we will not complete the Alaska Pipeline acquisition, we will apply
these proceeds to the acquisition of Spectrum.
Our Appalachian Basin Operations
Our Appalachian Basin gathering systems serve approximately 4,600 wells with
an average daily throughput of 52.5 mmcf of natural gas for the year ended
December 31, 2003 and 51.4 mmcf of natural gas for the three months ended
March 31, 2004. Our Appalachian Basin gathering systems provide a means
through which well owners and operators can transport the natural gas produced
by their wells to public utility pipelines for delivery to customers. To a
lesser extent, these gathering systems transport natural gas directly to
customers. Our Appalachian Basin gathering systems currently connect with
public utility pipelines operated by Peoples Natural Gas Company, National
Fuel Gas Supply, Tennessee Gas Pipeline Company, National Fuel Gas
Distribution Company, East Ohio Gas Company, Columbia of Ohio, Consolidated
Natural Gas Co., Texas Eastern Pipeline, Columbia Gas Transmission Corp. and
Equitable Utilities. We do not engage in storage or gas marketing programs in
our Appalachian Basin operations, nor do our Appalachian Basin operations
currently engage in the purchase and resale of natural gas for our account.
S-2
Our Relationship with Atlas America
Atlas America, Inc. (NASDAQ: ATLS) currently owns a 32% limited partner
interest and a 2% general partner interest in us through its ownership of our
general partner, Atlas Pipeline Partners GP, LLC. Atlas America and its
affiliates sponsor limited and general partnerships to raise funds from
investors to develop and produce natural gas and, to a lesser extent, oil from
locations in eastern Ohio, western New York and western Pennsylvania. Our
gathering systems are connected to approximately 4,200 wells developed and
operated by Atlas America. Through agreements between us and Atlas America,
substantially all of the natural gas we gather is produced from wells operated
by Atlas America.
Omnibus Agreement. We are party to an omnibus agreement with Atlas America
that is intended to maximize the use and expansion of our gathering systems
and the amount of natural gas they transport. Among other things, the omnibus
agreement requires Atlas America to install required flow lines and connect
wells it operates that are located within 2,500 feet of one of our gathering
systems. We are required to extend our systems up to 1,000 feet, at our
expense, as necessary to serve any well operated by Atlas America that is
located between 2,500 and 3,500 feet from one of our gathering systems. In
addition, we have the right, but not the obligation, to extend our systems, at
our expense, to serve any well operated by Atlas America located over 3,500
feet from one of our gathering systems. Atlas America drilled and connected
270 wells to our gathering systems during the year ended December 31, 2003,
195 wells during the year ended December 31, 2002 and 196 wells during the
year ended December 31, 2001. Atlas America intends to drill over 600 wells
during 2004, approximately 450 of which will be connected to our gathering
systems. During the three months ended March 31, 2004, Atlas America connected
77 wells to our gathering systems.
Natural Gas Gathering Agreements. We are also party to natural gas
gathering agreements with Atlas America under which it pays us gathering fees
generally equal to a percentage, generally 16%, of the gross or weighted
average sales price of the natural gas we transport, subject, in most cases,
to minimum fees of $.35 or $.40 per thousand cubic feet, or mcf. The gross
revenues from our Appalachian Basin business, therefore, depend in large part
on the prices at which the natural gas we transport is sold. We received
gathering fees averaging $.82 per mcf during the year ended December 31, 2003,
$.58 per mcf during the year ended December 31, 2002 and $.76 per mcf during
the year ended December 31, 2001. Our gathering fees during the three months
ended March 31, 2004 averaged $.90 per mcf.
Relationship with Resource America. Before the recent completion of its
initial public offering of common stock, Atlas America was an indirect,
wholly-owned subsidiary of Resource America, Inc. (NASDAQ: REXI). Resource
America currently owns approximately 80% of Atlas America's outstanding common
stock and has stated that, subject to the fulfillment of specified conditions
and, in particular, receipt of a favorable ruling from the Internal Revenue
Services as to tax consequences, it intends to distribute its 80% common stock
interest in Atlas America to Resource America stockholders. Resource America
is an asset management company that uses industry-specific expertise to
generate and administer investment opportunities for its own account and for
outside investors in the energy, financial services, real estate and equipment
leasing industries.
S-3
Objectives and Strategy
Our objective is to increase our cash flow, earnings, distributions and
returns to our unitholders by:
o expanding our revenue base through:
o construction of extensions necessary to connect additional wells
drilled by Atlas America to our Appalachian Basin gathering
systems; and
o accretive acquisitions of midstream energy assets such as natural
gas and NGL gathering, transmission, processing and storage
facilities;
o controlling operating costs through achievement of economies of scale
as a result of expanding our operations through extensions of our
existing gathering systems and acquisitions; and
o maintaining a strong balance sheet by financing our growth with a
combination of long-term debt and equity to provide the financial
flexibility to fund future opportunities.
Since commencing operations in January 2000, we have pursued these
objectives by:
o adding 372 miles of pipeline to our Appalachian Basin gathering
systems;
o connecting 906 wells to our Appalachian Basin gathering systems, 847
of which were drilled by Atlas America;
o acquiring gathering systems in Ohio and Pennsylvania, aggregating 120
miles of pipeline, with approximately 433 wells connected to those
systems;
o upgrading our Appalachian Basin system and substantially expanding our
capacity;
o agreeing to acquire Spectrum, which will provide geographic
diversification and expand our platform of midstream service
offerings; and
o maintaining a balance between equity and debt financing in order to
maximize our ability to finance additional acquisitions and
expansions.
S-4
Partnership Structure
Our operations are conducted through, and our operating assets are owned by,
our subsidiaries. Our general partner has sole responsibility for conducting
our business and managing our operations. Our general partner does not receive
any management fee or other compensation in connection with its management of
our business apart from its general partner interest, but it is reimbursed for
direct and indirect expenses incurred on our behalf. Our principal executive
offices are located at 311 Rouser Road, Moon Township, Pennsylvania 15108 and
our telephone number is (412) 262-2830.
The following chart shows our organization and ownership after giving effect
to this offering and the pending Spectrum acquisition.
---------------------------------------------------------
| Effective aggregate ownership of Atlas Pipeline and the |
| operating partnership after this offering: |
| |
| Public common unitholders 75.7% |
| Subordinated unitholder 22.3% |
| Combined general partner interest 2% |
---------------------------------------------------------
-------------------------------------------------------
| Resource America, Inc. (Nasdaq: REXI) |
-------------------------------------------------------
|
|
100% interest
|
|
-------------------------------------------------------
| Atlas America, Inc. (Nasdaq: ATLS) |
-------------------------------------------------------
|
|
80% interest
|
|
-------------------------------------------------------
| Atlas Pipeline Partners GP, LLC |----------------------------------
| 1,641,026 subordinated units | | |
------------------------------------------------------- | |
| | |
---------------------- | | |
| Common Unitholders | 22.6% limited partner interest 1.0101% |
|5,563,659 common units| -------------------- | general partner interest |
---------------------- | | | |
------------------------------------------- | |
76.4% | Atlas Pipeline Partners, L.P. |-------------------------- |
limited partner interest | (NYSE: APL) | |
------------------------------------------- |
| |
| |
| |
| |
98.9899% |
limited partner interest |
| |
| |
----------------------------------- |
| | -------------------------------------------
| |
--------------------------------- | Atlas Pipeline Operating |---------------------
| | Partnership, L.P. | |
| | | |
| ----------------------------------- |
| | | |
| | | |
| | | |
| | | |
100% interest 100% interest 100% interest 100% interest
| | | |
| | | |
| | | |
| | | |
----------------------------- ---------------------------- ------------------------ --------------------------------
|Spectrum Field Services, LLC | |Atlas Pipeline New York, LLC| |Atlas Pipeline Ohio, LLC| |Atlas Pipeline Pennsylvania, LLC|
----------------------------- ---------------------------- ------------------------ --------------------------------
S-5
The Offering
Securities offered.......................... 2,100,000 common units; 2,415,000 common units if the
underwriters' over-allotment option is exercised in full.
Units outstanding after this offering....... 5,563,659 common units and 1,641,026 subordinated units.
If the underwriters' over-allotment option is exercised in
full, 5,878,659 common units and 1,641,026 subordinated units.
Use of proceeds............................. We will incur credit facility debt and our operating
partnership will issue preferred units to Resource America and
Atlas America in order to finance our acquisition of Spectrum.
We intend to use the net proceeds of this offering to repay a
portion of our credit facility debt and to repurchase the
preferred units in our operating partnership. The closing of
this offering is contingent on our completion of the Spectrum
acquisition.
Cash distributions.......................... We must distribute all of our cash on hand at the end of each
quarter, less reserves established by our general partner in
its discretion. The amount of this cash may be greater than or
less than the minimum quarterly distribution referred to in
the next paragraph. We generally make cash distributions
within 45 days after the end of each quarter.
In general, we make cash distributions each quarter based on
the following priorities:
o first, 98% to the common units and 2% to our general
partner, until each common unit has received a minimum
quarterly distribution of $.42, plus any arrearages in the
payment of the minimum quarterly distribution from prior
quarters;
o second, 98% to our existing subordinated units and 2% to
our general partner, until each subordinated unit has
received a minimum quarterly distribution of $.42;
o third, 85% to all units and 15% to our general partner,
until each unit has received a total distribution of $.52
in that quarter;
o fourth, 75% to all units and 25% to our general partner,
until each unit has received a total distribution of $.60
in the quarter; and
o after that, 50% to all units and 50% to our general
partner.
The distributions to our general partner in the third through
fifth bullets above are incentive distributions and are
disproportionate to its 2% interest in us as our
S-6
general partner. For a discussion of our cash distribution
policy, please read "Our Partnership Agreement--Cash
Distribution Policy" in the accompanying prospectus.
Subordination period........................ The subordination period will end once we meet the financial
tests in our partnership agreement. We currently anticipate
that the subordination period will end on January 1, 2005.
When the subordination period ends, all subordinated units
will convert into common units on a one-for-one basis, and the
common units will no longer be entitled to arrearages.
Ratio of taxable income to distributions ... We estimate that if you purchase common units in this offering
and own them through December 31, 2006, you will be allocated
an amount of federal taxable income for that period which is
less than 30% of the cash we expect to distribute for that
period. We anticipate that, for taxable years beginning after
December 31, 2006, the taxable income allocable to you will
represent a higher percentage of cash distributed to you.
Please read "Tax Considerations--Tax Consequences of Unit
Ownership--Ratio of Taxable Income to Distributions" in this
prospectus supplement for an explanation of the basis of this
estimate.
New York Stock Exchange symbol.............. APL
S-7
Summary Pro Forma Financial Data
The following unaudited pro forma financial data reflects our historical
results as adjusted on a pro forma basis to give effect to the completion of
the Spectrum acquisition and this offering. The unaudited pro forma balance
sheet data is prepared as though these transactions occurred as of March 31,
2004. The unaudited pro forma statement of operations data for the year ended
December 31, 2003 is prepared as though these transactions occurred as of
January 1, 2003 and the unaudited pro forma statement of operations data for
the three months ended March 31, 2004 is prepared as though these transactions
occurred as of January 1, 2004. For a discussion of the assumptions and
specific adjustments used in preparing this unaudited pro forma financial
data, please read "Pro Forma Financial Data" in this prospectus supplement.
Three months ended Year ended
March 31, 2004 December 31, 2003
------------------ -----------------
(in thousands, except per unit data)
Statement of operations data:
Revenues ............................. $31,995 $114,423
Costs and expenses:
Transportation and compression ...... 607 2,421
Cost of gas sold .................... 21,951 78,827
General and administrative .......... 1,254 5,983
Operations and maintenance .......... 1,115 6,262
Depreciation and amortization ....... 2,743 10,664
------- --------
27,670 104,157
------- --------
Operating income .................... 4,325 10,266
------- --------
Other income (deductions):
Interest expense................... (2,106) (3,448)
Other.............................. (342) (745)
------- --------
(2,448) (4,193)
Net income ........................... $ 1,877 $ 6,073
======= ========
Net income - limited partners ........ $ 1,330 $ 4,873
======= ========
Net income - general partner ......... $ 547 $ 1,200
======= ========
Basic and diluted net income per
limited partner unit ................. $ .21 $ .80
======= ========
Weighted average units outstanding ... 6,456 6,081
======= ========
March 31, 2004
--------------
(in thousands)
Balance sheet data:
Cash and cash equivalents ..................................... $ 13,981
Accounts receivable ........................................... 9,433
Net property and equipment .................................... 171,990
Total assets .................................................. 205,784
Current liabilities ........................................... 14,540
Long-term debt ................................................ 50,853
Partners' capital ............................................. 140,391
S-8
RISK FACTORS
Limited partner interests are inherently different from the capital stock of
a corporation, although many of the business risks we encounter are similar to
those that would be faced by a corporation engaged in a similar business. In
addition, there are risks particularly associated with the proposed
acquisition of Spectrum. You should consider the following risk factors and
those described in the section entitled "Risk Factors" in the accompanying
prospectus together with all of the other information included or incorporated
by reference in this prospectus supplement and the accompanying prospectus in
evaluating an investment in the common units. If any of these risks actually
occurs, our business, financial condition or results of operations could be
materially adversely affected. In that case, the trading price of our common
units could decline and you may lose some or all of your investment.
Risks Relating to Our Business
We have included under the caption "Risk Factors" in the accompanying
prospectus risks relating to our business in addition to those associated with
the Spectrum acquisition described below. Those risks include the risk that our
cash distributions to you are not assured and that the distributions you receive
may fluctuate with our financial performance. Demand for and market prices of
natural gas, together with the volumes of natural gas we transport through our
systems, can significantly impact the amount of cash we have available for
distribution to you. For example, our quarterly distributions decreased in each
of the quarters ending September 30, 2001, December 31, 2001 and March 31, 2002
from prior levels as a result of the impact of falling natural gas prices on our
transportation fees which are generally equal to a percentage of either the
gross or weighted average sales price of the natural gas we transport. Please
consider this and each of the other risks described under the heading "Risk
Factors" in the accompanying prospectus as well as the risks described below.
Risks Relating to Pending Acquisition of Spectrum
Spectrum's profitability depends upon prices and market demand for natural gas
and NGLs, which are beyond its control and have been volatile.
Spectrum purchases, gathers and sells residual natural gas and NGLs. Natural
gas and NGL prices are subject to significant fluctuations. For example,
prices received by Spectrum for its natural gas ranged from a high of $8.97
per MMBTU to a low of $4.43 per MMBTU during the period January 1, 2003 to
March 31, 2004, while during the same period the prices it received for its
NGLs ranged from a high of $.606 per gallon to a low of $.428 per gallon.
Because 80% (by volume) of Spectrum's active purchase and gathering contracts
are POP arrangements, price fluctuations can have a significant impact upon
Spectrum's revenues and profitability which, after its acquisition by us, will
affect our earnings and distributable cash.
The markets and prices for natural gas and NGLs depend upon factors beyond
Spectrum's control. These factors include the demand for oil, natural gas and
NGLs, which fluctuates with changes in market and economic conditions and
other factors, including:
o the impact of weather on the demand for oil and natural gas;
o the level of domestic oil and natural gas production;
o the availability of imported oil and natural gas;
o actions taken by foreign oil and gas producing nations;
o the availability of local, intrastate and interstate transportation
systems;
o the availability and marketing of competitive fuels;
o the impact of energy conservation efforts; and
o the extent of governmental regulation and taxation.
S-9
Spectrum's success depends upon its ability to continually find and contract
for new sources of natural gas supply.
As with our Appalachian Basin operations, in order for Spectrum to maintain
or increase throughput levels on its gathering systems and at its processing
plant, it must continually contract for new natural gas supplies. The primary
factors affecting Spectrum's ability to connect new supplies of natural gas to
its gathering systems include its success in contracting for existing wells
that are not committed to other systems and the level of drilling activity
near its gathering systems. Unlike our Appalachian Basin operations, Spectrum
has no agreements with any well operators requiring them to transport or
process their natural gas or NGLs from wells they drill in the future through
Spectrum's system, and none of the drillers or operators in its service area
are affiliates of Spectrum or us.
Fluctuations in energy prices can greatly affect production rates and
investments by third parties in the development of new oil and natural gas
reserves. Drilling activity generally decreases as oil and natural gas prices
decrease. Spectrum has no control over the level of drilling activity in its
operating areas, the amount of reserves underlying wells that connect to its
system and the rate at which production from a well will decline, sometimes
referred to as the "decline rate." In addition, Spectrum has no control over
producers or their production decisions, which are affected by, among other
things, prevailing and projected energy prices, demand for hydrocarbons, the
level of reserves, geological considerations, governmental regulation and the
availability and cost of capital.
Spectrum depends on certain key producers for its supply of natural gas; the
loss of any of these key producers could reduce its revenues.
During 2003, ChevronTexaco, Inc., Chesapeake Operating, Inc. and Mack Energy
Co. supplied Spectrum with approximately 40% of its natural gas supply. During
the first quarter of 2004 those producers, together with Zinke & Trumbo, Inc.
supplied Spectrum with approximately 45.4% of its natural gas supply. If these
producers reduce the volumes of natural gas that they supply to Spectrum,
Spectrum's revenues would be reduced unless it obtains comparable supplies of
natural gas from other producers.
Spectrum is exposed to the credit risk of its customers, and an increase in
nonpayment could lead to material losses.
During the year ended December 31, 2003, ONEOK Energy Marketing and Trading
accounted for approximately 85% of Spectrum's residue natural gas sales from
Spectrum's Velma Plant and Tenaska Marketing Ventures accounted for
approximately 15% of such sales. Koch Hydrocarbons, L.P. accounted for all of
Spectrum's NGL sales. Spectrum extends credit to these customers and had
accounts receivable from them of $3.0 million for ONEOK Energy Marketing, $1.5
million for Tenaska Marketing Ventures and $3.7 million for Koch Hydrocarbons
at March 31, 2004. Should any of these customers fail to fulfill their payment
obligations, become insolvent or file a petition in bankruptcy, Spectrum would
incur material losses.
We have no previous experience either in Spectrum's service area or in
operating a natural gas processing plant.
Spectrum's pipelines are located in southern Oklahoma and north Texas, areas
in which we have had no previous operations. In addition, Spectrum operates a
natural gas processing plant, a business with which we have had no previous
operating experience. As a result, we will depend upon the experience,
knowledge and business relationships that have been developed by Spectrum's
senior management to operate Spectrum successfully. The loss of the services
of one or more members of Spectrum's senior management and, in particular,
Robert R. Firth, Spectrum's President and Chief Executive Officer, and David
D. Hall, Spectrum's Chief Financial Officer, could limit Spectrum's growth or
its ability to maintain its current level of operations.
S-10
We may be unable to successfully integrate Spectrum's operations with our
operations and to realize all of the anticipated benefits of the acquisition.
Our acquisition of Spectrum involves the integration of two companies that
previously have operated independently, which can be a complex, costly and
time-consuming process. The difficulties of combining the companies include,
among other things:
o operating a significantly larger combined company;
o the necessity of coordinating geographically disparate organizations,
systems and facilities;
o integrating personnel with diverse business backgrounds and
organizational cultures; and
o consolidating corporate and administrative functions.
Combining the companies may be made particularly difficult by the large size
of Spectrum as compared to us and the geographic separation of its operations
and our Appalachian Basin operations.
The process of combining the companies could cause an interruption in our
business and, possibly, the loss of key personnel. The diversion of
management's attention and any delays or difficulties encountered in
connection with the acquisition and the integration of the two companies could
harm the business, results of operations, financial condition or prospects of
the combined company after the acquisition.
State and local regulatory measures could increase Spectrum's operating costs.
Spectrum's intrastate natural gas gathering pipelines are located in Texas
and Oklahoma and are subject to regulation by the Oklahoma Corporation
Commission and the Texas Railroad Commission. The state of Oklahoma has
adopted a complaint-based statute that allows the Oklahoma Corporation
Commission to remedy discriminatory rates for providing gathering service
where the parties are unable to agree. In a similar way, the Texas Railroad
Commission sponsors a complaint procedure for resolving grievances about
natural gas gathering access and rate discrimination. The gathering fees
Spectrum charges are deemed just and reasonable under Oklahoma and Texas law
unless challenged by a complaint. Should a complaint be filed or regulation by
either of the commissions become more active, Spectrum's operating costs could
increase.
Texas and Oklahoma also administer federal pipeline safety standards under
the Natural Gas Pipeline Safety Act of 1968, which requires certain pipelines
to comply with safety standards in constructing and operating the pipelines,
and subjects pipelines to regular inspections. Failure to comply with
applicable regulations can result in the imposition of administrative, civil
and criminal remedies.
Spectrum's business is subject to stringent environmental laws and
regulations.
As with our Appalachian Basin operations, Spectrum's gathering systems,
plants and other facilities are subject to stringent federal, state and local
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. 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
obligations, and the issuance of injunctions that could limit or prohibit
Spectrum's operations. We describe these laws and regulations, and the
accompanying risks, in "Risk Factors--Litigation or governmental regulation
relating to environmental protection and operational safety may result in
substantial costs and liability" in the accompanying prospectus, and in
"Business--Regulation--
Environmental and Safety Regulations" in this prospectus supplement. In
addition, the possibility exists that stricter laws, regulations or
enforcement policies could significantly increase Spectrum's operating costs,
the cost of any investigation or remediation that may become necessary and,
possibly, its capital expenditures for improvements or other compliance
actions. Spectrum may also face increased risks of violations of environmental
laws and regulations and associated investigatory and remedial obligations
because, in addition to transporting natural gas, it processes the natural gas
so that NGLs and contaminants, including, principally hydrogen sulfide and
carbon dioxide gasses, may be removed from the gas stream. As a result,
Spectrum could incur material environmental costs and liabilities in
connection with the operation of its processing facilities. Moreover,
Spectrum's insurance may not provide sufficient coverage in the event an
environmental claim is successfully brought against it.
S-11
Spectrum's business involves many hazards and operational risks, some of which
may not be fully covered by insurance.
Similar to our Appalachian Basin operations, Spectrum's operations are
subject to hazards and unforeseen interruptions which might not be fully
covered by insurance. We discuss this risk in "Risk Factors--Gathering system
operations are subject to operational hazards and unforeseen interruptions" in
the accompanying prospectus.
Any reduction in the capacity of, or the allocations to, Spectrum's shippers
in interconnecting, third-party pipelines could reduce the volumes it
transports, which would reduce its revenues and cash flow.
Users of Spectrum's pipelines are dependent upon connections to third-party
pipelines to receive and deliver natural gas and NGLs. Any reduction of
capacities of these interconnecting pipelines due to testing, line repair,
reduced operating pressures or other causes could result in reduced volumes
transported in Spectrum's pipelines. Similarly, if additional shippers begin
transporting volumes of natural gas and NGLs over interconnecting pipelines,
the allocations to existing shippers in these pipelines would be reduced,
which could also reduce volumes transported in Spectrum's pipelines, which in
turn would reduce its revenues and cash flow.
Spectrum encounters competition from other midstream companies.
In its service area, Spectrum competes for the acquisition of well
connections with several other gathering/servicing operations, including
plants operated by Duke Energy Field Services, ONEOK Field Services and
Enogex. Spectrum believes that competition to connect wells to gathering
systems is based upon the net price well operators receive for their natural
gas and responsiveness of the gathering system operator to well operators'
needs. If Spectrum cannot compete successfully on price and service, it may be
unable to obtain new well connections and, possibly, could lose wells already
connected to its system, thereby reducing its revenues. See "Risk
Factors--Spectrum's success depends upon its ability to continually find and
contract for new sources of natural gas supply."
Risks Inherent in an Investment in Us
You will have very limited voting rights and ability to control management,
which may diminish the price at which the common units will trade.
Unlike the holders of common stock in a corporation, you will have only
limited voting rights on matters affecting our business. You will have no
right to elect our general partner or its managing board on an annual or other
continuing basis. The managing board of our general partner is chosen by the
members of our general partner, all of which are subsidiaries of Atlas
America.
In addition, our general partner may be removed only upon the vote of the
holders of at least 66 2/3% of the outstanding common units, excluding common
units held by our general partner and its affiliates, and a successor general
partner must be elected by a vote of the holders of at least a majority of the
outstanding common units, excluding common units held by our general partner
and its affiliates. Further, if any person or group, other than our general
partner or its affiliates, acquires beneficial ownership of 20% or more of any
class of units, that person or group will lose voting rights for all of its
units. These provisions have the practical effect of making removal of our
general partner difficult. Our partnership agreement requires that amendments
to our partnership agreement must first be proposed or consented to by our
general partner before they can be considered by unitholders. As a result,
unitholders will not be able to initiate amendments to our partnership
agreement not supported by our general partner. These provisions may diminish
the price at which the common units trade. We describe our partnership
agreement under "Our Partnership Agreement" in the accompanying prospectus.
S-12
Our partnership agreement contains provisions that will discourage attempts to
change control of us, which may diminish the price at which the common units
trade and may prevent a change of control even if doing so would be beneficial
to the holders of common units.
Our partnership agreement contains provisions that may discourage a person
or group from attempting to remove our general partner or otherwise seeking to
change our management. As described in the immediately preceding risk factor,
any person or group, other than our general partner or its affiliates, that
acquires beneficial ownership of 20% or more of any class of units will lose
voting rights for all of its units. In addition, if our general partner is
removed under circumstances where cause does not exist and our general partner
does not consent to that removal, then:
o the obligations of Atlas America under the omnibus agreement to
connect wells to our Appalachian Basin gathering systems and to
provide financing and other assistance for the expansion of our
Appalachian Basin gathering systems will terminate;
o the obligations of Atlas America under the master natural gas
gathering agreement will terminate as to any future wells drilled and
completed by Atlas America;
o any existing arrearages in the payment of minimum quarterly
distributions will be extinguished;
o the subordination period will end, and all outstanding subordinated
units will immediately convert into common units on a one-for-one
basis; and
o our general partner will have the right to convert its general partner
interest and incentive distribution rights into common units or
receive cash in exchange for those interests.
These provisions may diminish the price at which the common units trade. These
provisions may also prevent a change of control of us even if a change of
control would be beneficial to the holders of the common units.
We may issue additional common units or securities senior to the common units
without your approval, which would dilute existing unitholders' interests.
Our general partner can cause us to issue additional common units without
the approval of unitholders. The issuance of additional units may increase the
risk that we will be unable to pay the minimum quarterly distribution. We may
also issue securities senior to the common units without the approval of
unitholders after the subordination period terminates. The issuance of
additional common units or senior securities may dilute the value of the
interests of the existing unitholders in our net assets, dilute the interests
of unitholders in distributions by us and, if issued during the subordination
period, increase the risk that we will be unable to pay the full minimum
quarterly distribution.
Cost reimbursements to our general partner could reduce our cash available for
distribution.
Before making any distribution on the common units, we must reimburse our
general partner and its affiliates for all expenses incurred by them on our
behalf during the related period. Our general partner determines the amount of
these expenses in its sole discretion. Our reimbursement to our general
partner in the year ended December 31, 2003 was $11.7 million. In addition,
our general partner and its affiliates may provide us services for which we
will be charged reasonable fees as determined by our general partner. The
reimbursement of expenses and the payment of fees could adversely affect our
ability to make distributions.
Our general partner has conflicts of interest and limited fiduciary
responsibilities, which may permit our general partner to favor its and its
affiliates' interests to the detriment of the common unitholders.
Our general partner has a fiduciary duty to manage us in a manner beneficial
to us and our unitholders. However, because our general partner is a corporate
subsidiary of Atlas America, its officers and directors have fiduciary duties
to manage its business in a manner beneficial to Atlas America. As a result,
conflicts of interest may arise in the future between us and our unitholders,
on the one hand, and Atlas America and its affiliates, on the other hand. We
describe the situations which could give rise to conflicts of interest, and
our general partner's modified fiduciary responsibilities to us and our common
unitholders, in the accompanying prospectus under "Conflicts of Interest and
Fiduciary Responsibilities."
S-13
If we were to lose the management expertise of Atlas America, we would not
have sufficient stand-alone resources to operate.
We do not directly employ any of the persons responsible for our management.
Rather, Atlas America personnel manage and operate our business. Some
employees of Spectrum will become Atlas America employees at the consummation
of that acquisition. If we were to lose the management expertise of Atlas
America, we would not have sufficient stand-alone resources to operate.
Further, neither we nor our general partner has or intends to obtain key man
life insurance for the officers and employees of our general partner.
Our ability to grow will depend upon the availability of debt and equity
financing.
A key element of our growth strategy is to make accretive acquisitions of
midstream energy assets. In order to execute this strategy, we expect that we
will need to obtain both debt and equity financing for our acquisitions. If we
encounter illiquid capital markets at a time when we are seeking financing, we
may be unable to obtain the funds necessary to consummate an acquisition,
thereby preventing the transaction. Any such illiquidity, if it were to
persist for a substantial period, could thereby significantly limit our
ability to grow. Moreover, to the extent that future acquisitions
significantly increase the level of our indebtedness, our ability to obtain
further debt financing for acquisitions, irrespective of the liquidity of the
capital markets at the time we seek it, may be limited.
Tax Risks to Common Unitholders
For a discussion of the expected material federal income tax consequences of
owning and disposing of common units, see "Tax Considerations" in this
prospectus supplement.
The IRS could treat us as a corporation, which would substantially reduce the
cash available for distribution to unitholders.
The federal income tax 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. We have, however, received an opinion
of Ledgewood Law Firm, P.C., counsel to us and our general partner, that we
will be classified as a partnership for federal income tax purposes. Opinions
of counsel are based on specific factual assumptions and are not binding on
the IRS or any court.
If we were classified as a corporation for federal income tax purposes, we
would pay tax on our income at the corporate tax rate, which is currently 35%.
Distributions would generally be taxed again to the unitholders as corporate
distributions, and no income, gains, losses or deductions would flow through
to unitholders. Because a tax would be imposed upon us as an entity, the cash
available for distribution to you would be substantially reduced, likely
causing a substantial reduction in the value of the common units.
We cannot assure you that the law will not be changed and cause us to be
treated as a corporation for federal income tax purposes or otherwise to be
subject to entity-level taxation. 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
specified provisions of the partnership agreement will be subject to change,
including a decrease in distributions to reflect the impact of that law on us.
We may incur significant legal, accounting and related costs if the IRS
challenges our characterization as a limited partnership.
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 expressed in this prospectus supplement or from the positions we
take. It may be necessary to resort to administrative or court proceedings to
sustain counsel's conclusions or the positions we take. A court may not concur
with our conclusions. Any contest with the IRS may materially and adversely
impact the market for the common units and the prices at which
S-14
common units trade. In addition, the costs of any contest with the IRS,
principally legal, accounting and related fees and expenses, will be borne
directly or indirectly by our unitholders and our general partner.
You may be required to pay taxes on income from us even if you do not receive
cash distributions.
You will be required to pay federal income taxes and, in certain cases,
state and local income taxes on your allocable share of our income, whether or
not you receive cash distributions from us. We cannot assure you that you will
receive cash distributions equal to your allocable share of our taxable income
or even equal to the tax liability to you resulting from that income. Further,
you may incur a tax liability in excess of the amount of cash received upon
the sale of your common units or upon our liquidation.
In prior taxable years, unitholders received cash distributions that
exceeded the amount of taxable income allocated to the unitholders. This
excess was partially the result of depreciation deductions, but was primarily
the result of special allocations to our general partner of taxable income
earned by our operating subsidiary, which caused a corresponding reduction in
the amount of taxable income allocable to us. Our general partner has agreed
to receive additional special allocations from our operating subsidiary
through the year 2006. We describe these special allocations in "Tax
Considerations--Tax Consequences of Unit Ownership--Ratio of Taxable Income to
Distributions." Since these special allocations increase our general partner's
capital account, it will receive an increased distribution upon our
liquidation and distributions to unitholders will be correspondingly reduced.
Tax gain or loss on disposition of common units could be different than
expected.
Upon the sale of common units, you will recognize gain or loss equal to the
difference between the amount realized and your adjusted tax basis in those
common units. Prior distributions in excess of the net taxable income you were
allocated for a common unit which decreased your tax basis in that common unit
will, in effect, become taxable income if you sell the common unit at a price
greater than your tax basis in that common unit, even if the price is less
than your original cost. A substantial portion of the amount realized, whether
or not representing gains, may be ordinary income. Furthermore, should the IRS
successfully contest our conventions, including our method of allocating
income and loss as between transferors and transferees, you could realize more
gain on the sale of common units than would be the case under those
conventions without the benefit of decreased income in prior years.
Investors, other than individuals who are U.S. residents, may have adverse tax
consequences from owning units.
Investment in common units by tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to them. For example,
virtually all of our income will be unrelated business taxable income and will
be taxable to organizations exempt from federal income tax, including IRAs and
other retirement plans. Very little of our income will be qualifying income to
a regulated investment company. Distributions to foreign persons will be
reduced by withholding taxes.
We registered as a tax shelter; this may increase the risk of an audit of us
or a unitholder.
We registered as a "tax shelter" with the Secretary of the Treasury. The
Secretary of the Treasury requires partnerships meeting specified
characteristics to register as "tax shelters" in response to the perception
that they claim to generate tax benefits that the IRS may believe to be
unwarranted. We cannot assure unitholders that as a result of our registration
as a tax shelter we will not be audited by the IRS or that tax adjustments
will not be made. The rights of a unitholder owning less than a 1% profit
interest in us to participate in the income tax audit process are very
limited. Further, any adjustments in our tax returns will lead to adjustments
in the unitholders' tax returns and may lead to audits of unitholders' tax
returns and adjustments of items unrelated to us. Each unitholder would bear
the cost of any expenses incurred in connection with an examination of his
personal tax return.
S-15
We treat a purchaser of units as having the same tax benefits as the seller;
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, we will
take certain tax positions that may not conform with all aspects of proposed
and final Treasury regulations. For example, upon a transfer of units, we
treat a portion of the Section 743(b) adjustment to a common unitholder's tax
basis in our assets as amortizable over the same remaining life and by the
same method as the underlying assets, or nonamortizable if the underlying
assets are nonamortizable. A successful IRS challenge to those conventions,
including our method of amortizing Section 743(b) adjustments, could adversely
affect the amount of tax benefits available to you. It also could affect the
timing of these tax benefits or the amount of gain from your sale of common
units and could have a negative impact on the value of the common units or
result in audit adjustments to your tax returns.
You will likely be subject to state and local taxes as a result of an
investment in common units.
In addition to federal income taxes, you will likely be subject to other
taxes, including state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes imposed by the various jurisdictions
in which we do business or own property. You will likely be required to file
state and local income tax returns and pay state and local income taxes in
some or all of the various jurisdictions in which we do business or own
property. Further, you may be subject to penalties for failure to comply with
those requirements. We currently own assets and do business in Ohio,
Pennsylvania and New York and, upon completion of the Spectrum acquisition,
will own assets and do business in Oklahoma and Texas. Each of these states,
except Texas, currently imposes a personal income tax. It is your
responsibility to file all United States federal, state and local tax returns.
Our counsel has not rendered an opinion on the state or local tax consequences
of an investment in the common units.
S-16
USE OF PROCEEDS
We expect to receive net proceeds of approximately $72.1 million from the
sale of the 2,100,000 common units we are offering, after deducting
underwriting discounts and commissions and estimated offering expenses of $4.1
million. We intend to use the net proceeds of this offering to retire
indebtedness and redeem preferred equity used to fund the Spectrum
acquisition, as follows:
o $49.1 million to repay a portion of the borrowings outstanding under
our new credit facility and
o $23 million to repurchase the preferred units in our operating
partnership from Resource America and Atlas America.
The repurchase price for the preferred units includes a $1.1 million
repurchase premium. We describe the acquisition in "Business--Pending
Acquisition of Spectrum" and describe the proposed credit facility, including
the interest rates and maturities, in "Business --New Credit Facility." To the
extent that we do not apply the net proceeds as described above, such amounts
will be used for working capital. Similarly, we will use the proceeds from any
exercise of the underwriters' over-allotment option for working capital. The
closing of this offering is contingent on the closing of the Spectrum
acquisition.
S-17
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
As of July 6, 2004, we had 3,463,659 common units outstanding held by 65
holders, including common units held in street name. As of May 14, 2004, our
common units began trading on the New York Stock Exchange under the symbol
"APL." Before that, our common units were traded on the American Stock
Exchange under the symbol "APL." In connection with our initial public
offering, we also issued 1,641,026 subordinated units, all of which are held
by our general partner. The subordinated units are not publicly traded.
The following table sets forth the range of high and low sales prices of our
common units and cash distributions on our common units for the periods
indicated. The last reported sale price of our common units on the New York
Stock Exchange on July 8, 2004 was $37.05 per unit.
Distributions
High Low declared(1)
------ ------ -------------
Fiscal 2004
-----------
Third quarter (through July 8, 2004)........................................................... $37.10 $35.86 $ --(2)
Second quarter................................................................................. 40.03 32.60 .63(3)
First quarter.................................................................................. 41.50 34.00 .63
Fiscal 2003
-----------
Fourth quarter................................................................................. 42.50 34.70 .625
Third quarter.................................................................................. 36.00 29.40 .62
Second quarter................................................................................. 31.70 24.16 .58
First quarter.................................................................................. 28.96 24.90 .56
Fiscal 2002
-----------
Fourth quarter................................................................................. 27.90 21.80 .54
Third quarter.................................................................................. 26.95 20.40 .54
Second quarter................................................................................. 29.10 22.00 .54
First quarter.................................................................................. 29.60 23.51 .52
Fiscal 2001
-----------
Fourth quarter................................................................................. 29.50 19.25 .58
Third quarter.................................................................................. 31.95 25.01 .60
Second quarter................................................................................. 53.95 24.00 .67
First quarter.................................................................................. 28.00 19.19 .65
---------------
(1) Distributions are shown in the quarter with respect to which they were
declared.
(2) Distribution not yet declared.
(3) Declared for unitholders of record as of the close of business on June 30,
2004. The distribution is payable August 6, 2004.
S-18
CAPITALIZATION
The following table sets forth our historical capitalization as of March 31,
2004 and our pro forma as adjusted capitalization to give effect to:
o our acquisition of Spectrum;
o our sale of 750,000 common units in April 2004 and the application of
the net proceeds from that offering to the Spectrum acquisition; and
o the sale of common units in this offering and the application of net
proceeds as described in "Use of Proceeds."
As of March 31, 2004
---------------------
Pro forma,
Actual as adjusted
------- -----------
(in thousands)
Cash and cash equivalents ............................. $11,979 $ 13,981
======= ========
Long-term debt ........................................ -- 50,853
Partners' capital
Common unitholders ................................... 43,163 137,948
Subordinated unitholder .............................. 120 120
General partner ...................................... 321 2,323(1)
------- --------
Total partners' capital .............................. 43,604 140,391
------- --------
Total capitalization .................................. $43,604 $191,244
======= ========
---------------
(1) Under the terms of our partnership agreement and that of our operating
partnership, our general partner is required to make capital
contributions equal to its aggregate 2% general partner interest in us
and our operating partnership. Our general partner made a $545,000
capital contribution to us in connection with our April 2004 offering. We
have not included the $1.5 million that we will receive as a capital
contribution from our general partner in connection with this offering in
our calculation of net proceeds in "Use of Proceeds."
S-19
OUR SELECTED HISTORICAL FINANCIAL DATA
We derived the financial data set forth below as of and for the three years
ended December 31, 2003 from our consolidated financial statements for those
periods, which have been audited by Grant Thornton LLP, independent registered
public accountants. We have derived the selected financial data as of and for
the three month periods ended March 31, 2004 and 2003 from our unaudited
financial statements for these periods. You should read the financial data in
this table together with, and such financial data is qualified by reference
to, our consolidated financial statements, the notes to our consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" incorporated by reference in this
prospectus supplement.
For the three
months For the years ended
ended March 31, December 31,
--------------- ----------------------------
2004 2003 2003 2002 2001
------ ------ ------- ------- -------
(unaudited)
(in thousands, except per unit data)
Income statement data:
Revenues........................................................................ $4,246 $3,330 $15,749 $10,667 $13,129
====== ====== ======= ======= =======
Total transportation and compression, general and administrative expenses....... $1,188 $ 927 $ 4,081 $ 3,544 $ 3,042
====== ====== ======= ======= =======
Depreciation and amortization................................................... $ 519 $ 407 $ 1,770 $ 1,476 $ 1,356
====== ====== ======= ======= =======
Net income...................................................................... $2,477 $1,912 $ 9,639 $ 5,398 $ 8,556
====== ====== ======= ======= =======
Net income per limited partner unit - basic and diluted......................... $ .49 $ .55 $ 2.17 $ 1.54 $ 2.30
====== ====== ======= ======= =======
Distributions declared per common unit.......................................... $ .63 $ .56 $ 2.39 $ 2.14 $ 2.50
====== ====== ======= ======= =======
March 31, December 31,
----------------- ----------------------------
2004 2003 2003 2002 2001
------- ------- ------- ------- -------
(unaudited)
(in thousands)
Balance sheet data:
Total assets.................................................................. $47,350 $30,318 $49,512 $28,515 $26,002
======= ======= ======= ======= =======
Long-term debt................................................................ $ -- $ 8,500 $ -- $ 6,500 $ 2,089
======= ======= ======= ======= =======
Common unitholders' capital................................................... $43,163 $19,140 $43,551 $19,164 $20,129
Subordinated unitholder's capital............................................. 120 660 354 684 1,661
General partner's capital (deficit)........................................... 321 (163) 340 (161) (116)
------- ------- ------- ------- -------
Total partners' capital....................................................... $43,604 $19,637 $44,245 $19,687 $21,674
======= ======= ======= ======= =======
S-20
For the three
months For the years ended
ended March 31, December 31,
----------------- -----------------------------
2004 2003 2003 2002 2001
------- ------- ------- ------- --------
(unaudited)
(in thousands)
Cash flow data:
Cash flow provided by operating activities................................... $ 1,320 $ 1,791 $13,702 $ 8,138 $ 10,268
======= ======= ======= ======= ========
Cash flow used in investing activities....................................... $(1,305) $(1,192) $(9,154) $(5,231) $ (3,128)
======= ======= ======= ======= ========
Cash flow (used in) provided by financing activities......................... $(3,115) $ (139) $ 8,671 $(3,211) $(7,022)
======= ======= ======= ======= ========
Selected Operating Data
The following table summarizes information concerning the volumes of natural
gas we transported during the three month periods ended March 31, 2004 and
2003 and the years ended December 31, 2003, 2002 and 2001 as well as the
average transportation fees we received during those periods.
For the three months
ended March 31, For the years ended December 31,
----------------------- ----------------------------------------
2004 2003 2003 2002 2001
---------- ---------- ----------- ----------- -----------
Total volume of natural gas transported (in mcf)............ 4,680,800 4,504,100 19,152,300 18,382,600 17,125,000
========== ========== =========== =========== ===========
Average daily volume of natural gas transported (in mcf).... 51,437 50,045 52,472 50,363 46,918
========== ========== =========== =========== ===========
Average transportation rate per mcf......................... $ .90 $ .74 $ .82 $ .58 $ .76
========== ========== =========== =========== ===========
S-21
SPECTRUM'S SELECTED HISTORICAL FINANCIAL DATA
We derived the financial data set forth below as of and for the three years
ended December 31, 2003 from Spectrum's consolidated financial statements for
those periods, which have been audited by Grant Thornton LLP, independent
registered public accountants. We have derived the selected financial data as
of and for the three month periods ended March 31, 2004 and 2003 from
Spectrum's unaudited financial statements for these periods. You should read
the financial data in this table together with, and such financial data is
qualified by reference to, Spectrum's consolidated financial statements and
the notes to Spectrum's consolidated financial statements included in our
current report on Form 8-K dated July 12, 2004 and incorporated by reference
in this prospectus supplement.
For the three
months For the years ended
ended March 31, December 31,
----------------- ----------------------------
2004 2003 2003 2002 2001
------- ------- ------- ------- -------
(unaudited)
(in thousands)
Income statement data:
Sales of natural gas and liquids.............................................. $27,785 $28,378 $98,772 $65,760 $86,316
======= ======= ======= ======= =======
Cost of natural gas and liquids............................................... $21,951 $22,944 $78,827 $49,659 $64,160
======= ======= ======= ======= =======
General and administrative expenses........................................... $ 673 $ 489 $ 4,322 $ 2,374 $ 2,947
======= ======= ======= ======= =======
Depreciation and amortization................................................. $ 740 $ 4,772 $16,050 $ 4,407 $ 2,779
======= ======= ======= ======= =======
Net income (loss)............................................................. $ 1,334 $(1,210) $(5,954) $(1,672) $ 2,738
======= ======= ======= ======= =======
March 31, December 31,
----------------- ----------------------------
2004 2003 2003 2002 2001
------- ------- ------- ------- -------
(unaudited)
(in thousands)
Balance sheet data:
Total assets.................................................................. $63,071 $61,992 $59,625 $58,150 $59,483
======= ======= ======= ======= =======
Long-term debt, less current maturities....................................... $42,433 $35,969 $39,117 $35,200 $39,120
======= ======= ======= ======= =======
Total shareholders' equity.................................................... $ 2,460 $ 6,580 $ 1,647 $ 8,246 $ 7,632
======= ======= ======= ======= =======
S-22
For the three
months For the years ended
ended March 31, December 31,
----------------- -----------------------------
2004 2003 2003 2002 2001
------- ------- -------- ------- -------
(unaudited)
(in thousands)
Cash flow data:
Cash flow provided by operating activities................................... $ 173 $ 2,319 $ 10,998 $ 5,956 $ 1,503
======= ======= ======== ======= =======
Cash flow used in investing activities....................................... $(3,285) $(2,312) $(15,782) $(2,675) $(5,949)
======= ======= ======== ======= =======
Cash flow provided by (used in) financing activities......................... $ 2,939 $ 482 $ 4,479 $(3,312) $ 4,778
======= ======= ======== ======= =======
Selected Operating Data
The following table summarizes information concerning the volume of natural
gas liquids and residue gas Spectrum sold during the three month periods ended
March 31, 2004 and 2003 and the years ended December 31, 2003, 2002 and 2001.
For the three
months For the years ended
ended March 31, December 31,
--------------- -------------------------
2004 2003 2003 2002 2001
------ ------ ------ ------ ------
Residue gas (mcf per day).......................................................... 35,743 31,780 32,711 32,875 29,126
NGL production (bbl per day)....................................................... 5,261 5,125 5,127 5,231 5,638
S-23
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data reflects our historical
results as adjusted on a pro forma basis to give effect to our April 2004
offering of common units, the completion of the Spectrum acquisition and this
offering. The unaudited pro forma balance sheet is prepared as though these
transactions occurred as of March 31, 2004. The unaudited pro forma statement
of operations for the year ended December 31, 2003 is prepared as though these
transactions occurred as of January 1, 2003. The unaudited pro forma statement
of operations for the three months ended March 31, 2004 is prepared as though
these transactions occurred as of January 1, 2004. The acquisition and
offering adjustments are described in the notes to the unaudited pro forma
financial data. The unaudited pro forma financial data and accompanying notes
should be read together with our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our and Spectrum's
historical financial statements and related notes included elsewhere, or
incorporated by reference, in this prospectus supplement. Because we will not
complete the Alaska Pipeline acquisition due to recent events, that
acquisition is not included in these unaudited pro forma financial statements.
See "Business--Termination of Alaska Pipeline Acquisition."
We accounted for the acquisition of Spectrum in the unaudited pro forma
financial statements using the purchase method in accordance with the guidance
of Statement of Financial Accounting Standards No. 141, "Business
Combinations." For purposes of developing the unaudited pro forma financial
information, we have allocated the purchase price to Spectrum's gas gathering
and transmission facilities based on fair market value.
The unaudited pro forma financial statements presented are for informational
purposes only and are based upon available information and assumptions that we
believe are reasonable under the circumstances. You should not construe the
unaudited pro forma financial statements as indicative of the combined
financial position or results of operations that we and Spectrum would have
achieved had the transaction been consummated on the dates assumed. Moreover,
they do not purport to represent our and Spectrum's combined financial
position or results of operations for any future date or period or constitute
a representation that we will complete the Spectrum acquisition.
S-24
ATLAS PIPELINE PARTNERS, L.P.
PRO FORMA BALANCE SHEET (UNAUDITED)
MARCH 31, 2004
(in thousands)
Historical Pro forma
Atlas Historical Acquisition pre-offering Offering Pro forma
Pipeline Spectrum adjustments consolidated adjustments consolidated
---------- ---------- ----------- ------------ ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents .................. $11,979 $ -- $ 545(a)(b) $ 12,524 $ 1,457(i) $ 13,981
Accounts receivable ........................ 3 9,430 -- 9,433 -- 9,433
Inventories ................................ -- 334 -- 334 -- 334
Prepaid expenses ........................... 223 115 -- 338 -- 338
Other ...................................... -- 338 (10)(b) 328 -- 328
------- ------- ------- -------- -------- --------
Total current assets ....................... 12,205 10,217 535 22,957 1,457 24,414
Property and equipment:
Gas gathering and transmission facilities .. 38,203 56,902 84,794(b) 179,899 -- 179,899
Less - accumulated depreciation ............ (7,909) (7,306) 7,306(b) (7,909) -- (7,909)
------- ------- ------- -------- -------- --------
Net property and equipment ................. 30,294 49,596 92,100 171,990 -- 171,990
Goodwill .................................... 2,305 -- -- 2,305 -- 2,305
Deferred income taxes ....................... -- 1,645 (1,645)(b) -- -- --
Other assets ................................ 2,546 1,613 2,916(b) 7,075 -- 7,075
------- ------- ------- -------- -------- --------
$47,350 $63,071 $93,906 $204,327 $ 1,457 $205,784
======= ======= ======= ======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities ... $ 260 $10,794 $ -- $ 11,054 $ -- $ 11,054
Accounts payable - affiliates .............. 368 -- -- 368 -- 368
Current portion of long-term debt .......... -- 4,992 (4,992)(b) -- -- --
Distribution payable ....................... 3,118 2,392 (2,392)(b) 3,118 -- 3,118
------- ------- ------- -------- -------- --------
Total current liabilities .................. 3,746 18,178 (7,384) 14,540 -- 14,540
Long-term debt .............................. -- 42,433 57,567(b) 100,000 (49,147)(h) 50,853
Preferred equity ............................ -- -- 20,638(b) 20,638 (20,638)(h) --
Stockholders' equity ........................ -- 2,460 (2,460)(b) -- -- --
Partners' capital:
Common unitholders ......................... 43,163 -- 25,000(a) 68,163 69,785(h) 137,948
Subordinated unitholders ................... 120 -- -- 120 -- 120
General partner ............................ 321 -- 545(a) 866 1,457(i) 2,323
------- ------- ------- -------- -------- --------
Total partners' capital .................... 43,604 -- 25,545 69,149 71,242 140,391
------- ------- ------- -------- -------- --------
$47,350 $63,071 $93,906 $204,327 $ 1,457 $205,784
======= ======= ======= ======== ======== ========
See notes to pro forma financial statements
S-25
ATLAS PIPELINE PARTNERS, L.P.
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2003
(in thousands, except per unit data)
Historical Pro forma
Atlas Historical Acquisition pre-offering Offering Pro forma
Pipeline Spectrum adjustments consolidated adjustments consolidated
---------- ---------- ----------- ------------ ----------- ------------
Revenues:
Transportation and compression ............. $15,651 $ -- $ -- $ 15,651 $ -- $ 15,651
Sales of natural gas and liquids ........... -- 98,772 -- 98,772 -- 98,772
------- -------- ------- -------- ------- --------
15,651 98,772 -- 114,423 -- 114,423
Costs and expenses:
Transportation and compression ............. 2,421 -- -- 2,421 -- 2,421
Cost of gas sold ........................... -- 78,827 -- 78,827 -- 78,827
General and administrative ................. 1,661 4,322 -- 5,983 -- 5,983
Operations and maintenance ................. -- 6,262 -- 6,262 -- 6,262
Depreciation and amortization .............. 1,770 16,050 (7,156)(d) 10,664 -- 10,664
------- -------- ------- -------- ------- --------
5,852 105,461 (7,156) 104,157 -- 104,157
------- -------- ------- -------- ------- --------
Operating income (loss) .................... 9,799 (6,689) 7,156 10,266 -- 10,266
------- -------- ------- -------- ------- --------
Other income (deductions):
Interest expense ........................... (258) (2,725) (2,873)(c)(e) (5,856) 2,408(j)(k)(l)(3,448)
Other ...................................... 98 (843) -- (745) -- (745)
------- -------- ------- -------- ------- --------
(160) (3,568) (2,873) (6,601) 2,408 (4,193)
------- -------- ------- -------- ------- --------
Income (loss) before income taxes............ 9,639 (10,257) 4,283 3,665 2,408 6,073
Provision for income taxes................... -- (4,303) 4,303(f) -- -- --
------- -------- ------- -------- ------- --------
Net income (loss) .......................... 9,639 (5,954) (20) 3,665 2,408 6,073
Preferred stock dividends .................. -- 1,054 1,573(g) 2,627 (2,627)(m) --
------- -------- ------- -------- ------- --------
Net income (loss) attributable to partners... $ 9,639 $ (7,008) $(1,593)(g) $ 1,038 $ 5,035 $ 6,073
======= ======== ======= ======== ======= ========
Net income (loss) - limited partners......... $ 8,651 $ 120 $ 4,873
======= ======== ========
Net income (loss) - general partner.......... $ 988 $ 918 $ 1,200
======= ======== ========
Basic and diluted net income (loss) per
limited partner unit....................... $ 2.17 $ .03 $ .80
======= ======== ========
Weighted average units outstanding........... 3,981 3,981 2,100 6,081
======= ======== ======= ========
See notes to pro forma financial statements
S-26
ATLAS PIPELINE PARTNERS, L.P.
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(in thousands, except per unit data)
Historical Pro forma
Atlas Historical Acquisition pre-offering Offering Pro forma
Pipeline Spectrum adjustments consolidated adjustments consolidated
---------- ---------- ----------- ------------ ----------- ------------
Revenues:
Transportation and compression ............. $4,210 $ -- $ -- $ 4,210 $ -- $ 4,210
Sales of natural gas and liquids ........... -- 27,785 -- 27,785 -- 27,785
------ ------- ------- ------- ------ -------
4,210 27,785 -- 31,995 -- 31,995
Costs and expenses:
Transportation and compression ............. 607 -- -- 607 -- 607
Cost of gas sold ........................... -- 21,951 -- 21,951 -- 21,951
General and administrative ................. 581 673 -- 1,254 -- 1,254
Operations and maintenance ................. -- 1,115 -- 1,115 -- 1,115
Depreciation and amortization .............. 519 740 1,484(d) 2,743 -- 2,743
------ ------- ------- ------- ------ -------
1,707 24,479 1,484 27,670 -- 27,670
------ ------- ------- ------- ------ -------
Operating income ........................... 2,503 3,306 (1,484) 4,325 -- 4,325
------ ------- ------- ------- ------ -------
Other income (deductions):
Interest expense ........................... (63) (778) (488)(c)(e) (1,329) (777)(j)(k)(l(2,106)
Other ...................................... 36 (378) -- (342) -- (342)
------ ------- ------- ------- ------ -------
(27) (1,156) (488) (1,671) (777) (2,448)
------ ------- ------- ------- ------ -------
Income (loss) before income taxes............ 2,476 2,150 (1,972) 2,654 (777) 1,877
Provision for income taxes................... -- 816 (816)(f) -- -- --
------ ------- ------- ------- ------ -------
Net income (loss) .......................... 2,476 1,334 (1,156) 2,654 (777) 1,877
Preferred stock dividends .................. -- 264 393(g) 657 (657)(m) --
------ ------- ------- ------- ------ -------
Net income (loss) attributable to partners... $2,476 $ 1,070 $(1,549) $ 1,997 $ (120) $ 1,877
====== ======= ======= ======= ====== =======
Net income (loss) - limited partners......... $2,121 $ 823 $ 1,330
====== ======= =======
Net income (loss) general partner............ $ 355 $ 1,174 $ 547
====== ======= =======
Basic and diluted net income (loss) per
limited partner unit....................... $ .49 $ .19 $ .21
====== ======= =======
Weighted average units outstanding - basic... 4,355 4,355 2,100 6,455
====== ======= ====== =======
Weighted average units outstanding - diluted. 4,356 4,356 2,100 6,456
====== ======= ====== =======
See notes to pro forma financial statements
S-27
Atlas Pipeline Partners, L.P.
Notes to Unaudited Pro Forma Financial Statements
a. Reflects the net proceeds from our sale of 750,000 common units in April
2004 and our general partner's 2% capital contribution in accordance with
the terms of our partnership agreement.
b. Reflects our purchase of 100% of the equity of Spectrum for $147 million,
including estimated transaction costs. The acquisition will be financed
by a $21.9 million preferred equity investment by Atlas America and
Resource America in our operating subsidiary, the $25 million of net
proceeds from our April 2004 common unit offering and a $100 million term
loan under our new credit facility. Transaction costs include a $1.3
million commitment fee payable to Resource America and Atlas America in
connection with their commitment to purchase the preferred equity. We
describe our new credit facility under "Business--New Credit Facility."
Adjustments include the payment of $3.1 million of estimated financing
costs which appear in the pro forma balance sheet as other assets.
c. Reflects the adjustment to interest expense resulting from $100 million
of borrowings under our new credit facility bearing interest at the
London Interbank Offered Rate, or LIBOR, plus 375 basis points, assumed
to be 5.07% for the six months ended June 30, 2003 and 4.80% for the six
months ended December 31, 2003. For the three months ended March 31,
2004, the borrowings bear an interest rate of LIBOR plus 275 basis
points, assumed to be 3.90%.
d. Reflects the adjustment to depreciation expense based upon the cost of
the acquired gas gathering and transmission facilities using depreciable
lives ranging from 3 to 26.5 years and using the straight-line method.
e. Reflects the amortization of deferred financing costs related to our new
credit facility to finance the acquisition.
f. Reflects the elimination of federal and state income taxes following the
conversion of Spectrum, currently a C-corporation, to a limited liability
company concurrent with its acquisition by us.
g. Reflects the elimination of preferred stock dividends by Spectrum paid
prior to our acquisition and payment of dividends on the preferred equity
of our operating subsidiary.
h. Reflects net proceeds in this offering of $72.1 million after offering
costs of $4.1 million, assuming the issuance of 2.1 million common units
at a price of $36.31 per unit (the average closing price from June 29,
2004 to July 6, 2004), used to repurchase the $23 million preferred
equity from Resource America and Atlas America (including a $1.1 million
repurchase premium) and repay $49.1 million of borrowings under the $100
million term loan.
i. Reflects the 2% capital contribution from our general partner in
accordance with the terms of our partnership agreement.
j. Reflects the adjustment to interest expense resulting from the issuance
of common units and the repayment of debt incurred to finance the
Spectrum acquisition.
k. Reflects a write-off of deferred financing costs in connection with a
permanent $49.1 million repayment of the $100 million term loan.
l. Reflects the adjustment to amortization as a result of the write-off of
deferred financing costs due to the partial repayment of the $100 million
term loan.
m. Reflects the elimination of dividends paid on the preferred equity of our
operating subsidiary as a result of its repurchase from the net proceeds
of this offering.
S-28
BUSINESS
General
We own and operate natural gas pipeline gathering systems through our
operating partnership and its operating subsidiaries. Our systems consist of
approximately 1,380 miles of intrastate gathering systems located in the
Appalachian Basin in eastern Ohio, western New York and western Pennsylvania.
We have grown our gathering systems both through extensions to existing
systems in order to connect new natural gas supplies and through acquisitions.
In June 2004, we entered into an agreement to acquire Spectrum, a private
natural gas gathering and processing company headquartered in Tulsa, Oklahoma,
for approximately $140 million. Spectrum owns a gas processing plant in Velma,
Oklahoma and 1,900 miles of associated natural gas gathering pipelines in
southern Oklahoma and north Texas. This acquisition will significantly
increase our size and diversify the natural gas supply basins in which we
operate and the natural gas midstream services we provide to our customers. We
expect the Spectrum acquisition to be accretive to our cash distributions per
unit to our limited partners.
Objectives and Strategy
Our objective is to increase our cash flow, earnings, distributions and
returns to our unitholders through the following strategies:
o Exploitation of available growth opportunities with Atlas America. We
believe that our agreements with Atlas America present a favorable
source of internal growth through the continued development of natural
gas producing fields in the Appalachian Basin. We intend to continue
to construct system extensions necessary to service additional wells
drilled by Atlas America in the Appalachian Basin and to expand our
operations to fields that Atlas America develops outside the
Appalachian Basin, to the extent economically attractive.
o Growth through accretive acquisitions. We intend to continue to make
accretive acquisitions of midstream energy assets such as natural gas
and NGL gathering, transmission, processing and storage facilities. We
will seek opportunities in our current areas of operation, as well as
other regions of the U.S. with significant natural gas and oil
reserves or with growing demand for natural gas and oil.
o Controlling our operating costs. We intend to control our operating
costs by emphasizing the efficient management of existing and acquired
businesses and achieving economies of scale through the expansion of
our operations through extensions and acquisitions.
o Maintaining a flexible financial structure. Upon completion of this
offering, we expect to have available capacity of $35 million under
our new revolving credit facility. We intend to finance our growth
with a combination of long-term debt and equity to maintain our
financial flexibility to fund future opportunities.
Since commencing operations in January 2000, we have pursued these
objectives by:
o adding 372 miles of pipeline to our Appalachian Basin gathering
systems;
o connecting 906 wells to our Appalachian Basin gathering systems, 847
of which were drilled by Atlas America;
o acquiring gathering systems in Ohio and Pennsylvania, aggregating 120
miles of pipeline, with approximately 433 wells connected to those
systems;
o upgrading our Appalachian Basin system and substantially expanding our
capacity;
o agreeing to acquire Spectrum, which will provide geographic
diversification and expand our platform of midstream service
offerings; and
o financing our acquisitions and expansions with a balanced mix of debt
and common equity.
S-29
Competitive Strengths
We believe the following competitive strengths enhance our ability to
successfully execute our business strategy:
o Relationship with Atlas America. The agreements between us and Atlas
America are intended to maximize the use and expansion of our
Appalachian Basin gathering systems and the amount of natural gas they
transport. Of the approximately 4,600 wells connected to our gathering
systems, approximately 4,200 are operated by Atlas America. Atlas
America has a significant presence within its core Appalachian Basin
areas of New York, Ohio and Pennsylvania as well as an active drilling
and development program, which we believe will continue to provide us
a secure and stable source of natural gas supply.
o Strategically Located Assets. Our original gas gathering systems are
located in the Appalachian Basin, a producing region characterized by
long-life reserves. Due to the currently favorable natural gas pricing
environment and the comparatively lower-risk and lower-cost nature of
the basin, we expect that Atlas America will increase its drilling in
the area. Additionally, the Spectrum acquisition will diversify our
operations by giving us a presence in the prolific mid-continent
producing region of the United States.
o Favorable Commercial Agreements that Reduce Commodity Price
Risk. Substantially all of our operating income is derived from
percent of proceeds-based transportation arrangements with Atlas
America. Under these agreements, we generally earn fees based on a
percentage of the natural gas price Atlas America receives at the
wellhead, subject in most cases to minimum fees ranging from $.35 to
$.40 per mcf of gas transported. In addition, Spectrum generates its
operating income from a mix of POP and fee-based arrangements. Both
Atlas America and Spectrum have hedged a significant amount of their
near term natural gas production and NGL production, which we believe
should reduce volatility in our operating income.
o Strong Growth Record. We have grown our gathering systems through both
extensions to our existing systems to connect to new wells and
acquisitions. As a result of this internal and external growth, and
giving effect to the Spectrum acquisition, since 2001 we have grown
from an average throughput of 46.9 mmcf per day over 1,300 miles of
pipeline in 2001 to 98.4 mmcf per day over 3,240 miles of pipeline for
the first quarter of 2004. We believe there will continue to be
attractive acquisition opportunities in the midstream sector of the
energy industry in the near-term.
o Efficient Assets with Low Maintenance Capital Expenditure
Requirements. A significant portion of our existing gathering systems,
as well as Spectrum's Velma gas processing plant and associated
gathering system, are new or have been recently expanded or replaced.
Spectrum invested approximately $20 million during the two year period
ended December 31, 2003 to improve its assets, including the recent
replacement of all of its gas-fired compression units with
state-of-the-art, electric-driven compression units. Excluding new
well connects, we expect these initiatives to enable us to maintain
low maintenance capital expenditures for the combined company.
o Strong, Experienced Management Team. Our general partner is owned and
managed by Atlas America, which has significant management and
technical expertise. The management team averages 19 years of
experience in the oil and gas industry and in managing more than 90
public and private energy investment partnerships. Atlas America's
technical team, consisting of 13 geologists and engineers, averages 22
years of experience in drilling and producing gas wells and in
constructing and operating the pipeline systems necessary to deliver
that gas to consuming market areas. In addition, upon completion of
the acquisition of Spectrum, the Spectrum senior management team will
become Atlas America employees and will continue to manage Spectrum's
operations while assisting us in our efforts to grow. Spectrum's
senior management averages 30 years of experience in all facets of the
midstream natural gas industry.
S-30
Our Appalachian Basin Operations
Our Appalachian Basin gathering systems serve approximately 4,600 wells with
an average daily throughput of 52.5 mmcf of natural gas for the year ended
December 31, 2003 and 51.4 mmcf for the three months ended March 31, 2004. Our
gathering systems provide a means through which well owners and operators can
transport the natural gas produced by their wells to public utility pipelines
for delivery to customers. To a lesser extent, our gathering systems transport
natural gas directly to customers. Our gathering systems currently connect
with public utility pipelines operated by Peoples Natural Gas Company,
National Fuel Gas Supply, Tennessee Gas Pipeline Company, National Fuel Gas
Distribution Company, East Ohio Gas Company, Columbia of Ohio, Consolidated
Natural Gas Co., Texas Eastern Pipeline, Columbia Gas Transmission Corp. and
Equitable Utilities. We do not engage in storage or gas marketing programs,
nor do our Appalachian Basin operations currently engage in the purchase and
resale of natural gas for our account.
Appalachian Basin Overview. The Appalachian Basin includes the states of
Kentucky, Maryland, New York, Ohio, Pennsylvania, Virginia, West Virginia and
Tennessee. It is the most mature oil and gas producing region in the United
States, having established the first oil production in 1859. In addition, the
Appalachian Basin is strategically located near the energy-consuming regions
of the mid-Atlantic and northeastern United States which has historically
resulted in Appalachian producers selling their natural gas at a premium to
the benchmark price for natural gas on the NYMEX.
According to the Energy Information Administration, a branch of the U.S.
Department of Energy, in 2002 there were 23 trillion cubic feet, or tcf, of
natural gas consumed in the United States which represented approximately
23.6% of the total energy used. The Appalachian Basin accounted for
approximately 3.4% of total 2002 domestic natural gas production, or 642.8
billion cubic feet. Additionally, in 2002 there were approximately 145,120 gas
wells in the Appalachian Basin which represented roughly 37.8% of the total
number of gas wells in the United States. Of those wells, Atlas America and
its drilling investment partnerships own interests in approximately 4,760
proved developed producing wells, 84.5% of which Atlas America operates.
Furthermore, according to the Natural Gas Annual 2002, an annual report
published by the Energy Information Administration, Office of Oil and Gas, the
Appalachian Basin holds 10.6 tcf of economically recoverable reserves,
representing approximately 5.7% of total domestic reserves as of December 31,
2002. World Oil magazine, in its February 2004 issue, predicted that
approximately 5,576 oil and gas wells will be drilled in the Appalachian Basin
during 2004, approximately 16.7% of the total number of wells they predict
will be drilled in the United States during 2004, and an increase of 12.8%
over the number of Appalachian Basin wells estimated to have been drilled
during 2003, compared to an increase of 9.7% in the wells drilled in the
United States from 2003 to 2004.
Appalachian Basin Gathering Systems. We set forth in the following table
the volumes of the natural gas we transported, in mmcfs, for the periods
indicated:
Years ended December 31,
-------------------------
2003 2002 2001
------ ------ ------
New York systems...................................................................................... 450 494 571
Ohio systems.......................................................................................... 5,060 5,397 5,378
Pennsylvania systems.................................................................................. 13,642 12,492 11,176
------ ------ ------
19,152 18,383 17,125
====== ====== ======
The gathering systems are generally constructed with 2, 4, 6, 8 and 12 inch
cathodically protected and wrapped steel pipe and are generally buried 36
inches below the ground. Pipelines constructed in this manner typically are
expected to last at least 50 years from the date of construction. For the
three months ended March 31, 2004 and the years ended December 31, 2003, 2002
and 2001, the cost of operating the gathering systems, excluding depreciation,
was approximately $606,800, $2.4 million, $2.1 million and $1.9 million,
respectively. We do not believe that there are any significant geographic
limitations upon our ability to expand in the areas served by our Appalachian
Basin gathering systems.
S-31
Natural Gas Supply. Of the approximately 4,600 wells currently connected to
our gathering systems, approximately 4,200 are owned by Atlas America or its
affiliates or by investment partnerships managed or operated by Atlas America
or its affiliates, with the remainder being owned or managed by third parties.
We have an agreement with Atlas America and its affiliates relating to the
connection of future wells owned or controlled by them to our gathering
systems. We describe this agreement in "--Our Relationship with Atlas
America." These wells are the principal producers of gas transported by our
Appalachian Basin gathering systems and we anticipate that wells controlled by
Atlas America will continue in the future to be the principal producers into
those gathering systems. As of March 31, 2004, Atlas America and its
affiliates controlled leases on developed properties in the operational area
of our gathering systems totaling approximately 191,200 net acres. In
addition, Atlas America and its affiliates control leases on approximately
206,900 undeveloped net acres of land. Atlas America intends to drill over 600
wells during 2004, approximately 450 of which will be connected to our
gathering systems. Atlas America and its affiliates drilled and connected 77
wells to our gathering systems during the three months ended March 31, 2004,
270 wells during the year ended December 31, 2003, 195 wells during the year
ended December 31, 2002 and 196 wells during the year ended December 31, 2001.
Gas Revenues. Our revenues are determined primarily by the amount of
natural gas flowing through our gathering systems and the price received for
this natural gas. We have an agreement with Atlas America relating to the
transportation fees we charge. We describe this agreement in "--Our
Relationship with Atlas America." We charge other operators fees negotiated at
the time we connect these wells to our gathering systems or, in a pipeline
acquisition, that were established by the entity from which we acquired the
pipeline. Our ability to increase the flow of natural gas through our
gathering systems and to offset the natural decline of the production already
connected to our gathering systems will be determined primarily by the number
of wells drilled by Atlas America and connected to our gathering systems and
by our ability to acquire additional gathering assets.
Pending Acquisition of Spectrum
In June 2004, we entered into an agreement to acquire Spectrum for
approximately $140 million, including payment of taxes anticipated to be due
as a result of the transaction and subject to adjustment based on the amount
of working capital Spectrum has at closing. We expect to complete the
acquisition on July 16, 2004, subject to receipt of approvals for necessary
permits and satisfaction of other customary closing conditions.
We intend to finance the Spectrum acquisition, including approximately $7
million of transaction costs, as follows:
o We will borrow $100 million under a new $135 million senior secured
credit facility, which will close at the same time as the Spectrum
acquisition.
o We will use the $25 million of net proceeds from our April 2004 common
unit offering.
o We will use the $22 million we receive from the sale to Resource
America and Atlas America of preferred units of our operating
subsidiary, Atlas Pipeline Operating Partnership.
Transaction costs include a $1.3 million commitment fee payable to Resource
America and Atlas America in connection with their commitment to purchase the
preferred units.
We intend to use the net proceeds of this offering to repay a portion of the
borrowings under our new credit facility and to repurchase the preferred units
from Resource America and Atlas America. The closing of this offering is
contingent on our completion of the Spectrum acquisition.
Spectrum's principal assets consist of a gas processing plant in Velma,
Oklahoma and approximately 1,900 miles of natural gas gathering pipelines in
southern Oklahoma and north Texas. Spectrum gathers natural gas and processes
it into pipeline quality natural gas by extracting NGLs and removing various
impurities. During 2003, Spectrum processed an average of 47 mmcf of natural
gas per day and produced an average of 5,100 bbls per day of NGLs, and during
the three months ended March 31, 2004, processed an average of 48 mmcf of
natural gas per day and produced an average of 5,400 bbls per day of NGLs.
S-32
Velma Gas Plant. Spectrum's gas processing plant, located in Velma, Oklahoma,
has a design capacity of 100 mmcf per day and compression capacity of
approximately 58 mmcf per day. The plant receives natural gas from the Velma
gathering system and delivers residue gas to pipelines owned by ONEOK Energy
Marketing and Tenaska Marketing Ventures. The Velma gas plant is one of two
facilities in the area that is capable of treating natural gas with a high
content of hydrogen sulfide and carbon dioxide.
In September 2003, Spectrum completed a $11.7 million renovation of the
Velma gas plant to upgrade the plant's compression by replacing thirty-four
gas-fired engines with six state-of-the-art electric-driven compressors. These
compressors require less maintenance and are more efficient than gas-fired
engines and generators. In addition, the electric-driven compressors generate
fewer emissions, which will reduce or eliminate future emission costs.
Enville Gas Plant. In addition to the Velma gas plant, Spectrum owns an
Enville, Oklahoma gas processing facility, located north of the Red River in
Marshall County, Oklahoma. The Enville gas plant is currently inactive and is
used as a field compression booster station.
Spectrum's Gathering System. Spectrum's gathering system is comprised of
approximately 1,100 miles of active and 760 miles of inactive pipeline ranging
in size from 2 inches to 42 inches in diameter and currently gathers 56 mmcf
per day of natural gas. Currently, there are approximately 550 receipt points
connected to the gathering system. The following table shows the volumes of
natural gas gathered by Spectrum's system, in mmcfs, for the periods
indicated:
Three months ended March 31, 2004..................................... 4,377
Year ended December 31, 2003.......................................... 17,228
Year ended December 31, 2002.......................................... 17,458
Year ended December 31, 2001.......................................... 17,885
Natural Gas Supply. Spectrum has approximately 600 active purchase and
gathering contracts. Of these approximately 80% (by volume) are POP contracts.
Under its POP purchasing arrangements, Spectrum purchases natural gas at the
wellhead, processes the natural gas by extracting NGLs and removing impurities
and sells the residue gas and NGLs at market-based prices, remitting to
producers a contractually-determined percentage of the sale proceeds. POP
contracts, as opposed to keep-whole contracts, insulate the processor against
processing margin risk. Under keep-whole contracts, which Spectrum does not
have, the processor purchases natural gas from the producer at a specified
rate which is typically based upon market prices, and then must resell the
NGLs and natural gas (which is typically at a reduced price due to the
extraction of NGLs) at a higher aggregate price in order to realize a profit.
The differential is referred to as the processing margin. Spectrum currently
retains an average of approximately 26% of the NGL revenue and an average of
approximately 11% of the residue gas revenue. The remaining 20% of Spectrum's
purchase and gathering contracts are fixed-fee, under which Spectrum receives
a fee for gathering, compressing, treating and processing natural gas.
Most of the processing contracts include compression fees, treating fees,
and/or low volume fees, which Spectrum is entitled to charge in instances
where a producer's deliveries do not meet a pre-determined level. In
aggregate, such fees have averaged approximately $750,000 annually since July
2000. Producers also provide, in-kind, the fuel required to gather the gas and
operate the Velma gas plant. In addition, the producers bear all other plant
shrinkage and gathering system line loss.
ChevronTexaco is Spectrum's largest supplier of natural gas under a contract
that has a life-of-lease or 10-year term expiring in 2010 with a year-to-year
renewal provision. The 236 wells under ChevronTexaco's contract supply
approximately 10 mmcf per day to the Spectrum system. Spectrum retains a
weighted average of 47% of the NGL revenues and a weighted average of 10% of
the residue gas revenues from sales of this gas. Spectrum's remaining gas
contracts have varying terms: the latest expiration date is 2008, with a few
scheduled to terminate in 2005. The term of others has expired, but the
producers continue to sell the gas under the year-to-year renewal provisions.
In February, 2004, Spectrum entered into a contract with Zinke & Trumbo to
gather and process natural gas from a new development northwest of Duncan,
Oklahoma. In March 2004, Spectrum completed a
S-33
29-mile, large-diameter high pressure trunkline to connect this new gas supply.
Since the Duncan line will not require field compression, Spectrum does not
expect to incur incremental operating costs beyond the initial capital
expenditure in order to capture this new supply. The Duncan line is currently
delivering 9 mmcf per day.
NGL and Gas Marketing. Spectrum sells its NGL production to Koch
Hydrocarbons at the Velma gas plant under an agreement that is renewed
monthly. Spectrum has the right to elect (on a monthly basis) whether the NGLs
are sold into the Mont Belvieu or Conway markets. NGLs are priced at the
average monthly Oil Price Information Service price for the selected market.
In addition, this agreement provides for a fee which is based upon the Houston
Ship Channel spot-gas price and fluctuates monthly between $0.0125 and $0.015
per gallon for deliveries to Mont Belvieu.
Spectrum has a transportation and fractionation contract, also with Koch
Hydrocarbons, which expires January 2006. Condensate is collected at both at
the Velma gas plant and in the Velma gathering system and sold for Spectrum's
account to SemGroup, L.P. under an agreement that expires on November 30,
2004.
Spectrum sells natural gas to purchasers at the tailgate of the Velma gas
plant. During the year ended December 31, 2003, ONEOK Energy Marketing and
Trading accounted for 85% of Spectrum's residue natural gas sales and Tenaska
Marketing Ventures accounted for 15% of such sales. Spectrum currently sells
the majority of its residue natural gas at the average of ONEOK Gas
Transmission and Southern Star Central first-of-month indices as published in
Inside FERC, with the remainder being sold on a NYMEX basis, less a fixed
basis differential.
Natural Gas and NGL Hedging. Spectrum uses hedges to limit its exposure to
changing natural gas and NGL prices. These hedges include floating-for-fixed
swaps and collars. In a floating-for-fixed swap, Spectrum sells future
production to the counterparty at a fixed price and agrees to purchase
production from the counterparty at a price that will be established on the
date of hedge settlement by reference to a specified index price. In a collar,
Spectrum purchases a put option for specified production quantities while
simultaneously selling a call option on the same amount of production. These
hedges cover periods of up to two years from the date of the hedge. To insure
that these financial instruments will be used solely for hedging price risks
and not for speculative purposes, Spectrum has established a hedging committee
to review its hedges for compliance with its hedging policies and procedures.
In addition, Spectrum does not enter into a hedge where it cannot offset the
hedge with physical residue natural gas or NGL sales.
The portion of residue natural gas and NGLs that Spectrum hedges and the
manner in which it is hedged changes from time to time. As of June 30, 2004,
Spectrum's hedging position for the future months ending December 31, 2004 for
its residue and NGL production was approximately as follows:
o 13% was hedged under floating-for-fixed swaps;
o 22% was hedged with collars; and
o 65% was not hedged and was subject to market-based pricing.
Spectrum recognizes gains and losses from the settlement of its hedges in
revenue when it sells the associated physical residue natural gas or NGLs. Any
gain or loss realized as a result of hedging is substantially offset in the
market when Spectrum sells the physical residue natural gas or NGLs. All of
Spectrum's hedges are characterized as cash flow hedges as defined in
Statement of Financial Accounting Standards No. 133. Spectrum determines gains
or losses on open and closed hedging transactions as the difference between
the hedge price and the physical price. This mark-to-market uses daily closing
NYMEX prices when applicable and an internally-generated algorithm for hedged
commodities that are not traded on a market.
Our Relationship with Atlas America
Atlas America (NASDAQ: ATLS) currently owns a 32% limited partner interest
and a 2% general partner interest in us through its ownership of our general
partner, Atlas Pipeline Partners GP, LLC. Atlas America and its affiliates
sponsor limited and general partnerships to raise funds from investors to
explore for, develop and produce natural gas and, to a lesser extent, oil from
locations in eastern Ohio, western New York and western Pennsylvania. Our
gathering systems are connected to approximately 4,200 wells developed
S-34
and operated by Atlas America in the Appalachian Basin. Through agreements
between us and Atlas America, we gather substantially all of the natural gas for
our Appalachian Basin operations from wells operated by Atlas America.
Omnibus Agreement. Under the omnibus agreement, Atlas America and its
affiliates agreed to add wells to the gathering systems and provide consulting
services when we construct new gathering systems or extend existing systems.
The omnibus agreement also imposes conditions upon our general partner's
disposition of its general partner interest in us. The omnibus agreement is a
continuing obligation, having no specified term or provisions regarding
termination except for a provision terminating the agreement if our general
partner is removed as general partner without cause.
Well Connections. Under the omnibus agreement, Atlas America must construct
up to 2,500 feet of small diameter (two inches or less) sales or flow lines
from the wellhead of any well it drills and operates to a point of connection
to our gathering systems. Where Atlas America has extended sales and flow
lines to within 1,000 feet of one of our gathering systems, we must extend our
system to connect to that well.
With respect to wells drilled that are more than 3,500 feet from our
gathering systems, we have the right, at our cost, to extend our gathering
systems. If we do not elect to extend our gathering systems, Atlas America may
connect the wells to an interstate or intrastate pipeline owned by third
parties, a local natural gas distribution company or an end user; however, we
will have the right to assume the cost of construction of the necessary lines,
which then become part of our gathering systems. We must exercise our rights
within 30 days of notice to us from Atlas America that it intends to drill on
a particular site that is not within 3,500 feet of our gathering systems. If
we elect to have the well connected to our gathering systems, we must complete
construction of one of our gathering systems to within 2,500 feet of the well
within 60 days after Atlas America has notified us that the well will be
completed as a producing natural gas well. If we elect to assume the cost of
constructing lines, Atlas America will be responsible for the construction,
and we must pay the cost of that construction within 30 days of Atlas
America's invoice.
Consulting Services. The omnibus agreement requires Atlas America to assist
us in identifying existing gathering systems for possible acquisition and to
provide consulting services to us in evaluating and making a bid for these
systems. Any gathering system that Atlas America or its affiliates identify as
a potential acquisition must first be offered to us. We will have 30 days to
determine whether we want to acquire the identified system and advise Atlas
America of our intent. If we intend to acquire the system, we have an
additional 60 days to complete the acquisition. If we do not complete the
acquisition, or advise Atlas America that we do not intend to acquire the
system, then Atlas America may do so.
Gathering System Construction. The omnibus agreement requires Atlas America
to provide us with construction management services if we determine to expand
one or more of our gathering systems. We must reimburse Atlas America for its
costs, including an allocable portion of employee salaries, in connection with
its construction management services.
Construction Financing. The omnibus agreement requires Atlas America to
provide us with stand-by financing of up to $1.5 million per year for the cost
of constructing new gathering systems or gathering system expansions until
February 2005. If we choose to use the stand-by commitment, the financing will
be provided through the purchase by Atlas America of our common units in the
amount of the construction costs as they are incurred. The purchase price of
the common units will be the average daily closing price for the common units
on the New York Stock Exchange for the 20 consecutive trading days before the
purchase. Construction costs do not include maintenance expenses or capital
improvements following construction or costs of acquiring gathering systems.
We are not obligated to use the stand-by commitment and may seek financing
from other sources. We have not used the stand-by commitment to date.
Disposition of Interest in Our General Partner. Direct and indirect
wholly-owned subsidiaries of Atlas America act as the general partners,
operators or managers of the drilling investment partnerships sponsored by
Atlas America. Our general partner is a subsidiary of Atlas America. Under the
omnibus agreement, those subsidiaries, including our general partner, that
currently act as the general partners, operators or managers of partnerships
sponsored by Atlas America must also act as the general partners, operators or
managers for all new drilling investment partnerships sponsored by Atlas
America. Atlas America and its affiliates may not
S-35
divest their ownership of one entity without divesting their ownership of the
other entities to the same acquirer. For these purposes, divestiture means a
sale of all or substantially all of the assets of an entity, the disposition of
more than 50% of the capital stock or equity interest of an entity, or a merger
or consolidation that results in Atlas America and its affiliates, on a combined
basis, owning, directly or indirectly, less than 50% of the entity's capital
stock or equity interest. Atlas America and its affiliates may transfer their
interests to each other, or to their wholly or majority-owned direct or indirect
subsidiaries, or to a parent of any of them, provided that their combined direct
or indirect interest is not reduced to less than 50%.
Natural Gas Gathering Agreements. Under the master natural gas gathering
agreement, we receive a fee from Atlas America for gathering natural gas,
determined as follows:
o for natural gas from well interests allocable to Atlas America, or its
subsidiaries (excluding general or limited partnerships sponsored by
them) that were connected to our gathering systems at February 2,
2000, the greater of $.40 per mcf or 16% of the gross sales price of
the natural gas transported;
o for natural gas from well interests allocable to general and limited
partnerships sponsored by Atlas America that are connected to our
gathering systems at any time, and well interests allocable to
independent third parties in wells connected to our gathering systems
before February 2, 2000, the greater of $.35 per mcf or 16% of the
gross sales price of the natural gas transported;
o for natural gas from well interests allocable to Atlas America that
are connected to our gathering systems after February 2, 2000, the
greater of $.35 per mcf or 16% of the gross sales price of the natural
gas transported; and
o for natural gas from well interests operated by Atlas America and
drilled after December 1, 1999 that are connected to a gathering
system that is not owned by us and for which we assume the cost of
constructing the connection to that gathering system, an amount equal
to the greater of $.35 per mcf or 16% of the gross sales price of the
natural gas transported, less the gathering fee charged by the other
gathering system.
Atlas America receives gathering fees from contracts or other arrangements
with third party owners of well interests connected to our gathering systems.
However, Atlas America must pay gathering fees owed to us from its own
resources regardless of whether it receives payment under those contracts or
arrangements.
The master natural gas gathering agreement is a continuing obligation and,
accordingly, has no specified term or provisions regarding termination.
However, if our general partner is removed as our general partner without
cause, then no gathering fees will be due under the agreement with respect to
new wells drilled by Atlas America. The agreement provides that Atlas America,
as the shipper of natural gas, will indemnify us against claims relating to
ownership of the natural gas transported. For all other claims relating to
natural gas we transport, the party that has control and possession of the
natural gas must indemnify the other party with respect to losses arising in
connection with or related to the natural gas when it is in the first party's
possession and control.
In addition to the master natural gas gathering agreement, we have three
other gas gathering agreements with subsidiaries of Atlas America. Under two
of these agreements, relating to wells located in southeastern Ohio which
Atlas America acquired from Kingston Oil Corporation and wells located in
Fayette County, Pennsylvania which Atlas America acquired from American
Refining and Exploration Company, we receive a fee of $.80 per mcf. Under the
third agreement, which covers wells owned by third parties unrelated to Atlas
America or the investment partnerships it sponsors, we receive fees that range
between $.20 to $.29 per mcf or between 10% to 16% of the weighted average
sales price for the natural gas we transport.
Termination of Alaska Pipeline Acquisition
In September 2003, we entered into an agreement with SEMCO to purchase all
of the stock of Alaska Pipeline. In order to complete the acquisition, we
needed the approval of the Regulatory Commission of Alaska. The Regulatory
Commission initially approved the transaction, but on June 4, 2004 it vacated
its order of approval based upon a motion for clarification or reconsideration
filed by SEMCO. On July 1, 2004, SEMCO sent us a notice purporting to
terminate the transaction. While the acquisition agreement was
S-36
terminable by either of us or SEMCO beginning on June 16, 2004, we believe SEMCO
caused the delay in closing the transaction and breached its obligations under
the acquisition agreement. We intend to vigorously pursue our remedies under the
acquisition agreement.
We have not included pro forma financial information for the Alaska Pipeline
acquisition in this prospectus supplement. The accompanying prospectus does
include both historical and pro forma financial information with respect to
Alaska Pipeline. Because we will not complete this acquisition, the financial
information for Alaska Pipeline presented in the accompanying prospectus is no
longer relevant to an investment decision in us.
New Credit Facility
We have a commitment from Wachovia Bank for $135 million credit facility
that will replace our existing $20 million facility concurrently with the
completion of the Spectrum acquisition. The facility will include a $35
million 4-year revolving line of credit and a $100 million 5-year term loan.
Up to $5 million of the facility may be used for standby letters of credit.
Borrowings under the facility will be secured by a lien on and security
interest in all of our property and that of our subsidiaries and by the
guaranty of each of our subsidiaries. The credit facility will bear interest
at one of two rates, elected at our option:
o the base rate plus the applicable margin; or
o the adjusted London Interbank Offered Rate, or LIBOR, plus the
applicable margin.
The base rate for any day equals the higher of the federal funds rate plus 1/
2 of 1% or the Wachovia Bank prime rate. Adjusted LIBOR is LIBOR divided by
1.00 minus the percentage prescribed by the Board of Governors of the Federal
Reserve System for determining the reserve requirement for euro currency
funding. The applicable margin for the revolving line of credit is as follows:
o where our leverage ratio, that is, the ratio of our debt to EBITDA, is
less than or equal to 2.5, the applicable margin is 1.00% for base
rate loans and 2.00% for LIBOR loans;
o where our leverage ratio is greater than 2.5 but less than or equal to
3.0, the applicable margin is 1.25% for base rate loans and 2.25% for
LIBOR loans;
o where our leverage ratio is greater than 3.0 but less than or equal to
3.5, the applicable margin is 1.75% for base rate loans and 2.75% for
LIBOR loans; and
o where our leverage ratio is greater than 3.5, the applicable margin is
2.25% for base rate loans and 3.25% for LIBOR loans; and
The applicable margin for the term loan is .75% higher for both base rate
loans and LIBOR loans.
The credit facility will require us to maintain a ratio of current
liabilities and debt to EBITDA of not more than 4.25 to 1.0, reducing to 4.0
to 1.0 on December 31, 2004 and 3.5 to 1.0 on June 30, 2005 and an interest
coverage ratio of not less than 3.0 to 1.0. In addition, we will be required
to prepay the term loan with the net proceeds of any asset sales or issuances
of debt. With respect to any issuances of equity, we will be required to repay
the term loan from the proceeds of such issuances to the extent our ratio of
current liabilities and debt to EBITDA exceeds 3.5 to 1.0. We will be required
to pay down $5 million in principal on the term loan annually, but any
prepayments of principal that we make will be credited pro rata against this
repayment obligation.
The credit agreement will contain covenants from us customary for loans of
this size, including restrictions on incurring additional debt and making
material acquisitions, and a prohibition on paying distributions to our
unitholders if an event of default occurs. The events which constitute an
event of default will also be customary for loans of this size, including
payment defaults, breaches of our representations or covenants contained in
the credit agreement, adverse judgments against us in excess of a specified
amount, and a change of control of our general partner.
S-37
Competition
Appalachian Basin. Our Appalachian Basin operations do not encounter direct
competition in their service areas since Atlas America controls the majority of
the drillable acreage in each area. However, because our Appalachian Basin
operations principally serve wells drilled by Atlas America we are affected by
competitive factors affecting Atlas America's ability to obtain properties and
drill wells, which affects our ability to expand our gathering systems and to
maintain or increase the volume of natural gas we transport and, thus, our
transportation revenues. Atlas America also may encounter competition in
obtaining drilling services from third-party providers. Any competition it
encounters could delay Atlas America in drilling wells for its sponsored
partnerships, and thus delay the connection of wells to our gathering systems.
These delays would reduce the volume of gas we otherwise would have transported,
thus reducing our potential transportation revenues.
As our omnibus agreement with Atlas America generally requires it to connect
wells it operates to our system, we do not expect any direct competition in
connecting wells drilled and operated by Atlas America in the future. In
addition, we occasionally connect wells operated by third parties. During 2003
and the first six months of 2004, we connected no such wells.
During 2003 and the first six months of 2004, we encountered competition in
acquiring gas gathering systems owned by third parties. In several instances
we submitted bids in auction situations and in direct negotiations for the
acquisition of existing gas gathering systems. Except for our bids for Alaska
Pipeline and Spectrum, in each case we were either outbid by others or were
unwilling to meet the sellers' expectations and, as a result, were
unsuccessful in acquiring those systems. In the future, we expect to encounter
equal if not greater competition for gathering system acquisitions because, as
gas prices increase, the economic attractiveness of owning gathering systems
increases.
Spectrum. In its southern Oklahoma and north Texas service area, Spectrum
competes for the acquisition of well connections with several other gathering/
servicing operations. These operations include plants operated by Duke Energy
Field Services, ONEOK Field Services and Enogex. Spectrum believes that the
principal factors upon which competition for new well connections is based
are:
o the price received by an operator for its production after deduction
of allocable charges, principally the use of the natural gas to
operate compressors; and
o responsiveness to a well operator's needs.
Spectrum believes that its electric compressors operate more efficiently
than the gas-operated compressors used by its competitors. As a result,
Spectrum believes that it can operate as or more cost-effectively than its
competitors. Spectrum also believes that its relationships with operators
connected to its system are good. However, if Spectrum cannot compete
successfully, it may be unable to obtain new well connections and, possibly,
could lose wells already connected to its system. See "Risk
Factors--Spectrum's success depends upon its ability to continually find and
contract for new sources of natural gas supply."
Regulation
Federal Regulation. Under the Natural Gas Act, the Federal Energy
Regulatory Commission regulates various aspects of the operations of any
"natural gas company," including the transportation of natural gas, rates and
charges, construction of new facilities, extension or abandonment of services
and facilities, the acquisition and disposition of facilities, reporting
requirements, and similar matters. However, the Natural Gas Act definition of
a "natural gas company" requires that the company be engaged in the
transportation of natural gas in interstate commerce, or the sale in
interstate commerce of natural gas for resale. Since we believe that each of
our individual gathering systems and those of Spectrum perform primarily
gathering functions, we believe that neither we nor Spectrum is subject to
regulation under the Natural Gas Act. If either of us were determined to be a
natural gas company, our operations, or those of Spectrum, would become
regulated under the Natural Gas Act. We believe the expenses associated with
seeking certificates of authority for construction, service and abandonment,
establishing rates and a tariff for our gas gathering activities, and meeting
the detailed regulatory accounting and reporting requirements under the
Natural Gas
S-38
Act would substantially increase our operating costs and would
adversely affect our profitability, thereby reducing our ability to make
distributions to unitholders.
State Regulation. Our operations are subject to regulation by the Public
Utility Commission of Ohio, the New York Public Service Commission and the
Pennsylvania Public Utilities Commission. Spectrum's operations are subject to
regulation by the Oklahoma Corporation Commission and the Texas Railroad
Commission.
In Ohio, a producer or gatherer of natural gas may file an application
seeking exemption from regulation as a public utility. We have been granted an
exemption by the Public Utility Commission of Ohio for our Ohio facilities.
The New York Public Service Commission imposes traditional public utility
regulation on the transportation of natural gas by companies subject to its
regulation. This regulation includes rates, services and siting authority for
the construction of certain facilities. Our gas gathering operations currently
are not subject to regulation by the New York Public Service Commission. Our
operations in Pennsylvania currently are not subject to the Pennsylvania
Public Utility Commission's regulatory authority since they do not provide
service to the public generally and, accordingly, do not constitute the
operation of a public utility. In the event the New York and Pennsylvania
authorities seek to regulate our operations, we believe that our operating
costs could increase and our transportation fees could be adversely affected,
thereby reducing our net revenues and ability to make distributions to
unitholders.
Spectrum is subject to regulation by the Oklahoma Corporation Commission and
the Texas Railroad Commission. The state of Oklahoma has adopted a complaint-
based statute that allows the Oklahoma Corporation Commission to remedy
discriminatory rates for providing gathering service where the parties are
unable to agree. In a similar way, the Texas Railroad Commission sponsors a
complaint procedure for resolving grievances about natural gas gathering
access and rate discrimination. No such complaint has been made against
Spectrum to date in either Oklahoma or Texas.
Environmental and Safety Regulation. Under the Comprehensive Environmental
Response, Compensation and Liability Act, or CERCLA, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, or RCRA, the Clean
Air Act, the Clean Water Act and other federal and state laws relating to
discharges of materials into the environment or otherwise protective of the
environment, owners and operators of natural gas pipelines and associated
storage and processing facilities can be liable, sometimes on a strict, joint
and several basis, for fines, penalties investigatory and remedial costs, and
compliance costs including capital expenditures with respect to pollution
caused by the pipelines and associated facilities. Moreover, the owners' and
operators' liability can extend to pollution costs that arose from activities
or incidents that occurred prior to such owners' or operators' acquisition of
the pipelines and associated facilities, even in circumstances where the
current owner or operator did not cause or contribute to the pollution.
We own, lease or operate properties and, with our acquisition of Spectrum,
will own, lease, or operate additional properties, that in the past have been
subject to pipeline gathering and/or oil and gas processing activities.
Although we have used operating and disposal practices that were standard in
the industry at the time, hydrocarbons and wastes may have been disposed of or
released on or under these properties or on or under other locations where
such materials have been taken for disposal. A number of these properties,
including the Spectrum properties, have been operated by previous owners or
operators whose environmental activities were not under our control. These
properties and the hydrocarbons and wastes disposed thereon may be subject to
CERCLA, RCRA, and analogous state laws. Under such laws, we could be required
to remove or remediate previously disposed hydrocarbons, hazardous substances,
or wastes or property contamination, or to perform investigatory and remedial
actions to prevent future contamination.
Natural gas pipelines are also subject to safety regulation, administered by
state regulators, under the Natural Gas Pipeline Safety Act of 1968 and the
Pipeline Safety Act of 1992 which, among other things, dictate the type of
pipeline, quality of pipeline, depth, methods of welding and other
construction-related standards and subjects pipelines to regular inspections.
The state public utility regulators in our and Spectrum's service areas have
either adopted the federal standards or promulgated their own safety
requirements consistent with federal regulations. Although we believe that our
gathering systems comply in all material respects with applicable
environmental and safety regulations, risks of substantial costs and
liabilities are inherent in pipeline operations, and we cannot assure you that
we will not incur these costs and liabilities. Moreover, it is possible that
other developments, such as increasingly rigorous environmental laws,
regulations and enforcement policies, and claims for damages to property or
persons resulting from our operations, could result in substantial costs and
liabilities to us.
S-39
We are also subject to the requirements of the Occupational Safety and
Health Act, or OSHA, and comparable state statutes. We believe that our
operations comply in all material respects with OSHA requirements, including
general industry standards, record keeping, hazard communication requirements
and monitoring of occupational exposure and other regulated substances.
We have not expended and do not anticipate that we will be required in the
near future to expend, amounts that are material in relation to our revenues
by reason of environmental and safety laws. However, we cannot predict
legislative or regulatory developments or the costs of compliance with those
developments. In general, however, we anticipate that new laws, regulations or
policies will increase our operating costs and impose additional capital
expenditure requirements on us.
S-40
MANAGEMENT
Our Management
Our general partner manages our activities. Unitholders do not directly or
indirectly participate in our management or operation or have actual or
apparent authority to enter into contracts on our behalf or to otherwise bind
us. Our general partner will be liable, as general partner, for all of our
debts to the extent not paid, except to the extent that indebtedness or other
obligations incurred by us are made specifically non-recourse to our general
partner. Whenever possible, our general partner intends to make any
indebtedness or other obligations non-recourse to it.
Three members of the managing board of our general partner who are neither
officers nor employees of our general partner nor directors, managing board
members, officers or employees of any affiliate of our general partner (and
have not been for the past five years) serve on the conflicts committee.
Messrs. Bradley, Clifford and Levin currently serve as the conflicts
committee. The conflicts committee has the authority to review specific
matters as to which the managing board believes there may be a conflict of
interest in order to determine if the resolution of the conflict proposed by
our general partner is fair and reasonable to us. Any matters approved by the
conflicts committee are conclusively judged to be fair and reasonable to us,
approved by all our partners and not a breach by our general partner or its
managing board of any duties they may owe us or the unitholders. See
"Conflicts of Interest and Fiduciary Responsibilities--Fiduciary Duties" in
the accompanying prospectus. In addition, the members of the conflicts
committee also constitute an audit committee. The audit committee reviews the
external financial reporting by our management, the audit performed by our
independent public accountants, the procedures for internal auditing and the
adequacy of our internal accounting controls. Mr. Bradley has been designated
as the audit committee financial expert.
As is commonly the case with publicly traded limited partnerships, we do not
directly employ any of the persons responsible for our management or
operation. Rather, Atlas America personnel manage and operate our business.
Officers of our general partner may spend a substantial amount of time
managing the business and affairs of Atlas America and its affiliates and may
face a conflict regarding the allocation of their time between our business
and affairs and their other business interests.
Managing Board Members and Executive Officers of Our General Partner
The following table sets forth information with respect to the executive
officers and managing board members of our general partner. Executive officers
and managing board members are elected for one year terms.
Year
Name in which
------------- Age Position with general partner service began
--- -------------------------------------- -------------
Chairman of the Managing Board and
Edward E. Cohen 65 Chief Executive Officer 1999
Jonathan Z. Cohen 33 Vice Chairman of the Managing Board 1999
President, Chief Operating Officer and
Michael L. Staines 54 Managing Board Member 1999
Freddie M. Kotek 48 Chief Financial Officer 2004
Tony C. Banks 48 Managing Board Member 1999
Michael J. Bradley 59 Managing Board Member 2004
Curtis D. Clifford 61 Managing Board Member 2004
Murray S. Levin 61 Managing Board Member 2001
Edward E. Cohen has been Chairman of the Board of Directors of Resource
America since 1990, and a director of Resource America since 1988. Mr. Cohen
served as Resource America's Chief Executive Officer from 1990 to May 2004 and
President from 2000 to October 2003. He has been Chairman of the Board of
Directors, Chief Executive Officer and President of Atlas America since 1998.
He is Chairman of the Board of Directors of Brandywine Construction &
Management, Inc., a property management company, and a director of TRM
Corporation, a publicly traded consumer services company. Mr. Cohen is the
father of Jonathan Z. Cohen.
S-41
Jonathan Z. Cohen has been Chief Executive Officer of Resource America since
May 2004, President since October 2003 and a director since 2002. Mr. Cohen
served as Resource America's Chief Operating Officer from 2002 to May 2004,
Executive Vice President from 1999 to 2001 and Vice President from 1998 to
1999. Mr. Cohen has been Vice Chairman of Atlas America since 1998. Mr. Cohen
has also served as Trustee and Secretary of RAIT Investment Trust, a real
estate investment trust, since 1997 and Vice Chairman of RAIT since 2003, and
Chairman of the Board of Directors of The Richardson Company, a sales
consulting company, since 1999. Mr. Cohen is the son of Edward E. Cohen.
Michael L. Staines served as Senior Vice President of Resource America from
1989 to May 2004, a director from 1989 through 2000 and Secretary from 1989
through 1998. Since 1998, Mr. Staines has been Executive Vice President,
Secretary and a director of Atlas America. Mr. Staines is a member of the Ohio
Oil and Gas Association and the Independent Oil and Gas Association of New
York.
Freddie M. Kotek has been an Executive Vice President and Chief Financial
Officer of Atlas America since February 2004 and served as a director from
September 2001 until February 2004. Mr. Kotek has been Chairman of Atlas
Resources, Inc., Atlas America's wholly-owned subsidiary which acts as the
managing partner of its drilling investment partnerships, since September 2001
and Chief Executive Officer and President of Atlas Resources since January
2002. He was a Senior Vice President of Resource America from 1995 to May
2004.
Tony C. Banks is a consultant to utilities, energy service companies and
energy technology firms. From 2000 through 2002, Mr. Banks was President of
RAI Ventures, Inc. and Chairman of the Board of Optiron Corporation, which was
an energy technology subsidiary of Atlas America until September 2002. In
addition, Mr. Banks served as President of our general partner during 2000. He
was Chief Executive Officer and President of Atlas America from 1998 through
2000. From 1995 to 1998, Mr. Banks was Vice President of various subsidiaries
of Atlas America.
Michael J. Bradley has been a co-owner and Managing Director of BF
Healthcare, Inc., a supplier of physician services to hospitals and assisted
living facilities, since 1994. Mr. Bradley has served on the board of
directors of SourceCorp., a provider of business process outsourcing solutions
to the healthcare, legal, financial services, government, transportation and
logistics industries, since 1996. From 1988 to 1998, Mr. Bradley served as
Chairman of First Executive Bank, and from 1998 to 2003 he served as Vice
Chairman of First Republic Bank. From 1994 through 1997, Mr. Bradley was
Executive Vice President of Mercy Health Corporation of Southeast
Pennsylvania. Before joining Mercy Health Corporation, Mr. Bradley served as
President and Chief Executive Officer of several healthcare organizations,
including Thomas Jefferson University Hospital and North Philadelphia Health
System, both of which are located in Philadelphia, and the Columbia
Presbyterian Medical Center in New York City. Mr. Bradley is a certified
public accountant and holds a B.S. in Business Administration from Drexel
University.
Curtis D. Clifford has been the principal of CL4D CO, an energy consulting,
marketing and reporting firm since 1998. Mr. Clifford has 37 years' experience
in the natural gas industry, from exploration, production and gathering to
procurement, marketing and consulting.
Murray S. Levin is a senior litigation partner at Pepper Hamilton LLP, a
firm with which he has been associated since 1970. Mr. Levin served as the
first American president of the Association Internationale des Jeunes Avocats
(Young Lawyers International Association), headquartered in Western Europe. He
is a past president of the American Chapter and a member of the board of
directors of the Union Internationale des Avocats (International Association
of Lawyers), a Paris-based organization that is the world's oldest
international lawyers association.
Other Significant Employees
Nancy J. McGurk, 48, has been the Chief Accounting Officer of our general
partner since 1999. Ms. McGurk was Vice President of Resource America from
1992 until 2004 and Treasurer and Chief Accounting Officer from 1989 to May
2004.
S-42
Management Following our Acquisition of Spectrum
The following persons will become officers of Spectrum Field Services, LLC
following our acquisition of Spectrum.
Robert R. Firth, 49, will become President. He has served as Spectrum's
President and Chief Executive Officer since 2002. From 1999 to 2002, Mr. Firth
served as Vice President, Operations and Commercial Services at ScissorTail
Energy. Mr. Firth has 30 years experience in the midstream gas industry.
David D. Hall, 47, will become Executive Vice President and Chief Financial
Officer. Mr. Hall has served as Vice President and Chief Financial Officer of
Spectrum since 2002. From 2000 to 2002, Mr. Hall served as a senior business
analyst at ScissorTail Energy. Mr. Hall has more than 25 years' experience as
a financial executive in the energy industry.
Reimbursement of Expenses of Our General Partner and its Affiliates
Our general partner does not receive any management fee or other
compensation for its services apart from its general partner and incentive
distribution interests. We reimburse our general partner and its affiliates,
including Atlas America, for all expenses incurred on our behalf. These
expenses include the costs of employee, officer and managing board member
compensation and benefits properly allocable to us, and all other expenses
necessary or appropriate to the conduct of our business. Our partnership
agreement provides that our general partner will determine the expenses that
are allocable to us in any reasonable manner determined by our general partner
in its sole discretion. Our general partner allocates the costs of employee
and officer compensation and benefits based upon the amount of business time
spent by those employees and officers on our business. We reimbursed our
general partner $11.7 million for expenses incurred during 2003, which
constituted all of our transportation and compression, general and
administrative and capital expenditures costs.
S-43
TAX CONSIDERATIONS
General
The following summarizes material federal income tax considerations that may
be relevant to a prospective unitholder who is a citizen or resident of the
United States. The tax consequences of investing in us may not be the same for
all investors. A careful analysis of your particular tax situation is required
to analyze an investment in our common units properly. Moreover, this summary
does not purport to address all aspects of taxation that may be relevant to
particular unitholders, such as insurance companies, tax-exempt organizations,
foreign corporations and persons who are not citizens or residents of the
United States who may be subject to special treatment under federal income tax
laws, except to the extent specifically discussed in this summary. As a
consequence, we urge you to consult your own tax advisor.
Opinion of Tax Counsel
We have obtained an opinion from Ledgewood Law Firm, P.C., our tax counsel,
concerning the federal tax issues described in this section. The opinion is
based on the facts described in this prospectus supplement and the
accompanying prospectus and on additional facts that we provided to tax
counsel about how we plan to operate. Any alteration of our activities from
the description we gave to tax counsel may render the opinion unreliable.
The statements in this discussion and our counsel's opinion are based on
current provisions of the Internal Revenue Code, existing, temporary and
currently proposed Treasury Regulations promulgated under the Internal
Revenues Code, the legislative history of the Internal Revenue Code, existing
administrative rulings and practices of the IRS, and judicial decisions.
Future legislative, judicial or administrative actions or decisions, which may
be retroactive in effect, may cause actual tax consequences to vary
substantially from those discussed in this summary. Moreover, the tax opinion
represents only tax counsel's best legal judgment. It is not binding on the
IRS nor does it have any other official status. We cannot assure you that the
IRS will accept tax counsel's conclusions.
For the reasons set forth in the more detailed discussion as to each item,
Ledgewood Law, P.C. has not rendered an opinion with respect to the following
specific federal income tax issues:
o the treatment of a unitholder whose common units are loaned to a short
seller to cover a short sale of common units (see "--Tax Consequences
of Unit Ownership--Treatment of Short Sales"),
o whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (see
"--Disposition of Common Units--Allocations Between Transferors and
Transferees"), and
o whether our method for depreciating Section 743 adjustments is
sustainable (see "--Disposition of Common Units--Section 754
Election").
Partnership Status
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his or her allocable share of the partnership's items of income, gain,
loss and deduction in computing his or her federal income tax liability,
regardless of whether cash distributions are made. Distributions by a
partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of his or her adjusted basis in the partnership
interest immediately before the distribution.
Our counsel is of the opinion that we and our operating partnership will be
treated as a partnership for federal income tax purposes. We have not and will
not request a ruling from the IRS on this matter. Counsel's opinion is based
partially upon our representations that:
o neither we nor our operating partnership or any operating subsidiary
has elected or will elect to be treated as an association or
corporation;
S-44
o we, our operating partnership and each operating subsidiary have been
operated and will be operated in accordance with all applicable
partnership statutes, its applicable partnership agreement or limited
liability company agreement; and
o for each taxable year, more than 90% of our gross income has been and
will be derived from:
o the exploration, development, production, processing, refining,
transportation or marketing of any mineral or natural resource,
including oil, gas or products thereof, or
o other items of income as to which counsel has opined or will opine
are "qualifying income" within the meaning of Section 7704(d) of
the Code.
Section 7704 of the Code provides that publicly-traded partnerships such as
us will, as a general rule, be taxed as corporations. However, an exception,
referred to as the "qualifying income exception" exists if at least 90% of a
publicly-traded partnership's gross income for every taxable year consists of
"qualifying income." Qualifying income includes income and gains derived from
the transportation of crude oil, natural gas and products thereof. Other types
of qualifying income include interest from other than a financial business,
dividends, gains from the sale or lease of real property and gains from the
sale or other disposition of capital assets held for the production of income
that otherwise constitutes qualifying income. For this purpose, our share of
the gross income earned by our operating subsidiaries will be included in our
gross income as if we directly earned such income. We estimate that less than
1% of our current gross income is not qualifying income; however, this
estimate could change from time to time. Based upon and subject to this
estimate, the factual representations made by us and our general partner, and
a review of the applicable legal authorities, Ledgewood Law Firm, P.C. is of
the opinion that at least 90% of our current gross income constitutes
qualifying income. Moreover, unless our business changes from that of
transporting natural gas, it is unlikely that we would fail to meet the 90%
test in the future.
If we fail to meet the qualifying income exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred
all of our assets, subject to liabilities, to a newly formed corporation on
the first day of the year in which we fail to meet the qualifying income
exception in return for stock in that corporation, and then distributed that
stock to our unitholders in liquidation of their units. This contribution and
liquidation should be tax-free to us and our unitholders so long as we, at
that time, do not have liabilities in excess of the tax basis of our assets.
Although the tax basis of our assets is now greater than our liabilities, our
tax basis will be reduced over time by depletion and depreciation deductions.
If we incur substantial indebtedness in the future, it is possible that at
some time in the future our liabilities may exceed our tax basis in our
assets. If the deemed contribution and distribution in liquidation happened
after such time, our unitholders would be taxed on the excess of our
liabilities over our assets. Whether or not there is taxable income at the
time of this event, thereafter we would be treated as a corporation for
federal income tax purposes.
If we were treated as a corporation in any taxable year, either as a result
of a failure to meet the qualifying income exception or otherwise, our items
of income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would
be taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent
of our current or accumulated earnings and profits, or, in the absence of
earnings and profits, a nontaxable return of capital, to the extent of the
unitholder's basis in his or her common units, or taxable capital gain, after
his or her tax basis in his or her common units is reduced to zero.
Accordingly, treatment of us as a corporation would result in a material
reduction in a unitholder's cash flow and after-tax return and, thus, would
likely result in a substantial reduction of the value of the common units.
The discussion below is based on the assumption that we will be treated as a
partnership for federal income tax purposes.
S-45
Limited Partner Status
Unitholders who have become our limited partners will be treated as our
partners for federal income tax purposes. Counsel is also of the opinion,
based upon and in reliance upon those same representations set forth under
"--Partnership Status," that
o assignees who have executed and delivered transfer applications and
are awaiting admission as limited partners, and
o unitholders whose common units are held in street name or by a nominee
and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units,
will be treated as our partners for federal income tax purposes. As there is
no direct authority addressing assignees of common units who are entitled to
execute and deliver transfer applications and thereby become entitled to
direct the exercise of attendant rights, but who fail to execute and deliver
transfer applications, Counsel's opinion does not extend to these persons.
Furthermore, a purchaser or other transferee of common units who does not
execute and deliver a transfer application may not receive some federal income
tax information or reports furnished to record holders of common units unless
the common units are held in a nominee or street name account and the nominee
or broker has executed and delivered a transfer application for those common
units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale would appear to lose his or her status
as a partner with respect to such units for federal income tax purposes. See
"--Tax Consequences of Unit Ownership-Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These
holders should consult their own tax advisors with respect to their status as
our partners for federal income tax purposes.
Tax Consequences of Unit Ownership
Flow-through of Taxable Income. We do not pay any federal income tax.
Instead, each unitholder is required to report on his or her income tax return
his or her allocable share of our income, gains, losses and deductions without
regard to whether we make cash distributions to that unitholder. Consequently,
we may allocate income to our unitholders although we have made no cash
distribution to them. Each unitholder will be required to include in income
his or her allocable share of our income, gain, loss and deduction for our
taxable year ending with or within his or her taxable year.
Treatment of Distributions. Our distributions generally will not be taxable
for federal income tax purposes to the extent of a unitholders' tax basis in
his or her common units immediately before the distribution. Our cash
distributions in excess of that tax basis generally will be considered to be
gain from the sale or exchange of the common units, taxable in accordance with
the rules described under "--Disposition of Common Units" below. Any reduction
in a unitholder's share of our liabilities for which no partner, including our
general partner, bears the economic risk of loss, known as "nonrecourse
liabilities," will be treated as a distribution of cash to that unitholder. To
the extent our distributions cause a unitholder's "at risk" amount to be less
than zero at the end of any taxable year, the unitholder must recapture any
losses deducted in previous years. See "--Limitations on Deductibility of Our
Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his or her share of our
nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his or her tax basis
in our common units, if the distribution reduces his or her share of our
"unrealized receivables," including depreciation recapture, or substantially
appreciated "inventory items," both as defined in Section 751 of the Internal
Revenue Code, known collectively as "Section 751 assets." To that extent, a
unitholder will be treated as having been distributed his or her
S-46
proportionate share of the Section 751 assets and having exchanged those
assets with us in return for the non-pro rata portion of the actual
distribution made to him or her. This latter deemed exchange will generally
result in the unitholder's realization of ordinary income under Section 751(b)
of the Internal Revenue Code. That income will equal the excess of:
o the non-pro rata portion of that distribution over
o his or her tax basis for the share of Section 751 assets deemed
relinquished in the exchange.
Ratio of Taxable Income to Distributions. We estimate that a purchaser of
common units in this offering who owns those common units from the date of
closing of this offering through December 31, 2006 will be allocated an amount
of federal taxable income for that period that will be less than 30% of the
cash distributed with respect to that period. We anticipate that after the
taxable year ending December 31, 2006, the ratio of taxable income to cash
distributions will increase. These estimates are based upon assumptions with
respect to gross income from operations, capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject
to, among other things, numerous business, economic, regulatory, competitive
and political uncertainties beyond our control. The actual taxable income that
will be allocated as a percentage of distributions could be higher or lower,
and any difference could be material and could materially affect the value of
the common units.
In prior taxable years, unitholders received cash distributions that
exceeded the amount of taxable income allocated to the unitholders. This
excess was partially the result of depreciation deductions, but was primarily
the result of special allocations to our general partner of taxable income
earned by our operating subsidiary which caused a corresponding reduction in
the amount of taxable income allocable to us. Our general partner has agreed
to receive additional special allocations of taxable income as follows:
o For 2004, the lesser of $1,800,000 or the amount necessary to make the
ratio of taxable income of all unitholders who own units throughout
2004 to the cash received by such unitholders with respect to 2004 not
higher than 39%.
o For 2005, the lesser of $2,400,000 or the amount necessary to make the
ratio of taxable income of all unitholders who own units throughout
2005 to the cash received by such unitholders with respect to 2005 not
higher than 39%.
o For 2006, the lesser of $2,800,000 or the amount necessary to make the
ratio of taxable income of all unitholders who own units throughout
2006 to the cash received by such unitholders with respect to 2006 not
higher than 39%.
Since these special allocations increase our general partner's capital
account, the distribution it will receive upon our liquidation will be
increased and distributions to unitholders will be correspondingly reduced. It
is possible that upon liquidation common unitholders will recognize taxable
income in excess of liquidation distributions.
Tax Rates. In general the highest effective United States federal income
tax rate for individuals for 2004 is 35% and the maximum United States federal
income tax rate for net capital gains of an individual for 2004 is 15% if the
asset disposed of was held for more than 12 months at the time of disposition.
Alternative Minimum Tax. Although we do not expect to generate significant
tax preference items or adjustments, each unitholder will be required to take
into account his distributive share of any items of our income, gain,
deduction or loss for purposes of the alternative minimum tax.
Basis of Common Units. A unitholder's initial tax basis for his or her
common units will be the amount he or she paid for the common units plus his
or her share of our nonrecourse liabilities. That basis will be increased by
his or her share of our income and by any increases in his or her share of our
nonrecourse liabilities. That basis will be decreased, but not below zero, by
our distributions to him or her, by his or her share of our losses, by any
decreases in his or her share of our nonrecourse liabilities and by his or her
share of our expenditures that are not deductible in computing taxable income
and are not required to be capitalized.
S-47
Limitations on Deductibility of Our Losses. The deduction by a unitholder
of his or her share of our losses will be limited to the tax basis in his or
her units and, in the case of an individual unitholder or a corporate
unitholder that is subject to the "at risk" rules (for example, if more than
50% of the value of its stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations), to the amount for which the
unitholder is considered to be "at risk" with respect to our activities, if
that is less than its tax basis. A unitholder must recapture losses deducted
in previous years to the extent that distributions cause his at risk amount to
be less than zero at the end of any taxable year. Losses disallowed to a
unitholder or recaptured as a result of these limitations will carry forward
and will be allowable to the extent that his tax basis or at risk amount,
whichever is the limiting factor, is subsequently increased. Upon the taxable
disposition of a unit, any gain recognized by a unitholder can be offset by
losses that were previously suspended by the at risk limitation but may not be
offset by losses suspended by the basis limitation. Any excess loss above that
gain previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his or her units, excluding any portion of that basis attributable to his or
her share of our nonrecourse liabilities, reduced by any amount of money he or
she borrows to acquire or hold the units, if the lender of those borrowed
funds owns an interest in us, is related to the unitholder or can look only to
the units for repayment. A unitholder's at risk amount will increase or
decrease as the tax basis of the unitholder's units increases or decreases,
other than tax basis increases or decreases attributable to increases or
decreases in his or her share of our nonrecourse liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations
can deduct losses from passive activities, which are generally activities in
which the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly-traded partnership.
Consequently, any passive losses we generate will only be available to offset
our passive income generated in the future and will not be available to offset
income from other passive activities or investments, including our investments
in other publicly-traded partnerships, or salary or active business income.
Passive losses that are not deductible because they exceed a unitholder's
share of our income may be deducted in full when the unitholder disposes of
his or her entire investment in us in a fully taxable transaction with an
unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions, including the at risk rules and the
basis limitation.
A unitholder's share of our net income may be offset by any of our suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." As noted, a unitholder's share of our
net passive income will be treated as investment income for this purpose. In
addition, a unitholder's share of our portfolio income will be treated as
investment income. Investment interest expense includes:
o interest on indebtedness properly allocable to property held for
investment;
o our interest expense attributed to portfolio income; and
o the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio
income.
The computation of a unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
Allocation of Income, Gain, Loss and Deductions. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among our general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made to the
common units
S-48
and in excess of distributions to the subordinated units, or that incentive
distributions are made to our general partner, gross income will be allocated
to the recipients to the extent of these distributions. If we have a net loss
for the entire year, the amount of that loss will generally be allocated first
to our general partner and the unitholders in accordance with their particular
percentage interests in us to the extent of their positive capital accounts
and, second, to our general partner.
As required by the Internal Revenue Code some items of our income,
deduction, gain and loss will be allocated to account for the difference
between the tax basis and fair market value of property contributed to us by
our general partner referred to in this discussion as "contributed property."
The effect of these allocations to a unitholder will be essentially the same
as if the tax basis of the contributed property were equal to its fair market
value at the time of contribution. In addition, specified items of recapture
income will be allocated to the extent possible to the partner who was
allocated the deduction giving rise to the treatment of that gain as recapture
income in order to minimize the recognition of ordinary income by some
unitholders.
Finally, although we do not expect that our operations will result in the
creation of negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be allocated in an
amount and manner sufficient to eliminate the negative balance as quickly as
possible.
Ledgewood Law Firm, P.C. is of the opinion that, with the exception of the
issues described in "--Disposition of Common Units--Section 754 Election" and
"--Disposition of Common Units--Allocations Between Transferors and
Transferees," allocations under our partnership agreement will be recognized
for federal income tax purposes in determining a partner's share of an item of
our income, gain, loss or deduction.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or
our general partner or any former unitholder, we are authorized to pay those
taxes from our funds. That payment, if made, will be treated as a distribution
of cash to the person on whose behalf the payment was made. If the payment is
made on behalf of a person whose identity cannot be determined, we are
authorized to treat the payment as a distribution to all current unitholders
and our general partner. We are authorized to amend the partnership agreement
in the manner necessary to maintain uniformity of intrinsic tax
characteristics of units and to adjust later distributions, so that after
giving effect to these distributions, the priority and characterization of
distributions otherwise applicable under the partnership agreement is
maintained as nearly as is practicable. Payments by us as described above
could give rise to an overpayment of tax on behalf of a unitholder in which
event he could file a claim for credit or refund.
Treatment of Short Sales. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
ownership of those units. If so, the unitholder would no longer own units for
federal income tax purposes during the period of the loan and may recognize
gain or loss from the disposition. As a result, during this period:
o any of our income, gain, deduction or loss with respect to those units
would not be reportable by the unitholder;
o any cash distributions we make to that unitholder with respect to
those units would be fully taxable; and
o all of those distributions would appear to be treated as ordinary
income.
Unitholders desiring to assure ownership of their units for tax purposes and
avoid these consequences should modify any applicable brokerage account
agreements to prohibit their brokers from borrowing their units. The IRS has
announced that it is actively studying issues relating to the tax treatment of
short sales of partnership interests. See also "--Disposition of Common
Units--Recognition of Gain or Loss." Because the IRS has not announced the
results of its study and there is no authority addressing the treatment of
short sales of partnership interests, Ledgewood Law Firm, P.C. is unable to
opine on the treatment of such short sales.
S-49
Tax Treatment of Operations
Accounting Method and Taxable Year. We use the accrual method of accounting
and the tax year ending December 31 for federal income tax purposes. Each
unitholder must include in income his or her share of our income, gain, loss
and deduction for our taxable year(s) ending within or with his or her taxable
year. In addition, a unitholder who has a taxable year ending on a date other
than December 31, and who disposes of all of his or her units following the
close of our taxable year but before the close of his or her taxable year,
must include his or her share of our income, gain, loss and deduction in
income for his or her taxable year, with the result that he or she will be
required to report income for his or her taxable year for his or her share of
more than one year of our income, gain, loss and deduction.
Tax Basis, Depreciation and Amortization. The tax basis of our assets will
be used for purposes of computing depreciation and cost recovery deductions
and, ultimately, gain or loss on the disposition of these assets. The federal
income tax burden associated with the difference between the fair market value
of property contributed and the tax basis established for that property will
be borne by our general partner and the unitholders. See "--Tax Treatment of
Unitholders--Allocation of Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we acquire or construct is depreciated using accelerated
methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be
subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a unitholder who has taken cost recovery or
depreciation deductions with respect to our property may be required to
recapture those deductions as ordinary income upon a sale of his units. See
"--Tax Consequences of Unit Ownership--Allocation of Income, Gain, Loss and
Deduction" and "--Disposition of Common Units--Recognition of Gain or Loss."
Uniformity of Units. We must maintain economic and tax uniformity of the
units to all holders. A lack of tax uniformity can result from a literal
application of Treasury Regulation Sections 1.167(c)-1(a)(6) and
1.197-2(g)(3). Any resulting non-uniformity could have a negative impact on
the value of the common units by reducing the tax deductions available to a
purchaser of units. See "--Disposition of Common Units--Section 754 Election."
We intend to continue to depreciate or amortize the Section 743(b)
adjustment attributable to unrealized appreciation in the value of contributed
property in a way that will avoid non-uniformity of tax treatment among
unitholders. See "--Disposition of Common Units--Section 754 Election." If we
determine that this position cannot reasonably be taken, we may adopt a
different position in an effort to maintain uniformity. This could result in
lower annual depreciation and amortization deductions than would otherwise be
allowable to some unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that these deductions are
otherwise allowable. The IRS may challenge any method of depreciating the
Section 743(b) adjustment we adopt. If such a challenge were made and
sustained, the uniformity of units might be affected, and the gain from the
sale of units might be increased without the benefit of additional deductions.
See "--Disposition of Common Units--Recognition of Gain or Loss."
Valuation of Our Properties. The federal income tax consequences of the
ownership and disposition of units depends in part on our estimates of the
relative fair market values of our assets. Although we may from time to time
consult with professional appraisers regarding valuation matters, we make many
of the relative fair market value estimates ourselves. These estimates are
subject to challenge and will not be binding on the IRS or the courts. If the
estimates of fair market value are later found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their
tax liability for prior years and incur interest and penalties with respect to
such adjustments.
S-50
Disposition of Common Units
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis in the units sold. A unitholder's amount realized will be measured
by the sum of the cash or the fair market value of other property received
plus his or her share of our nonrecourse liabilities. Because the amount
realized includes a unitholder's share of our nonrecourse liabilities, the
gain recognized on the sale of units could result in a tax liability in excess
of any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable income for a
common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than the unitholder's tax basis in that common unit, even if the price is less
than his original cost.
Should the IRS successfully contest our method of depreciating or amortizing
the Section 743(b) adjustment, described under "--Disposition of Common
Units--Section 754 Election," attributable to contributed property, a
unitholder could realize additional gain from the sale of units than had our
method been respected. In that case, the unitholder may have been entitled to
additional deductions against income in prior years but may be unable to claim
them, with the result to him of greater overall taxable income than
appropriate. Due to the lack of final regulations, Ledgewood Law Firm, P.C. is
unable to opine as to the validity of the convention but believes a contest by
the IRS is unlikely because a successful contest could result in substantial
additional deductions to other unitholders.
Except as noted below, gain or loss recognized by a unitholder, other than a
"dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain
recognized by an individual on the sale of units held more than 12 months will
generally be taxed at a maximum rate of 15%. However, a portion of this gain
or loss, which will likely be substantial, will be separately computed and
taxed as ordinary income under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. Ordinary income
attributable to unrealized receivables, inventory items and depreciation
recapture may exceed net taxable gain realized upon the sale of a unit and may
be recognized even if there is a net taxable loss realized on that sale. Thus,
a unitholder may recognize both ordinary income and a capital loss upon a
disposition of units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of those
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. Although the ruling is unclear as
to how the holding period of these interests is determined once they are
combined, Treasury regulations allow a selling unitholder, who can identify
units transferred with an ascertainable holding period, to use the actual
holding period of the units transferred. Thus, according to the ruling, a
unitholder will not be able to select high or low basis common units to sell,
as would be the case with corporate stock, but may designate specific common
units sold for purposes of determining the holding period of units
transferred. A unitholder electing to use the actual holding period of units
transferred must consistently use that identification method for all
subsequent sales or exchanges of units. A unitholder considering the purchase
of additional common units or a sale of common units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
this ruling and application of the Treasury regulations.
Specific provisions of the Internal Revenue Code affect the taxation of some
financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one
in which gain would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons enter into:
o a short sale;
o an offsetting notional principal contract; or
S-51
o a futures or forward contract with respect to the partnership interest
or substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having
sold that position if the taxpayer or a related person then acquires the
partnership interest or substantially identical property. The Secretary of
Treasury is also authorized to issue regulations that treat a taxpayer that
enters into transactions or positions that have substantially the same effect
as the preceding transactions as having constructively sold the financial
position.
Allocations Between Transferors and Transferees. Our taxable income and
losses are determined annually, prorated on a monthly basis and apportioned
among the unitholders in proportion to the number of units owned by each of
them as of the opening of the New York Stock Exchange on the first business
day of the month. However, gain or loss realized on a sale or other
disposition of our assets other than in the ordinary course of business is
allocated among the unitholders as of the opening of the New York Stock
Exchange on the first business day of the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be allocated
income, gain, loss and deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
regulations. Accordingly, Ledgewood Law Firm, P.C. is unable to opine on the
validity of this method of allocating income and deductions between
transferors and transferees of units. If this method is not allowed under the
Treasury Regulations, or only applies to transfers of less than all of the
unitholder's interest, our taxable income or losses might be reallocated among
the unitholders. Under our partnership agreement, we are authorized to revise
our method of allocation between transferors and transferees, as well as among
partners whose interests otherwise vary during a taxable period, to conform to
a method permitted under future Treasury regulations.
A unitholder who owns units at any time during a quarter and who disposes of
them prior to the record date set for a cash distribution for that quarter
will be allocated a share of our income, gain, loss and deductions
attributable to that quarter but will not be entitled to receive that cash
distribution.
Section 754 Election. We have made the election permitted by Section 754 of
the Internal Revenue Code. That election is irrevocable without the consent of
the IRS. The election generally permits us to adjust a common unit purchaser's
tax basis in our assets ("inside basis") to reflect his or her purchase price.
This election does not apply to a person who purchases common units directly
from us. The adjustment belongs to the purchaser and not to other unitholders.
For purposes of this discussion, a partner's inside basis in our assets will
be considered to have two components:
o his or her share of our tax basis in our assets ("common basis") and
o his or her Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal Revenue Code require,
if the remedial allocation method is adopted, a portion of the adjustment
attributable to recovery property to be depreciated over the remaining cost
recovery period for built-in gain. Under Treasury Regulation Section
1.167(c)-1(a)(6), an adjustment attributable to property subject to
depreciation under Section 167 of the Internal Revenue Code rather than cost
recovery deductions under Section 168 is generally required to be depreciated
using either the straight-line method or the 150% declining balance method. A
literal application of these different rules result in lack of uniformity.
Under our partnership agreement, our general partner is authorized to adopt a
position intended to preserve the uniformity of units even if that position is
not consistent with the Treasury Regulations. See "--Tax Treatment of
Operations--Uniformity of Units."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of property previously
contributed to us, to the extent of any unamortized book-tax disparity, using
a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis of the
property. If this contributed property is not amortizable, we will treat that
portion as non-amortizable. This method is consistent with the regulations
under Section 743. This method, however, is arguably inconsistent with
Treasury Regulation Section 1.167(c)-1(a)(6) and Treasury Regulation Section
1.197-2(g)(3), neither of which is expected to directly apply to a material
portion of our
S-52
assets. To the extent this Section 743(b) adjustment exceeds that amount, we
will apply the rules described in the Treasury Regulations and legislative
history. If we determine that this position cannot reasonably be taken, we may
adopt a different position which could result in lower annual depreciation or
amortization deductions than would otherwise be allowable to specified
unitholders. See "--Tax Treatment of Operations--Uniformity of Units."
The allocation of the Section 743(b) adjustment among our assets must be
made in accordance with the Internal Revenue Code. The IRS could seek to
allocate some or all of any Section 743(b) adjustment to goodwill not so
allocated by us. Goodwill, as an intangible asset, is generally amortizable
over a longer period of time or under a less accelerated method than our
tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
or her units is higher than that units' share of the aggregate tax basis of
our assets immediately prior to the transfer. In that case, as a result of the
election, the transferee would have a higher tax basis in his or her share of
our assets for purposes of calculating, among other items, his or her
depreciation and depletion deductions and share of any gain or loss on a sale
of our assets. Conversely, a Section 754 election is disadvantageous if the
transferee's tax basis in his or her units is lower than that units' share of
the aggregate tax basis of our assets immediately prior to the transfer. Thus,
the fair market value of the units may be affected either favorably or
adversely by the election.
The calculations involved in the Section 754 election are complex and we
will make them on the basis of assumptions as to the value of our assets and
other matters. There is no assurance that the determinations we make will not
be successfully challenged by the IRS and that the deductions resulting from
them will not be reduced or disallowed altogether. Should the IRS require a
different basis adjustment to be made, and should, in our opinion, the expense
of compliance exceed the benefit of the election, we may seek permission from
the IRS to revoke our Section 754 election. If permission is granted, a
subsequent purchaser of units may be allocated more income than he would have
been allocated had the election not been revoked.
Notification Requirements. A unitholder who sells or exchanges units is
required to notify us in writing of that sale or exchange within 30 days after
the sale or exchange. We are required to notify the IRS of that transaction
and to furnish information to the transferor and transferee. However, these
reporting requirements do not apply to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that describe the amount
of the consideration received for the unit that is allocated to our goodwill
or going concern value. Failure to satisfy these reporting obligations may
lead to the imposition of substantial penalties.
Dissolutions and Terminations
Upon our dissolution, our assets will be sold and any resulting gain or loss
will be allocated among our general partner and the unitholders. See "--Tax
Consequences of Unit Ownership--Allocation of Income, Gain Loss and
Deductions." We will distribute all cash to our general partner and
unitholders in liquidation in accordance with their positive capital account
balances. See "Our Partnership Agreement--Cash Distribution
Policy--Distributions of Cash on Liquidation" in the accompanying prospectus.
We will be considered to have terminated for tax purposes if there is a sale
or exchange of 50% or more of the total interests in our capital and profits
within a 12-month period. Our termination would result in the closing of our
taxable year for all unitholders. In the case of a unitholder reporting on a
taxable year other than a fiscal year ending December 31, the closing of our
taxable year might result in more than 12 months of our taxable income or loss
being includable in his taxable income for the year of termination. See "--Tax
Treatment of Operations--Accounting Method and Taxable Year." We would be
required to make new tax elections after a termination, including a new
election under Section 754 of the Internal Revenue Code, and a termination
could result in a deferral of our deductions for depreciation. A termination
could also result in penalties if we were unable to determine that the
termination had occurred. Moreover, a termination might either accelerate the
application of, or subject us to, any tax legislation enacted before the
termination.
S-53
Tax-Exempt Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors
and, as described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement
plans, are subject to federal income tax on unrelated business taxable income.
Virtually all of our taxable income allocated to a unitholder which is a
tax-exempt organization will be unrelated business taxable income and thus
will be taxable to that unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. Under
current law, it is not anticipated that any significant amount of our gross
income will include that type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States on
account of ownership of our units. As a consequence they will be required to
file federal tax returns reporting their share of our income, gain, loss or
deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income that is effectively connected with the
conduct of a United States trade or business and which is allocable to foreign
partners. Under rules applicable to publicly traded partnerships, we will
withhold at the highest applicable effective tax rate on cash distributions
made to foreign unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our transfer
agent on a Form W-8 BEN in order to obtain credit for the taxes withheld.
Because a foreign corporation that owns units will be treated as engaged in
a United States trade or business, that corporation may be subject to United
States branch profits tax a rate of 30%, in addition to regular federal income
tax, on its share of our income and gain, as adjusted for changes in its "U.S.
net equity," which are effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated by an income
tax treaty between the United States and the country in which the foreign
corporate unitholder is a "qualified resident." In addition, this type of
unitholder is subject to special information reporting requirements under
Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on
the disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business of the foreign unitholder.
Apart from the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the disposition of a unit if he has owned less than 5% in
value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the disposition.
Administrative Matters
Information Returns and Audit Procedures. We furnish to each unitholder,
within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his or her share of our
income, gain, loss and deduction for our preceding taxable year. In preparing
this information, which is generally not reviewed by counsel, we take various
accounting and reporting positions, some of which have been mentioned earlier,
to determine the unitholder's share of income, gain, loss and deduction. We
cannot assure you that those accounting and reporting positions will yield a
result that conforms with the requirements of the Internal Revenue Code,
regulations, or administrative interpretations of the IRS. We also cannot
assure you that the IRS will not successfully contend in court that those
accounting and reporting positions are impermissible. Any challenge by the IRS
could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any such audit may require each unitholder to adjust a prior
year's tax liability, and possibly may result in an audit of that unitholder's
own return. Any audit of a unitholder's return could result in adjustments not
related to our returns as well as those related to our returns.
S-54
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Internal Revenue
Code provides for one partner to be designated as the "tax matters partner"
for these purposes. The partnership agreement appoints our general partner as
our tax matters partner.
The tax matters partner will make some elections on our behalf and on behalf
of unitholders. In addition, the tax matters partner can extend the statute of
limitations for assessment of tax deficiencies against unitholders for items
in our returns. The tax matters partner may bind a unitholder with less than a
1% profits interest in us to a settlement with the IRS unless that unitholder
elects, by filing a statement with the IRS, not to give that authority to the
tax matters partner. The tax matters partner may seek judicial review, by
which all the unitholders are bound, of a final partnership administrative
adjustment and, if the tax matters partner fails to seek judicial review,
judicial review may be sought by any unitholder having at least a 1% interest
in profits and by unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and
each unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
o the name, address and taxpayer identification number of the beneficial
owner and the nominee;
o whether the beneficial owner is
o a person that is not a United States person;
o a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing; or
o a tax-exempt entity;
o the amount and description of units held, acquired or transferred for
the beneficial owner; and
o specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost
for purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with
the information furnished to us.
Registration as a Tax Shelter. The Internal Revenue Code requires that "tax
shelters" be registered with the Secretary of the Treasury. It is arguable
that we are not subject to the registration requirement on the basis that we
will not constitute a tax shelter. However, our general partner has registered
us as a tax shelter with the Secretary of Treasury in the absence of assurance
that we will not be subject to tax shelter registration and in light of the
substantial penalties which might be imposed if registration is required and
not undertaken. Our tax shelter registration number is 99344000008. Issuance
of this registration number does not mean that an investment in us or the
claimed tax benefits have been reviewed examined or approved by the IRS.
Registration as a tax shelter may increase the likelihood of an audit of our
tax return or the tax return of a holder of common units. See
"--Administrative Matters--Information Returns and Audit Procedures."
Registration as a tax shelter could also result in penalties being assessed to
a holder of units if he does not comply with the rules discussed in the next
paragraph.
S-55
We will furnish the registration number to the unitholders, and a unitholder
who sells or otherwise transfers a unit in a later transaction must furnish
the registration number to the transferee. The penalty for failure of the
transferor of a unit to furnish the registration number to the transferee is
$100 for each failure. The unitholders must disclose our tax shelter
registration number on Form 8271 to be attached to the tax return on which any
deduction, loss or other benefit generated by us is claimed or on which any of
our income is included. A unitholder who fails to disclose the tax shelter
registration number on his return, without reasonable cause for that failure,
will be subject to a $250 penalty for each failure. These penalties are not
deductible for federal income tax purposes.
Recently issued Treasury regulations require taxpayers to report certain
information on Internal Revenue Service Form 8886 if they participate in a
"reportable transaction." Unitholders may be required to file this form with
the IRS if we participate in a "reportable transaction." A transaction may be
a reportable transaction based upon any of several factors. Unitholders are
urged to consult with their own tax advisor concerning the application of any
of these factors to their investment in our common units. Congress is
considering legislative proposals that, if enacted, would impose significant
penalties for failure to comply with these disclosure requirements. The
Treasury regulations also impose obligations on "material advisors" that
organize, manage or sell interests in registered "tax shelters." As stated in
the accompanying prospectus, we have registered as a tax shelter, and, thus,
one of our material advisors will be required to maintain a list with specific
information, including unitholder names and tax identification numbers, and to
furnish this information to the IRS upon request. Unitholders are urged to
consult with their own tax advisor concerning any possible disclosure
obligation with respect to their investment and should be aware that we and
our material advisors intend to comply with the list and disclosure
requirements.
Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for portion of an underpayment if it is shown that there was
a reasonable cause for that portion and that the taxpayer acted in good faith
regarding that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally
is reduced if any portion is attributable to a position adopted on the return:
o for which there is, or was, "substantial authority" or
o as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
allocated to unitholders might result in that kind of an "understatement" of
income for which no "substantial authority" exists, we must disclose the
pertinent facts on our return. In addition, we will make a reasonable effort
to furnish sufficient information for unitholders to make adequate disclosure
on their returns to avoid liability for this penalty.
State, Local and Other Tax Considerations
In addition to federal income taxes, you will be subject to other taxes,
including state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property. Although an analysis of
those various taxes is not presented here, each prospective unitholder should
consider his or her potential impact on his or her investment in us. We
currently own property or do business in Ohio, Pennsylvania and New York and,
upon completion of the Spectrum acquisition, will own property and do business
in Oklahoma and Texas. Each of these states, except Texas, currently imposes a
personal income tax. We may also own property or do business in other states
in the future. A unitholder will be required to file state income tax returns
and to pay state income taxes in some or all of these states in which we do
business or own property and may be subject
S-56
to penalties for failure to comply with those requirements. In some states,
tax losses may not produce a tax benefit in the year incurred and also may not
be available to offset income in subsequent taxable years. Some of the states
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
unitholder's income tax liability to the state, generally does not relieve a
nonresident 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. See "--Tax Consequences of
Ownership--Entity-Level Collections." Based on current law and our anticipated
future operations, our general partner anticipates that any amounts required
to be withheld will not be material.
It is the responsibility of each unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities, of his or her
investment in us. Accordingly, each prospective unitholder should consult, and
must depend upon, his or her own tax counsel or other advisor with regard to
those matters. Further, it is the responsibility of each unitholder to file
all state and local, as well as United States federal tax returns that may be
required of him or her. Ledgewood Law Firm, P.C. has not rendered an opinion
on the state or local tax consequences of an investment in us.
Investment by Employee Benefit Plans
An investment in us by an employee benefit plan is subject to additional
considerations because the investments of these plans are subject to the
fiduciary responsibility and prohibited transaction provisions of ERISA and
restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans,
simplified employee pension plans and tax deferred annuities or IRAs
established or maintained by an employer or employee organization. Among other
things, consideration should be given to:
o whether the investment is prudent under Section 404(a)(1)(B) of ERISA;
o whether, in making the investment, the plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of ERISA; and
o whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return.
The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in us is authorized by the appropriate governing instrument and is
a proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit
employee benefit plans, and also IRAs that are not considered part of an
employee benefit plan, from engaging in specified transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Internal Revenue Code with respect to the
plan.
In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should
consider whether the plan will, by investing in us, be deemed to own an
undivided interest in our assets, with the result that our general partner
also would be a fiduciary of the plan and our operations would be subject to
the regulatory restrictions of ERISA, including its prohibited transaction
rules, as well as the prohibited transaction rules of the Internal Revenue
Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under some circumstances. Under these
regulations, an entity's assets would not be considered to be "plan assets"
if, among other things,
o the equity interests acquired by employee benefit plans are publicly
offered securities, i.e., the equity interests are widely held by 100
or more investors independent of the issuer and each other, freely
transferable and registered under some provisions of the federal
securities laws;
S-57
o the entity is an "operating company," i.e., it is primarily engaged in
the production or sale of a product or service other than the
investment of capital either directly or through a majority-owned
subsidiary or subsidiaries; or
o there is no significant investment by benefit plan investors, which is
defined to mean that less than 25% of the value of each class of
equity interest, disregarding some interests held by our general
partner, its affiliates, and some other persons, is held by the
employee benefit plans referred to above, IRAs and other employee
benefit plans not subject to ERISA, including governmental plans.
Our assets should not be considered "plan assets" under these regulations
because we satisfy the first requirement above.
Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code is light of the serious penalties imposed on persons who engage
in prohibited transactions or other violations.
S-58
UNDERWRITING
Under the underwriting agreement related to this common unit offering that
will be filed as an exhibit to a current report on Form 8-K and incorporated
by reference into the registration statement of which this prospectus
supplement is a part, each of the underwriters named below has severally
agreed to purchase from us, and we have agreed to sell to the underwriters,
the number of common units opposite its name below:
Underwriters Number of
------------ Common Units
------------
Lehman Brothers Inc. ............................................
A.G. Edwards & Sons, Inc. .......................................
Friedman, Billings, Ramsey & Co., Inc. ..........................
KeyBanc Capital Markets, a division of McDonald Investments Inc.
Sanders Morris Harris Inc. ......................................
Total ........................................................ 2,100,000
=========
The underwriting agreement provides that the underwriters are obligated to
purchase, subject to certain conditions, all of the common units in the
offering if any are purchased, other than those covered by the over-allotment
option described below. The conditions contained in the underwriting agreement
include the requirements that:
o all the representations and warranties made by us to the underwriters
are true;
o there has been no material adverse change in our condition or in the
financial markets; and
o we deliver to the underwriters customary closing documents.
Over-Allotment Option
We have granted the underwriters a 30-day option after the date of the
underwriting agreement to purchase, in whole or part, up to an aggregate of
315,000 additional common units at the public offering price less the
underwriting discounts and commissions. This option may be exercised to cover
over-allotments, if any, made in connection with the common unit offering. To
the extent that the option is exercised, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional common units
approximately proportionate to that underwriter's initial purchase commitment.
Commission and Expenses
We have been advised by the underwriters that the underwriters propose to
offer the common units directly to the public at the price to the public set
forth on the cover page of this prospectus supplement and to selected dealers,
who may include the underwriters, at the offering price less a selling
concession not in excess of $ per unit. The underwriters may allow, and
the selected dealers may reallow, a discount from the concession not in excess
of $ per unit to other dealers. After the offering, the underwriters may
change the offering price and other selling terms.
The following table summarizes the underwriting discounts and commissions we
will pay to the underwriters. These amounts are shown assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase up to 315,000 additional common units. The underwriting fee is the
difference between the public offering price per unit and the amount per unit
the underwriters pay us to purchase the common units.
No Exercise Full Exercise
----------- -------------
Per unit ........................................ $ $
Total.........................................
We estimate that our total expenses for this offering, including
registration, filing and listing fees, printing fees and our legal and
accounting expenses but excluding underwriting discounts and commissions, will
be approximately $500,000.
S-59
Lock-Up Agreements
We and the directors and executive officers of our general partner have
agreed that we and they will not offer for sale, sell, pledge or otherwise
dispose of, directly or indirectly, any common units or any securities
convertible into or exchangeable for common units or sell or grant options,
rights or warrants for common units or any securities convertible into or
exchangeable for common units or enter into any derivative transaction with a
similar effect as a sale of common units for a period of 90 days after the
date of this prospectus supplement without the prior written consent of Lehman
Brothers Inc. These restrictions do not apply to (i) issuances of common units
or the grant of options to purchase common units under our existing employee
benefit plans, as such plans may be amended from time to time and (ii)
issuances of preferred units in our operating partnership to Resource America
and Atlas America in connection with the acquisition of Spectrum.
Lehman Brothers Inc., in its discretion, may release the common units
subject to lock-up agreements in whole or in part at any time with or without
notice. When determining whether or not to release common units from lock-up
agreements, Lehman Brothers Inc. will consider, among other factors, our or
the unitholder's reasons for requesting the release, the number of common
units for which the release is being requested, and market conditions at the
time.
Stabilization, Short Positions and Penalty Bids
In connection with this offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common units in accordance with Regulation M under the
Securities Exchange Act of 1934.
o Over-allotment transactions involve sales by the underwriters of the
common units in excess of the number of common units the underwriters
are obligated to purchase, which creates a syndicate short position.
The short position may be either a covered short position or a naked
short position. In a covered short position, the number of common
units over-allotted by the underwriters is not greater than the number
of common units that they may purchase in the over-allotment option.
In a naked short position, the number of common units involved is
greater than the number of common units in the over-allotment option.
The underwriters may close out any short position by either exercising
their over-allotment option and/or purchasing the common units in the
open market.
o Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
o Syndicate covering transactions involve purchases of the common units
in the open market after the distribution has been completed in order
to cover syndicate short positions. In determining the source of the
common units to close out the short position, the underwriters will
consider, among other things, the price of common units available for
purchase in the open market as compared to the price at which they may
purchase common units through the over-allotment option. If the
underwriters sell more common units than could be covered by the
over-allotment option, a naked short position, the position can only
be closed out by buying common units in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
common units in the open market after pricing that could adversely
affect investors who purchase in the offering.
o Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when the common units originally sold by the
syndicate member are purchased in a stabilizing or syndicate covering
transaction to cover a syndicate short position.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common units or preventing or retarding a decline in the market price of the
common units. As a result, the price of the common units may be higher than
the price that might otherwise exist in the open market. These transactions
may be effected on the New York Stock Exchange or otherwise and, if commenced,
may be discontinued at any time.
S-60
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common units. In
addition, neither we nor any of the underwriters makes any representation that
the underwriters will engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without notice.
Listing
Our common units are traded on the New York Stock Exchange under the symbol
"APL."
Indemnification
We, our general partner and our operating companies have agreed to indemnify
the underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
Affiliations
Some of the underwriters have engaged in transactions with, and, from time to
time, have performed services for, Resource America, Atlas America and us in the
ordinary course of business and have received customary fees for performing
these services. Friedman, Billings, Ramsey & Co., Inc. and KeyBanc Capital
Markets, a division of McDonald Investments Inc., acted as the managing
underwriters of our initial public offering and our follow-on offering in May
2003, provided advisory services to us in connection with our proposed
acquisition of Triton Coal Company, which was terminated in July 2002, and acted
as managing underwriters for Atlas America's initial public offering. Friedman,
Billings, Ramsey provided advisory services to us in connection with our
proposed acquisition of Alaska Pipeline, and one of its affiliates agreed to
provide stand-by financing for the acquisition. In addition, an affiliate of
KeyBanc Capital Markets is a lender under our existing credit facility and will
be a lender under our new credit facility. Lehman Brothers Inc. acted as the
exclusive financial advisor to Energy Spectrum Capital Partners, which holds a
controlling interest in Spectrum, in the solicitation of proposals for a
potential sale transaction of Spectrum and expects to receive customary fees for
its role as advisor.
Electronic Distribution
A prospectus supplement and the accompanying prospectus in electronic format
may be made available on the Internet sites or through other online services
maintained by one or more of the underwriters and/or selling group members
participating in this common unit offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and, depending
upon the particular underwriters or selling group members, prospective
investors may be allowed to place orders online. The underwriters may agree
with us to allocate a specific number of common units for sale to online
brokerage account holders. Any such allocation for online distributions will
be made by the underwriters on the same basis as other allocations.
Other than the prospectus in electronic format, the information on the
underwriters' or selling group members' website and any information contained
in any other website maintained by the underwriters or selling group members
is not part of the prospectus or the registration statement of which this
prospectus supplement forms a part, has not been approved and/or endorsed by
us or the underwriters or selling group members in their capacity as
underwriters or selling group members and should not be relied upon by
investors.
National Association of Securities Dealers Conduct Rules
Because the NASD views the common units offered hereby as interests in a
direct participation program, the offering is being made in compliance with
Rule 2810 of the NASD Conduct Rules. Investor suitability with respect to the
common units should be judged similarly to the suitability with respect to
other securities that are listed for trading on a national securities
exchange.
S-61
LEGAL MATTERS
The validity of the common units and tax matters will be passed upon for us
by Ledgewood Law Firm, P.C., Philadelphia, Pennsylvania. Specific legal
matters in connection with the offering of the common units are being passed
upon for the underwriters by Vinson & Elkins L.L.P.
EXPERTS
The consolidated financial statements of Atlas Pipeline Partners, L.P. and
subsidiaries and the financial statements of Spectrum Field Services, Inc. as of
December 31, 2003 and 2002, and for each of the three years in the period ended
December 31, 2003, incorporated by reference in this prospectus supplement and
elsewhere in the registration statement of which this prospectus supplement is a
part, have been audited by Grant Thornton LLP, independent registered public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving such reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 with respect
to this offering. This prospectus supplement and the accompanying prospectus
constitute only part of the registration statement and do not contain all of
the information set forth in the registration statement, its exhibits and its
schedules.
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms. Please call the
SEC at 1-800-SEC-0330 for additional information on the public reference
rooms.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
it. This means that we can disclose important information to you by referring
to these documents. The information incorporated by reference is an important
part of this prospectus supplement and the accompanying prospectus, and
information that we file later with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 will automatically update and
supersede this information.
We are incorporating by reference the following documents that we have
previously filed with the SEC (other than information in such documents that
is deemed not to be filed):
o our Annual Report on Form 10-K for the fiscal year ended December 31,
2003;
o our Quarterly Report on Form 10-Q for the quarter ended March 31,
2004;
o our Proxy Statement on Schedule 14A for the special meeting of
unitholders held on February 11, 2004; and
o our Current Reports on Form 8-K filed April 8, 2004, June 9, 2004,
June 15, 2004, July 1, 2004 and July 12, 2004.
You may obtain a copy of these filings without charge by writing or calling
us at:
Investor Relations
Atlas Pipeline Partners, L.P.
311 Rouser Road
P.O. Box 611
Moon Township, Pennsylvania 15108
(412) 262-2830
S-62
$250,000,000
ATLAS PIPELINE PARTNERS, L.P.
Common Units
Subordinated Units
Debt Securities
Warrants
We may offer from time to time the following types of securities:
o our common units representing limited partner interests;
o our subordinated units representing limited partner interests;
o our debt securities, in one or more series, which may be senior debt
securities or subordinated debt securities, in each case consisting of
notes or other evidences of indebtedness;
o warrants to purchase any of the other securities that may be sold under
this prospectus; or
o any combination of these securities, individually or as units.
The securities will have an aggregate initial offering price of up to
$250,000,000. The securities may be offered separately or together in any
combination and as a separate series. This prospectus also covers guarantees, if
any, of our payment obligations under any debt securities, which may be given by
certain of our subsidiaries on terms to be determined at the time of the
offering.
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any prospectus supplement, as
well as the documents incorporated or deemed to be incorporated by reference in
this prospectus, carefully before you invest. This prospectus may not be used to
consummate sales of securities unless accompanied by the applicable prospectus
supplement.
Our common units are quoted on the American Stock Exchange under the symbol
"APL."
You should read "Risk Factors" beginning on page 14 of this prospectus, as
well as those which may be contained in any supplement to this prospectus, for a
discussion of important factors that you should consider before you invest.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We may sell these securities directly, through agents, dealers or
underwriters as designated from time to time, or through a combination of these
methods. We reserve the sole right to accept, and together with our agents,
dealers and underwriters reserve the right to reject, in whole or in part, any
proposed purchase of securities to be made directly or through agents, dealers
or underwriters. If any agents, dealers or underwriters are involved in the sale
of any securities, the relevant prospectus supplement will set forth any
applicable commissions or discounts. Our net proceeds from the sale of
securities also will be set forth in the relevant prospectus supplement.
Prospectus dated April 5, 2004
PROSPECTUS SUMMARY
About this Prospectus
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under this shelf process, we may, from time to time, offer any combination of
the securities described in this prospectus in one or more offerings up to a
total dollar amount of $250,000,000. This prospectus provides you with a general
description of the securities we may offer. Each time we use this prospectus to
offer these securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering. The prospectus
supplement may also add, update or change information contained in this
prospectus. Please carefully read this prospectus and the prospectus supplement
together with the additional information described under the heading "Where You
Can Find More Information."
Atlas Pipeline
We own and operate natural gas pipeline gathering systems through our
operating partnership and its operating subsidiaries. Our primary assets consist
of approximately 1,380 miles of intrastate gathering systems located in eastern
Ohio, western New York and western Pennsylvania. In September 2003, we entered
into a purchase and sale agreement with SEMCO Energy, Inc. (NYSE: SEN) under
which we or our designee will purchase all of the outstanding equity of SEMCO's
wholly-owned subsidiary, Alaska Pipeline Company, which owns a 354-mile
intrastate natural gas transmission pipeline that delivers gas to metropolitan
Anchorage. The total consideration, payable in cash at closing, will be
approximately $95 million, subject to an adjustment based on the amount of
working capital that Alaska Pipeline has at closing.
Currently, our gathering systems serve approximately 4,500 wells with
an average daily throughput for the year ended December 31, 2003 of 52.5 million
cubic feet, or mmcf, of natural gas. Our gathering systems provide a means
through which well owners and operators can transport the natural gas produced
by their wells to public utility pipelines for delivery to customers. To a
lesser extent, our gathering systems transport natural gas directly to
customers. Our gathering systems currently connect with public utility pipelines
operated by Peoples Natural Gas Company, National Fuel Gas Supply, Tennessee Gas
Pipeline Company, National Fuel Gas Distribution Company, East Ohio Gas Company,
Columbia of Ohio, Consolidated Natural Gas Co., Texas Eastern Pipeline, Columbia
Gas Transmission Corp. and Equitable Utilities. We do not engage in storage or
gas marketing programs, nor do we currently engage in the purchase and resale
for our own account of natural gas transported through our gathering systems.
We originally acquired the gathering systems of Atlas America, Inc. and
its affiliates, all of which are subsidiaries of Resource America, Inc. (NASDAQ:
REXI), when we commenced operations in January 2000. Throughout this prospectus,
we refer to the Resource America energy subsidiaries with which we have
contractual relationships, including Atlas America, collectively as "Atlas
America," unless specifically stated otherwise. Atlas America and its affiliates
sponsor limited and general partnerships to raise funds from investors to
explore for natural gas, and produce natural gas and, to a lesser extent, oil
from locations in eastern Ohio, western New York and western Pennsylvania. Our
gathering systems are connected to 4,100 of those wells. Atlas America drilled
and connected 270 wells to our gathering systems during the year ended December
31, 2003, 195 wells during the year ended December 31, 2002 and 196 wells during
the year ended December 31, 2001.
We are party to an omnibus agreement with Atlas America that is
intended to maximize the use and expansion of our gathering systems and the
amount of natural gas they transport. Among other things, the omnibus agreement
requires Atlas America to install required flow lines and connect wells it
operates that are located within 2,500 feet of one of our gathering systems.
2
We are also party to natural gas gathering agreements with Atlas
America under which it pays us gathering fees generally equal to a percentage,
generally 16%, of the gross or weighted average sales price of the natural gas
we transport subject, in certain cases, to minimum prices of $.35 or $.40 per
thousand cubic feet, or mcf. Our business, therefore, depends in large part on
the prices at which the natural gas we transport is sold. Due to the volatility
of natural gas prices, our gross revenues can vary materially from period to
period. During the year ended December 31, 2003, we received gathering fees
averaging $.82 per mcf, while during the previous year, our average gathering
fee was $.58 per mcf.
Objectives and Strategy
Our objective is to increase cash flow, earnings and returns to our
unitholders by:
o expanding our revenue base through:
o construction of extensions necessary to service additional
wells drilled by Atlas America and others and
o accretive acquisitions of mid-stream energy assets such as
natural gas gathering, transmission, processing and storage
facilities and liquid gathering, transmission and storage
facilities;
o limiting operating costs through achievement of economies of
scale as a result of expanding our operations through extensions
and acquisitions; and
o continuing to strengthen our balance sheet by financing our
growth with a combination of long-term debt and equity to provide
the financial flexibility to fund future opportunities.
Since commencing operations in January 2000, we have pursued these
objectives by:
o adding 372 miles of pipeline to our original system;
o connecting 829 wells to our pipeline, 770 of which were drilled
by Atlas America;
o acquiring gathering systems in Ohio and Pennsylvania, aggregating
120 miles of pipeline, with approximately 433 wells connected to
those systems;
o agreeing in September 2003 to acquire Alaska Pipeline, which we
believe will add a significant source of stable income and
distributable cash flow; and
o upgrading our system and substantially expanding our capacity.
Partnership Information
We were formed in May 1999 as a Delaware limited partnership and, under
our partnership agreement, will be required to dissolve no later than December
31, 2098. We own a 98.9899% limited partnership interest in Atlas Pipeline
Operating Partnership, L.P., also a Delaware limited partnership, which owns our
current gathering systems through subsidiaries. We recently formed APC
Acquisition, LLC, in which we currently own 100% of the membership interests, in
order to acquire Alaska Pipeline. We have no significant assets other than our
limited partnership interest in the operating partnership. Our general partner
has sole responsibility for conducting our business and managing our operations.
As is commonly the case with publicly traded limited partnerships, we do not
directly employ any of the persons responsible for our management or operation.
Rather, Atlas America personnel manage and operate our business. Our general
partner also acts as general partner of the operating partnership. As a
consequence, the affairs of the operating partnership are controlled by our
general partner and not by us. However, our general partner may not, without the
consent of all of our limited partners, consent to any act that would make it
impossible to carry on our ordinary business and may not, without the consent of
limited partners holding a majority of the outstanding common units and
subordinated units, voting as separate classes, dispose of all or substantially
all of our assets or the assets of the operating partnership.
3
Our common units are entitled to receive cash distributions of $.42 per
quarter, or $1.68 on an annualized basis, before any distributions are paid on
our existing subordinated units. We expect this priority to continue until
January 1, 2005. Our general partner owns all of our outstanding 1,641,026
subordinated units.
Our principal executive offices are located at 311 Rouser Road, Moon
Township, Pennsylvania 15108 and our telephone number is (412) 262-2830.
Summary of Conflicts of Interest and Fiduciary Responsibilities
Our general partner has a fiduciary duty to manage us in a manner
beneficial to us and our unitholders. However, because our general partner is a
corporate subsidiary of Atlas America, its officers and directors have fiduciary
duties to manage its business in a manner beneficial to Atlas America. As a
result, conflicts of interest may arise in the future between us and our
unitholders, on the one hand, and Atlas America and its affiliates, on the other
hand.
The following situations, among others, could give rise to conflicts of
interest:
o our general partner determines the amount and timing of asset
purchases and sales, capital expenditures, issuances of additional
common units, borrowings and reserves, which can impact the amount of
distributions to unitholders;
o our general partner may take actions on our behalf that have the
effect of enabling our general partner to receive distributions on
its subordinated units;
o some of the officers of our general partner who provide services to
us also devote significant time to the businesses of our general
partner's affiliates, and competition for their services may develop;
o the officers of our general partner may make decisions on behalf of
Atlas America, as the operator of natural gas wells connected to our
gathering systems, as to the volume of gas produced by these wells,
and these decisions may affect the volume of natural gas transported
by us and, thus, our revenues; and
o our general partner makes decisions that affect the obligations of
Atlas America to us in constructing gathering systems, providing
financing for that construction and identifying gathering systems for
possible acquisition.
Our general partner has a conflicts committee, consisting of three
independent members of its managing board, that is available to review matters
involving conflicts of interest.
Our partnership agreement limits the liability and reduces the
fiduciary duties of our general partner to our unitholders. Our partnership
agreement also restricts the remedies available to unitholders for actions that
might otherwise constitute breaches of its fiduciary duty. By purchasing a
common unit, you are treated as having consented to these restrictions, and to
various actions contemplated in the partnership agreement and to conflicts of
interest that might otherwise be considered a breach of fiduciary or other
duties under applicable state law.
4
Distributions and Payments to Our General Partner and Its Affiliates
The following summarizes the distributions and payments we make to our
general partner and its affiliates in connection with our operation and
liquidation. These distributions and payments were determined by and among
affiliated entities and, consequently, are not the result of arm's length
negotiations.
Cash distributions to our general partner........... Cash distributions are generally made 98% to the
unitholders, including to our general partner as
holder of our existing subordinated units, and 2% to
our general partner. If distributions exceed specified
target levels, our general partner will receive from
15% to 50% of the excess distributions. We refer to
these distributions as our general partner's
"incentive distribution rights." For the year ended
December 31, 2003, our general partner received
distributions of $4,561,100, including $594,000 of
incentive distributions, $192,700 on its general
partner interest and $3,774,400 on its subordinated
units.
Payments to our general partner..................... Our general partner does not receive management fees or other
compensation for managing us. We reimburse our general partner
for all direct, indirect and capital expenditures it incurs on
our behalf. For the year ended December 31, 2003, we reimbursed
$11,715,600 to our general partner, consisting of $2,420,500 in
transportation and compression costs, $1,660,900 in general and
administrative costs and $7,634,200 in capital expenditures.
Withdrawal or removal of our general
partner............................................. If our general partner withdraws or is removed, its general partner
interest and incentive distribution rights will either be sold to
the new general partner for cash or converted into common units,
in each case for an amount equal to the fair market value of those
interests.
Liquidation......................................... Upon our liquidation and after payment of our creditors, the
partners, including our general partner, will be entitled to
receive liquidating distributions according to their
particular capital account balances. For a description of how
capital account balances are determined and adjusted upon
liquidation, see "Cash Distribution Policy--Distributions of
Cash Upon Liquidation."
Our Partnership Agreement
Cash distributions.................................. We must distribute all of our cash on hand at the end of each
quarter, less reserves established by our general partner in its
discretion. The amount of this cash may be greater than or less
than the minimum quarterly distribution referred to in the next
paragraph. We generally make cash distributions within 45 days
after the end of each quarter.
5
In general, we make cash distributions each quarter based on the
following priorities:
o first, 98% to the common units and 2% to our general partner until
each common unit has received a minimum quarterly distribution of
$.42, plus any arrearages in the payment of the minimum quarterly
distribution from prior quarters;
o second, 98% to our existing subordinated units and 2% to our
general partner until each subordinated unit has received a
minimum quarterly distribution of $.42;
o third, 85% to all units and 15% to our general partner until each unit has
received a total distribution of $.52 in that quarter;
o fourth, 75% to all units and 25% to our general partner until each
unit has received a total distribution of $.60 in the quarter; and
o after that, 50% to all units and 50% to our general partner.
The distributions to our general partner in the third through fifth
distribution levels are incentive distributions and are
disproportionate to its 2% interest in us as our general partner.
If we make a distribution from capital surplus, which generally
means distributions from cash generated other than from operations
or from working capital reserves, it is treated as if it were
repayment of the unit price from our initial public offering of
common units, which was $13.00 per common unit. To reflect
repayment, distribution levels, including the minimum quarterly
distributions, will be adjusted downward by multiplying each
distribution amount by a fraction. This fraction is determined as
follows:
o the numerator is the unrecovered initial unit price of the common
unit immediately after giving effect to the repayment, and
o the denominator is the unrecovered initial unit price of the
common units immediately before the repayment.
The unrecovered initial unit price is the initial public offering
price per common unit of $13.00 less any distributions from capital
surplus. Distributions from capital surplus will not reduce the
minimum quarterly distribution or target or other distribution
levels for the quarter in which they are distributed. We do not
anticipate that there will be significant distributions from capital
surplus.
6
Upon liquidation, we will distribute any cash remaining, after we
have paid our creditors, to unitholders and our general partner in
accordance with their capital account balances. To the extent
proceeds of liquidation are available, we will adjust the capital
accounts of our general partner and the common unitholders to give
our general partner amounts representing incentive distributions.
Existing subordinated units;
subordination period................................ Our existing subordinated units are a separate class of interest in
us whose rights to distributions are subordinate to those of the
common units during the subordination period. The subordination
period will end on January 1, 2005 unless the financial tests in the
partnership agreement are not met. When the subordination period
ends, all of these subordinated units will convert into common units
on a one-for-one basis. The subordinated units will similarly
convert to common units if our general partner is removed without
cause. Converted subordinated units will have the same rights as
common units and will thus participate equally with the other common
units in distributions.
Issuance of additional units........................ We are permitted to issue common units, subordinated units, debt and
other securities without restriction under our partnership agreement
except that, during the subordination period for our existing
subordinated units, we cannot issue securities having rights to
distribution or in liquidation ranking prior or senior to our common
units without unitholder consent.
Amendment of our partnership
agreement........................................... Our partnership agreement may generally be amended by a vote of
persons holding a majority of the common units and existing
subordinated units, voting as separate classes, provided that we
obtain an opinion of counsel that the amendment will not materially
adversely affect the limited liability of the limited partners.
Amendments may be proposed only by or with the consent of our
general partner, which may withhold its consent in its sole
discretion. Our general partner may, without the consent of
unitholders, amend our partnership agreement to accommodate
administrative functions such as admission, withdrawal or
substitution of limited partners, to effect our qualification to do
business in a jurisdiction or to prevent us from being deemed an
investment company. No amendment may be made that would enlarge the
obligations of any limited partner without that partner's consent;
enlarge, restrict or reduce the rights, obligations, or amounts
distributable or reimbursable to our general partner; change our
term or modify the nature of those events causing our dissolution.
7
Limited liability of limited partners............... The liability of a person purchasing common units or subordinated
units will be limited to the amount of the purchaser's investment
plus the purchaser's share of any of our undistributed profits or
assets, so long as the purchaser does not participate in the control
of our business within the meaning of Delaware law and otherwise
acts in conformity with our partnership agreement.
Limited voting rights............................... Holders of common units and subordinated units do not have voting
rights except with respect to the following matters, for which the
partnership agreement requires unitholder approval:
o a sale or exchange of all or substantially all of our
assets;
o the removal or withdrawal of our general partner;
o the election of a successor general partner;
o our dissolution or reconstitution;
o a merger;
o termination or material modification of the master natural gas
gathering agreement and omnibus agreement with Atlas America;
o approval of the transfer by our general partner of its general
partner interest or incentive distribution rights, except in a
merger or to an affiliate; and
o in general, amendments to the partnership agreement.
Change of control................................... Any person or group, other than our general partner and its
affiliates or a direct transferee of our general partner or its
affiliates, that acquires beneficial ownership of 20% or more of our
common units will lose its voting rights with respect to all of its
common units.
Removal or withdrawal of our general
partner............................................. Our general partner may be removed by the vote of at least 66 2/3%
of our outstanding common units and the election of a successor
general partner by the vote of a majority of the outstanding common
units, excluding in both cases common units held by our general
partner and its affiliates.
Our general partner may not withdraw as our general partner without
the vote of at least a majority of the outstanding common units,
excluding common units held by our general partner and its
affiliates. However, our general partner may withdraw without
approval of our common units if at least 50% of our common units are
held or controlled by one person or its affiliates other than our
general partner and its affiliates.
8
Consequences of removal of our general
partner............................................. If our general partner is removed other than for cause, all of our
existing subordinated units will immediately convert into common
units on a one-for-one basis. Any existing arrearages in the payment
of the minimum quarterly distribution to the common units will be
extinguished, and our general partner will have the right to convert
its general partner interest and its right to receive incentive
distributions into common units or to receive cash in exchange for
such interests. In addition, the omnibus agreement will terminate
and the master natural gas gathering agreement will terminate with
respect to future wells drilled and completed by Atlas America.
9
Summary Financial Data
We derived the financial data set forth below as of and for the three
years ended December 31, 2003 from our consolidated financial statements for
those periods, which have been audited by Grant Thornton LLP, independent
accountants. You should read the financial data in this table together with, and
such financial data is qualified by reference to, our consolidated financial
statements, the notes to our consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere or incorporated by reference in this prospectus.
For the years ended December 31,
-----------------------------------
2003 2002 2001
------- ------- -------
(in thousands, except per unit data)
Income statement data:
Revenues............................................. $15,749 $10,667 $13,129
======= ======= =======
Total transportation and compression, general and
administrative expenses............................. $ 4,081 $ 3,544 $ 3,042
======= ======= =======
Depreciation and amortization........................ $ 1,770 $ 1,476 $ 1,356
======= ======= =======
Net income........................................... $ 9,639 $ 5,398 $ 8,556
======= ======= =======
Net income per limited partner unit - basic and $ 2.17 $ 1.54 $ 2.30
diluted.............................................. ======= ======= =======
Distributions declared per common unit............... $ 2.39 $ 2.14 $ 2.50
======= ======= =======
At December 31,
-----------------------------------
2003 2002 2001
------- ------- -------
(in thousands)
Balance sheet data:
Total assets......................................... $49,512 $28,515 $26,002
======= ======= =======
Long-term debt....................................... $ - $ 6,500 $ 2,089
======= ======= =======
Common unitholders' capital.......................... $43,551 $19,164 $20,129
Subordinated unitholder's capital.................... 354 684 1,661
General partner's capital (deficit).................. 340 (161) (116)
------- ------- -------
Total partners' capital.............................. $44,245 $19,687 $21,674
======= ======= =======
10
Summary Operating Data
The following table summarizes information concerning the volumes of
natural gas we transported during the years ended December 31, 2003, 2002 and
2001 as well as the average transportation rate we received during those
periods.
For the years ended December 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Total volume of natural gas transported (in
mcf).......................................... 19,152,300 18,382,600 17,125,000
=========== =========== ===========
Average daily volume of natural gas transported
(in mcf)...................................... 52,472 50,363 46,918
=========== =========== ===========
Average transportation rate per mcf.............. $ .82 $ .58 $ .76
=========== =========== ===========
Available cash from operating surplus(1)......... $10,800,000 $ 7,385,300 $ 9,284,600
=========== =========== ===========
-----------------
(1) We define available cash from operating surplus under "Our Partnership
Agreement--Cash Distribution Policy--Distributions of Available Cash from
Operating Surplus." Available cash from operating surplus is not a measure
of cash flow as determined by generally accepted accounting principles. We
have included information concerning available cash from operating surplus
because it provides investors and management additional information as to
our ability to pay distributions to common unitholders and fixed charges
and is presented solely as a supplemental financial measure. Available cash
from operating surplus should not be considered as an alternative to, or
more meaningful than, net income or cash flow as determined in accordance
with generally accepted accounting principles or as an indicator of our
operating performance or liquidity. Available cash from operating surplus
is not necessarily comparable to a similarly titled measure of another
company. The table below shows how we calculated available cash from
operating surplus.
For the years ended December 31,
--------------------------------
2003 2002 2001
-------- ------- -------
(in thousands)
Net cash provided by operating activities........... $ 13,702 $ 8,138 $10,268
Net borrowings less capital expenditures
and acquisitions................................. (14,134) (820) (1,039)
Capital contributions and net proceeds from
offering......................................... 25,720 - 45
Increase in other assets............................ (2,468) (61) (38)
(Increase) decrease in cash reserves................ (12,020) 128 49
-------- ------- -------
Available cash from operating surplus............... $ 10,800 $7,385 $ 9,285
======== ======= =======
11
RISK FACTORS
Limited partner interests are inherently different from the capital
stock of a corporation, although many of the business risks we encounter are
similar to those that would be faced by a corporation engaged in a similar
business. You should consider the following risk factors together with all of
the other information included in this prospectus in evaluating an investment in
our securities. If any of the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our securities could decline and
you may lose some or all of your investment.
Our cash distributions are not assured and may fluctuate with our performance.
The amounts of cash that we generate may not be sufficient to pay the
minimum quarterly distributions established in our partnership agreement or any
other level of distributions. The actual amounts of cash we generate will depend
upon numerous factors relating to our business which may be beyond our control,
including:
o the demand for and price of natural gas;
o the volume of natural gas we transport;
o continued development of wells for connection to our gathering
systems;
o the expenses we incur in providing our gathering services;
o the cost of acquisitions and capital improvements;
o our issuance of equity securities;
o required principal and interest payments on our debt;
o fluctuations in working capital;
o prevailing economic conditions;
o fuel conservation measures;
o alternate fuel requirements;
o government regulations; and
o technical advances in fuel economy and energy generation devices.
Our ability to make cash distributions depends primarily on our cash
flow. Cash distributions do not depend directly on our profitability, which is
affected by non-cash items. Therefore, cash distributions may be made during
periods when we record losses and may not be made during periods when we record
profits.
The failure of Atlas America to perform its obligations under the natural gas
gathering agreements may adversely affect our revenues.
Our revenues currently consist of the fees we receive under the master
natural gas gathering agreement and other transportation agreements we have with
Atlas America and its affiliates. While Atlas America receives gathering fees
from the well owners, it is contractually obligated to pay our fees even if the
gathering fees paid to it by well owners are less than the fees it must pay us.
Our cash flow could be materially adversely affected if Atlas America failed to
discharge its obligations to us.
The amount of natural gas we transport will decline over time unless new wells
are connected to our gathering systems.
Production of natural gas from a well generally declines over time
until the well can no longer economically produce natural gas and is plugged and
abandoned. Failure to connect new wells to our gathering systems could,
therefore, result in the amount of natural gas we transport reducing
substantially over time and could, upon exhaustion of the current wells, cause
us to abandon one or more of our gathering
12
systems and, possibly, cease operations. As a consequence, our revenues and,
thus, our ability to make distributions to unitholders would be materially
adversely affected.
We entered into the omnibus agreement with Atlas America to, among
other things, increase the number of natural gas wells connected to our
gathering systems. However, well connections resulting from that agreement
depend principally upon the success of Atlas America in sponsoring drilling
investment partnerships and completing wells for these partnerships in areas
where our gathering systems are located. If Atlas America cannot or does not
continue to organize these partnerships, if the amount of money raised by these
partnerships decreases, or if the number of wells actually drilled and completed
as commercial producing wells decreases, our revenues and ability to make cash
distributions will be materially adversely affected.
The amount of natural gas we transport may be reduced if the public utility
pipelines to which we deliver gas cannot or will not accept the gas.
Our gathering systems principally serve as intermediate transportation
facilities between sales lines from wells connected to our systems and the
public utility pipelines to which we deliver natural gas. If one or more of
these public utility pipelines has service interruptions, capacity limitations
or otherwise does not accept the natural gas we transport, and we cannot arrange
for delivery to other public utility pipelines, local distribution companies or
end users, the amount of natural gas we transport may be reduced. Since our
revenues depend upon the volumes of natural gas we transport, this could result
in a material reduction in our revenues.
We may not be able to complete the acquisition of Alaska Pipeline.
Completion of the acquisition of Alaska Pipeline is subject to a number
of conditions, including receipt of governmental and non-governmental consents
and approvals and the absence of a material adverse change in Alaska Pipeline's
business. Among the required governmental authorizations are approval of the
Regulatory Commission of Alaska. The purchase and sale agreement may be
terminated by either SEMCO or us if the transaction is not completed by June 16,
2004.
We will incur substantial indebtedness to acquire Alaska Pipeline which may
restrict our liquidity and, if interest rates increase, affect cash flow from
the acquisition.
We intend to finance the Alaska Pipeline acquisition in part through
borrowing all of the $20 million available under our existing credit facility.
Unless the borrowing is paid down, or the amount of availability increased, we
will not have further borrowing capacity to finance future acquisitions, capital
expenditures or other liquidity needs. Moreover, since this borrowing, and the
$50 million borrowing that APC Acquisition will also make to finance the
acquisition, are at variable interest rates, any increase in interest rates will
adversely affect the cash flow we expect to derive from the acquisition. We
intend to use the proceeds of one or more offerings of our securities pursuant
to this prospectus to reduce some of these borrowings. However, we cannot assure
you that we and Alaska Pipeline will generate sufficient cash flow from
operations to satisfy our and its future liquidity needs.
Governmental regulation of our pipelines could increase our operating costs.
Currently our gathering of natural gas from wells is exempt from
regulation under the Natural Gas Act. However, the implementation of new laws or
policies could subject us to regulation by the Federal Energy Regulatory
Commission under the Natural Gas Act. We expect that any such regulation would
increase our costs, decrease our revenues, or both.
Gas gathering operations are subject to regulation at the state level.
Matters subject to regulation include rates, service and safety. We have been
granted an exemption from regulation as a public utility in Ohio. Presently, our
rates are not regulated in New York and Pennsylvania. Changes in state
regulations, or our status under these regulations that subject us to further
regulation, could increase our operating costs or require material capital
expenditures.
13
Litigation or governmental regulation relating to environmental protection and
operational safety may result in substantial costs and liabilities.
Our operations are subject to federal and state environmental laws
under which owners of natural gas pipelines can be liable for clean-up costs and
fines in connection with any pollution caused by their pipelines. We may also be
held liable for clean-up costs resulting from pollution which occurred before
our acquisition of the gathering systems. In addition, we are subject to federal
and state safety laws that dictate the type of pipeline, quality of pipe
protection, depth, methods of welding and other construction-related standards.
Any violation of environmental, construction or safety laws could impose
substantial liabilities and costs on us.
We are also subject to the requirements of the Occupational Health and
Safety Act, or OSHA, and comparable state statutes. Any violation of OSHA could
impose substantial costs on us.
We cannot predict whether or in what form any new legislation or
regulatory requirements might be enacted or adopted, nor can we predict our
costs of compliance. In general, we expect that new regulations would increase
our operating costs and, possibly, require us to obtain additional capital to
pay for improvements or other compliance action necessitated by those
regulations.
We may not be able to fully execute our growth strategy.
Our strategy contemplates substantial growth through both the
acquisition of other gathering systems and the development of our existing
system. Typically, we have paid for system development in cash and have made
acquisitions either for cash or a combination of cash and common units. As a
result, limitations on our access to capital or on the market for our common
units will impair our ability to execute our growth strategy. In addition, our
strategy of growth through acquisitions involves numerous risks, including:
o we may not be able to identify suitable acquisition candidates;
o we may not be able to make acquisitions on economically
acceptable terms;
o our costs in seeking to make acquisitions may be material, even
if we cannot complete any acquisition we have pursued;
o irrespective of estimates at the time we make an acquisition, the
acquisition may prove to be dilutive to earnings and operating
surplus;
o we may encounter difficulties in integrating operations and
systems; and
o we may acquire assets located outside of our core geographic
area of operations or acquire businesses or operations that
differ in nature from traditional gas pipeline or gathering
activities, and we may incur difficulties or delays in
successfully operating such new businesses;
A decline in natural gas prices could adversely affect our revenues.
Our gathering fees are generally equal to a percentage of either the
gross or weighted average sales price of the natural gas we transport, although
in some cases we receive a flat fee per mcf of gas transported. Our income
therefore depends upon the prices at which the natural gas we transport is sold.
Historically, the price of natural gas has been volatile; as a result, our
income may vary widely from period to period.
Gathering system operations are subject to operational hazards and unforeseen
interruptions.
The operations of our gathering systems are subject to hazards and
unforeseen interruptions, including natural disasters, adverse weather,
accidents or other events beyond our control. A casualty occurrence might result
in injury and extensive property or environmental damage. Our insurance coverage
may not be sufficient for any casualty loss we may incur.
14
USE OF PROCEEDS
Unless we indicate otherwise in an accompanying prospectus supplement,
we intend to use the net proceeds from the sale of the securities offered by
this prospectus for general partnership purposes, which may include, but not be
limited to, refinancing of indebtedness, working capital, capital expenditures,
acquisitions and repurchases and redemptions of securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table shows our ratio of earnings to fixed charges for
the periods indicated.
Inception
through
Year ended December 31, December 31,
---------------------------- ------------
2003 2002 2001 2000
---- ---- ---- -----
Ratio of earnings to fixed
charges..................... 29.2 18.0 36.9 753.8
PRO FORMA FINANCIAL DATA
Following are our unaudited pro forma financial statements as of and
for the year ended December 31, 2003. The unaudited pro forma balance sheet is
prepared as though the acquisition of Alaska Pipeline described in this
prospectus occurred as of December 31, 2003, and the unaudited pro forma
statement of operations is prepared as though the acquisition occurred as of
January 1, 2003. The acquisition adjustments are described in the notes to the
unaudited pro forma financial statements. The unaudited pro forma financial
statements and accompanying notes should be read together with our "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our and Alaska Pipeline's historical financial statements and related notes
included elsewhere, or incorporated by reference, in this prospectus.
We accounted for the acquisition of Alaska Pipeline in the unaudited
pro forma financial statements using the purchase method in accordance with the
guidance of Statement of Financial Accounting Standards No. 141, "Business
Combinations." For purposes of developing the unaudited pro forma financial
information, we have allocated the purchase price to Alaska Pipeline's gas
gathering and transmission facilities based on fair market value.
The unaudited pro forma financial statements are for informational
purposes only and are based upon available information and assumptions that we
believe are reasonable under the circumstances. You should not construe the
unaudited pro forma financial statements as indicative of the combined financial
position or results of operations that we and Alaska Pipeline would have
achieved had the transaction been consummated on the dates assumed. Moreover,
they do not purport to represent our and Alaska Pipeline's combined financial
position or results of operations for any future date or period or a
representation that we will complete the Alaska Pipeline acquisition. See "Risk
Factors--We may not be able to complete the acquisition of Alaska Pipeline."
15
ATLAS PIPELINE PARTNERS, L.P.
PRO FORMA BALANCE SHEET (UNAUDITED)
DECEMBER 31, 2003
(in thousands)
Historical Historical
Atlas Alaska Acquisition Pro forma
Pipeline Pipeline adjustments consolidated
---------- ---------- ----------- ------------
ASSETS
Current assets:
Cash and cash
equivalents............ $ 15,078 $ - $ - $ 15,078
Accounts receivable...... - 714 (714) (a) -
Accounts receivable -
affiliates............. 12 11,555 (11,555) (a) 12
Prepaid expenses......... 67 124 (124) (a) 67
-------- --------- ------------ ------------
Total current assets... 15,157 12,393 (12,393) 15,157
Property and equipment:
Gas gathering and
transmission
facilities............. 37,018 58,888 36,885 (b) 132,791
Less - accumulated
depreciation........... (7,390) (12,212) 12,212 (b) (7,390)
--------- ---------- ----------- -------------
Net property and
equipment............ 29,628 46,676 49,097 125,401
Goodwill.................... 2,305 46,472 (46,472) (a) 2,305
Other assets................ 2,422 267 3,315 (a)(b)(c) 6,004
-------- --------- ----------- ------------
$ 49,512 $ 105,808 $ (6,453) $ 148,867
======== ========= =========== ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and
accrued liabilities.... $ 521 $ 8,245 $ (8,245) (a) $ 521
Accounts payable -
affiliates............. 1,673 - 4,355 (a)(b)(c) 6,028
Distribution payable..... 3,073 - - 3,073
-------- --------- ----------- ------------
Total current
liabilities.......... 5,267 8,245 (3,890) 9,622
Long-term debt.............. - 35,900 34,100 (a)(b) 70,000
Regulatory liability........ - 1,819 (1,819) (b) -
Deferred income taxes....... - 6,947 (6,947) (a) -
Preferred equity
subject to
redemption............... - - 25,000 (b) 25,000
Stockholder's equity........ - 52,897 (52,897) (a) -
Members equity.............. - - - (a)(b) -
Partners' capital:
Common unitholders....... 43,551 - - 43,551
Subordinated
unitholders............ 354 - - 354
General partner.......... 340 - - 340
-------- --------- ----------- ------------
Total partners'
capital.............. 44,245 - - 44,245
-------- --------- ----------- ------------
$ 49,512 $ 105,808 $ (6,453) $ 148,867
======== ========= =========== ============
See notes to pro forma financial statements
16
ATLAS PIPELINE PARTNERS, L.P.
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2003
(in thousands, except per unit data)
Historical Historical
Atlas Alaska Acquisition Pro forma
Pipeline Pipeline adjustments consolidated
--------- ---------- ----------- ------------
Revenues:
Transportation and
compression............ $ 15,651 $ 67,733 $ (52,581) (d) $ 30,803
Pipeline management
services............... - 3,110 (3,110) (d) -
--------- --------- ----------- ---------
15,651 70,843 (55,691) 30,803
Costs and expenses:
Transportation and
compression............ 2,421 - - 2,421
Cost of gas sold......... - 55,549 (55,549) (d) -
General and
administrative......... 1,661 3,575 (2,104) (e) 3,132
Operations and
maintenance............ - 4,007 (1,470) (e) 2,537
Depreciation and
amortization........... 1,770 3,265 (293) (g)(h) 4,742
--------- --------- ------------ ---------
5,852 66,396 (59,416) 12,832
--------- --------- ------------ ---------
Operating income......... 9,799 4,447 3,725 17,971
--------- --------- ----------- ---------
Other income
(deductions):
Interest expense....... (258) (2,937) (4,674) (f)(i) (7,869)
Other.................. 98 263 (263) (d) 98
--------- --------- ------------ ---------
(160) (2,674) (4,937) (7,771)
--------- --------- ----------- ---------
Income before
income taxes............. 9,639 1,773 (1,212) 10,200
Provision for income taxes.. - 733 (733) (j) -
--------- --------- ------------ ---------
Net income............... $ 9,639 $ 1,040 $ (479) $ 10,200
========= ========= =========== =========
Net income - limited
partners................. $ 8,651 $ 7,593
========= =========
Net income - general
partner.................. $ 988 $ 2,607
========= =========
Basic and diluted net
income per limited
partner ................. $ 2.17 $ 1.91
========= =========
Weighted average units
outstanding.............. 3,981 3,981
========= =========
Per unit distributions -
limited partner.......... $ 2.39 $ 2.84 (k)
========== =========
See notes to pro forma financial statements
17
Atlas Pipeline Partners, L.P.
Notes to Unaudited Pro Forma Financial Statements
a. Immediately prior to the closing, Alaska Pipeline will convert from a
corporation to a Delaware limited liability company ("LLC"), transfer
its pipeline assets to the newly formed LLC, and dividend all of its
remaining net assets to SEMCO.
b. To reflect our purchase of 100% of the interest in the LLC for $96.5
million including estimated transaction costs and the payment of
$250,000 for the tower license fee and $450,000 for the gas control
services fee. The acquisition will be financed by a $25 million
preferred equity mezzanine investment, a $50 million revolving credit
facility and $20 million from bank borrowings under our existing credit
facility. The remaining $1.5 million is funded through borrowings from
our parent, which appear as an increase to accounts payable -
affiliates.
c. To reflect the payment of $2.9 million of estimated financing costs
which appear in the pro forma balance sheet as an increase in accounts
payable - affiliates.
d. Reflects the adjustment to gas sales and transportation and compression
revenue in accordance with the terms of the Special Contract for Gas
Transportation to be entered into with ENSTAR Natural Gas Company (the
division of SEMCO which conducts its Alaska distribution business) in
connection with the acquisition and the elimination of Alaska
Pipeline's pipeline management services and other income. The
adjustment also reflects the elimination of Alaska Pipeline's cost of
gas sold. The revenue Alaska Pipeline earned for gas sales and the
expense it recognized for the cost of gas sold are the result of an
intercompany gas sales agreement with ENSTAR that requires Alaska
Pipeline to sell ENSTAR the gas volumes it purchases from gas producing
entities.
e. Reflects the general and administrative costs in accordance with the
terms of the Operation and Maintenance and Administrative Services
Agreement to be entered into with ENSTAR in connection with the
acquisition.
f. Reflects the adjustment to interest expense resulting from the $25
million preferred equity (treated as debt for financial reporting
purposes) bearing a fixed interest rate of 12% and the $50 million of
new borrowings bearing an interest rate of LIBOR plus 350 basis points,
assumed to be 4.82% for the six months ended June 30, 2003 and 4.55%
for the six months ended December 31, 2003. In addition, reflects
borrowings under our existing credit facility and inter-company line
with our parent bearing an interest rate of LIBOR plus 200 basis
points, assumed to be 3.32% for the six months ended June 30, 2003 and
3.05% for the six months ended December 31, 2003.
g. Reflects the adjustment to depreciation expense based upon the cost of
the acquired gas gathering and transmission facilities using a 33 year
depreciable life and using the straight-line method.
h. Reflects the amortization of the gas control services and tower license
fees on a straight line basis over the 10 year term of the contract.
i Reflects the amortization of deferred financing costs related to the
various borrowing facilities to finance the acquisition over their
respective terms.
j. Reflects the elimination of federal and state income taxes following
the conversion of Alaska Pipeline to a LLC and its acquisition by us, a
master limited partnership not subject to income taxes.
k. Reflects the impact to limited partner distributions from adjusting our
distributable cash flow as a result of the acquisition of Alaska
Pipeline.
18
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
Conflicts of Interest
General
Conflicts of interest exist and may arise in the future as a result of
the relationships between our general partner and Atlas America and its
affiliates, on the one hand, and us and our limited partners, on the other hand.
The managing board members and officers of our general partner have fiduciary
duties to manage our general partner in a manner beneficial to Atlas America and
its affiliates as members. At the same time, our general partner has a fiduciary
duty to manage us in a manner beneficial to us and our unitholders.
Our partnership agreement contains provisions that allow our general
partner to take into account the interests of parties in addition to ours in
resolving conflicts of interest. In effect, these provisions limit our general
partner's fiduciary duty to the unitholders. The partnership agreement also
restricts the remedies available to unitholders for actions taken that might,
without those limitations, constitute breaches of fiduciary duty.
Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us or any partner, on the other, our general
partner has the responsibility to resolve that conflict. A conflicts committee
of our general partner's managing board will, at the request of our general
partner, review conflicts of interest. The conflicts committee consists of the
independent managing board members, currently William R. Bagnell, Donald W.
Delson and Murray S. Levin. Our general partner will not be in breach of its
obligations under the partnership agreement or its duties to us or our
unitholders if the resolution of the conflict is considered to be fair and
reasonable to us. Any resolution is considered to be fair and reasonable to us
if that resolution is:
o approved by the conflicts committee, although no party is
obligated to seek approval and our general partner may adopt a
resolution or course of action that has not received approval;
o on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
o fair to us, taking into account the totality of the
relationships between the parties involved, including other
transactions that may be particularly favorable or advantageous
to us.
In resolving a conflict, our general partner may, unless the resolution
is specifically provided for in the partnership agreement, consider:
o the relative interest of the parties involved in the conflict or
affected by the action;
o any customary or accepted industry practices or historical
dealings with a particular person or entity; and
o generally accepted accounting practices or principles and other
factors as it considers relevant, if applicable.
Conflicts of interest could arise in the situations described below,
among others:
Actions taken by our general partner may affect the amount of cash available for
distribution to unitholders or accelerate the conversion of subordinated units.
The amount of cash that is available for distribution to unitholders is
affected by decisions of our general partner regarding various matters,
including:
o amount and timing of asset purchases and sales;
o cash expenditures;
o borrowings;
o issuances of additional units; and
19
o the creation, reduction or increase of reserves in any quarter.
In addition, our borrowings do not constitute a breach of any duty owed
by our general partner to the unitholders, including borrowings that have the
purpose or effect of:
o enabling our general partner and its affiliates to receive
distributions on any subordinated units held by them or the
incentive distribution rights or
o hastening the expiration of the subordination period.
Our partnership agreement provides that we and the operating
partnership may borrow funds from our general partner and its affiliates. Our
general partner and its affiliates may not borrow funds from us or the operating
partnership. The partnership agreement limits the amount of debt we may incur,
including amounts borrowed from our general partner.
We do not have any employees and rely on the employees of our general partner
and its affiliates.
We do not have any officers or employees and rely solely on officers
and employees of our general partner and its affiliates. Affiliates of our
general partner conduct business and activities of their own in which we have no
economic interest. If these separate activities are significantly greater than
our activities, there could be material competition between us, our general
partner and affiliates of our general partner for the time and effort of the
officers and employees who provide services to our general partner. The officers
of our general partner who provide services to us are not required to work full
time on our affairs. These officers may devote significant time to the affairs
of our general partner's affiliates and be compensated by these affiliates for
the services rendered to them. There may be significant conflicts between us and
affiliates of our general partner regarding the availability of these officers
to manage us.
We must reimburse our general partner and its affiliates for expenses.
We must reimburse our general partner and its affiliates for costs
incurred in managing and operating us, including costs incurred in rendering
corporate staff and support services properly allocable to us.
Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual
arrangements so that the other party has recourse only as to all or particular
assets of ours and not against our general partner or its assets. The
partnership agreement provides that any action taken by our general partner to
limit our or its liability is not a breach of our general partner's fiduciary
duties, even if we could have obtained more favorable terms without the
limitation on liability.
Common unitholders have no right to enforce obligations of our general partner
and its affiliates under agreements with us.
Any agreements between us, on the one hand, and our general partner and
its affiliates, on the other, will not grant to the unitholders, separate and
apart from us, the right to enforce the obligations of our general partner and
those affiliates in favor of us.
Determinations by our general partner may affect its obligations and the
obligations of Atlas America.
We have agreements with Atlas America regarding, among other things,
transporting natural gas from wells controlled by it and its affiliates,
construction of expansions to our gathering systems, financing that construction
and identification of other gathering systems for acquisition. Determinations
made by our general partner will significantly affect the obligations of Atlas
America under these agreements. For example, a determination by our general
partner to seek outside financing to expand our gathering systems would reduce
the amount of additional investment Atlas America would be required to make in
us. A determination not to acquire a gathering system identified by Atlas
America could result in the acquisition of that system by Atlas America.
20
Contracts between us, on the one hand, and our general partner and Atlas America
and its affiliates, on the other, will not be the result of arm's-length
negotiations.
The partnership agreement allows our general partner to pay itself or
its affiliates for any services rendered, provided these services are on terms
fair and reasonable to us. Our general partner may also enter into additional
contractual arrangements with any of its affiliates on our behalf. Neither the
partnership agreement nor any of the other agreements, contracts and
arrangements between us, on the one hand, and our general partner and its
affiliates on the other, are or will be the result of arm's length negotiations.
In addition, our general partner will negotiate the terms of any acquisitions
from Atlas America subject to the approval of the conflicts committee consisting
of persons unaffiliated with Atlas America.
We may not retain separate counsel or other professionals.
Attorneys, independent public accountants and others who perform
services for us are selected by our general partner or the conflicts committee
and may also perform services for our general partner and Atlas America and its
affiliates. We may retain separate counsel in the event of a conflict of
interest arising between our general partner and its affiliates, on the one
hand, and us or the holders of common units, on the other, depending on the
nature of that conflict. We do not intend to do so in most cases.
Fiduciary Duties
State Law Fiduciary Duty Standards
Fiduciary duties are generally considered to include an obligation to
act with due care and loyalty. The duty of care, in the absence of a provision
in a partnership agreement providing otherwise, would generally require a
general partner to act for the partnership in the same manner as a prudent
person would act on his own behalf. The duty of loyalty, in the absence of a
provision in a partnership agreement providing otherwise, would generally
prohibit a general partner of a Delaware limited partnership from taking any
action or engaging in any transaction where a conflict of interest is present.
The Delaware Revised Uniform Limited Partnership Act provides that a
limited partner may institute legal action on our behalf to recover damages from
a third party where our general partner has refused to institute the action or
where an effort to cause our general partner to do so is not likely to succeed.
In addition, the statutory or case law may permit a limited partner to institute
legal action on behalf of himself and all other similarly situated limited
partners to recover damages from a general partner for violations of its
fiduciary duties to the limited partners.
Partnership Agreement Modified Standards; Limitations on Remedies of Unitholders
Our partnership agreement contains provisions that waive or consent to
conduct by our general partner and its affiliates that might otherwise raise
issues as to compliance with fiduciary duties or applicable law. For example,
the partnership agreement permits our general partner to make a number of
decisions in its "sole discretion." This entitles our general partner to
consider only the interests and factors that it desires; it has no duty or
obligation to give any consideration to any interest of, or factors affecting,
us, our affiliates or any limited partner. Other provisions of the partnership
agreement provide that our general partner's actions must be made in its
reasonable discretion. These standards reduce the obligations to which our
general partner would otherwise be held and limit the remedies that would
otherwise be available to unitholders for actions by our general partner that,
in the absence of those standards, might constitute breaches of fiduciary duty
to unitholders.
Our partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not involving a required
vote of unitholders must be "fair and reasonable" to us under the factors
previously described. In determining whether a transaction or resolution is
"fair and reasonable," our general partner may consider interests of all parties
involved, including its own. Unless our general partner has acted in bad faith,
the action taken by our general partner will not constitute a breach of its
fiduciary duty. These standards reduce the obligations to which our general
partner would otherwise be held and limit the remedies
21
that would otherwise be available to unitholders for actions by our general
partner that, in the absence of those standards, might constitute breaches of
fiduciary duty to unitholders.
Our partnership agreement specifically provides that, subject only to
the obligations of Atlas America and its affiliates to us under the omnibus
agreement, the master natural gas gathering agreement or similar agreements, it
will not be a breach of our general partner's fiduciary duty if its affiliates
engage in business interests and activities in preference to or to the exclusion
of us. Also, our general partner and its affiliates have no obligation to
present business opportunities to us except for the obligation of Atlas America
to us in connection with the identification of potential acquisitions of
existing gathering systems. These standards reduce the obligations to which our
general partner would otherwise be held and limit the remedies that would
otherwise be available to unitholders for actions by our general partner that,
in the absence of those standards, might constitute breaches of fiduciary duty
to unitholders.
In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement further provides
that our general partner and its officers and managing board members will not be
liable for monetary damages to us, our limited partners or assignees for errors
of judgment or for any acts or omissions if our general partner and those other
persons acted in good faith.
In order to become a limited partner, a unitholder is required to agree
to be bound by the provisions of our partnership agreement, including the
provisions discussed above. This is in accordance with the policy of the
Delaware Revised Uniform Limited Partnership Act favoring the principle of
freedom of contract and the enforceability of partnership agreements. The
failure of a limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against that person.
We are required to indemnify our general partner and its officers,
managing board members, employees, affiliates, partners, members, agents and
trustees, to the fullest extent permitted by law, against liabilities, costs and
expenses incurred by our general partner or these other persons. This
indemnification is required if our general partner or the other persons acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
our best interests. Indemnification is required for criminal proceedings if our
general partner or these other persons had no reasonable cause to believe their
conduct was unlawful. See "Our Partnership Agreement--Indemnification."
22
GENERAL DESCRIPTION OF SECURITIES THAT WE MAY SELL
We, directly or through agents, dealers or underwriters that we may
designate, may offer and sell, from time to time, up to $250,000,000 aggregate
initial offering price of:
o our common units representing limited partner interests;
o our subordinated units representing limited partner interests;
o our debt securities, in one or more series, which may be senior debt
securities or subordinated debt securities, in each case consisting
of notes or other evidences of indebtedness;
o warrants to purchase any of the other securities that may be sold
under this prospectus; or
o any combination of these securities, individually or as units.
We may offer and sell these securities either individually or as units
consisting of one or more of these securities, each on terms to be determined at
the time of sale. We may issue debt securities that are exchangeable for and/or
convertible into common units or any of the other securities that may be sold
under this prospectus. When particular securities are offered, a supplement to
this prospectus will be delivered with this prospectus, which will describe the
terms of the offering and sale of the offered securities.
DESCRIPTION OF COMMON UNITS
We describe our common units under the heading "Our Partnership
Agreement." The prospectus supplement relating to the common units offered will
state the number of units offered, the initial offering price and the market
price, distribution information and any other relevant information. Rules of the
American Stock Exchange, on which our common units trade, may limit the amount
of common units we may issue. Current AMEX rules require us to seek unitholder
approval if a proposed issuance of common units as consideration for an
acquisition of assets or stock of another company would increase our outstanding
common equity by more than 20%.
DESCRIPTION OF SUBORDINATED UNITS
The subordinated units will be a separate class of limited partner
interest. We currently have outstanding 1,641,026 subordinated units which we
expect will convert into common units on January 1, 2005, as described under
"Our Partnership Agreement." The rights of holders of new subordinated units to
participate in distributions to partners will differ from, and be subordinated
to, the rights of the holders of common units. The prospectus supplement
relating to the new subordinated units offered will state the number of units
offered, the initial offering price and the market price, the terms of the
subordination, any ways in which the new subordinated units will differ from
common units, distribution information and any other relevant information.
DESCRIPTION OF DEBT SECURITIES
We may issue debt securities either separately, or together with, or
upon the conversion of or in exchange for, other securities. The debt securities
may be our unsubordinated obligations, which we refer to as "senior debt
securities," or our subordinated obligations, which we refer to as "subordinated
debt securities." The subordinated debt securities of any series may be our
senior subordinated obligations, subordinated obligations, junior subordinated
obligations or may have such other ranking as will be described in the relevant
prospectus supplement. We may issue any of these types of debt securities in one
or more series.
Our senior debt securities may be issued from time to time under a
senior debt securities indenture. Our subordinated debt securities may be issued
from time to time under a subordinated debt securities indenture. Each of the
senior debt securities indenture and the subordinated debt securities indenture
is referred to individually as an "indenture" and they are referred to
collectively as the "indentures." Each trustee is referred to individually as a
"trustee" and the trustees are collectively referred to as the "trustees."
23
This section summarizes selected terms of the debt securities that we
may offer. The applicable prospectus supplement and the form of applicable
indenture relating to any particular debt securities offered will describe the
specific terms of that series, which may be in addition to or different from the
general terms summarized in this section. If any particular terms of the debt
securities described in a prospectus supplement differ from any of the terms
described in this prospectus, then the terms described in the applicable
prospectus supplement will supersede the terms described in this prospectus. The
following summary and any description of our debt securities contained in an
applicable prospectus supplement do not describe every aspect of the applicable
indenture or the debt securities. When evaluating the debt securities, you also
should refer to all provisions of the applicable indenture and the debt
securities. The forms of indentures have been filed as exhibits to the
registration statement of which this prospectus is a part.
General
We can issue an unlimited amount of debt securities under the
indentures. However, certain of our existing or future debt agreements may limit
the amount of debt securities we may issue. We can issue debt securities from
time to time and in one or more series as determined by us. In addition, we can
issue debt securities of any series with terms different from the terms of debt
securities of any other series and the terms of particular debt securities
within any series may differ from each other, all without the consent of the
holders of previously issued series of debt securities.
The applicable prospectus supplement relating to the series of debt
securities will describe the specific terms of the debt securities being
offered, including, where applicable, the following:
o the title and series designation of the series of debt securities
and whether the debt securities of the series will be senior debt
securities or subordinated debt securities;
o any limit on the aggregate principal amount of debt securities of
the series;
o the price or prices at which the debt securities of the series
will be issued;
o whether the debt securities of the series will be guaranteed and
the terms of any such guarantees;
o the date or dates on which the principal amount and premium, if
any, are payable;
o the interest rate or rates or the method for calculating the
interest rate, which may be fixed or variable, at which the debt
securities of the series will bear interest, if any, the date or
dates from which interest will accrue and the interest payment
date on which interest will be payable, subject to our right, if
any, to defer or extend an interest payment date and the duration
of that deferral or extension;
o the date or dates on which interest, if any, will be payable and
the record dates for payment of interest;
o the place or places where the principal and premium, if any, and
interest, if any, will be payable and where the debt securities
of the series can be surrendered for transfer, conversion or
exchange;
o our right, if any, to redeem the debt securities and the terms
and conditions upon which the debt securities of the series may
be redeemed, in whole or in part;
o any mandatory or optional sinking fund or analogous provisions;
o if the debt securities of the series will be secured, any
provisions relating to the security provided;
o whether the debt securities of the series are convertible or
exchangeable into other debt or equity securities, and, if so,
the terms and conditions upon which such conversion or exchange
will be effected;
o whether any portion of the principal amount of the debt
securities of the series will be payable upon declaration or
acceleration of the maturity thereof pursuant to an event of
default;
o whether the debt securities of the series, in whole or any
specified part, will not be defeasible pursuant to the applicable
indenture and, if other than by an officers' certificate, the
manner in which any election by us to defease the debt securities
of the series will be evidenced;
24
o any deletions from, modifications of or additions to the events
of default or our covenants pertaining to the debt securities of
the series;
o any terms applicable to debt securities of any series issued at
an issue price below their stated principal amount, including the
issue price thereof and the rate or rates at which the original
issue discount will accrue;
o whether the debt securities of the series are to be issued or
delivered (whether at the time of original issuance or at the
time of exchange of a temporary security of such series or
otherwise), or any installment of principal or any premium or
interest is to be payable only, upon receipt of certificates or
other documents or satisfaction of other conditions in addition
to those specified in the applicable indenture;
o whether the debt securities of the series are to be issued in
fully registered form without coupons or are to be issued in the
form of one or more global securities in temporary global form or
permanent global form;
o whether the debt securities of the series are to be issued in
registered or bearer form, the terms and conditions relating the
applicable form, including, but not limited to, tax compliance,
registration and transfer procedures and, if in registered form,
the denominations in which we will issue the registered
securities if other than $1,000 or a multiple thereof and, if in
bearer form, the denominations in which we will issue the bearer
securities;
o any special United States federal income tax considerations
applicable to the debt securities of the series;
o any addition to or change in the covenants set forth in the
indenture which apply to the debt securities of the series; and
o any other terms of the debt securities of the series not
inconsistent with the provisions of the applicable indenture.
The prospectus supplement relating to any series of subordinated debt
securities being offered also will describe the subordination provisions
applicable to that series, if different from the subordination provisions
described in this prospectus. In addition, the prospectus supplement relating to
a series of subordinated debt will describe our rights, if any, to defer
payments of interest on the subordinated debt securities by extending the
interest payment period.
Debt securities may be issued as original issue discount securities to
be sold at a discount below their principal amount or at a premium above their
principal amount. In the event of an acceleration of the maturity of any
original issue discount security, the amount payable to the holder upon
acceleration will be determined in the manner described in the applicable
prospectus supplement.
The above is not intended to be an exclusive list of the terms that may
be applicable to any debt securities and we are not limited in any respect in
our ability to issue debt securities with terms different from or in addition to
those described above or elsewhere in this prospectus, provided that the terms
are not inconsistent with the applicable indenture. Any applicable prospectus
supplement also will describe any special provisions for the payment of
additional amounts with respect to the debt securities.
Guarantees
Debt securities may be guaranteed by certain of our subsidiaries, if so
provided in the applicable prospectus supplement. The prospectus supplement will
describe the terms of any guarantees, including, among other things, the method
for determining the identity of the guarantors and the conditions under which
guarantees will be added or released. Any guarantees will be joint and several
obligations of the guarantors. The obligations of each guarantor under its
guarantee will be limited as necessary to prevent that guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
25
Subordination Provisions Relating to Subordinated Debt
Debt securities may be subject to contractual subordination provisions
contained in the subordinated debt securities indenture. These subordination
provisions may prohibit us from making payments on the subordinated debt
securities in certain circumstances before a defined class of "senior
indebtedness" is paid in full or during certain periods when a payment or other
default exists with respect to certain senior indebtedness. If we issue
subordinated debt securities, the applicable prospectus supplement relating to
the subordinated debt securities will include a description of the subordination
provisions and the definition of senior indebtedness that apply to the
subordinated debt securities.
If the trustee under the subordinated debt indenture or any holder of
the series of subordinated debt securities receives any payment or distribution
that is prohibited under the subordination provisions, then the trustee or the
holders will have to repay that money to the holders of senior indebtedness.
Even if the subordination provisions prevent us from making any payment
when due on the subordinated debt securities of any series, we will be in
default on our obligations under that series if we do not make the payment when
due. This means that the trustee under the subordinated debt indenture and the
holders of that series can take action against us, but they will not receive any
money until the claims of the holders of senior indebtedness have been fully
satisfied.
Unless otherwise indicated in an applicable prospectus, if any series
of subordinated debt securities is guaranteed by certain of our subsidiaries,
then the guarantee will be subordinated to the senior indebtedness of such
guarantor to the same extent as the subordinated debt securities are
subordinated to the senior indebtedness.
Conversion and Exchange Rights
The debt securities of a series may be convertible into or exchangeable
for any of our other securities, if at all, according to the terms and
conditions of an applicable prospectus supplement. Such terms will include the
conversion or exchange price and any adjustments thereto, the conversion or
exchange period, provisions as to whether conversion or exchange will be
mandatory, at our option or at the option of the holders of that series of debt
securities and provisions affecting conversion or exchange in the event of the
redemption of that series of debt securities.
Form, Exchange, Registration and Transfer
The debt securities of a series may be issued as registered securities,
as bearer securities (with or without coupons attached) or as both registered
securities and bearer securities. Debt securities of a series may be issuable in
whole or in part in the form of one or more global debt securities, as described
below under "-Global Debt Securities." Unless otherwise indicated in an
applicable prospectus supplement, registered securities will be issuable in
denominations of $1,000 and integral multiples thereof.
Registered securities of any series will be exchangeable for other
registered securities of the same series of any authorized denominations and of
a like aggregate principal amount and tenor. Debt securities may be presented
for exchange as provided above, and unless otherwise indicated in an applicable
prospectus supplement, registered securities may be presented for registration
of transfer, at the office or agency designated by us as registrar or
co-registrar with respect to any series of debt securities, without service
charge and upon payment of any taxes, assessments or other governmental charges
as described in the applicable indenture. The transfer or exchange will be
effected on the books of the registrar or any other transfer agent appointed by
us upon the registrar or transfer agent, as the case may be, being satisfied
with the documents of title and identity of the person making the request. We
intend to initially appoint the trustee as registrar and the name of any
different or additional registrar designated by us with respect to the debt
securities of any series will be included in the applicable prospectus
supplement. If a prospectus supplement refers to any transfer agents (in
addition to the registrar) designated by us with respect to any series of debt
securities, we may at any time rescind the designation of any transfer agent or
approve a change in the location through which any transfer agent acts, except
that, if debt securities of a series are issuable only as
26
registered securities, we will be required to maintain a transfer agent in each
place of payment for that series. We may at any time designate additional
transfer agents with respect to any series of debt securities.
In the event of any redemption of debt securities of any series, we
will not be required to:
o issue, register the transfer of or exchange debt securities of
that series during a period beginning at the opening of business
15 days before any selection of debt securities of that series to
be redeemed and ending at the close of business on the day of
mailing of the relevant notice of redemption; or
o register the transfer of or exchange any registered security, or
portion thereof, called for redemption, except the unredeemed
portion of any registered security being redeemed in part.
Payment and Paying Agents
Unless otherwise indicated in an applicable prospectus supplement,
payment of principal of, premium, if any, and interest, if any, on registered
securities will be made at the office of the paying agent or paying agents
designated by us from time to time, except that at our option, payment of
principal and premium, if any, or interest also may be made by wire transfer to
an account maintained by the payee. Unless otherwise indicated in an applicable
prospectus supplement, payment of any installment of interest on registered
securities will be made to the person in whose name the registered security is
registered at the close of business on the regular record date for the interest
payment.
Unless otherwise indicated in an applicable prospectus supplement, the
trustee will be designated as our sole paying agent for payments with respect to
debt securities which are issuable solely as registered securities. We may at
any time designate additional paying agents or rescind the designation of any
paying agent or approve a change in the office through which any paying agent
acts, except that, if debt securities of a series are issuable only as
registered securities, we will be required to maintain a paying agent in each
place of payment for that series.
All monies paid by us to a paying agent for the payment of principal
of, premium, if any, or interest, if any, on any debt security which remains
unclaimed at the end of two years after that principal or interest will have
become due and payable will be repaid to us, and the holder of the debt security
or any coupon will thereafter look only to us for payment of those amounts.
Global Debt Securities
The debt securities of a series may be issued in whole or in part in
global form. A global debt security will be deposited with, or on behalf of, a
depositary, which will be identified in an applicable prospectus supplement. A
global debt security may be issued in either registered or bearer form and in
either temporary or permanent form. A global debt security may not be
transferred except as a whole to the depositary for the debt security or to a
nominee or successor of the depositary. If any debt securities of a series are
issuable in global form, the applicable prospectus supplement will describe the
circumstances, if any, under which beneficial owners of interests in a global
debt security may exchange their interests for definitive debt securities of
that series of like tenor and principal amount in any authorized form and
denomination, the manner of payment of principal of, premium, if any, and
interest, if any, on the global debt securities and the specific terms of the
depositary arrangement with respect to any global debt security.
Covenants
Reports. Except as otherwise set forth in an applicable prospectus
supplement, so long as any debt securities of a series are outstanding, we will
furnish to the holders of debt securities of that series, within the time
periods specified in the rules and regulations of the SEC:
o our reports on Forms 10-Q and 10-K, including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a
report on the audited financial statements by our certified
independent accountants; and
o all current reports on Form 8-K.
27
We also will file a copy of all of the foregoing information and
reports with the SEC for public availability within the time periods specified
in the SEC's rules and regulations (unless the SEC will not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request.
Any additional covenants with respect to any series of debt securities
will be set forth in the applicable prospectus supplement. Unless otherwise
indicated in an applicable prospectus supplement, the indentures do not include
covenants restricting our ability to enter into a highly leveraged transaction,
including a reorganization, restructuring, merger or similar transaction
involving us that may adversely affect the holders of the debt securities, if
the transaction is a permissible consolidation, merger or similar transaction.
In addition, unless otherwise specified in an applicable prospectus supplement,
the indentures do not afford the holders of the debt securities the right to
require us to repurchase or redeem the debt securities in the event of a highly
leveraged transaction. See "-Merger, Consolidation and Sale of Assets."
Merger, Consolidation and Sale of Assets
Except as otherwise set forth in an applicable prospectus supplement,
we may not, directly or indirectly:
o consolidate with or merge into any other person (whether or not
we are the surviving corporation); or
o sell, assign, transfer, convey or otherwise dispose of all or
substantially all of our properties and assets, unless
o either
o we are the continuing corporation; or
o the person formed by or surviving any such consolidation or
merger (if other than us) or to which such sale, assignment,
transfer, conveyance or disposition will have been made is a
corporation organized and existing under the laws of the
United States, any state thereof or the District of Columbia
and that person assumes all of our obligations under the debt
securities of such series and the indenture relating thereto
pursuant to agreements reasonably satisfactory to the
applicable trustee; and
o any other conditions specified in the applicable prospectus
supplement have been satisfied.
In addition, we may not, directly or indirectly, lease all or
substantially all of our properties or assets in one or more related
transactions to any other person. This covenant will not apply to a sale,
assignment, transfer, conveyance or other disposition of assets between or among
us and any guarantors, if applicable.
Events of Default and Remedies
Under each indenture, unless otherwise specified with respect to a
series of debt securities, the following events will constitute an event of
default with respect to any series of debt securities:
o default for 30 days in the payment when due of any interest on
any debt securities of that series;
o default in payment when due of the principal of, or premium, if
any, on any debt security of that series;
o failure to comply with the provisions described under the caption
"-Merger, Consolidation and Sale of Assets";
o failure for 60 days after notice to comply with any of the other
agreements in the indenture;
o except as permitted by the indenture, if debt securities of a
series are guaranteed, any guarantee shall be held in any final,
non-appealable judicial proceeding to be unenforceable or invalid
or shall cease for any reason to be in full force and effect or
any guarantor, or any person acting on behalf of any guarantor,
shall deny, or disaffirm its obligations under its guarantee
(unless such guarantor could be released from its guarantee in
accordance with the applicable terms of the indenture);
28
o certain events of bankruptcy or insolvency described in the
indenture with respect to us or any of our significant
subsidiaries, as defined below; and
o any other event of default applicable to the series of debt
securities and set forth in the applicable prospectus supplement.
For purposes of this section, "significant subsidiary" means any
subsidiary that would be a "significant subsidiary" as defined in Article 1,
Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act.
Each indenture provides that in the case of an event of default arising
from certain events of bankruptcy or insolvency relating to us with respect to a
series of debt securities, all outstanding debt securities of that series will
become due and payable immediately without further action or notice. If any
other event of default occurs and is continuing, the trustee or the holders of
at least 25% in principal amount of the then outstanding debt securities of that
series may declare all the debt securities of that series to be due and payable
immediately.
Holders of the debt securities of a series may not enforce the
indenture or the debt securities of that series except as provided in the
indenture. Subject to certain limitations, holders of a majority in principal
amount of the then outstanding debt securities of a series may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
holders of the debt securities of a series notice of any continuing default or
event of default if it determines that withholding notice is in their interest,
except a default or event of default relating to the payment of principal or
interest.
Each indenture provides that we are required to deliver to the trustee
annually a statement regarding compliance with the indenture. Upon becoming
aware of any default or event of default, we are required to deliver to the
trustee a statement specifying such default or event of default.
The holders of a majority in aggregate principal amount of the debt
securities of a series then outstanding by notice to the trustee may on behalf
of the holders of all of the debt securities of that series waive any existing
default or event of default and its consequences under the indenture except a
continuing default or event of default in the payment of interest or premium on,
or the principal of, the debt securities of that series.
Such limitations do not apply, however, to a suit instituted by a
holder of any debt security for the enforcement of the payment of the principal
of, premium, if any, and interest in respect of a debt security on the date
specified for payment in the debt security. Unless otherwise specified with
respect to a series of debt securities, the holders of at least a majority in
aggregate principal amount of the then outstanding debt securities of that
series may, on behalf of the holders of the debt securities of any series, waive
any past defaults under the applicable indenture, other than:
o a default in any payment of the principal of, and premium, if
any, or interest on, any debt security of the series; or
o any default in respect of the covenants or provisions in the
applicable indenture which may not be modified without the
consent of the holder of each outstanding debt security of the
series affected.
Amendment, Supplement and Waiver
Each indenture permits us and the applicable trustee, with the consent
of the holders of at least a majority in aggregate principal amount of the
outstanding debt securities of the series affected by the supplemental
indenture, to execute a supplemental indenture to add provisions to, or change
in any manner or eliminate any provisions of, the indenture with respect to that
series of debt securities or modify in any manner the rights of the holders of
the debt securities of that series and any related coupons under the applicable
indenture. However, the supplemental indenture will not, without the consent of
the holder of each outstanding debt security of that series affected thereby:
o change the stated maturity of the principal of, or any
installment of principal or interest on, the debt securities of
that series or any premium payable upon redemption thereof;
29
o reduce the principal amount of, or premium, if any, or the rate
of interest on, the debt securities of that series;
o change the place or currency of payment of principal and premium,
if any, or interest, if any, on the debt securities of that
series;
o impair the right to institute suit for the enforcement of any
payment after the stated maturity date on any debt securities of
that series, or in the case of redemption, on or after the
redemption date;
o reduce the principal amount of outstanding debt securities of
that series necessary to modify or amend or waive compliance with
any provisions of the indenture;
o release any applicable guarantor from any of its obligations
under its guarantee or the indenture, except in accordance with
the indenture;
o modify the foregoing amendment and waiver provisions, except to
increase the percentage in principal amount of outstanding debt
securities of any series necessary for such actions or to provide
that certain other provisions of the indenture cannot be modified
or waived without the consent of the holder of each debt security
of a series affected thereby; and
o change such other matters as may be specified in an applicable
prospectus supplement for any series of debt securities.
The indentures also permit us, the guarantors, if any, and the
applicable trustee to execute a supplemental indenture without the consent of
the holders of the debt securities:
o to cure any ambiguity, defect or inconsistency;
o to provide for uncertificated debt securities in addition to or
in place of certificated debt securities;
o to provide for the assumption of our obligations or, if
applicable, a guarantor's obligations to holders of debt
securities of a series in the case of a merger or consolidation
or sale of all or substantially all of our assets or, if
applicable, a guarantor's assets;
o to make any change that would provide any additional rights or
benefits to the holders of debt securities of a series or that
does not adversely affect the legal rights under the indenture of
any such holder;
o to comply with the requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act;
o to add a guarantor under the indenture;
o to evidence and provide the acceptance of the appointment of a
successor trustee under the applicable indenture;
o to mortgage, pledge, hypothecate or grant a security interest in
favor of the trustee for the benefit of the holders of debt
securities of any series as additional security for the payment
and performance of our or any applicable guarantor's obligations
under the applicable indenture, in any property or assets;
o to add to, change or eliminate any provisions of the applicable
indenture (which addition, change or elimination may apply to one
or more series of debt securities), provided that, any such
addition, change or elimination:
o shall neither:
o apply to any debt security of any series created prior to the
execution of such supplemental indenture and entitled to the
benefit of such provision nor
o modify the rights of the holders of such debt securities with
respect to such provisions or
o shall become effective only when there is no such outstanding
debt securities of such series; and
o to establish the form and terms of debt securities of any series
as permitted by the indenture.
30
The holders of a majority in principal amount of outstanding debt
securities of any series may waive compliance with certain restrictive covenants
and provisions of the applicable indenture.
Discharge
Unless otherwise indicated in an applicable prospectus supplement, each
indenture provides that we may satisfy and discharge our obligations thereunder
with respect to the debt securities of any series, when either:
o all debt securities of that series that have been authenticated,
except lost, stolen or destroyed debt securities of that series
that have been replaced or paid and debt securities of that
series for whose payment money has been deposited in trust and
thereafter repaid to us, have been delivered to the trustee for
cancellation; or
o all debt securities of that series that have not been delivered
to the trustee for cancellation have become due and payable by
reason of the mailing of a notice of redemption or otherwise or
will become due and payable within one year and we or, if
applicable, any guarantor has irrevocably deposited or caused to
be deposited with the trustee as trust funds in trust solely for
the benefit of the holders of debt securities of that series,
cash, non-callable U.S. government securities, or a combination
thereof, in amounts as will be sufficient without consideration
of any reinvestment of interest, to pay and discharge the entire
indebtedness on the debt securities of that series not delivered
to the trustee for cancellation for principal, premium, if any,
and accrued interest to the date of maturity or redemption.
Defeasance
Unless otherwise indicated in an applicable prospectus supplement, each
indenture provides that we may, at our option and at any time, elect to have all
of our obligations discharged with respect to the outstanding debt securities of
a series and, if applicable, all obligations of the guarantors discharged with
respect to their guarantees ("legal defeasance") except for:
o the rights of holders of the outstanding debt securities of that
series to receive payments in respect of the principal of, or
premium or interest, if any, on the debt securities of that
series when such payments are due from the trust referred to
below;
o our obligations with respect to the debt securities of that
series concerning issuing temporary securities, registration of
securities, mutilated, destroyed, lost or stolen securities and
the maintenance of an office or agency for payment and money for
security payments held in trust;
o the rights, powers, trusts, duties and immunities of the
applicable trustee, our obligations and, if applicable, the
guarantor's obligations in connection therewith; and
o the legal defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations and, if applicable, the guarantors' obligations released with
respect to certain covenants in respect of the debt securities of any series
that are described in the indenture ("covenant defeasance") and thereafter any
omission to comply with those covenants will not constitute a default or event
of default with respect to the debt securities of that series. In the event
covenant defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"--Events of Default and Remedies" will no longer constitute an event of default
with respect to the debt securities of that series.
In order to exercise either legal defeasance or covenant defeasance we
are required to meet specified conditions, including:
o we must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the debt securities of that series,
cash, non-callable U.S. government securities, or a combination
thereof, in amounts as will be sufficient to pay the principal
of, or premium and interest, if any, on the outstanding debt
securities of that series on the stated maturity or on the
applicable redemption date, as the case may be;
31
o in the case of legal defeasance, we have delivered to the
applicable trustee an opinion of counsel reasonably acceptable to
the trustee confirming that (a) we have received from, or there
has been published by, the Internal Revenue Service a ruling or
(b) since the date of the indenture, there has been a change in
the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel will
confirm that, the holders of the outstanding debt securities of
that series will not recognize income, gain or loss for federal
income tax purposes as a result of such legal defeasance and will
be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
legal defeasance had not occurred; and
o in the case of covenant defeasance, we have delivered to the
trustee an opinion of counsel reasonably acceptable to the
trustee confirming that the holders of the outstanding debt
securities of that series will not recognize income, gain or loss
for federal income tax purposes as a result of such covenant
defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such covenant defeasance had not occurred.
The Trustees under the Indentures
If a trustee becomes a creditor of ours or any guarantor, the indenture
limits its right to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or otherwise.
Each trustee will be permitted to engage in other transactions with us and/or
the guarantors, if any; however, if any trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
debt securities of a series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
trustee, subject to certain exceptions. The indenture provides that in case an
event of default occurs and is continuing, a trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of its own affairs. Subject to such provisions, a trustee will be under
no obligation to exercise any of its rights or powers under the indenture at the
request of any holder of debt securities, unless such holder has offered to the
trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Applicable Law
The debt securities and the indentures will be governed by and
construed in accordance with the laws of the State of Delaware.
32
DESCRIPTION OF WARRANTS
We may issue, either separately or together with other securities,
warrants for the purchase of any of the other types of securities that we may
sell under this prospectus.
This section summarizes the general terms of the warrants that we may
offer. The warrants will be issued under warrant agreements to be entered into
between us and a bank or trust company, as warrant agent. The prospectus
supplement relating to a particular series of warrants will describe the
specific terms of that series, which may be in addition to or different from the
general terms summarized in this section. The summaries in this section and the
prospectus supplement do not describe every aspect of the warrants. If any
particular terms of a series of warrants described in a prospectus supplement
differ from any of the terms described in this prospectus, then the terms
described in the applicable prospectus supplement will be deemed to supersede
the terms described in this prospectus. When evaluating the warrants, you also
should refer to all the provisions of the applicable warrant agreement, the
certificates representing the warrants and the specific descriptions in the
applicable prospectus supplement. The applicable warrant agreement and warrant
certificates will be filed as exhibits to or incorporated by reference in the
registration statement.
General
The prospectus supplement will describe the terms of the warrants in
respect of which this prospectus is being delivered as well as the related
warrant agreement and warrant certificates, including the following, where
applicable:
o the principal amount of, or the number of securities, as the case
may be, purchasable upon exercise of each warrant and the initial
price at which the principal amount or number of securities, as
the case may be, may be purchased upon such exercise;
o the designation and terms of the securities, if other than common
units, purchasable upon exercise thereof and of any securities,
if other than common units, with which the warrants are issued;
o the procedures and conditions relating to the exercise of the
warrants;
o the date, if any, on and after which the warrants, and any
securities with which the warrants are issued, will be separately
transferable;
o the offering price of the warrants, if any;
o the date on which the right to exercise the warrants will
commence and the date on which that right will expire;
o a discussion of any special United States federal income tax
considerations applicable to the warrants;
o whether the warrants represented by the warrant certificates will
be issued in registered or bearer form, and, if registered, where
they may be transferred and registered;
o call provisions of the warrants, if any;
o antidilution provisions of the warrants, if any; and
o any other material terms of the warrants.
Exercise of Warrants
Each warrant will entitle the holder to purchase for cash that
principal amount of or number of securities, as the case may be, at the exercise
price set forth in, or to be determined as set forth in, the applicable
prospectus supplement relating to the warrants. Unless otherwise specified in
the applicable prospectus supplement, warrants may be exercised at the corporate
trust office of the warrant agent or any other office indicated in the
applicable prospectus supplement at any time up to 5:00 p.m. Eastern Standard
Time on the expiration date set forth in the applicable prospectus supplement.
After 5:00 p.m. Eastern Standard Time on the expiration date, unexercised
warrants will become void. Upon receipt of payment and the warrant certificate
properly completed and duly executed, we will, as soon as practicable, issue the
33
securities purchasable upon exercise of the warrant. If less than all of the
warrants represented by the warrant certificate are exercised, a new warrant
certificate will be issued for the remaining amount of warrants.
No Rights of Security Holder Prior to Exercise
Prior to the exercise of their warrants, holders of warrants will not
have any of the rights of holders of the securities purchasable upon the
exercise of the warrants and will not be entitled to:
o in the case of warrants to purchase debt securities, payments of
principal of, premium, if any, or interest, if any, on the debt
securities purchasable upon exercise; or
o in the case of warrants to purchase equity securities, the right
to vote or to receive dividend payments or similar distributions
on the securities purchasable upon exercise.
Exchange of Warrant Certificates
Warrant certificates will be exchangeable for new warrant certificates
of different denominations at the corporate trust office of the warrant agent or
any other office indicated in the applicable prospectus supplement.
OUR PARTNERSHIP AGREEMENT
The following is a summary of our current partnership agreement which
relates to our common units and our existing subordinated units. Accordingly,
references to "subordinated units" and the "subordination period" are to the
existing subordinated units and the subordination period relating to those
units. Pursuant to our partnership agreement and this prospectus we may issue
additional limited partner interests having different rights and
characteristics. These rights and characteristics will be set forth in a
prospectus supplement with respect to the issuance of any of these securities.
Organization and Duration
We were formed in May 1999. We will dissolve on December 31, 2098,
unless sooner dissolved under the terms of our partnership agreement.
Purpose
Our purpose under our partnership agreement is limited to serving as
the limited partner of our operating partnership and engaging in any business
activity that may be engaged in by our operating partnership or that is approved
by our general partner. The operating partnership agreement provides that our
operating partnership may, directly or indirectly, engage in:
o operations as conducted on February 2, 2000, including the
ownership and operation of our gathering systems;
o any other activity approved by our general partner, but only to
the extent that our general partner reasonably determines that,
as of the date of the acquisition or commencement of the
activity, the activity generates "qualifying income" as that term
is defined in Section 7704 of the Internal Revenue Code; or
o any activity that enhances the operations described above.
The Units
Our common units and the subordinated units represent limited partner
interests in us. The holders of units are entitled to participate in partnership
distributions and exercise the rights or privileges available to limited
partners under our partnership agreement. For a description of the relative
rights and preferences of holders of common units and subordinated units to
partnership distributions, together with a description of the circumstances
under which subordinated units may convert into common units, see "--Cash
Distribution Policy" and "--Description of the Subordinated Units."
34
Description of the Subordinated Units
The subordinated units are a separate class of interest and the rights
of holders to participate in distributions to partners differ from, and are
subordinated to, the rights of the holders of common units. For any given
quarter, any available cash is first distributed to our general partner and to
the holders of common units, plus any arrearages on the common units, and then
distributed to the holders of subordinated units.
The subordination period will extend until the first day of any quarter
beginning after December 31, 2004 that each of the following three events
occurs:
o distributions of available cash from operating surplus on the
common units and the subordinated units equal or exceed the sum
of the minimum quarterly distributions on all of the outstanding
common units and the subordinated units for each of the 12
consecutive quarters immediately preceding that date;
o the adjusted operating surplus generated during each of the 12
immediately preceding quarters equals or exceeds the sum of the
minimum quarterly distributions on all of the outstanding common
units and the subordinated units during those periods on a fully
diluted basis and the related distributions on the general
partner interests during those periods; and
o there are no arrearages in the payment of the minimum quarterly
distribution on the common units.
Once the subordination period ends, all existing subordinated units
will convert into common units on a one-for-one basis and will participate, pro
rata, with the other common units in distributions of available cash.
Limited Voting Rights
Holders of common units generally vote as a class separate from the
holders of subordinated units and have similarly limited voting rights. During
the subordination period, common units and subordinated units vote separately as
a class on the following matters:
o a sale or exchange of all or substantially all of our assets;
o our dissolution or reconstitution;
o our merger;
o termination or material modification of the omnibus agreement or
master natural gas gathering agreement; and
o substantive amendments to our partnership agreement, including
any amendment that would cause us to become taxable as a
corporation.
Only the common units are entitled to vote on approval of the removal
or voluntary withdrawal of our general partner or the transfer by our general
partner of its general partner interest or incentive distribution rights during
the subordination period, except that our general partner may transfer all of
its general partner interest and incentive distribution rights to an affiliate
or in connection with a merger of our general partner without approval of the
common unitholders. Removal of our general partner requires a two-thirds vote of
all outstanding common units, excluding those held by our general partner and
its affiliates. Our partnership agreement permits our general partner generally
to make amendments to it that do not materially adversely affect unitholders
without the approval of any unitholders.
Cash Distribution Policy
Quarterly Distributions of Available Cash. Our operating partnership is
required by the operating partnership agreement to distribute to us, within 45
days of the end of each fiscal quarter, all of its available cash for that
quarter. We, in turn, distribute to our partners all of the available cash
received from our operating partnership for that quarter.
Available cash generally means, for any of our fiscal quarters, all
cash on hand at the end of the quarter less cash reserves that our general
partner determines are appropriate to provide for our operating costs,
35
including potential acquisitions, and to provide funds for distributions to the
partners for any one or more of the next four quarters. We generally make
distributions of all available cash within 45 days after the end of each quarter
to holders of record on the applicable record date.
For each quarter during the subordination period, to the extent there
is sufficient available cash, the holders of common units have the right to
receive the minimum quarterly distribution of $.42 per unit, plus any arrearages
on the common units, before any distribution is made to the holders of
subordinated units. This subordination feature enhances our ability to
distribute the minimum quarterly distribution on the common units during the
subordination period.
We make distributions of available cash to unitholders regardless of
whether the amount distributed is less than the minimum quarterly distribution.
If distributions from available cash on the common units for any quarter during
the subordination period are less than the minimum quarterly distribution of
$.42 per common unit, holders of common units will be entitled to arrearages.
Common unit arrearages will accrue and be paid in a future quarter after the
minimum quarterly distribution is paid for that quarter. Subordinated units will
not accrue any arrearages on distributions for any quarter.
The holders of subordinated units will have the right to receive the
minimum quarterly distribution only after the common units have received the
minimum quarterly distribution plus any arrearages in payment of the minimum
quarterly distribution. Upon expiration of the subordination period, the
subordinated units will convert into common units on a one-for-one basis, and
will then participate pro rata with the other common units in distributions of
our available cash.
Distributions of Available Cash from Operating Surplus. Cash
distributions are characterized as distributions from either operating surplus
or capital surplus. This distinction affects the amounts distributed to
unitholders relative to our general partner, and also determines whether holders
of subordinated units receive any distributions.
Operating surplus means:
o our cash balance, excluding cash constituting capital surplus, less
o all of our operating expenses, debt service payments, maintenance
costs, capital expenditures and reserves established for future
operations.
Capital surplus means capital generated only by borrowings other than
working capital borrowings, sales of debt and equity securities and sales or
other dispositions of assets for cash, other than inventory, accounts receivable
and other assets disposed of in the ordinary course of business.
We treat all available cash distributed from any source as distributed
from operating surplus until the sum of all available cash distributed since we
began operations equals our total operating surplus from the date we began
operations until the end of the quarter that immediately preceded the
distribution. This method of cash distribution avoids the difficulty of trying
to determine whether available cash is distributed from operating surplus or
capital surplus. We treat any excess available cash, irrespective of its source,
as capital surplus, which would represent a return of capital, and we will
distribute it accordingly. For a discussion of distributions of capital surplus,
see "--Distributions of Capital Surplus" below.
We distribute available cash from operating surplus for any quarter
during the subordination period in the following manner:
o first, 98% to the common units, pro rata, and 2% to our general
partner, until we have distributed for each outstanding common unit
an amount equal to the minimum quarterly distribution for that
quarter;
o second, 98% to the common units, pro rata, and 2% to our general
partner, until we have distributed for each outstanding common unit
an amount equal to any arrearages in payment of the minimum quarterly
distribution on the common units;
o third, 98% to the subordinated units, pro rata, and 2% to our general
partner, until we have distributed for each outstanding subordinated
unit an amount equal to the minimum quarterly distribution for that
quarter; and
36
o after that, in the manner described in "-Incentive Distribution
Rights" below.
The 2% allocation of available cash from operating surplus to our
general partner includes our general partner's percentage interest in
distributions from us and our operating partnership on a combined basis,
exclusive of its interest as a subordinated unitholder.
We distribute available cash from operating surplus for any quarter
after the subordination period in the following manner:
o first, 98% to all units, pro rata, and 2% to our general partner,
until we have distributed for each unit an amount equal to the
minimum quarterly distribution for that quarter;
o second, 98% to the common units, pro rata, and 2% to our general
partner, until we have distributed for each outstanding common unit
an amount equal to any arrearages in payment of the minimum quarterly
distribution on the common units; and
o after that, in the manner described in "-Incentive Distribution
Rights" below.
Adjusted operating surplus for any period generally means operating
surplus generated during that period, less:
o any net increase in working capital borrowings during that period and
o any net reduction in cash reserves for operating expenditures during
that period not relating to an operating expenditure made during that
period,
and plus:
o any net decrease in working capital borrowings during that period and
o any net increase in cash reserves for operating expenditures during
that period required by any debt instrument for the repayment of
principal, interest or premium.
Operating surplus generated during a period is equal to the difference
between:
o the operating surplus determined at the end of that period and
o the operating surplus determined at the beginning of that period.
Incentive Distribution Rights. By "incentive distribution rights" we
mean the general partner's right to receive an increasing percentage of
quarterly distributions of available cash from operating surplus after we have
made the minimum quarterly distributions and we have met specified target
distribution levels, as described below. Our general partner may transfer its
incentive distribution rights separately from its general partner interest
subject, during the subordination period, to the consent of a majority of the
common units and the subordinated units voting as separate classes. After the
subordination period no consent is required.
We make incentive distributions to our general partner for any quarter
in which each of the following occurs:
o we have distributed available cash from operating surplus to the
common and subordinated unitholders in an amount equal to the minimum
quarterly distribution and
o we have distributed available cash from operating surplus on the
common units in an amount necessary to eliminate any cumulative
common unit arrearages.
If these conditions have been satisfied, the remaining available cash
will be distributed as follows:
o first, 85% to all units, pro rata, and 15% to our general partner,
until each unitholder has received a total of $.52 per unit for that
quarter, in addition to any distributions to common unitholders to
eliminate any cumulative arrearages in payment of the minimum
quarterly distribution on the common units;
o second, 75% to all units, pro rata, and 25% to our general partner,
until each unitholder has received a total of $.60 per unit for that
quarter, in addition to any distributions to common unitholders to
37
eliminate any cumulative arrearages in payment of the minimum
quarterly distribution on the common units; and
o after that, 50% to all units, pro rata, and 50% to our general
partner.
The distributions to our general partner that exceed its aggregate 2%
general partner interest represent the incentive distribution rights.
Distributions from Capital Surplus. We distribute available cash from
capital surplus in the following manner:
o first, 98% to all units, pro rata, and 2% to our general partner,
until each common unit has received distributions equal to $13.00 per
unit;
o second, 98% to the common units, pro rata, and 2% to our general
partner, until each common unit has received an aggregate amount
equal to any unpaid arrearages in payment of the minimum quarterly
distribution on the common units; and
o after that, we will distribute all available cash from capital
surplus, as if it were from operating surplus.
When we make a distribution from capital surplus, we will treat it as
if it were a repayment of your investment in your common units. For these
purposes, the partnership agreement deems the investment to be $13.00 per common
unit, which is the unit price from our initial public offering, regardless of
the price you actually pay for your common units in this offering. To reflect
this repayment, we will reduce the amount of the minimum quarterly distribution
and the distribution levels at which our general partner's incentive
distribution rights begin, which we refer to in this prospectus as "target
distribution levels," by multiplying each amount by a fraction, determined as
follows:
o the numerator is $13.00 less all distributions from capital surplus
including the distribution just made, and
o the denominator is $13.00 less all distributions from capital surplus
excluding the distribution just made.
We refer to the initial public offering price of $13.00 per common
unit, less any distributions from capital surplus, as the "unrecovered unit
price." This adjustment to the minimum quarterly distribution may accelerate the
dates at which the subordinated units convert into common units.
After the minimum quarterly distribution and the target distribution
levels have been reduced to zero, we will treat all distributions of available
cash from all sources as if they were from operating surplus. Because the
minimum quarterly distribution and the target distribution levels will have been
reduced to zero, our general partner will then be entitled to receive 50% of all
distributions of available cash in its capacity as general partner and holder of
the incentive distribution rights, in addition to any distributions to which it
may be entitled as a holder of units.
Distributions from capital surplus will not reduce the minimum
quarterly distribution or target distribution levels for the quarter in which
they are distributed.
Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels. In addition to adjustments made upon a distribution of available cash
from capital surplus, we will proportionately adjust each of the following
upward or downward, as appropriate, if any combination or subdivision of units
occurs:
o the minimum quarterly distribution,
o the target distribution levels,
o the unrecovered unit price,
o the number of common units issuable upon conversion of the
subordinated units, and
o other amounts calculated on a per unit basis.
38
For example, if a two-for-one split of the common units occurs, we will
reduce the minimum quarterly distribution, the target distribution levels and
the unrecovered initial unit price of the common units to 50% of their initial
levels.
We will not make any adjustment for the issuance of additional common
units for cash or property.
We may also adjust the minimum quarterly distribution and the target
distribution levels if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us or our operating partnership to become
taxable as a corporation or otherwise subject to taxation as an entity for
federal, state or local income tax purposes. In this event, we will reduce the
minimum quarterly distribution and the target distribution levels for each
quarter after that time to amounts equal to the product of:
o the minimum quarterly distribution and each of the target
distribution levels multiplied by
o one minus the sum of:
o the highest marginal federal income tax rate which could apply to
the partnership that is taxed as a corporation plus
o any increase in the effective overall state and local income tax
rate that would have been applicable in the preceding calendar year
as a result of the new imposition of the entity level tax, after
taking into account the benefit of any deduction allowable for
federal income tax purposes for the payment of state and local
income taxes, but only to the extent of the increase in rates
resulting from that legislation or interpretation.
For example, assuming we are not previously subject to state and local income
tax, if we became taxable as a corporation for federal income tax purposes and
subject to a maximum marginal federal, and effective state and local, income tax
rate of 40%, then we would reduce the minimum quarterly distribution and the
target distribution levels to 60% of the amount immediately before the
adjustment.
Distributions of Cash Upon Liquidation. When we commence dissolution
and liquidation, we will sell or otherwise dispose of our assets and adjust the
partners' capital account balances to reflect any resulting gain or loss. We
will first apply the proceeds of liquidation to the payment of our creditors in
the order of priority provided in our partnership agreement and by law. After
that, we will distribute the proceeds to the unitholders and our general partner
in accordance with their capital account balances, as so adjusted.
We maintain capital accounts in order to ensure that the partnership's
allocations of income, gain, loss and deduction are respected under the Internal
Revenue Code. The balance of a partner's capital account also determines how
much cash or other property the partner will receive on liquidation of the
partnership. A partner's capital account is credited with (increased by) the
following items:
o the amount of cash and fair market value of any property (net of
liabilities) contributed by the partner to the partnership, and
o the partner's share of "book" income and gain (including income and
gain exempt from tax).
A partner's capital account is debited with (reduced by) the following items:
o the amount of cash and fair market value (net of liabilities) of
property distributed to the partner, and
o the partner's share of loss and deduction (including some items not
deductible for tax purposes).
Partners are entitled to liquidating distributions in accordance with
their capital account balances. The allocations of gains and losses upon
liquidation are intended, to the extent possible, to entitle common unitholders
to a preference over the subordinated unitholders upon our liquidation to the
extent required to permit common unitholders to receive the unrecovered initial
public offering unit price described in "-Distributions from Capital Surplus,"
above, plus any unpaid arrearages in payment of the minimum quarterly
distributions. Thus, we will allocate net losses recognized upon our liquidation
to the holders of the subordinated units to the extent of their capital account
balances before we allocate any loss to the holders of the common units. Also we
will allocate net gains recognized upon our liquidation first to restore
negative balances in the capital account of our general partner and any
unitholders and then to the common
39
unitholders until their capital account balances equal the unrecovered initial
unit price plus unpaid arrearages in payment of the minimum quarterly
distributions. However, we cannot assure you that there will be sufficient gain
upon our liquidation to enable the holders of common units to fully recover all
of these amounts, even though there may be cash available for distribution to
the holders of subordinated units.
If our liquidation occurs before the end of the subordination period,
any gain, or unrealized gain attributable to assets distributed in kind, will be
allocated to the partners in the following manner:
o first, to our general partner and the holders of units who have
negative balances in their capital accounts to the extent of and in
proportion to those negative balances;
o second, 98% to the common units, pro rata, and 2% to our general
partner, until the capital account for each common unit is equal to
the sum of:
o the unrecovered unit price,
o the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs, and
o any unpaid arrearages in payment of the minimum quarterly
distribution;
o third, 98% to the subordinated units, pro rata, and 2% to our general
partner, until the capital account for each subordinated unit is
equal to the sum of:
o the unrecovered capital on that subordinated unit and
o the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;
o fourth, 85% to all units, pro rata, and 15% to our general partner,
until there has been allocated under this paragraph an amount per
unit equal to:
o the excess of the $.52 target distribution per unit over the
minimum quarterly distribution per unit for each quarter of our
existence less
o the cumulative amount per unit of any distribution of available
cash from operating surplus in excess of the minimum quarterly
distribution per unit that was distributed 85% to the units, pro
rata, and 15% to our general partner for each quarter of our
existence;
o fifth, 75% to all units, pro rata, and 25% to our general partner,
until there has been allocated under this paragraph an amount per
unit equal to:
o the excess of the $.60 target distribution per unit over the $.52
target distribution per unit for each quarter of our existence less
o the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the first target
distribution per unit that was distributed 75% to the units, pro
rata, and 25% to our general partner for each quarter of our
existence; and
o after that, 50% to all units, pro rata, and 50% to our general
partner.
If our liquidation occurs after the end of the subordination period,
the distinction between common units and subordinated units will disappear, so
that the second and third priorities above will no longer be applicable.
Upon our liquidation, any loss will generally be allocated to our
general partner and the unitholders in the following manner:
o first, 98% to holders of subordinated units in proportion to the
positive balances in their capital accounts and 2% to our general
partner, until the capital accounts of the holders of the
subordinated units have been reduced to zero;
40
o second, 98% to the holders of common units in proportion to the
positive balances in their capital accounts and 2% to our general
partner, until the capital accounts of the common unitholders have
been reduced to zero; and
o after that, 100% to our general partner.
If our liquidation occurs after the subordination period, the distinction
between common units and subordinated units will disappear, so that all of the
first priority above will no longer be applicable.
In addition, we will make interim adjustments to the capital accounts
at the time we issue additional equity interests or make distributions of
property. We will base these adjustments on the fair market value of the
interests or the property distributed and we will allocate any gain or loss
resulting from the adjustments to the unitholders and our general partner in the
same manner as we allocate gain or loss upon liquidation. In the event that we
make positive interim adjustments to the capital accounts, we will allocate any
later negative adjustments to the capital accounts resulting from the issuance
of additional equity interests, our distributions of property, or upon our
liquidation, in a manner which results, to the extent possible, in the capital
account balances of our general partner equaling the amount which would have
been our general partner's capital account balances if we had not made any
earlier positive adjustments to the capital accounts.
Power of Attorney
Each limited partner, and each person who acquires a unit from a
unitholder and executes and delivers a transfer application, grants to our
general partner and, if appointed, a liquidator, a power of attorney to, among
other things, execute and file documents required for our qualification,
continuance or dissolution and the amendment of our partnership agreement, and
to make consents and waivers under our partnership agreement.
Capital Contributions
Unitholders are not obligated to make additional capital contributions,
except as described below under "--Limited Liability."
Limited Liability
So long as a limited partner does not participate in the control of our
business within the meaning of the Delaware Revised Uniform Limited Partnership
Act and otherwise acts in conformity with the provisions of our partnership
agreement, the limited partner's liability under the Delaware Act will be
limited to the amount of capital he is obligated to contribute to us for his
common units plus his share of any undistributed profits and assets. If it were
determined that a limited partner participated in the control of our business,
then the limited partner could be held personally liable for our obligations
under Delaware law to the same extent as our general partner. This liability
would extend only to persons who transact business with us who reasonably
believe that the limited partner is a general partner. However, what constitutes
participating in the control of a limited partnership's business has not been
clearly established in all states. If it were determined, for example, that the
right, or exercise of a right, by the limited partners to:
o remove our general partner,
o approve some amendments to our partnership agreement, or
o take other action under our partnership agreement
constituted participation in the control of our business, then limited partners
could be held liable for our obligations to the same extent as our general
partner.
Under the Delaware Act, we cannot make a distribution to a partner if,
after the distribution, all our liabilities, other than liabilities to partners
on account of their partnership interests and liabilities for which the recourse
of creditors is limited to specific property, exceed the fair value of our
assets. For the purpose of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of property subject
to liability for which recourse of creditors is limited shall be included in the
assets of the
41
limited partnership only to the extent that the fair value of that property
exceeds the nonrecourse liability. The Delaware Act provides that a limited
partner who receives a distribution and knew at the time of the distribution
that the distribution was in violation of the Delaware Act is liable to the
limited partnership for the amount of the distribution for three years. Under
the Delaware Act, an assignee who becomes a substituted limited partner is
liable for the obligations of his assignor to make contributions to the
partnership, except the assignee is not obligated for liabilities unknown to him
at the time he became a limited partner and which he could not ascertain from
our partnership agreement.
Our operating partnership currently conducts business in New York, Ohio
and Pennsylvania. The limitations on the liability of limited partners for the
obligations of a limited partnership have not been clearly established in many
jurisdictions. If it were determined that we were, by virtue of our limited
partner interest in our operating partnership or otherwise, conducting business
in any state under the applicable limited partnership statute, or that the right
or exercise of the right by the limited partners as a group to remove or replace
our general partner, to approve some amendments to our partnership agreement, or
to take other action under our partnership agreement constituted "participation
in the control" of our business for purposes of the statutes of any relevant
jurisdiction, then the limited partners could be held personally liable for our
obligations under the law of that jurisdiction to the same extent as our general
partner. We operate in a manner our general partner considers reasonable and
appropriate to preserve the limited liability of the limited partners.
Transfer Agent and Registrar
American Stock Transfer and Trust Company is our registrar and transfer
agent for the common units. We pay all fees charged by the transfer agent for
transfers of common units, except that the following fees must be paid by
unitholders:
o surety bond premiums to replace lost or stolen certificates, taxes
and other governmental charges,
o special charges for services requested by a holder of a common unit,
and
o other similar fees or charges.
There is no charge to unitholders for disbursements of cash distributions.
We will indemnify the transfer agent, its agents and each of their
particular shareholders, directors, officers and employees against all claims
and losses that may arise out of acts performed or omitted in its capacity as
our transfer agent, except for any liability due to any negligence, gross
negligence, bad faith or intentional misconduct of the indemnified person or
entity.
Transfer of Common Units
The transfer agent will not record a transfer of common units, and we
will not recognize the transfer, unless the transferee executes and delivers a
transfer application. The form of transfer application appears on the reverse
side of the certificates representing the common units. By executing and
delivering a transfer application, the transferee of common units:
o becomes the record holder of the common units and is an assignee
until admitted as a substituted limited partner;
o automatically requests admission as a substituted limited partner;
o agrees to be bound by the terms and conditions of our partnership
agreement;
o represents that the transferee has the capacity, power and authority
to enter into our partnership agreement;
o grants powers of attorney to officers of our general partner and our
liquidator, as specified in our partnership agreement; and
o makes the consents and waivers contained in our partnership
agreement.
42
An assignee will become a substituted limited partner as to the
transferred common units upon the consent of our general partner and the
recordation of the name of the assignee on our books and records. Our general
partner may withhold its consent in its sole discretion.
A transferee's broker, agent or nominee may complete, execute and
deliver the transfer applications. We are entitled to treat the nominee holder
of a common unit as the absolute owner. In that case, the beneficial holder's
rights are limited solely to those that it has against the nominee holder as a
result of any agreement between the beneficial owner and the nominee holder.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to the rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner. A purchaser or transferee of common units who
does not execute and deliver a transfer application will have only
o the right to assign the common units to a purchaser or other
transferee and
o the right to transfer the right to seek admission as a substituted
limited partner.
Thus, a purchaser or transferee of common units who does not execute and deliver
a transfer application will not receive
o cash distributions or federal income tax allocations unless the
common units are held in a nominee or "street name" account and the
nominee or broker has executed and delivered a transfer application
and
o may not receive federal income tax information or reports furnished
to record holders of common units.
The transferor of common units must provide the transferee with all
information necessary to transfer the common units. The transferor will not be
required to insure the execution of the transfer application by the transferee
and will have no liability or responsibility if the transferee neglects or
chooses not to execute and forward the transfer application to the transfer
agent. See "-Status as Limited Partner or Assignee."
Until a common unit has been transferred on our books, we and the
transfer agent may treat the record holder of the unit as the absolute owner for
all purposes, except as otherwise required by law or stock exchange regulations,
even if either of us has notice of an attempted transfer.
Issuance of Additional Securities
Our partnership agreement generally authorizes us to issue an unlimited
number of additional limited partner interests, debt and other securities for
the consideration and on the terms and conditions established by our general
partner in its sole discretion without the approval of any limited partners.
During the subordination period, we cannot issue securities having rights to
distribution or in liquidation ranking prior or senior to our common units
without the approval of our unitholders.
We have funded, and will likely continue to fund, acquisitions through
the issuance of additional common units or other equity securities. Holders of
any additional common units we issue will be entitled to share equally with the
then-existing holders of common units in our distributions of available cash. In
addition, the issuance of additional partnership interests may dilute the value
of the interests of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership securities that, in the sole
discretion of our general partner, may have special voting rights to which the
common units are not entitled.
Upon issuance of additional partnership securities, our general partner
must make additional capital contributions to the extent necessary to maintain
its combined 2% general partner interest in us and in our operating partnership.
Moreover, our general partner will have the right, which it may from time to
time assign in whole or in part to any of its affiliates, to purchase common
units, subordinated units or other equity securities whenever, and on the same
terms that, we issue those securities to persons other than our
43
general partner and its affiliates, to the extent necessary to maintain its
percentage interest that existed immediately before each issuance. The holders
of common units will not have preemptive rights to acquire additional common
units or other partnership interests.
Amendment of Our Partnership Agreement
Amendments to our partnership agreement may be proposed only by or with
the consent of our general partner, which it may withhold in its sole
discretion. In order to adopt a proposed amendment, other than the amendments
discussed in "--No Unitholder Approval" below, our general partner must seek
written approval of the holders of the number of units required to approve the
amendment or call a meeting of the limited partners to consider and vote upon
the proposed amendment.
Prohibited Amendments. No amendment may be made that would:
o change the percentage of outstanding units required to take
partnership action, unless approved by the affirmative vote of
unitholders constituting at least the voting requirement sought to be
reduced;
o enlarge the obligations of any limited partner without its consent,
unless approved by at least a majority of the type or class of
limited partner interests so affected;
o enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by us to our general partner or any
of its affiliates without its consent, which may be given or withheld
in its sole discretion;
o change our term;
o provide that we are not dissolved upon the expiration of our term or
upon an election to dissolve us by our general partner that is
approved by holders of a majority of the units of each class; or
o give any person the right to dissolve us other than our general
partner's right to dissolve us with the approval of holders of a
majority of the units of each class.
The provision of our partnership agreement preventing the amendments
having the effects described above can be amended upon the approval of the
holders of at least 90% of the outstanding units voting together as a single
class.
No Unitholder Approval. Our general partner may amend our partnership
agreement, without the approval of the unitholders, to:
o change our name, the location of our principal place of business, our
registered agent or registered office;
o reflect the admission, substitution, withdrawal or removal of
partners in accordance with our partnership agreement;
o qualify us or continue our qualification as a limited partnership
under the laws of any state or to ensure that neither we nor our
operating partnership will be taxed as a corporation or otherwise
taxed as an entity for federal income tax purposes;
o prevent us or our general partner, or its directors, officers, agents
or trustees, from being subject to the provisions of the Investment
Advisers Act of 1940 or "plan asset" regulations adopted under the
Employee Retirement Income Security Act of 1974;
o authorize additional limited or general partner interests;
o reflect changes required by a merger agreement that has been approved
under the terms of our partnership agreement;
o permit us to form or invest in any entity, other than the operating
partnership, permitted by our partnership agreement;
o change our fiscal year or taxable year; and
44
o make other changes substantially similar to any of the matters
described above.
In addition, our general partner may amend our partnership agreement,
without the approval of the unitholders, if those amendments:
o do not adversely affect the limited partners in any material respect;
o are necessary to satisfy any requirements or guidelines contained in
any opinion, directive, order, ruling or regulation of any federal or
state agency or judicial authority or contained in any federal or
state statute;
o are necessary to facilitate the trading of limited partner interests
or to comply with any rule or guideline of any securities exchange or
interdealer quotation system on which the limited partner interests
are or will be listed for trading;
o are necessary for any action taken by our general partner relating to
splits or combinations of units; or
o are required to effect the intent expressed in this prospectus or the
intent of the provisions of our partnership agreement or are
otherwise contemplated by our partnership agreement.
Opinion of Counsel and Unitholder Approval. Except in the case of the
amendments described above under "--No Unitholder Approval," amendments to our
partnership agreement will not become effective without the approval of holders
of at least 90% of the units unless we obtain an opinion of counsel to the
effect that the amendment will not affect the limited liability under applicable
law of any limited partner or cause us or our operating partnership to be
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously taxed as such). Subject to
obtaining the opinion of counsel, any amendment that would have a material
adverse effect on the rights or preferences of any type or class of outstanding
units in relation to other classes of units will require the approval of at
least a majority of the type or class of units so affected.
Merger, Sale or Other Disposition of Our Assets
Our general partner may not, without the prior approval of holders of a
majority of the outstanding units of each class, cause us to sell, exchange or
otherwise dispose of all of substantially all of our assets, including by way of
merger, consolidation or other combination, or approve on our behalf the sale,
exchange or other disposition of all or substantially all of the assets of our
operating partnership. However, our general partner may mortgage or otherwise
grant a security interest in all or substantially all of our assets or sell all
or substantially all of our assets under a foreclosure without that approval.
Furthermore, provided that conditions specified in our partnership agreement are
satisfied, our general partner may merge us or any of our subsidiaries into, or
convey some or all of our and their assets to, a newly formed entity if the sole
purpose of that merger or conveyance changes our legal form into another limited
liability entity.
The unitholders are not entitled to dissenters' rights of appraisal in
the event of a merger, consolidation, sale of substantially all of our assets or
any other transaction or event.
Termination and Dissolution
We will continue until December 31, 2098, unless terminated sooner upon:
o the election of our general partner to dissolve us, if approved by
the holders of a majority of the outstanding units of each class;
o the sale, exchange or other disposition of all or substantially all
of our assets and those of our operating partnership;
o the entry of a decree of judicial dissolution of us; or
o the withdrawal or removal of our general partner or any other event
that results in its ceasing to be our general partner other than the
transfer of its general partner interest in accordance with our
partnership agreement or withdrawal or removal following approval and
admission of a successor.
45
Upon a dissolution under the last item above, the holders of a majority
of the units of each class may also elect, within specific time limitations, to
reconstitute us by forming a new limited partnership on terms identical to those
in our partnership agreement and having as general partner an entity approved by
the holders of a majority of the units of each class subject to our receipt of
an opinion of counsel to the effect that:
o the action would not result in the loss of limited liability of any
limited partner and
o we, the reconstituted limited partnership, and the operating
partnership would not be taxed as a corporation or otherwise be taxed
as an entity for federal income tax purposes upon the exercise of
that right to continue.
Liquidation and Distribution of Proceeds
Unless we are reconstituted and continue as a new limited partnership,
upon our liquidation the liquidator will liquidate our assets and apply the
proceeds of the liquidation as described in "--Cash Distribution
Policy--Distributions of Cash Upon Liquidation." The liquidator may defer
liquidation or distribution of our assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a sale would be
impractical or would cause undue loss to the partners.
Withdrawal or Removal of Our General Partner
Except as described below, our general partner will not withdraw
voluntarily either as our general partner or as general partner of our operating
partnership during the subordination period without obtaining the approval of
the holders of at least a majority of the outstanding common units, excluding
common units held by our general partner and its affiliates, and furnishing an
opinion of counsel regarding limited liability and tax matters. At the end of
the subordination period, our general partner may withdraw as our general
partner without first obtaining approval from the unitholders by giving 90 days'
written notice. In addition, our general partner may withdraw at any time
without unitholder approval upon 90 days' notice if at least 50% of the
outstanding common units are held or controlled by one person and its affiliates
other than our general partner and its affiliates. Our general partner may also
sell or otherwise transfer all of its general partner interests in us without
the approval of the unitholders as described below under "-Transfer of General
Partner Interest and Incentive Distribution Rights." Upon withdrawal, we must
reimburse our general partner for all expenses incurred by it on our behalf or
allocable to us in connection with operating our business.
If our general partner withdraws, other than as a result of a transfer
of all or a part of its general partner interests in us, the holders of a
majority of the common units may elect a successor to the withdrawing general
partner. If a successor is not elected, or is elected but an opinion of counsel
regarding limited liability and tax matters cannot be obtained, we will be
dissolved and liquidated, unless within 180 days after that withdrawal the
holders of a majority of the units of each class agree in writing to continue
our business and to appoint a successor general partner. See "--Termination and
Dissolution."
Our general partner may not be removed except by the vote of the
holders of at least 66 2/3% of the outstanding common units, excluding common
units held by our general partner and its affiliates, and we receive an opinion
of counsel regarding limited liability and tax matters. Any removal is also
subject to the approval of a successor general partner by the vote of the
holders of a majority of the common units, excluding common units held by our
general partner and its affiliates. If our general partner is removed under
circumstances where cause does not exist and does not consent to that removal:
o the subordination period will end and all outstanding subordinated
units will immediately convert into common units on a one-for-one
basis;
o the agreement of Atlas America to connect wells to our gathering
systems will terminate;
o the master natural gas gathering agreement with Atlas America will
not apply to any future wells drilled by Atlas America although it
will continue as to wells connected to the gathering system at the
time of removal;
46
o the obligations of Atlas America to provide financing and other
assistance for the extension of our gathering systems and to provide
assistance in the identification and acquisition of gathering systems
from third parties will terminate;
o any existing arrearages in payment of the minimum quarterly
distributions will be extinguished; and
o our general partner will have the right to convert its general
partner interests and incentive distribution rights into common units
or to receive cash in exchange for those interests from the successor
general partner.
Our partnership agreement defines "cause" as existing where a court has
rendered a final, non-appealable judgment that our general partner has committed
fraud, gross negligence or willful or wanton misconduct in its capacity as
general partner.
Withdrawal or removal of our general partner as our general partner
also constitutes its withdrawal or removal as the general partner of our
operating partnership.
In the event of removal of our general partner under circumstances
where cause exists or a withdrawal of our general partner that violates our
partnership agreement, a successor general partner will have the option to
purchase the general partner interests and incentive distribution rights of the
departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where our general partner
withdraws or is removed, the departing general partner will have the option to
require the successor general partner to purchase those interests for their fair
market value. In each case, fair market value will be determined by agreement
between the departing general partner and the successor general partner. If they
cannot reach an agreement, an independent expert selected by the departing
general partner and the successor general partner will determine the fair market
value. If the departing general partner and the successor general partner cannot
agree on an expert, then an expert chosen by agreement of the experts selected
by each of them will determine the fair market value. If the purchase option is
not exercised by either the departing general partner or the successor general
partner, the general partner interests and incentive distribution rights will
automatically convert into common units equal to the fair market value of those
interests. The successor general partner must indemnify the departing general
partner (or its transferee) from all of our debt and liability arising on or
after the date on which the departing general partner becomes a common
unitholder as a result of the conversion. Except for this limited indemnity
right and the right of the departing general partner to receive distributions on
its common units, no other payments will be made to our general partner after
withdrawal.
Transfer of General Partner Interest and Incentive Distribution Rights
Except for a transfer by our general partner of all, but not less than
all, of its general partner interests in us and our operating partnership to:
o an affiliate of our general partner or
o another person as part of the merger or consolidation of the general
partner with or into another person or the transfer by the general
partner of all or substantially all of its assets to another person,
our general partner may not transfer any part of its general partner interest in
us and our operating partnership to another person during the subordination
period without the approval of the holders of at least a majority of the
outstanding common units, excluding those held by our general partner and its
affiliates. After the subordination period ends, our general partner may
transfer all or any part of its general partner interest without obtaining the
consent of the common unitholders. As a condition to the transfer of a general
partner interest, either before or after the subordination period ends, the
transferee must assume the rights and duties of the general partner to whose
interest it has succeeded, furnish an opinion of counsel regarding limited
liability and tax matters, agree to acquire all of the general partner's
interest in our operating partnership and agree to be bound by the provisions of
the partnership agreement of our operating partnership. Our general partner may
at any time, however, transfer its subordinated units without unitholder
approval. In addition, the members of our general partner may sell or transfer
all or part of their interest in our general partner to an affiliate without the
approval of the unitholders.
47
Our general partner or a later holder may transfer its incentive
distribution rights to an affiliate or another person as part of its merger or
consolidation with or into, or sale of all or substantially all of its assets
to, that person without the prior approval of the unitholders. However, the
transferee must agree to be bound by the provisions of our partnership
agreement. Before the end of the subordination period, other transfers of the
incentive distribution rights will require the affirmative vote of holders of a
majority of the outstanding common units, excluding those held by our general
partner and its affiliates. After the subordination period ends, the incentive
distribution rights will be freely transferable.
Atlas America and its affiliates have agreed that they will not divest
their interest in our general partner without also divesting to the same
acquiror their ownership interest in subsidiaries which act as the general
partner of oil and gas investment partnerships sponsored by them.
Change of Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to remove Atlas
Pipeline Partners GP, LLC as our general partner or otherwise change management.
If any person or group other than our general partner and its affiliates
acquires beneficial ownership of 20% or more of any class of units, that person
or group will lose voting rights on all of its units and the units will not be
considered outstanding for the purposes of noticing meetings, determining the
presence of a quorum, calculating required votes and other similar matters. In
addition, the removal of our general partner under circumstances where cause
does not exist and our general partner does not consent to that removal has the
adverse consequences described under "--Withdrawal or Removal of Our General
Partner."
Limited Call Right
If at any time not more than 20% of the outstanding limited partner
interests of any class are held by persons other than our general partner and
its affiliates, our general partner will have the right, which it may assign in
whole or in part to any of its affiliates or to us, to acquire all, but not less
than all, of the remaining limited partner interests of the class held by
unaffiliated persons as of a record date selected by our general partner on at
least 10 but not more than 60 days' notice. The purchase price is the greater
of:
o the highest cash price paid by our general partner or any of its
affiliates for any limited partner interests of the class purchased
within the 90 days preceding the date on which our general partner
first mails notice of its election to purchase those limited partner
interests and
o the current market price as of the date three days before the date
the notice is mailed.
As a result of our general partner's right to purchase outstanding
limited partner interests, a holder of limited partner interests may have his
limited partner interests purchased at an undesirable time or price. The tax
consequences to a unitholder of the exercise of this call right are the same as
a sale by that unitholder of his common units in the market.
Meetings; Voting
Except as described above under "-Change of Management Provisions,"
unitholders or assignees who are record holders of units on a record date will
be entitled to notice of, and to vote at, meetings of our limited partners and
to act upon matters for which approvals may be solicited. Common units that are
owned by an assignee who is a record holder, but who has not yet been admitted
as a substituted limited partner, will be voted by our general partner at the
written direction of the record holder. Absent direction of this kind, the
common units will not be voted, except that, in the case of common units held by
our general partner on behalf of non-citizen assignees, our general partner
shall distribute the votes on those common units in the same ratios as the votes
of limited partners on other units are cast.
Any action to be taken by the unitholders may be taken either at a
meeting of the unitholders or without a meeting if consents in writing
describing the action so taken are signed by holders of the same number of units
as would be necessary to take the action. Meetings of the unitholders may be
called by our general partner or by unitholders owning at least 20% of the
outstanding units of the class for which a meeting is
48
proposed. Unitholders may vote either in person or by proxy at meetings. The
holders of a majority of the outstanding units of the class or classes for which
a meeting has been called, represented in person or by proxy, will constitute a
quorum unless any action by the unitholders requires approval by holders of a
greater percentage of the units, in which case the quorum will be the greater
percentage.
Except as described above under "--Change of Management Provisions,"
each record holder will have a vote in accordance with his percentage interest,
although additional limited partner interests having different voting rights
could be issued. See "--Issuance of Additional Securities." Units held in
nominee or street name account will be voted by the broker or other nominee in
accordance with the instruction of the beneficial owner. Except as otherwise
provided in our partnership agreement, subordinated units will vote together
with common units as a single class.
We or the transfer agent will deliver any notice, report or proxy
material required or permitted to be given or made to record holders of common
units under our partnership agreement to the record holder.
Status as Limited Partner or Assignee
An assignee of a common unit, after executing and delivering a transfer
application, but pending its admission as a substituted limited partner, is
entitled to an interest equivalent to that of a limited partner sharing in
allocations and distributions, including liquidating distributions. Our general
partner will vote and exercise other powers attributable to common units owned
by an assignee who has not become a substituted limited partner at the written
direction of the assignee. See "--Meetings; Voting." We will not treat
transferees who do not execute and deliver a transfer application as assignees
or as record holders of common units, and they will not receive cash
distributions, federal income tax allocations or reports furnished to record
holders. See "-Transfer of Common Units."
Non-Citizen Assignees; Redemption
If we are or become subject to federal, state or local laws or
regulations that, in the reasonable determination of our general partner, create
a substantial risk of cancellation or forfeiture of any property in which we
have an interest because of the nationality, citizenship or related status of
any limited partner or assignee, we may redeem the units held by the limited
partner or assignee at their current market price. In order to avoid any
cancellation or forfeiture, our general partner may require each limited partner
or assignee to furnish information about his nationality, citizenship or related
status. If a limited partner or assignee fails to furnish this information
within 30 days after a request for it, or our general partner determines after
receipt of the information that the limited partner or assignee is not an
eligible citizen, then the limited partner or assignee may be treated as a
non-citizen assignee. In addition to other limitations on the rights of an
assignee who is not a substituted limited partner, a non-citizen assignee does
not have the right to direct the voting of his units and may not receive
distributions in kind upon our liquidation.
Indemnification
Under the partnership agreement, we will indemnify the following
persons, by reason of their status as such, to the fullest extent permitted by
law, from and against all losses, claims or damages arising out of or incurred
in connection with our business:
o our general partner;
o any departing general partner;
o any person who is or was an affiliate of our general partner or any
departing general partner;
o any person who is or was a member, partner, officer, director,
employee, agent or trustee of our general partner, any departing
general partner or the operating partnership or any affiliate of a
general partner, any departing general partner or the operating
partnership; or
o any person who is or was serving at the request of a general partner
or any departing general partner or any affiliate of a general
partner or any departing general partner as an officer, director,
employee, member, partner, agent, fiduciary or trustee of another
person.
49
Our indemnification obligation arises only if the indemnified person
acted in good faith and in a manner the person reasonably believed to be in, and
not opposed to, our best interests. With respect to criminal proceedings, the
indemnified person must not have had reasonable cause to believe that the
conduct was unlawful.
Any indemnification under these provisions will be only out of our
assets. Our general partner will not be personally liable for the
indemnification obligations and will not have any obligation to contribute or
loan funds to us in connection with it. The partnership agreement permits us to
purchase insurance against liabilities asserted against and expenses incurred by
persons for our activities, regardless of whether we would have the power to
indemnify the person against liabilities under the partnership agreement.
Books and Reports
Our general partner keeps appropriate books on our business at our
principal offices. The books are maintained for both tax and financial reporting
purposes on an accrual basis. For tax and financial reporting purposes, our
fiscal year is the calendar year.
We furnish or make available to record holders of common units, within
120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we also furnish
or make available summary financial information within 90 days after the close
of each quarter.
We furnish each record holder information reasonably required for tax
reporting purposes within 90 days after the close of each calendar year. We
expect to furnish information in summary form so that some complex calculations
normally required of partners can be avoided. Our ability to furnish this
summary information to unitholders depends on the cooperation of unitholders in
supplying us with specific information. We will furnish every unitholder with
information to assist him in determining his federal and state tax liability and
filing his federal and state income tax returns, regardless of whether he
supplies us with information.
Right to Inspect Our Books and Records
Our partnership agreement provides that a limited partner can, for a
purpose reasonably related to his interest as a limited partner, upon reasonable
demand and at his own expense, have furnished to him:
o a current list of the name and last known address of each partner;
o a copy of our tax returns;
o information as to the amount of cash, and a description and statement
of the agreed value of any other property or services, contributed or
to be contributed by each partner and the date on which each became a
partner;
o copies of our partnership agreement, the certificate of limited
partnership and related amendments and powers of attorney under which
they have been executed;
o information regarding the status of our business and financial
condition; and
o other information regarding our affairs that is just and reasonable.
Our general partner intends to keep confidential from the limited
partners trade secrets or other information the disclosure of which our general
partner believes in good faith is not in our best interests or which we are
required by law or by agreements with third parties to keep confidential.
Registration Rights
Under the partnership agreement, we have agreed to register for resale
under the Securities Act and applicable state securities laws any common units,
subordinated units or other partnership securities proposed to be sold by our
general partner or any of its affiliates if an exemption from the registration
requirements is not otherwise available. We are obligated to pay all expenses
incidental to the registration, excluding underwriting discounts and
commissions.
50
EXPERTS
The financial statements included or incorporated by reference in this
prospectus have been so included or incorporated in reliance upon the reports of
Grant Thornton LLP, independent certified public accountants, upon the authority
of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the securities offered hereby and tax matters will be
passed upon for us by Ledgewood Law Firm, P.C., Philadelphia, Pennsylvania.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 with
respect to this offering. This prospectus only constitutes part of the
registration statement and does not contain all of the information set forth in
the registration statement, its exhibits, and its schedules.
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms. Please call the
SEC at 1-800-SEC-0330 for additional information on the public reference rooms.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it. This means that we can disclose important information to you by
referring to these documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 will
automatically update and supersede this information.
We are incorporating by reference the following documents that we have
previously filed with the SEC (other than information in such documents that is
deemed not to be filed):
o our Annual Report on Form 10-K for the fiscal year ended December
31, 2003, and
o our Proxy Statement on Schedule 14A for the special meeting of
unitholders held on February 11, 2004.
You may obtain a copy of these filings without charge by writing or
calling us at:
Investor Relations
Atlas Pipeline Partners, L.P.
311 Rouser Road
P.O. Box 611
Moon Township, Pennsylvania 15108
(412) 262-2830
You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. We are not making an offer to sell these securities
or soliciting an offer to buy these securities in any state where the offer or
sale is not permitted. You should not assume that the information in this
prospectus or the documents we have incorporated by reference is accurate as of
any date other than the date on the front of those documents.
51
PLAN OF DISTRIBUTION
We may distribute the securities from time to time in one or more
transactions at a fixed price or prices. We may change these prices from time to
time. We may also distribute our securities at market prices prevailing at the
time of sale, at prices related to prevailing market prices or at negotiated
prices. We will describe the distribution method for each offering in a
prospectus supplement.
We may sell our securities in any of the following ways:
o through underwriters or dealers,
o through agents who may be deemed to be underwriters as defined in the
Securities Act, or
o directly to one or more purchasers.
The prospectus supplement for a particular offering will set forth the
terms of the offering, purchase price, the proceeds we will receive from the
offering, any delayed delivery arrangements, and any underwriting arrangements,
including underwriting discounts and other items constituting underwriters'
compensation and any discounts or concessions allowed or reallowed or paid to
dealers. We may have agreements with the underwriters, dealers and agents who
participate in the distribution to indemnify them against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments which they may be required to make.
Securities offered may be a new issue of securities with no established
trading market. Any underwriters to whom or agents through whom these securities
are sold by us for public offering and sale may make a market in these
securities, but such underwriters or agents will not be obligated to do so and
may discontinue any market making at any time without notice. No assurance can
be given as to the liquidity of or the trading market for any such securities.
If we use underwriters in the sale, the securities we offer will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
Our securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of securities will be named in the
prospectus supplement relating to that offering, and if an underwriting
syndicate is used, the managing underwriter or underwriters will be set forth on
the cover of that prospectus supplement.
If we use dealers in an offering, we will sell the securities to the
dealers as principals. The dealers may then resell the securities to the public
at varying prices to be determined by those dealers at the time of resale. The
names of the dealers and the terms of the transaction will be set forth in a
prospectus supplement. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
We may also offer our securities directly, or though agents we
designate, from time to time at fixed prices, which we may change, or at varying
prices determined at the time of sale. We will name any agent we use and
describe the terms of the agency, including any commissions payable by us to the
agent, in a prospectus supplement. Unless otherwise indicated in the prospectus
supplement, any agent we use will act on a reasonable best efforts basis for the
period of its appointment.
52
Report of Independent Certified Public Accountants
Shareholder
Alaska Pipeline Company
We have audited the accompanying consolidated balance sheets of Alaska
Pipeline Company and subsidiary as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in shareholder's equity,
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Alaska
Pipeline Company and subsidiary as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, effective January 1,
2002, Alaska Pipeline Company changed its method of accounting related to
goodwill in accordance with the adoption of Statement of Financial Accounting
Standard No. 142, Goodwill and Other Intangible Assets.
/s/ GRANT THORNTON LLP
------------------------
Cleveland, Ohio
March 26, 2004
F-1
ALASKA PIPELINE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------ ------------
Current Assets
Cash ........................................... $ -- $ 99,407
Notes receivable - affiliates .................. 11,554,502 6,346,451
Accounts receivable - trade .................... 714,392 203,019
Prepaid expenses ............................... 123,545 131,691
------------ ------------
Total current assets.......................... 12,392,439 6,780,568
Property, Plant and Equipment
Plant in service, at cost ...................... 58,887,932 58,152,685
Less - accumulated depreciation ................ 12,211,960 9,463,050
------------ ------------
46,675,972 48,689,635
Deferred Charges and Other Assets
Goodwill, net of accumulated amortization of
$2,661,605..................................... 46,472,348 46,472,348
Unamortized debt expense, net .................. 267,141 306,940
------------ ------------
46,739,489 46,779,288
------------ ------------
Total Assets ................................... $105,807,900 $102,249,491
============ ============
Current Liabilities
Accounts payable and accrued liabilities ....... $ 8,245,102 $ 7,674,537
Deferred Credits and Other Liabilities
Deferred income taxes .......................... 6,946,939 5,440,065
Regulatory Liability ............................ 1,818,788 1,378,195
Long-Term Debt - Affiliate ...................... 35,900,000 35,900,000
Shareholder's Equity
Common stock, 2,850,000 shares authorized;
1,900,500 shares issued and outstanding,
$1 par value.................................. 1,900,500 1,900,500
Capital surplus ................................ 49,841,297 49,841,297
Retained earnings .............................. 1,155,274 114,897
------------ ------------
Total shareholder's equity ..................... 52,897,071 51,856,694
------------ ------------
Total Liabilities and Shareholder's Equity ...... $105,807,900 $102,249,491
============ ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-2
ALASKA PIPELINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Operating revenues
Gas sales and transportation - affiliate....................................... $67,732,859 $67,852,910 $69,083,247
Pipeline management services................................................... 3,109,996 562,109 --
----------- ----------- -----------
70,842,855 68,415,019 69,083,247
Operating expenses
Cost of gas sold............................................................... 55,548,942 56,148,644 56,620,021
Operations and maintenance..................................................... 4,006,898 1,273,348 1,232,789
General and administrative..................................................... 3,575,399 3,808,055 3,105,009
Depreciation and amortization.................................................. 3,265,221 3,349,051 4,591,050
----------- ----------- -----------
66,396,460 64,579,098 65,548,869
----------- ----------- -----------
Operating income............................................................. 4,446,395 3,835,921 3,534,378
Other income (expense)
Interest expense - affiliate................................................... (2,897,130) (3,013,200) (3,586,510)
Amortization of debt expense................................................... (39,799) (45,091) (54,984)
Other.......................................................................... 263,733 4,098 25,233
----------- ----------- -----------
(2,673,196) (3,054,193) (3,616,261)
----------- ----------- -----------
Income (loss) before income taxes............................................ 1,773,199 781,728 (81,883)
Income tax provision............................................................ 732,822 313,879 30,431
----------- ----------- -----------
NET INCOME (LOSS)............................................................... $ 1,040,377 $ 467,849 $ (112,314)
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
ALASKA PIPELINE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Common stock.................................................................... $ 1,900,500 $ 1,900,500 $ 1,900,500
Capital surplus................................................................. 49,841,297 49,841,297 49,841,297
Retained earnings (deficit)
Beginning balance.............................................................. 114,897 (352,952) (240,638)
Net income (loss).............................................................. 1,040,377 467,849 (112,314)
----------- ----------- -----------
Ending balance................................................................. 1,155,274 114,897 (352,952)
----------- ----------- -----------
Total Shareholder's Equity...................................................... $52,897,071 $51,856,694 $51,388,845
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
ALASKA PIPELINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- ------------
Cash flow from operating activities
Net income (loss).............................................................. $ 1,040,377 $ 467,849 $ (112,314)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................................................ 3,305,020 3,394,142 4,646,034
Deferred income tax expense.................................................. 1,506,874 2,023,203 1,636,048
Gain on sale of property..................................................... (260,292) -- --
Changes in operating assets and liabilities:
Accounts receivable......................................................... (511,373) (203,019) --
Prepaid expenses............................................................ 8,146 23,439 (34,967)
Accounts payable and accrued liabilities.................................... 570,565 (1,624,617) 4,252,384
----------- ----------- ------------
Net cash provided by operating activities.................................. 5,659,317 4,080,997 10,387,185
Cash flows from investing activities
Property additions............................................................. (863,559) (553,805) (989,108)
Proceeds from sale of property................................................. 312,886 -- --
----------- ----------- ------------
Net cash used in investing activities...................................... (550,673) (553,805) (989,108)
Cash flows from financing activities
(Increase) decrease in notes receivable - affiliates........................... (5,208,051) (3,427,785) 6,601,923
Repayment of long-term debt - affiliate........................................ -- -- (16,000,000)
----------- ----------- ------------
Net cash used in financing activities...................................... (5,208,051) (3,427,785) (9,398,077)
----------- ----------- ------------
NET (DECREASE) INCREASE.................................................... (99,407) 99,407 --
Cash - Beginning of period...................................................... 99,407 -- --
----------- ----------- ------------
Cash - End of period............................................................ $ -- $ 99,407 $ --
=========== =========== ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
ALASKA PIPELINE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE 1 -- NATURE OF BUSINESS
Alaska Pipeline Company ("APC"), a wholly owned subsidiary of SEMCO Energy,
Inc. ("SEMCO"), is an intrastate natural gas transmission company which owns
and operates the high-pressure gas pipelines that transport gas from Alaska's
Cook Inlet gas fields to ENSTAR Natural Gas Company's ("ENSTAR") distribution
system and various commercial customers of ENSTAR. ENSTAR, a division of
SEMCO, is a natural gas distribution company. NORSTAR Pipeline Company, Inc.
("NORSTAR") is a 100% owned subsidiary of APC, and its primary business is
pipeline management services. APC and NORSTAR have no employees and ENSTAR is
APC's only customer. SEMCO is a publicly traded company (trading under the
symbol SEN on the NYSE) operating in the energy, construction, and information
technology service industries.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
Principles of Consolidation
The consolidated financial statements include the accounts of APC, and its
wholly owned subsidiary, NORSTAR, collectively ("the Company"). NORSTAR was
incorporated in 2001 and began operating in April 2002. All material
intercompany transactions have been eliminated.
Basis of Presentation
The financial statements of the Company were prepared in conformity with
accounting principles generally accepted in the United States of America. In
connection with the preparation of the financial statements, management was
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Financial Instruments
For cash, notes receivable, accounts receivable, and accounts payable and
accrued liabilities, the carrying amounts approximate fair values because of
the short maturity of those instruments. The carrying value of long-term debt
from an affiliate approximates fair market value since interest rates
approximate current market rates.
Reclassifications
Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 presentation.
Property, Plant, Equipment and Depreciation
The Company's property, plant and equipment, consisting primarily of
pipeline assets, are recorded at cost. The Company provides for depreciation
on a straight-line basis over 33 years, the estimated useful life of the
assets. Expenditures for routine maintenance and repairs are charged to
expense as incurred.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets ("SFAS 144"). SFAS 144 requires the cost of long-lived assets be
tested for recoverability whenever events or changes in circumstances indicate
that their carrying amounts may not be recoverable. The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the
asset. In that circumstance, an impairment loss shall be measured as the
amount by which
F-6
ALASKA PIPELINE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 2003, 2002 and 2001
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
the carrying amount of the asset exceeds it fair value. The adoption of SFAS 144
did not have a material effect on the Company's financial position or results of
operations.
Goodwill
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible assets of businesses acquired. On January
1, 2002, the Company adopted SFAS No. 141, Business Combinations ("SFAS 141")
and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141
addresses financial accounting and reporting for all business combinations and
requires that all business combinations entered into subsequent to June 30,
2001 be recorded under the purchase method. This Statement also addresses
financial accounting and reporting for goodwill and other intangible assets
acquired in a business combination at the date of acquisition. SFAS 142
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets at the date of acquisition. This
Statement also addresses financial accounting and reporting for goodwill and
other intangible assets subsequent to their acquisition.
As of January 1, 2002, the date of adoption of SFAS 142, the Company had
unamortized goodwill in the amount of $46.5 million. Prior to the adoption,
goodwill was being amortized on a straight-line basis over a period of 40
years. Amortization expense related to goodwill was $1,228,344 in 2001.
The Company will continue to evaluate its goodwill at least annually as
required by SFAS 142 and will reflect the impairment of goodwill, if any, in
operating income in the income statement in the period in which the impairment
is indicated.
The following table presents what would have been reported as net income for
the periods presented in the financial statements exclusive of amortization
expense (net of any related tax effects) related to goodwill:
Years Ended December 31,
----------------------------------
2003 2002 2001
---------- -------- ---------
Net income (loss)............................................................... $1,040,377 $467,849 $(112,314)
Add back: Goodwill amortization, net of income taxes............................ -- -- 798,424
---------- -------- ---------
Adjusted net income............................................................ $1,040,377 $467,849 $ 686,110
========== ======== =========
Revenue Recognition
ENSTAR is APC's only gas transportation customer and, thus, all gas sales
and transportation revenue relates to ENSTAR. Gas sales and transportation
revenue is recognized at the time the natural gas purchased for sale to ENSTAR
is transported through the Company's system to ENSTAR's system. The Company
earns revenue from ENSTAR under an intercompany gas sales agreement that
compensates the Company for the cost of purchased gas and transporting the
purchased gas. Under the terms of the agreement, the Company earns revenue
only on the volume of gas sold to ENSTAR. Volumes that are transported by the
Company to ENSTAR's system that do not involve a sale of gas by the Company to
ENSTAR do not provide revenue to the Company. The gas sold to ENSTAR is sold
by ENSTAR to its gas sales service customers. Because the Company and ENSTAR
are viewed as one entity by the Regulatory Commission of Alaska ("RCA") for
purposes of rate making, regulatory review of the revenue from ENSTAR to
compensate the Company for transportation service has not been necessary.
Cost of Gas
The cost of gas is based upon contracts entered into between the Company and
several gas producing entities. Furthermore, these contracts have been
approved by the RCA. The base price of gas purchased under
F-7
ALASKA PIPELINE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 2003, 2002 and 2001
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
these contracts can be adjusted annually based on factors such as the price of
certain traded oil futures, certain natural gas futures and other inflationary
measures.
Income Taxes
The Company is included in SEMCO's consolidated federal income tax return
and income taxes are allocated to the Company based upon its separate taxable
income.
Supplemental Disclosure of Cash Flow Information
All taxes are paid by SEMCO, and accordingly, the Company made no income tax
payments for the years ended December 31, 2003, 2002, and 2001. Additionally,
since all debt is owed to affiliates, the interest expense represents an
affiliate transaction and was recorded as a reduction to notes receivable --
affiliates, thus no cash was specifically paid for interest for the years
ended December 31, 2003, 2002, or 2001.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). The Standard
required entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded by an entity, it also increases the carrying amount of the
related long-lived asset. The liability is accreted each period to its present
value and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
Company has determined that it does not have any asset retirement obligations
required to be recorded in accordance with SFAS 143. However, the Company is
subject to the provisions of SFAS 71, Accounting for the Effects of Certain
Types of Regulation. The provisions of SFAS 71 allow the Company to defer
expenses and income as regulatory assets and liabilities in the Consolidated
Balance Sheets when it is probable that those expenses and income will be
allowed in the rate setting process in a period different from the period in
which they would have been reflected in the Consolidated Statements of Income by
an unregulated company. These deferred regulatory assets and liabilities are
then included in the Consolidated Statements of Income in the periods in which
the same amounts are reflected in rates. In prior years, negative salvage value
was recorded in the accumulated depreciation of the Company in accordance with
industry practice. Negative salvage value has been reclassified to regulatory
liabilities in accordance with SFAS 143, Accounting for Asset Retirement
Obligations, which was adopted by the Company on January 1, 2003.
Notes Receivable -- Affiliate
As of December 31, 2003 and 2002, the Company had non-interest bearing notes
receivable from SEMCO of $11,554,502 and $6,346,451, respectively.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Operations and Maintenance Expenses
Since the Company has no employees, all functions relating to the Company
are conducted by ENSTAR and SEMCO employees. ENSTAR charges the Company for
the payroll and related costs of the employees who work directly on the
operations and maintenance of the Company's pipelines and related equipment.
Any purchased items or services relating to the Company, although processed by
ENSTAR, are also directly charged to the Company at cost. Additionally, ENSTAR
and SEMCO allocate a portion of their
F-8
ALASKA PIPELINE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 2003, 2002 and 2001
NOTE 3 -- RELATED PARTY TRANSACTIONS -- (Continued)
administrative and general expenses to the Company, which amounted to $2,700,503
in 2003, $2,301,948 in 2002, and $2,122,433 in 2001.
Interest Expense
Since all long-term debt is owed to SEMCO, all interest expense incurred is
with a related party.
NOTE 4 -- REGULATORY MATTERS
The Company is subject to regulation by the RCA. The Company and ENSTAR are
viewed together as one entity by the RCA for purposes of rate making and other
regulatory matters. The RCA has jurisdiction over, among other things, rates,
accounting procedures, and standards of service.
The Company and ENSTAR have undergone a rate review with the RCA, which
began in 2000. The Company and ENSTAR received a rate order in August 2002,
which set the combined revenue requirement for the Company and ENSTAR and
included a 12.55% authorized return on equity. After receiving the order,
the Company and ENSTAR filed the rate design portion of the case. The Company
and ENSTAR stipulated with all parties to a rate design and an order on the
rate design was issued on May 21, 2003 providing for decreases to residential,
power plant and industrial customers and an increase to commercial customers.
The design also increases the monthly customer service charges over a 3-year
period.
NOTE 5 -- INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting For Income Taxes ("SFAS 109"). SFAS 109 requires an annual
measurement of deferred tax assets and deferred tax liabilities based upon the
estimated future tax effects of temporary differences and carryforwards.
The table below summarizes the components of the Company's provision for
income taxes:
Years Ended December 31,
---------------------------------------
2003 2002 2001
---------- ----------- -----------
Federal income taxes:
Currently refundable........................................................... $ (677,544) $(1,520,436) $(1,454,496)
Deferred to future periods..................................................... 1,243,504 1,764,531 1,492,138
State income taxes:
Currently refundable........................................................... (96,508) (188,888) (151,121)
Deferred to future periods..................................................... 263,370 258,672 143,910
---------- ----------- -----------
Total income tax provision...................................................... $ 732,822 $ 313,879 $ 30,431
========== =========== ===========
Deferred income taxes arise from temporary differences between the tax bases
of assets and liabilities and their reported amounts in the financial
statements. The table below shows the principal components of the Company's
deferred tax liability.
December 31,
-----------------------
2003 2002
---------- ----------
Deferred tax liability components:
Property ........................................... $4,109,653 $3,629,226
Goodwill ........................................... 1,859,344 1,096,267
Other .............................................. 977,942 714,572
---------- ----------
Total deferred tax liability ........................ $6,946,939 $5,440,065
========== ==========
F-9
ALASKA PIPELINE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 2003, 2002 and 2001
NOTE 6 -- DEBT
Long-Term Debt -- Affiliate
The long-term debt -- affiliate is payable to SEMCO. Interest on the note is
recorded monthly as an intercompany transaction. The weighted average interest
rate charged to the Company by SEMCO was 8.07% in 2003, 8.17% in 2002 and
8.39% in 2001.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases right of way access from various companies and
governmental agencies. The resulting leases are classified as operating leases
in accordance with SFAS 13, "Accounting for Leases." The
terms of these agreements range from one to thirty-three years. Management
anticipates renewing these leases as they become due.
The Company's annual future minimum lease payments under leases that have
initial or remaining non-cancellable terms in excess of one year for the years
ended December 31, 2004 through 2008 total approximately $123,000. Total lease
expense approximated $115,000, $107,000 and $103,000 in 2003, 2002 and 2001,
respectively.
Other Contingencies
In the normal course of business, the Company is party to certain lawsuits
and administrative proceedings before various courts and government agencies.
These lawsuits and proceedings may involve personal injury, property damage,
contractual issues and other matters. Management cannot predict the ultimate
outcome of any pending or threatened litigation or of actual or possible
claims; however, management believes resulting liabilities, if any, will not
have a material adverse impact upon the Company's financial position or
results of operations.
NOTE 8 -- PROPOSED SALE OF COMPANY
In September 2003, SEMCO entered into a definitive sales agreement to sell
APC to Atlas Pipeline Partners, L.P. for approximately $95 million, subject to
an adjustment based on the amount of working capital that APC has at closing.
The sale is subject to approval under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, approval by the RCA, and consents under various
contracts. In regard to the RCA approval process, a stipulation on a final
order was reached with all interveners in the case and filed with the RCA on
March 26, 2004. A hearing on the stipulation is scheduled for April 7 and 8,
2004. A full hearing is scheduled for the week of April 26, 2004, if required.
As part of the sale, APC will enter into a ten-year Special Contract with
ENSTAR for gas transportation pursuant to which ENSTAR will pay a reservation
fee for use of all of APC's transportation capacity of $943,000 per month plus
a volumetric rate of $0.075 per Mcf of gas transported. The Special Contract
is subject to RCA approval. Additionally, SEMCO will execute a gas
transmission agreement with APC under which SEMCO will be obligated to make up
any difference if the RCA reduces the transportation rates payable by ENSTAR
pursuant to the Special Contract.
Furthermore, APC will enter into an Operations and Maintenance and
Administrative Services Agreement with ENSTAR under which ENSTAR will continue
to operate and maintain the pipeline for at least five years for a fee of
$334,000 per month for the first three years. Thereafter, ENSTAR's fees will
be adjusted for inflation.
All gas purchase contracts discussed in Note 2 will be assigned to ENSTAR
prior to the sale and the intercompany gas sales agreement between APC and
ENSTAR discussed in Note 2 will be terminated. NORSTAR is not part of the
sale.
F-10
2,100,000 Common Units
Representing Limited Partner Interests
PROSPECTUS SUPPLEMENT
July , 2004
LEHMAN BROTHERS
A.G. EDWARDS
FRIEDMAN BILLINGS RAMSEY
KEYBANC CAPITAL MARKETS
SANDERS MORRIS HARRIS