e424b2
Filed Pursuant to Rule 424(b)(2)
File No. 333-142278
PROSPECTUS SUPPLEMENT
(To Prospectus dated November 8, 2007)
DCP Midstream Partners, LP
4,250,000 Common Units
Representing Limited Partner
Interests
We are selling 4,250,000 common units of DCP Midstream
Partners, LP. We have granted the underwriters a
30-day
option to purchase up to an additional 637,500 common units
to cover over-allotments.
Our common units trade on the New York Stock Exchange under the
symbol DPM. On March 11, 2008, the last
reported sale price of our common units on the New York Stock
Exchange was $33.64 per common unit.
Investing in our common units involves risks. See Risk
Factors beginning on
page S-17
of this prospectus supplement and on page 6 of the
accompanying prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Per Common Unit
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Total
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Public offering price
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$
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32.44
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$
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137,870,000
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Underwriting discount and commission
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$
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1.27
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$
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5,397,500
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Proceeds to DCP Midstream Partners, LP (before expenses)
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$
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31.17
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$
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132,472,500
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The underwriters expect to deliver the common units on or about
March 17, 2008.
Joint Book-Running Managers
March 12, 2008
TABLE OF
CONTENTS
PROSPECTUS SUPPLEMENT
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S-1
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S-24
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PROSPECTUS
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S-i
ABOUT
THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is the prospectus
supplement, which describes the specific terms of this offering
and also adds to and updates information contained in the
accompanying prospectus and the documents incorporated by
reference into this prospectus supplement and the accompanying
prospectus. The second part is the accompanying prospectus,
which gives more general information about securities we may
offer from time to time, some of which does not apply to this
offering. To the extent the information contained in this
prospectus supplement differs or varies from the information
contained in the accompanying prospectus, the information in
this prospectus supplement controls. Before you invest in our
common units, you should carefully read this prospectus
supplement, along with the accompanying prospectus, in addition
to the information contained in the documents we refer to under
the heading Information Incorporated by Reference in
this prospectus supplement and Where You Can Find More
Information in the accompanying prospectus.
You should rely only on the information contained or
incorporated by reference in this prospectus supplement, the
accompanying prospectus or any free writing
prospectus we may authorize to be delivered to you.
Neither we nor the underwriters have authorized anyone to
provide you with information that is different. If anyone
provides you with different or inconsistent information, you
should not rely on it. This prospectus supplement is not an
offer to sell or a solicitation of an offer to buy our common
units in any jurisdiction where such offer or any sale would be
unlawful. You should not assume that the information in this
prospectus supplement, the accompanying prospectus or any free
writing prospectus that we may authorize to be delivered to you,
including any information incorporated by reference, is accurate
as of any date other than their respective dates. If any
statement in one of these documents is inconsistent with a
statement in another document having a later date
for example, a document incorporated by reference in this
prospectus supplement or the accompanying prospectus
the statement in the document having the later date modifies or
supersedes the earlier statement.
S-ii
SUMMARY
This summary highlights information contained elsewhere in
this prospectus supplement and the accompanying prospectus. It
does not contain all of the information that you should consider
before making an investment decision. You should carefully read
this prospectus supplement, the accompanying prospectus and the
documents incorporated by reference for a more complete
understanding of our business and the terms of our common units,
as well as the tax and other considerations that are important
to you in making your investment decision. You should pay
special attention to the Risk Factors section
beginning on
page S-17
of this prospectus supplement, on page 6 of the
accompanying prospectus and incorporated by reference from our
Annual Report on
Form 10-K
for the year ended December 31, 2007 to determine whether
an investment in our common units is appropriate for you. Unless
otherwise specifically stated, the information presented in this
prospectus supplement assumes that the underwriters have not
exercised their option to purchase additional common units.
Throughout this prospectus supplement, when we use the terms
we, us, or the partnership,
we are referring either to DCP Midstream Partners, LP in its
individual capacity or to DCP Midstream Partners, LP and its
operating subsidiaries collectively, as the context requires.
References in this prospectus supplement to our general
partner refer to DCP Midstream GP, LP
and/or DCP
Midstream GP, LLC, the general partner of DCP Midstream GP, LP,
as appropriate.
DCP
Midstream Partners, LP
We are a Delaware limited partnership formed by DCP Midstream,
LLC to own, operate, acquire and develop a diversified portfolio
of complementary midstream energy assets. We are currently
engaged in the business of gathering, compressing, treating,
processing, transporting and selling natural gas; producing,
transporting, storing and selling propane in wholesale markets;
and transporting and selling NGLs and condensate. Supported by
our relationship with DCP Midstream, LLC and its parents,
Spectra Energy Corp, or Spectra Energy, and ConocoPhillips, we
have a management team dedicated to executing our growth
strategy by acquiring and constructing additional assets.
Our
Operations
Our operations are organized into three business segments,
Natural Gas Services, Wholesale Propane Logistics and NGL
Logistics.
Natural Gas Services. Our Natural Gas Services
segment includes:
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our Northern Louisiana system, which is an integrated pipeline
system located in northern Louisiana and southern Arkansas that
gathers, compresses, treats, processes, transports and sells
natural gas, and that transports and sells NGLs and condensate.
This system consists of the following:
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the Minden processing plant and gathering system, which includes
a
115 MMcf/d
cryogenic natural gas processing plant supplied by approximately
725 miles of natural gas gathering pipelines, which are
connected to approximately 460 receipt points, with throughput
and processing capacity of approximately
115 MMcf/d;
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the Ada processing plant and gathering system, which includes a
45 MMcf/d
refrigeration natural gas processing plant supplied by
approximately 130 miles of natural gas gathering pipelines,
which are connected to approximately 210 receipt points, with
throughput capacity of approximately
80 MMcf/d; and
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the Pelico Pipeline, LLC system, or Pelico system, an
approximately
600-mile
intrastate natural gas gathering and transportation pipeline
with throughput capacity of approximately
250 MMcf/d
and connections to the Minden and Ada processing plants and
approximately 450 other receipt points. The Pelico system
delivers natural gas to multiple interstate and intrastate
pipelines, as well as directly to industrial and utility end-use
markets.
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our Southern Oklahoma, or Lindsay, gathering system, that we
acquired in the Southern Oklahoma Asset Acquisition (as defined
below in Recent Acquisitions) in May
2007, and which consists of approximately 225 miles of
pipeline, with throughput capacity of approximately
35 MMcf/d;
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our equity interests that we acquired in the East
Texas/Discovery Acquisition (as defined below in
Recent Acquisitions) in July 2007 from
DCP Midstream, LLC, which consist of the following:
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our 40% interest in Discovery Producer Services LLC, or
Discovery, which operates a
600 MMcf/d
cryogenic natural gas processing plant, a natural gas liquids
fractionator plant, an approximately
280-mile
natural gas pipeline with approximate throughput capacity of
600 MMcf/d
that transports gas from the Gulf of Mexico to its processing
plant, and several onshore laterals expanding its presence in
the Gulf; and
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our 25% interest in DCP East Texas Holdings, LLC, or East Texas,
which operates a
780 MMcf/d
natural gas processing complex, a natural gas liquids
fractionator and an
845-mile
gathering system with approximate throughput capacity of
780 MMcf/d,
connects to third party gathering systems, and delivers residue
gas to interstate and intrastate pipelines; and
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our Colorado and Wyoming gathering, processing and compression
assets that we acquired in the MEG Acquisition (as defined below
in Recent Acquisitions) in August 2007
from DCP Midstream, LLC, which consist of the following:
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our 70% operating interest in the approximately
30-mile
Collbran Valley Gas Gathering system, or Collbran system, which
has assets in the Piceance Basin that gather and process natural
gas from over 20,000 dedicated acres in western Colorado, and a
processing facility with a capacity that is being expanded from
an original capacity of
60 MMcf/d
to
120 MMcf/d; and
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the Powder River Basin assets, which include the approximately
1,320-mile Douglas gas gathering system, or Douglas system, with
throughput capacity of approximately
60 MMcf/d
and covers more than 4,000 square miles in northeastern
Wyoming, and Millis terminal, and associated NGL pipelines in
southwestern Wyoming.
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Wholesale Propane Logistics. Our Wholesale
Propane Logistics segment, acquired in November 2006 from DCP
Midstream, LLC, includes:
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six owned rail terminals located in the Midwest and northeastern
United States, one of which is currently idle, with aggregate
storage capacity of 25 MBbls;
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one leased marine terminal located in Providence, Rhode Island,
with storage capacity of 410 MBbls;
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one pipeline terminal located in Midland, Pennsylvania with
storage capacity of 56 MBbls; and
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access to several open access pipeline terminals.
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NGL Logistics. Our NGL Logistics segment
includes:
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our Seabreeze pipeline, an approximately
68-mile
intrastate NGL pipeline located in Texas with throughput
capacity of 33 MBbls/d;
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our Wilbreeze pipeline, the construction of which was completed
in December 2006, an approximately
39-mile
intrastate NGL pipeline located in Texas, which connects a DCP
Midstream, LLC gas processing plant to the Seabreeze pipeline,
with throughput capacity of 11 MBbls/d; and
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our 45% interest in the Black Lake Pipe Line Company, or Black
Lake, the owner of an approximately
317-mile
interstate NGL pipeline in Louisiana and Texas with throughput
capacity of 40 MBbls/d.
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Recent
Acquisitions
MEG Acquisition. In August 2007, we acquired
certain subsidiaries of Momentum Energy Group, Inc., or MEG,
from DCP Midstream, LLC, referred to in this prospectus
supplement as the MEG Acquisition, for approximately
$165.8 million. The consideration consisted of
approximately $153.8 million of cash and the issuance of
275,735 common units to an affiliate of DCP Midstream, LLC that
were valued at approximately
S-2
$12.0 million. We have incurred post-closing purchase price
adjustments to date that include a liability of
$9.0 million for net working capital and general and
administrative charges. The acquired entities own gathering,
processing and compression assets in the Piceance and Powder
River producing basins. DCP Midstream, LLC manages and operates
these assets on our behalf. We financed this transaction with
$120.0 million of revolver and term loan borrowings under
our amended credit agreement, along with a portion of the
proceeds of the August 2007 private placement of common units
described below and cash on hand.
East Texas/Discovery Acquisition. On
July 1, 2007, we acquired a 25% limited liability company
interest in East Texas, a 40% limited liability company interest
in Discovery and a non-trading derivative instrument from DCP
Midstream, LLC for aggregate consideration of approximately
$271.3 million. These transactions are collectively
referred to in this prospectus supplement as the East
Texas/Discovery Acquisition. The consideration consisted of
approximately $243.7 million in cash, including net working
capital of $1.3 million and other adjustments, the issuance
of 620,404 common units to DCP Midstream, LLC valued at
$27.0 million and the issuance of 12,661 general partner
equivalent units valued at $0.6 million. We financed the
cash portion of the transaction consideration with borrowings of
$245.9 million under our revolving credit facility.
Southern Oklahoma Asset Acquisition. In May
2007, we acquired certain gathering and compression assets
located in Southern Oklahoma, as well as related commodity
purchase contracts, from Anadarko Petroleum Corporation,
referred to in this prospectus supplement as the Southern
Oklahoma Asset Acquisition, for approximately
$181.1 million. We financed this transaction with
borrowings of $88.0 million under a two-month bridge loan,
which was subsequently repaid with a portion of the proceeds of
the June 2007 private placement of common units described below,
$89.0 million in borrowings under our revolving credit
facility and $4.1 million of cash on hand.
Recent
Private Placements of Equity
August 2007 Private Placement of Equity. In
August 2007, we issued 2,380,952 common units in a private
placement, pursuant to a common unit purchase agreement with
private owners of MEG or affiliates of such owners, at $42.00
per unit, for net proceeds of $100.0 million. The proceeds
from this private placement were used to purchase qualifying
securities to fully secure the $100.0 million in borrowings
under our term loan facility to finance the MEG Acquisition.
June 2007 Private Placement of Equity. In June
2007, we issued 3,005,780 common units in a private placement
pursuant to a private placement agreement with a group of
institutional investors at $43.25 per unit, for net proceeds of
$128.5 million. A portion of the proceeds from this private
placement were used to extinguish the $88.0 million of debt
outstanding under our bridge loan incurred in connection with
the Southern Oklahoma Asset Acquisition, and the remaining
amount was used to partially finance the cash consideration for
the MEG Acquisition in August 2007.
Other
Recent Developments
As of March 3, 2008, we posted collateral with certain
counterparties to our commodity derivative instruments of
approximately $47.9 million. On March 4, 2008, we
entered into a temporary agreement with a counterparty to
certain of our swap contracts, whereby our collateral threshold
was increased by $20.0 million, resulting in a
corresponding reduction of our posted collateral.
In February 2008, we borrowed $35.0 million under our
revolving credit facility, $10.0 million of which has since
been repaid. In March 2008, we borrowed $30.0 million under
our revolving credit facility and retired $30.0 million of
outstanding indebtedness under our term loan facility. Amounts
repaid under our term loan cannot be reborrowed. As a result, we
liquidated $30.0 million of restricted investments securing
the term loan portion of our credit facility, the proceeds of
which were used for working capital purposes. As a result of the
above activity, the borrowing capacity under our revolving
credit facility was increased to $630.0 million. We had
$585.0 million outstanding under our revolving credit
facility as of March 6, 2008.
S-3
In February 2008, one of our three primary propane suppliers
terminated its supply contract with us. We are actively seeking
alternative sources of supply and believe such supply sources
are available on commercially acceptable terms.
In February 2008, we satisfied the financial tests contained in
our partnership agreement for the early conversion of 50% of the
outstanding subordinated units held by DCP Midstream, LLC into
common units. Prior to the conversion, DCP Midstream, LLC held
7,142,857 subordinated units, and after the conversion, DCP
Midstream, LLC holds 3,571,429 subordinated units, which may
convert into common units in the first quarter of 2009 if we
satisfy certain additional financial tests contained in our
partnership agreement.
On January 24, 2008, the board of directors of DCP
Midstream GP, LLC declared a quarterly distribution of $0.57 per
unit, that was paid on February 14, 2008, to unitholders of
record on February 7, 2008.
Subsequent to December 31, 2007, we executed a series of
derivative instruments to mitigate a portion of our anticipated
commodity exposure. We entered into natural gas swap contracts
for 2,000 MMBtu/d at
$7.80/MMBtu,
for a term from July through December 2008, and we entered into
crude oil swap contracts, each for 225 Bbls/d at an average
of $87.93/Bbl, for terms ranging from July 2008 through December
2012.
Our
Business Strategies
Our primary business objective is to increase our cash
distribution per unit over time. We intend to accomplish this
objective by executing the following business strategies:
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Optimize: maximize the profitability of existing
assets. We intend to optimize the profitability
of our existing assets by maintaining existing volumes and
adding volumes to enhance utilization, improving operating
efficiencies and capturing marketing opportunities when
available. Our natural gas and NGL pipelines have excess
capacity, which allows us to connect new supplies of natural gas
and NGLs at minimal incremental cost. Our wholesale propane
logistics business has diversified supply options that allow us
to capture lower cost supply to lock in our margin, while
providing reliable supplies to our customers.
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Build: capitalize on organic expansion
opportunities. We continually evaluate
economically attractive organic expansion opportunities to
construct new midstream systems in new or existing operating
areas. For example, we believe there are opportunities to expand
several of our gas gathering systems to attach increased volumes
of natural gas produced in the areas of our operations. We also
believe that we can continue to expand our wholesale propane
logistics business via the construction of new propane terminals.
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Acquire: pursue strategic and accretive
acquisitions. We plan to continue to pursue
strategic and accretive acquisition opportunities within the
midstream energy industry, both in new and existing lines of
business, and geographic areas of operation. We believe there
will continue to be acquisition opportunities as energy
companies continue to divest their midstream assets. We intend
to pursue acquisition opportunities both independently and
jointly with DCP Midstream, LLC and its parents, Spectra Energy
and ConocoPhillips, and we may also acquire assets directly from
them, which we believe will provide us with a broader array of
growth opportunities than those available to many of our
competitors. Please see Our Relationship with
DCP Midstream, LLC and its Parents.
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Our
Competitive Strengths
We believe that we are well positioned to execute our business
strategies and achieve our primary business objective of
increasing our cash distribution per unit because of the
following competitive strengths:
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Affiliation with DCP Midstream, LLC and its
parents. Our relationship with DCP Midstream, LLC
and its parents, Spectra Energy and ConocoPhillips, should
continue to provide us with significant business opportunities.
DCP Midstream, LLC is one of the largest gatherers of natural
gas (based on wellhead volume), one of the largest producers of
NGLs and one of the largest marketers of NGLs in North America.
This relationship also provides us with access to a significant
pool of management
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talent. We believe our strong relationships throughout the
energy industry, including with major producers of natural gas
and NGLs in the United States, will help facilitate the
implementation of our strategies. Additionally, we believe DCP
Midstream, LLC, which operates many of our assets on our behalf,
has established a reputation in the midstream business as a
reliable and cost-effective supplier of services to our
customers, and has a track record of safe, efficient and
environmentally responsible operation of our facilities. Please
see Our Relationship with DCP Midstream, LLC
and its Parents.
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Strategically located assets. Our assets are
strategically located in areas that hold potential for expanding
each of our business segments volume throughput and cash
flow generation. Our Natural Gas Services segment has a
strategic presence in several active natural gas producing areas
including Northern Louisiana, eastern Texas, western Colorado,
northeastern Wyoming, southern Oklahoma, and the Gulf of Mexico.
These natural gas gathering systems provide a variety of
services to our customers including natural gas gathering,
compression, treating, processing, fractionation and
transportation services. The strategic location of our assets,
coupled with their geographic diversity, presents us continuing
opportunities to provide competitive natural gas services to our
customers and opportunities to attract new natural gas
production. Our NGL Logistics segment has strategically located
NGL transportation pipelines in northern Louisiana, eastern
Texas and southern Texas, all of which are major NGL producing
regions. Our NGL pipelines connect to various natural gas
processing plants in the region and transport the NGLs to large
fractionation facilities, a petrochemical plant or an
underground NGL storage facility along the Gulf Coast. Our
Wholesale Propane Logistics Segment has terminals in the
Northeastern and upper Midwestern states that are strategically
located to receive and deliver propane to one of the largest
demand areas for propane in the United States.
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Stable cash flows. Our operations consist of a
favorable mix of fee-based and margin-based services, which
together with our derivative activities, generate relatively
stable cash flows. While our percentage-of-proceeds gathering
and processing contracts subject us to commodity price risk, we
have mitigated a portion of our currently anticipated natural
gas, NGL and condensate commodity price risk associated with the
equity volumes from our gathering and processing operations
through 2013 with natural gas and crude oil swaps.
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Integrated package of midstream services. We
provide an integrated package of services to natural gas
producers, including gathering, compressing, treating,
processing, transporting and selling natural gas, as well as
transporting and selling NGLs. We believe our ability to provide
all of these services gives us an advantage in competing for new
supplies of natural gas because we can provide substantially all
services that producers, marketers and others require to move
natural gas and NGLs from wellhead to market on a cost-effective
basis.
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Comprehensive propane logistics systems. We
have multiple propane supply sources and terminal locations for
wholesale propane delivery. We believe our ability to purchase
large volumes of propane supply and transport such supply for
resale or storage allows us to provide our customers with
reliable supplies of propane during periods of tight supply.
These capabilities also allow us to moderate the effects of
commodity price volatility and reduce significant fluctuations
in our sales volumes.
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Experienced management team. Our senior
management team and board of directors includes some of the most
senior officers of DCP Midstream, LLC and former senior officers
from other energy companies who have extensive experience in the
midstream industry. Our management team has a proven track
record of enhancing value through the acquisition, optimization
and integration of midstream assets.
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Partnership
Structure and Management
Our operations are conducted through, and our operating assets
are owned by, our subsidiaries. We own our interests in our
subsidiaries through our 100% ownership interest in our
operating partnership, DCP Midstream Operating, LP. DCP
Midstream GP, LLC is the general partner of our general partner,
DCP Midstream GP, LP, and has sole responsibility for conducting
our business and managing our operations.
S-5
Our executive offices are located at 370 17th Street,
Suite 2775, Denver, Colorado 80202, and our telephone
number is
(303) 633-2900.
Our
Relationship with DCP Midstream, LLC and its Parents
One of our principal strengths is our relationship with DCP
Midstream, LLC and its parents, Spectra Energy and
ConocoPhillips. DCP Midstream, LLC intends to use us as an
important growth vehicle to pursue the acquisition, expansion,
and existing and organic construction of midstream natural gas,
NGL and other complementary energy businesses and assets. In
November 2006, we acquired our wholesale propane logistics
business, in July 2007, we acquired our interests in Discovery
and East Texas, and in August 2007, we acquired certain
subsidiaries of MEG, from DCP Midstream, LLC. We expect to have
future opportunities to make additional acquisitions directly
from DCP Midstream, LLC; however, we cannot say with any
certainty which, if any, of these acquisitions may be made
available to us, or if we will choose to pursue any such
opportunity. In addition, through our relationship with DCP
Midstream, LLC and its parents, we expect to have access to a
significant pool of management talent, strong commercial
relationships throughout the energy industry and DCP Midstream,
LLCs broad operational, commercial, technical, risk
management and administrative infrastructure. As of
December 31, 2007, our general partner or its affiliates
employed nine people directly and approximately 146 people
who provided direct support for our operations through DCP
Midstream, LLC.
DCP Midstream, LLC has a significant interest in our partnership
through its ownership of the general partner interest in us and
all of our incentive distribution rights, as well as 4,675,022
common units and 3,571,429 subordinated units, which
collectively represent a 33.9% limited partner interest in us
prior to this offering. We have entered into an omnibus
agreement with DCP Midstream, LLC and some of its affiliates
that governs our relationship with them regarding the operation
of many of our assets, as well as certain reimbursement and
indemnification matters.
S-6
Ownership
of DCP Midstream Partners, LP
The chart below depicts our organization and ownership structure
as of the date of this prospectus supplement before giving
effect to this offering.
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Our Natural Gas Services Segment includes our 40% interest in
Discovery, our 25% interest in East Texas and our 70% operating
interest in the Collbran system. |
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Our NGL Logistics Segment includes our 45% interest in Black
Lake. |
S-7
The
Offering
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Common units offered |
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4,250,000 common units. |
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4,887,500 common units if the underwriters exercise their
over-allotment option in full. |
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Units outstanding after this offering |
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24,661,754 common units, representing a 86.2% limited
partner interest in us, and 3,571,429 subordinated units,
representing a 12.5% limited partner interest in us. |
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25,299,254 common units, representing a 86.5% limited
partner interest in us, and 3,571,429 subordinated units,
representing a 12.2% limited partner interest in us,
respectively, if the underwriters exercise their over-allotment
option in full. |
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Use of proceeds |
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We will receive net proceeds from the offering of approximately
$132.1 million, or approximately $151.9 million if the
underwriters over-allotment option is exercised in full
(in each case after payment of offering expenses). |
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We will use the net proceeds from this offering and cash on hand
to purchase $150.0 million of United States Treasury or
other qualifying securities, and we also will borrow an
equivalent amount under our term loan facility. The United
States Treasury or other qualifying securities purchased will be
assigned as collateral to secure our additional borrowings under
the term loan facility. The proceeds of the additional term loan
borrowings will be used to repay amounts outstanding under our
revolving credit facility. The borrowings under our revolving
credit facility were incurred primarily to fund acquisitions and
for general partnership purposes. Please see Use of
Proceeds. |
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We will use any net proceeds from the underwriters
exercise of their over-allotment option to repay additional
borrowings outstanding under our revolving credit facility and
for general working capital purposes. |
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Affiliates of certain underwriters are lenders under our
revolving credit facility and as such may receive a portion of
the proceeds from this offering. Please see
Underwriting. |
|
Cash distributions |
|
Under our partnership agreement, we must distribute all of our
cash on hand at the end of each quarter, less reserves
established by our general partner in its sole discretion. We
refer to this cash available for distribution as available
cash, and we define its meaning in our partnership
agreement. Please see Our Cash Distribution Policy and
Restrictions on Distributions in the accompanying
prospectus for a description of available cash. |
|
|
|
Common units are entitled to receive distributions of operating
surplus of $0.35 per quarter, or $1.40 on an annualized basis,
referred to as our minimum quarterly distribution,
before any distributions are paid on our subordinated units. The
amount of available cash may be greater than or less than the
minimum quarterly distribution, and our ability to pay cash
distributions at this initial distribution rate is subject to
various restrictions and other factors described in more detail
under the caption Our Cash Distribution |
S-8
|
|
|
|
|
Policy and Restrictions on Distributions in the
accompanying prospectus. |
|
|
|
On February 14, 2008, we paid a quarterly distribution of
$0.57 per unit to our common and subordinated unitholders of
record on February 7, 2008. |
|
|
|
Our partnership agreement, after adjustment for our general
partners relative ownership level, currently 1.5% before
giving effect to this offering, requires that we make
distributions of available cash for any quarter during the
subordination period in the following manner: |
|
|
|
first, to the common unitholders and the general
partner, in accordance with their pro rata interest, until each
common unit has received a minimum quarterly distribution of
$0.35 plus any arrearages from prior quarters;
|
|
|
|
second, to the subordinated unitholders and the
general partner, in accordance with their pro rata interest,
until each subordinated unit has received a minimum quarterly
distribution of $0.35; and
|
|
|
|
third, to all unitholders and the general partner,
in accordance with their pro rata interest, until each unit has
received a distribution of $0.4025.
|
|
|
|
If cash distributions to our unitholders exceed $0.4025 per
common unit in any quarter, our general partner will receive, in
addition to distributions on its 1.5% general partner interest
before giving effect to this offering, increasing percentages,
up to 48%, of the cash we distribute in excess of that amount.
We refer to these distributions as incentive
distributions. Please see Our Cash Distribution
Policy and Restrictions on Distributions General
Partner Interest and Incentive Distribution Rights
beginning on page 49 of the accompanying prospectus. |
|
Timing of distributions |
|
We pay distributions approximately 45 days after
March 31, June 30, September 30 and December 31 to the
unitholders of record on the applicable record date. The first
distribution payable to holders of the common units offered by
this prospectus supplement will be declared and paid in the
second quarter of 2008. |
|
Subordinated units and subordination period
|
|
A subsidiary of DCP Midstream, LLC owns all of our subordinated
units. The principal difference between our common units and
subordinated units is that in any quarter during the
subordination period, holders of the subordinated units are
entitled to receive the minimum quarterly distribution of $0.35
per unit only after the common units have received the minimum
quarterly distribution plus any arrearages in the payment of the
minimum quarterly distribution from prior quarters. Subordinated
units will not accrue arrearages. |
|
|
|
The subordination period generally will end if we have earned
and paid at least $1.40 on each outstanding unit and general
partner unit for any three consecutive, non-overlapping
four-quarter periods ending on or after December 31, 2010.
The subordination period |
S-9
|
|
|
|
|
may also end on or after December 31, 2008, if certain
financial tests are met as described below but the subordination
period will not end prior to December 31, 2008 under any
circumstances other than upon the removal of our general partner
other than for cause and the units held by our general partner
and its affiliates are not voted in favor of such removal. |
|
|
|
When the subordination period ends, each remaining subordinated
unit will convert into one common unit and the common units will
no longer be entitled to arrearages. Please see Our Cash
Distribution Policy and Restrictions on
Distributions Subordination Period
Expiration of Subordination Period beginning on
page 48 of the accompanying prospectus. |
|
Early conversion of subordinated units |
|
On February 18, 2008, after meeting the financial tests
provided for in our partnership agreement, we completed the
early conversion of 3,571,428, or 50%, of our subordinated units
into common units on a one-for-one basis. In addition, if we
have earned and paid at least $1.75 (125% of the annualized
minimum quarterly distribution) on each outstanding unit and
general partner unit for any two consecutive, non-overlapping
four-quarter periods ending on or after December 31, 2008,
the remaining 3,571,429 subordinated units will convert into
common units at the end of such period. The early conversion of
the remaining 50% of the subordinated units may not occur until
at least one year after the early conversion of the first 50% of
the subordinated units. Please see Our Cash Distribution
Policy and Restrictions on Distributions
Subordination Period Early Conversion of
Subordinated Units beginning on page 48 of the
accompanying prospectus. |
|
General Partners right to reset the target distribution
levels
|
|
Our general partner has the right, at a time when there are no
subordinated units outstanding and it has received incentive
distributions at the highest level to which it is entitled (48%)
for each of the prior four consecutive fiscal quarters, to reset
the initial cash target distribution levels at higher levels
based on the distribution at the time of the exercise of the
reset election. Following a reset election by our general
partner, the minimum quarterly distribution amount will be reset
to an amount equal to the average cash distribution amount per
common unit for the two fiscal quarters immediately preceding
the reset election (such amount is referred to as the
reset minimum quarterly distribution) and the target
distribution levels will be reset to correspondingly higher
levels based on the same percentage increases above the reset
minimum quarterly distribution amount. Our current distribution
level exceeds the highest incentive distribution level. |
|
|
|
In connection with resetting these target distribution levels,
our general partner will be entitled to receive Class B
units. The Class B units will be entitled to the same cash
distributions per unit as our common units and will be
convertible into an equal number of common units. The number of
Class B units to be issued will be equal to that number of
common units whose aggregate quarterly cash distributions
equaled the average of the distributions to our general partner
on the incentive distribution rights in |
S-10
|
|
|
|
|
the prior two quarters. For a more detailed description of our
general partners right to reset the target distribution
levels upon which the incentive distribution payments are based
and the concurrent right of our general partner to receive
Class B units in connection with this reset, please see
Our Cash Distribution Policy and Restrictions on
Distributions General Partners Right to Reset
Incentive Distribution Levels beginning on page 50 of
the accompanying prospectus. |
|
Estimated ratio of taxable income to distributions
|
|
We estimate that if you own the common units you purchase in
this offering through December 31, 2011, you will be
allocated, on a cumulative basis, an amount of federal taxable
income for that period that will be 30% or less of the cash
distributed to you with respect to that period. Please see
Material Tax Considerations beginning on
page S-20
for an explanation of the basis of this estimate. |
|
Exchange listing |
|
Our common units are traded on the New York Stock Exchange under
the symbol DPM. |
S-11
Summary
Historical Financial and Operating Data
The following table sets forth our summary historical financial
and operating data as of and for the dates and periods
indicated. Our summary historical financial data as of
December 31, 2006 and 2007 and for the years ended
December 31, 2005, 2006 and 2007 are derived from our
audited financial statements appearing in our annual report on
Form 10-K
for the year ended December 31, 2007 incorporated by
reference into this prospectus supplement.
These consolidated financial statements include our accounts,
and prior to December 7, 2005, the assets, liabilities and
operations contributed to us by DCP Midstream, LLC and its
wholly-owned subsidiaries, or DCP Midstream Partners
Predecessor, upon the closing of our initial public offering,
which have been combined with the historical assets, liabilities
and operations of our wholesale propane logistics business which
we acquired from DCP Midstream, LLC in November 2006, and our
25% limited liability company interest in East Texas, our 40%
limited liability company interest in Discovery, and a
non-trading derivative instrument which DCP Midstream, LLC
entered into in March 2007 (referred to herein as the
Swap), which we acquired from DCP Midstream, LLC in
July 2007 in connection with the East Texas/Discovery
Acquisition. These were transactions among entities under common
control; accordingly, our financial information includes the
historical results of our wholesale propane logistics business,
Discovery and East Texas for all periods presented. The
information contained herein should be read together with, and
is qualified in its entirety by reference to, the consolidated
financial statements and the accompanying notes included in our
annual report on
Form 10-K
for the year ended December 31, 2007 incorporated by
reference into this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007(a)
|
|
|
|
(Millions, except per unit data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues(b)(c)
|
|
$
|
1,144.3
|
|
|
$
|
795.8
|
|
|
$
|
873.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of natural gas, propane and NGLs
|
|
|
1,047.3
|
|
|
|
700.4
|
|
|
|
826.7
|
|
Operating and maintenance expense
|
|
|
22.4
|
|
|
|
23.7
|
|
|
|
32.1
|
|
Depreciation and amortization expense
|
|
|
12.7
|
|
|
|
12.8
|
|
|
|
24.4
|
|
General and administrative expense
|
|
|
14.2
|
|
|
|
21.0
|
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,096.6
|
|
|
|
757.9
|
|
|
|
907.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(c)
|
|
|
47.7
|
|
|
|
37.9
|
|
|
|
(34.0
|
)
|
Interest income
|
|
|
0.5
|
|
|
|
6.3
|
|
|
|
5.3
|
|
Interest expense
|
|
|
(0.8
|
)
|
|
|
(11.5
|
)
|
|
|
(25.8
|
)
|
Earnings from equity method investments(d)
|
|
|
25.7
|
|
|
|
29.2
|
|
|
|
39.3
|
|
Non-controlling interest in income
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
Income tax expense(e)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(c)
|
|
$
|
69.8
|
|
|
$
|
61.9
|
|
|
$
|
(15.8
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to predecessor operations(f)
|
|
|
(65.1
|
)
|
|
|
(26.6
|
)
|
|
|
(3.6
|
)
|
General partner interest in net income
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocable to limited partners
|
|
$
|
4.6
|
|
|
$
|
34.6
|
|
|
$
|
(21.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per limited partner unit-basic and diluted
|
|
$
|
0.20
|
|
|
$
|
1.90
|
|
|
$
|
(1.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
|
|
$
|
194.7
|
|
|
$
|
500.7
|
|
Total assets
|
|
|
|
|
|
$
|
665.9
|
|
|
$
|
1,120.7
|
|
Accounts payable
|
|
|
|
|
|
$
|
117.3
|
|
|
$
|
165.8
|
|
Long-term debt
|
|
|
|
|
|
$
|
268.0
|
|
|
$
|
630.0
|
|
Partners equity
|
|
|
|
|
|
$
|
267.7
|
|
|
$
|
168.4
|
|
S-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007(a)
|
|
|
|
(Millions, except per unit data)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(c)(g)
|
|
$
|
86.1
|
|
|
$
|
79.9
|
|
|
$
|
29.2
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
113.0
|
|
|
|
94.8
|
|
|
|
65.4
|
|
Investing activities
|
|
|
(130.4
|
)
|
|
|
(93.8
|
)
|
|
|
(521.7
|
)
|
Financing activities
|
|
|
59.6
|
|
|
|
3.0
|
|
|
|
434.6
|
|
Cash distributions declared per unit
|
|
$
|
0.095
|
|
|
$
|
1.565
|
|
|
$
|
2.115
|
|
Cash distributions paid per unit
|
|
|
N/A
|
|
|
|
1.230
|
|
|
|
1.975
|
|
|
|
|
(a) |
|
Includes the effect of the Southern Oklahoma Asset Acquisition
in May 2007 and the MEG Acquisition in August 2007. |
|
(b) |
|
Includes the effect of the acquisition of the Swap entered into
by DCP Midstream, LLC in March 2007, acquired in connection with
the East Texas/Discovery Acquisition. The derivative financial
instrument is for a total of approximately 1.9 million
barrels of crude oil at $66.72 per barrel. |
|
(c) |
|
Because of the volatility of the prices for natural gas, NGLs
and condensate, we have mitigated a portion of our anticipated
commodity price risk associated with the equity volumes from our
gathering and processing operations through 2013 with natural
gas, NGL and crude oil swaps. Effective July 1, 2007, we
elected to discontinue using the hedge method of accounting for
our commodity cash flow hedges. Accordingly, we are now using
the mark-to-market method of accounting for all of our commodity
derivative instruments. While swaps mitigate the cash flow
impact of future earnings, the mark-to-market method of
accounting significantly increases the volatility of our results
of operations because we recognize, in current period earnings,
all non-cash gains and losses from the mark-to-market of these
derivatives. Non-cash loss associated with our commodity
derivative activity during 2007 was $81.1 million for the
year ended December 31, 2007. We experienced insignificant
non-cash gains or losses for the same periods in 2006 and 2005.
For additional information regarding our commodity derivative
activities, please read Managements Discussion and
Analysis of Financial Condition and Results of Operations
in our Annual Report on
Form 10-K
for the year ended December 31, 2007 and Note 12 to
our audited financial statements appearing therein. |
|
(d) |
|
Includes the effect of the acquisition of a 25% limited
liability company interest in East Texas and a 40% limited
liability company interest in Discovery in July 2007, as well as
the amortization of the net difference between the carrying
amount of Discovery and the underlying equity of Discovery,
which was $43.7 million at December 31, 2007. |
|
(e) |
|
Income tax expense for 2005 is applicable to the results of
operations of our wholesale propane logistics business. We
incurred no income tax expense in 2006, due to the change in tax
status of our wholesale propane logistics business in December
2005. Income tax expense in 2007 represents a margin-based
franchise tax in Texas, or the Texas margin tax. |
|
(f) |
|
Includes the net income attributable to DCP Midstream Partners
Predecessor through December 7, 2005, the net income (loss)
attributable to our wholesale propane logistics business before
the date of our acquisition from DCP Midstream, LLC in November
2006, and the net income attributable to the acquisition of a
25% limited liability company interest in East Texas, a 40%
limited liability company interest in Discovery, and the Swap
prior to the date of our acquisition from DCP Midstream, LLC in
July 2007. |
|
(g) |
|
Please see Non-GAAP Financial
Measures for our definition of EBITDA and our
reconciliations of this non-GAAP financial measure to its most
directly comparable financial measures as calculated and
presented in accordance with GAAP. |
S-13
Summary
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Natural gas throughput
(MMcf/d)(a)
|
|
|
629
|
|
|
|
666
|
|
|
|
756
|
|
NGL gross production (Bbls/d)(a)
|
|
|
17,562
|
|
|
|
19,485
|
|
|
|
22,122
|
|
Propane sales volume (Bbls/d)
|
|
|
22,604
|
|
|
|
21,259
|
|
|
|
22,798
|
|
NGL pipelines throughput (Bbls/d)(a)
|
|
|
20,565
|
|
|
|
25,040
|
|
|
|
28,961
|
|
|
|
|
(a) |
|
Includes our proportionate share of the throughput volumes and
gross production volumes of Black Lake, East Texas and
Discovery. Earnings for Discovery and Black Lake include the
amortization of the net difference between the carrying amount
of the investments and the underlying equity of the investments. |
S-14
Non-GAAP Financial
Measures
The financial information included in Summary
Historical Financial and Operating Data includes the
non-GAAP financial measure of EBITDA. We define EBITDA as net
income less interest income, plus interest expense, income tax
expense and depreciation and amortization expense. EBITDA is
used as a supplemental liquidity measure by our management and
by external users of our financial statements, such as
investors, commercial banks, research analysts and others, to
assess the ability of our assets to generate cash sufficient to
pay interest costs, support our indebtedness, make cash
distributions to our unitholders and general partner, and
finance maintenance capital expenditures. EBITDA is also a
financial measurement that is reported to our lenders, and used
as a gauge for compliance with our financial covenants under our
credit facility, which requires us to maintain: (1) a
leverage ratio (the ratio of our consolidated indebtedness to
our consolidated EBITDA, in each case as is defined by our
amended credit agreement) of not more than 5.0 to 1.0, and on a
temporary basis for not more than three consecutive quarters
following the consummation of asset acquisitions in the
midstream energy business (including the quarter in which such
acquisition is consummated), of not more than 5.50 to 1.0; and
(2) an interest coverage ratio (the ratio of our
consolidated EBITDA to our consolidated interest expense, in
each case as is defined by our amended credit agreement) of
equal to or greater than 2.5 to 1.0 determined as of the last
day of each quarter for the four-quarter period ending on the
date of determination. Our EBITDA may not be comparable to a
similarly titled measure of another company because other
entities may not calculate EBITDA in the same manner.
EBITDA is also used as a supplemental performance measure by our
management and by external users of our financial statements,
such as investors, commercial banks, research analysts and
others, to assess:
|
|
|
|
|
financial performance of our assets without regard to financing
methods, capital structure or historical cost basis;
|
|
|
|
our operating performance and return on capital as compared to
those of other companies in the midstream energy industry,
without regard to financing methods or capital
structure; and
|
|
|
|
viability of acquisitions and capital expenditure projects and
the overall rates of return on alternative investment
opportunities.
|
EBITDA should not be considered an alternative to, or more
meaningful than, net income, operating income, cash flows from
operating activities or any other measure of financial
performance presented in accordance with GAAP as measures of
operating performance, liquidity or ability to service debt
obligations.
S-15
The following table sets forth our reconciliation of EBITDA to
its most directly comparable financial measure calculated in
accordance with GAAP:
Reconciliation
of Non-GAAP Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(Millions)
|
|
|
Reconciliation of net income (loss) to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
69.8
|
|
|
$
|
61.9
|
|
|
$
|
(15.8
|
)
|
Interest income
|
|
|
(0.5
|
)
|
|
|
(6.3
|
)
|
|
|
(5.3
|
)
|
Interest expense
|
|
|
0.8
|
|
|
|
11.5
|
|
|
|
25.8
|
|
Income tax expense
|
|
|
3.3
|
|
|
|
|
|
|
|
0.1
|
|
Depreciation and amortization expense
|
|
|
12.7
|
|
|
|
12.8
|
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
86.1
|
|
|
$
|
79.9
|
|
|
$
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net cash provided by operating activities
to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
113.0
|
|
|
$
|
94.8
|
|
|
$
|
65.4
|
|
Interest income
|
|
|
(0.5
|
)
|
|
|
(6.3
|
)
|
|
|
(5.3
|
)
|
Interest expense
|
|
|
0.8
|
|
|
|
11.5
|
|
|
|
25.8
|
|
Earnings from equity method investments, net of distributions
|
|
|
(11.0
|
)
|
|
|
3.3
|
|
|
|
0.4
|
|
Income tax expense
|
|
|
3.3
|
|
|
|
|
|
|
|
0.1
|
|
Net changes in operating assets and liabilities
|
|
|
(19.9
|
)
|
|
|
(25.8
|
)
|
|
|
(56.9
|
)
|
Other, net
|
|
|
0.4
|
|
|
|
2.4
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
86.1
|
|
|
$
|
79.9
|
|
|
$
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-16
RISK
FACTORS
Before you invest in our common units, you should be aware that
such an investment involves various risks, including those
described in the accompanying prospectus and the documents we
have incorporated by reference. If any of those risks actually
occurs, then our business, financial condition or results of
operations could be materially adversely affected. In such case,
the trading price of our common units could decline, and you
could lose all or part of your investment. You should also
consider carefully the discussion of risk factors on page 6
of the accompanying prospectus under the captions Risk
Factors and Information Regarding Forward-Looking
Statements and in our other current filings with the SEC
under the Exchange Act, particularly under Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations
in our Annual Report on
Form 10-K
for our fiscal year ended December 31, 2007, which is
incorporated by reference into this prospectus supplement and
the accompanying prospectus.
USE OF
PROCEEDS
The net proceeds from this offering will be approximately
$132.1 million, or approximately $151.9 million if the
underwriters over-allotment option is exercised in full,
in each case, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
We will use the net proceeds from this offering and cash on hand
to purchase $150.0 million of United States Treasury or
other qualifying securities. In connection with this offering,
we will borrow an additional $150.0 million under our
existing $220.0 million term loan facility. The United
States Treasury or other qualifying securities purchased will be
assigned as collateral to secure these additional term loan
borrowings. The interest we receive from our ownership of these
United States Treasury and other qualifying securities will
partially offset our cost of borrowings under the term loan
facility. The proceeds of the additional term loan borrowings
will be used to repay a portion of the amounts outstanding under
our $630.0 million revolving credit facility.
We will use any net proceeds from the underwriters
exercise of their over-allotment option to repay additional
borrowings outstanding under our revolving credit facility and
for general working capital purposes.
As of March 6, 2008, total borrowings under our
$630.0 million revolving credit facility were
$585.0 million, and it had a weighted average interest rate
of 5.0%. The revolving credit facility has a maturity date of
June 21, 2012. As of March 6, 2008, total borrowings
under our $220.0 million term loan facility were
$70.0 million, and it had a weighted average interest rate
of 3.2%. The borrowings under our revolving credit facility and
term loan facility were incurred primarily to fund acquisitions
and for general partnership purposes. For a detailed description
of our revolving credit facility and our term loan facility,
please see Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources Description of
Amended Credit Agreement in our annual report on
Form 10-K
for the year ended December 31, 2007 incorporated by
reference into this prospectus supplement.
Affiliates of certain underwriters are lenders under our
revolving credit facility and as such may receive a portion of
the proceeds from this offering. See Underwriting.
S-17
CAPITALIZATION
The following table sets forth our capitalization as of
December 31, 2007 on:
|
|
|
|
|
a historical basis;
|
|
|
|
as adjusted to give effect to (i) the early conversion of
3,571,428 subordinated units to common units on
February 18, 2008, (ii) our February 2008 additional
borrowings of $35.0 million under our revolving credit
facility, $10.0 million of which has since been repaid and
(iii) our March 2008 additional borrowings of
$30.0 million under our revolving credit facility and the
application of those proceeds to retire $30.0 million of
outstanding indebtedness under our term loan facility and the
resulting liquidation of $30.0 million of restricted
investments securing the term loan portion of our credit
facility; and
|
|
|
|
as further adjusted to give effect to (i) the issuance of
4,250,000 common units in this offering, (ii) the
application of the net proceeds from this offering and cash on
hand to purchase $150.0 million of United States Treasury
or other qualifying securities as described in Use of
Proceeds, (iii) the additional borrowings of
$150.0 million under our term loan facility and
(iv) the application of the net proceeds of the additional
term loan borrowings to repay a portion of the amounts
outstanding under our revolving credit facility.
|
You should read our financial statements and notes that are
incorporated by reference into this prospectus supplement and
the accompanying prospect for additional information about our
capital structure. The following table does not reflect any
common units that may be sold to the underwriters upon exercise
of their over-allotment option, the proceeds of which will be
used to repay additional borrowings outstanding under our
revolving credit facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
As Further
|
|
|
|
Historical
|
|
|
As Adjusted
|
|
|
Adjusted
|
|
|
Cash and cash equivalents
|
|
$
|
24.5
|
|
|
$
|
24.5
|
|
|
$
|
6.6
|
|
Short-term investments
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
|
$
|
1.3
|
|
Restricted investments(1)
|
|
$
|
100.5
|
|
|
$
|
70.5
|
|
|
$
|
220.5
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
$
|
530.0
|
|
|
$
|
585.0
|
|
|
$
|
435.0
|
|
Term Loan Facility(1)
|
|
|
100.0
|
|
|
|
70.0
|
|
|
|
220.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
630.0
|
|
|
$
|
655.0
|
|
|
$
|
655.0
|
|
Partners equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
|
308.8
|
|
|
|
248.7
|
|
|
|
380.8
|
|
Subordinated unitholders
|
|
|
(120.1
|
)
|
|
|
(60.0
|
)
|
|
|
(60.0
|
)
|
General partner interest
|
|
|
(5.4
|
)
|
|
|
(5.4
|
)
|
|
|
(5.4
|
)
|
Accumulated other comprehensive loss
|
|
|
(14.9
|
)
|
|
|
(14.9
|
)
|
|
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
168.4
|
|
|
|
168.4
|
|
|
|
300.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
798.4
|
|
|
$
|
823.4
|
|
|
$
|
955.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our obligations under our revolving credit facility are
unsecured, and our term loan facility is secured at all times by
United States Treasury or other qualifying securities in an
amount equal to or greater than the outstanding principal amount
of the term loan. These collateral securities are classified as
restricted investments on our balance sheet. Any portion of the
term loan facility balance may be repaid at any time, and we
would then have access to a corresponding amount of the
collateral securities. |
S-18
PRICE
RANGE OF COMMON UNITS AND DISTRIBUTIONS
Our common units trade on the New York Stock Exchange under the
symbol DPM. The following table shows the high and
low sales prices per common unit, as reported by the New York
Stock Exchange, and cash distributions paid per common unit and
subordinated unit for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Per
|
|
|
Distribution Per
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
Common Unit
|
|
|
Subordinated Unit
|
|
|
March 31, 2008 (through March 11, 2008)
|
|
$
|
46.00
|
|
|
$
|
33.05
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
December 31, 2007
|
|
$
|
46.05
|
|
|
$
|
37.17
|
|
|
$
|
0.570
|
|
|
$
|
0.570
|
|
September 30, 2007
|
|
$
|
51.33
|
|
|
$
|
40.00
|
|
|
$
|
0.550
|
|
|
$
|
0.550
|
|
June 30, 2007
|
|
$
|
49.90
|
|
|
$
|
37.70
|
|
|
$
|
0.530
|
|
|
$
|
0.530
|
|
March 31, 2007
|
|
$
|
40.50
|
|
|
$
|
33.60
|
|
|
$
|
0.465
|
|
|
$
|
0.465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
35.54
|
|
|
$
|
27.60
|
|
|
$
|
0.430
|
|
|
$
|
0.430
|
|
September 30, 2006
|
|
$
|
29.00
|
|
|
$
|
27.30
|
|
|
$
|
0.405
|
|
|
$
|
0.405
|
|
June 30, 2006
|
|
$
|
29.75
|
|
|
$
|
26.00
|
|
|
$
|
0.380
|
|
|
$
|
0.380
|
|
March 31, 2006
|
|
$
|
28.30
|
|
|
$
|
24.00
|
|
|
$
|
0.350
|
|
|
$
|
0.350
|
|
|
|
|
(1) |
|
The distribution attributable to the quarter ending
March 31, 2008 has not yet been declared or paid. |
The last reported sale price of our common units on the New York
Stock Exchange on March 11, 2008 was $33.64 per unit. As of
March 3, 2008, there were approximately 63 record
holders and approximately 4,500 beneficial owners (held in
street name) of our common units.
The subordinated units are held by our general partner and its
affiliates. Our general partner and its affiliates will receive
a quarterly distribution on these units only after sufficient
funds have been paid to the common unitholders. There is no
established public trading market for our subordinated units.
S-19
MATERIAL
TAX CONSIDERATIONS
The tax consequences to you of an investment in our common units
will depend in part on your own tax circumstances. For a
discussion of the principal federal income tax considerations
associated with our operations and the purchase, ownership and
disposition of our common units, please read Material Tax
Consequences in the accompanying prospectus. You are urged
to consult with your own tax advisor about the federal, state,
local and foreign tax consequences peculiar to your
circumstances.
The anticipated after-tax economic benefit of an investment in
our common units depends largely on our being treated as a
partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on
this or any other tax matter affecting us.
If we were treated as a corporation for federal income tax
purposes, we would pay federal income tax on our taxable income
at the corporate tax rate, which is currently a maximum of 35%,
and would likely pay state income tax at varying rates.
Distributions to you would generally be taxed again as corporate
distributions, and no income, gains, losses or deductions would
flow through to you. Because a tax would be imposed upon us as a
corporation, our cash available for distribution to you would be
substantially reduced. Therefore, treatment of us as a
corporation would result in a material reduction in the
anticipated cash flow and after-tax return to the unitholders,
likely causing a substantial reduction in the value of our
common units.
We estimate that if you purchase common units in this offering
and own them through December 31, 2011, then you will be
allocated, on a cumulative basis, an amount of federal taxable
income for that period that will be 30% or less of the cash
distributed with respect to that period. Thereafter, we
anticipate that the ratio of allocable taxable income to cash
distributions to the unitholders will increase. These estimates
are based upon the assumption that gross income from operations
will approximate the amount required to make the minimum
quarterly distribution on all units and other assumptions with
respect to capital expenditures, cash flow, net working capital
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. Further, the estimates are
based on current tax law and tax reporting positions that we
will adopt and with which the IRS could disagree. Accordingly,
we cannot assure you that these estimates will prove to be
correct. The actual percentage of distributions that will
constitute taxable income could be higher or lower than
expected, and any differences could be material and could
materially affect the value of the common units. For example,
the ratio of allocable taxable income to cash distributions to a
purchaser of common units in this offering will be greater, and
perhaps substantially greater, than our estimate with respect to
the period described above if:
|
|
|
|
|
gross income from operations exceeds the amount required to make
minimum quarterly distributions on all units, yet we only
distribute the minimum quarterly distributions on all
units; or
|
|
|
|
we make a future offering of common units and use the proceeds
of the offering in a manner that does not produce substantial
additional deductions during the period described above, such as
to repay indebtedness outstanding at the time of this offering
or to acquire property that is not eligible for depreciation or
amortization for federal income tax purposes or that is
depreciable or amortizable at a rate significantly slower than
the rate applicable to our assets at the time of this offering.
|
Ownership of common units by tax-exempt entities, regulated
investment companies and
non-U.S. investors
raises issues unique to such persons. Please read Material
Tax Consequences Tax-Exempt Organizations and Other
Investors in the accompanying prospectus.
S-20
UNDERWRITING
Citigroup Global Markets Inc. and Wachovia Capital Markets, LLC
are acting as joint book-running managers of the offering and as
representatives of the underwriters named below. Subject to the
terms and conditions stated in the underwriting agreement dated
the date of this prospectus, each underwriter named below has
agreed to purchase, and we have severally agreed to sell to that
underwriter, the number of common units set forth opposite the
underwriters name.
|
|
|
|
|
|
|
Number of
|
Underwriters
|
|
Common Units
|
|
Citigroup Global Markets Inc.
|
|
|
1,168,750
|
|
Wachovia Capital Markets, LLC
|
|
|
1,168,750
|
|
Lehman Brothers Inc.
|
|
|
440,938
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
440,938
|
|
Morgan Stanley & Co. Incorporated
|
|
|
440,938
|
|
UBS Securities LLC
|
|
|
440,938
|
|
Credit Suisse Securities (USA) LLC
|
|
|
148,748
|
|
|
|
|
|
|
Total
|
|
|
4,250,000
|
|
|
|
|
|
|
The underwriters propose to offer some of the common units
directly to the public at the public offering price set forth on
the cover page of this prospectus supplement and some of the
common units to dealers at the public offering price less a
concession not to exceed $0.77 per common unit. If all of
the common units are not sold at the initial offering price, the
representatives may change the public offering price and the
other selling terms.
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus supplement, to
purchase up to 637,500 additional common units at the
public offering price less the underwriting discount. The
underwriters may exercise the option solely for the purpose of
covering over-allotments, if any, in connection with this
offering. To the extent the option is exercised, each
underwriter must purchase a number of additional units
approximately proportionate to that underwriters initial
purchase commitment.
We, together with DCP Midstream, LLC, our general partner and
the executive officers and directors of our general partner have
agreed that, for a period of 90 days from the date of this
prospectus supplement, we and they will not, without the prior
written consent of Citigroup Global Markets Inc. and Wachovia
Capital Markets, LLC, dispose of or hedge any of our common
units or any securities convertible into or exchangeable for our
common units. Citigroup Global Markets Inc. and Wachovia Capital
Markets, LLC in their sole discretion may release any of the
securities subject to these
lock-up
agreements at any time without notice.
Our common units are traded on the New York Stock Exchange under
the symbol DPM.
The following table shows the underwriting discounts and
commissions that we are to pay to the underwriters in connection
with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters option to
purchase additional common units.
|
|
|
|
|
|
|
|
|
|
|
No Exercise
|
|
Full Exercise
|
|
Per Unit
|
|
$
|
1.27
|
|
|
$
|
1.27
|
|
Total
|
|
$
|
5,397,500
|
|
|
$
|
6,207,125
|
|
In connection with the offering, the representatives, on behalf
of the underwriters, may purchase and sell common units in the
open market. These transactions may include short sales,
syndicate covering transactions and stabilizing transactions.
Short sales involve syndicate sales of common units in excess of
the number of units to be purchased by the underwriters in the
offering, which creates a syndicate short position.
Covered short sales are sales of units made in an
amount up to the number of units represented by the
underwriters over-allotment option. In determining the
source of units to close out the covered syndicate short
position, the underwriters will consider, among other things,
the price of units available for purchase in the open market as
S-21
compared to the price at which they may purchase units through
their option to purchase common units through the over-allotment
option. Transactions to close out the covered syndicate short
position involve either purchases of the common units in the
open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also
make naked short sales of units in excess of the
over-allotment option. The underwriters must close out any naked
short position by purchasing common units in the open market. A
naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure
on the price of the units in the open market after pricing that
could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of bids for or purchases of
units in the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from a
syndicate member when an underwriter repurchases units
originally sold by that syndicate member in order to cover
syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of the common units.
They may also cause the price of the common units to be higher
than the price that would otherwise exist in the open market in
the absence of these transactions. The underwriters may conduct
these transactions on the New York Stock Exchange or in the
over-the-counter market, or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at
any time.
The compensation received by the underwriters in connection with
this common unit offering does not exceed 10% of the gross
proceeds from this common unit offering for commissions and 0.5%
for due diligence.
We estimate that our portion of the total expenses of this
offering will be approximately $400,000.
Because the Financial Industry Regulatory Authority 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.
As of December 31, 2007, an affiliate of Lehman Brothers
Inc. owned approximately 9.9% of our common units. Some of the
underwriters and affiliates of some of the underwriters have
performed investment banking, commercial banking and advisory
services for us from time to time for which they have received
customary fees and expenses. The underwriters may, from time to
time in the future, engage in transactions with and perform
services for us in the ordinary course of their business. In
March 2008, we entered into a temporary agreement with an
affiliate of Citigroup Global Markets Inc. that is a
counterparty to certain of our swap contracts, whereby our
collateral threshold was increased by $20.0 million,
resulting in a corresponding reduction of our posted collateral.
In addition, affiliates of Citigroup Global Markets Inc.,
Wachovia Capital Markets, LLC, Lehman Brothers Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, UBS
Securities LLC and Credit Suisse Securities (USA) LLC are
lenders under our credit facility and other commercial
arrangements and receive customary fees for such services. If we
repay borrowings under our credit facility with proceeds from
this offering, such affiliates will receive a portion of the
proceeds from this offering.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters. The
representatives may agree to allocate a number of common units
to underwriters for sale to their online brokerage account
holders. The representatives will allocate units to underwriters
that may make Internet distributions on the same basis as other
allocations. In addition, common units may be sold by the
underwriters to securities dealers who resell units to online
brokerage account holders.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members website
and any information contained in any other website maintained by
any underwriter or selling group member 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 any underwriter or selling group member in its
capacity as underwriter or selling group member and should not
be relied upon by investors.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments that may be required to be
made in respect of these liabilities.
S-22
LEGAL
MATTERS
The validity of the common units will be passed upon for us by
Vinson & Elkins L.L.P., Houston, Texas. Certain legal
matters in connection with the common units offered hereby will
be passed upon for the underwriters by Baker Botts L.L.P.,
Houston, Texas.
EXPERTS
The consolidated financial statements and the related financial
statement schedule of DCP Midstream Partners, LP (the
Company), as of December 31, 2007 and 2006 and
for each of the three years in the period ended
December 31, 2007, which financial statements give
retroactive effect to the July 1, 2007 acquisition by the
Company of a 25% limited liability interest in DCP East Texas
Holdings, LLC (formerly the East Texas Midstream Business)
(East Texas); a 40% limited liability interest in
Discovery Producer Services, LLC (Discovery); and a
non-trading derivative instrument (the Swap) from
DCP Midstream, LLC (Midstream), which has been
accounted for in a manner similar to a pooling of interests as
described in Note 4 to the consolidated financial
statements, incorporated in this prospectus by reference from
the Companys Annual Report on
Form 10-K
for the year ended December 31, 2007, and the effectiveness
of the Companys internal control over financial reporting,
have been audited by Deloitte & Touche LLP, as stated
in their reports, which are incorporated herein by reference
(which (1) report on the financial statements and the
related financial statement schedule is based in part on the
report of Ernst & Young LLP as it relates to Discovery and
expresses an unqualified opinion on the consolidated financial
statements and financial statement schedule and includes
explanatory paragraphs referring to the preparation of the
portion of the Companys consolidated financial statements
attributable to (a) operations prior to December 7,
2005 (b) the wholesale propane logistics business and
(c) East Texas, Discovery, and the Swap from the separate
records maintained by Midstream) and (2) report on the
effectiveness of the Companys internal control over
financial reporting expresses an unqualified opinion). Such
consolidated financial statements and financial statement
schedules have been so incorporated herein in reliance upon the
respective reports of such firms given upon their authority as
experts in accounting and auditing. All of the foregoing firms
are independent registered public accounting firms.
The consolidated balance sheet of DCP Midstream GP, LP (the
Company), as of December 31, 2007, which gives
retroactive effect to the July 1, 2007 acquisition by the
Company of a 25% limited liability interest in DCP East Texas
Holdings, LLC (formerly the East Texas Midstream Business)
(East Texas), a 40% limited liability interest in
Discovery Producer Services, LLC (Discovery), and a
nontrading derivative instrument (the Swap) from DCP
Midstream, LLC (Midstream), which has been accounted
for in a manner similar to a pooling of interests as described
in Note 4 to the consolidated balance sheet, incorporated
in this prospectus by reference from DCP Midstream Partners,
LPs Annual Report on
Form 10-K
for the year ended December 31, 2007, has been audited by
Deloitte & Touche LLP, as stated in their report,
based in part on the report of Ernst & Young LLP as it
relates to Discovery, which is incorporated herein by reference.
Such consolidated balance sheet of the Company has been
incorporated herein in reliance upon the respective reports of
such firms given upon their authority as experts in accounting
and auditing. Deloitte and Touche LLP are independent auditors
and Ernst & Young LLP are independent registered
public accountants.
The consolidated balance sheet of DCP Midstream, LLC as of
December 31, 2007 incorporated in this prospectus by
reference from DCP Midstream Partners, LPs Annual Report
on
Form 10-K
for the year ended December 31, 2007 has been audited by
Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference, and
has been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements and related financial
statement schedule of DCP East Texas Holdings, LLC (formerly the
East Texas Midstream Business) (East Texas) as of
December 31, 2007 and 2006 and for each of the three years
in the period ended December 31, 2007, incorporated in this
prospectus by reference from DCP Midstream Partners, LPs
Annual Report on
Form 10-K
for the year ended December 31, 2007 have been audited by
Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference
(which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the preparation of the
consolidated financial statements and financial statement
schedule
S-23
of East Texas from the separate records maintained by DCP
Midstream, LLC), and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Discovery Producer
Services LLC at December 31, 2007 and 2006, and for each of
the three years in the period ended December 31, 2007, have
been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report
thereon, appearing in DCP Midstream Partners, LPs Annual
Report on
Form 10-K
for the year ended December 31, 2007, incorporated by
reference herein. Such financial statements are incorporated by
reference in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
FORWARD-LOOKING
STATEMENTS
Some of the information included in this prospectus supplement
and the documents we incorporate by reference herein contain
forward-looking statements. All statements that are
not statements of historical facts, including statements
regarding our future financial position, business strategy,
budgets, projected costs and plans and objectives of management
for future operations, are forward-looking statements. Such
statements are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
You can typically identify forward-looking statements by the use
of forward-looking words, such as may,
could, project, believe,
anticipate, expect,
estimate, potential, plan,
forecast and other similar words. When considering
forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this prospectus
supplement, the accompanying prospectus and the documents we
have incorporated by reference.
These forward-looking statements reflect our intentions, plans,
expectations, assumptions and beliefs about future events and
are subject to risks, uncertainties and other factors, many of
which are outside our control. Important factors that could
cause actual results to differ materially from the expectations
expressed or implied in the forward-looking statements include
known and unknown risks. Known risks and uncertainties include,
but are not limited to, the risks set forth in Risk
Factors beginning on
page S-17
in this prospectus supplement and on page 6 of the
accompanying prospectus as well as the following risks and
uncertainties:
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the level and success of natural gas drilling around our assets,
and our ability to connect supplies to our gathering and
processing systems in light of competition;
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our ability to grow through acquisitions, contributions from
affiliates, or organic growth projects, and the successful
integration and future performance of such assets;
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our ability to access the debt and equity markets, which will
depend on general market conditions, interest rates and our
ability to effectively limit a portion of the adverse effects of
potential changes in interest rates by entering into derivative
financial instruments, and the credit ratings for our debt
obligations;
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the extent of changes in commodity prices, our ability to
effectively limit a portion of the adverse impact of potential
changes in prices through derivative financial instruments, and
the potential impact of price on natural gas drilling, demand
for our services, and the volume of NGLs and condensate
extracted;
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our ability to purchase propane from our principal suppliers for
our wholesale propane logistics business;
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our ability to construct facilities in a timely fashion, which
is partially dependent on obtaining required building,
environmental and other permits issued by federal, state and
municipal governments, or agencies thereof, the availability of
specialized contractors and laborers, and the price of and
demand for supplies;
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the creditworthiness of counterparties to our transactions;
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weather and other natural phenomena, including their potential
impact on demand for the commodities we sell and our and
third-party-owned infrastructure;
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changes in laws and regulations, particularly with regard to
taxes, safety and protection of the environment or the increased
regulation of our industry;
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S-24
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industry changes, including the impact of consolidations,
increased delivery of liquefied natural gas to the United
States, alternative energy sources, technological advances and
changes in competition;
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the amount of collateral we may be required to post from time to
time in our transactions; and
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general economic, market and business conditions.
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You should read these statements carefully because they discuss
our expectations about our future performance, contain
projections of our future operating results or our future
financial condition, or state other forward-looking
information. Before you invest, you should be aware that the
occurrence of any of the events described in Risk
Factors beginning on
page S-17
in this prospectus supplement and on page 6 of the
accompanying prospectus could substantially harm our business,
results of operations and financial condition. In light of these
risks, uncertainties and assumptions, the events described in
the forward-looking statements might not occur or might occur to
a different extent or at a different time than we have
described. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
INFORMATION
INCORPORATED BY REFERENCE
We file annual, quarterly and other reports with and furnish
other information to the SEC. You may read and copy any document
we file with or furnish to the SEC at the SECs public
reference room at 100 F Street, NE, Room 1580,
Washington, D.C. 20549. Please call the SEC at
1-800-732-0330
for further information on their public reference room. Our SEC
filings are also available at the SECs web site at
http://www.sec.gov.
The SEC allows us to incorporate by reference the
information we have filed with the SEC. This means that we can
disclose important information to you without actually including
the specific information in this prospectus supplement by
referring you to those documents. The information incorporated
by reference is an important part of this prospectus supplement.
Information that we file later with the SEC will automatically
update and may replace information in this prospectus supplement
and information previously filed with the SEC. We incorporate by
reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act (excluding any information furnished under
Items 2.02 or 7.01 on any current report on
Form 8-K)
after the date of this prospectus supplement and until the
termination of this offering:
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our annual report on
Form 10-K
for the fiscal year ended December 31, 2007, filed on
March 10, 2008;
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our current reports on
Form 8-K
filed on January 7, 2008, January 15, 2008,
February 21, 2008 (two filings), February 25, 2008 and
March 12, 2008 (in each case to the extent filed and not
furnished);
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our current report on
Form 8-K/A
filed on January 29, 2008 (to the extent filed and not
furnished); and
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the description of our common units in our registration
statement on
Form 8-A
filed on November 18, 2005.
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You may obtain any of the documents incorporated by reference in
this prospectus from the SEC through the SECs website at
the address provided above. You may request a copy of any
document incorporated by reference into this prospectus
(including exhibits to those documents specifically incorporated
by reference in this document), at no cost, by visiting our
website at http://www.dcppartners.com, or by writing or
calling us at the following address:
DCP Midstream Partners, LP
370 17th Street, Suite 2775
Denver, Colorado 80202
Attention: Corporate Secretary
Telephone:
(303) 633-2900
Any statement contained in a document incorporated or considered
to be incorporated by reference in this prospectus supplement
shall be considered to be modified or superseded for purposes of
this prospectus supplement to the extent that a statement
contained in this prospectus supplement or in any subsequently
filed document that is or is considered to be incorporated by
reference modifies or supersedes that statement. Any
S-25
statement that is modified or superseded shall not, except as so
modified or superseded, constitute a part of this prospectus
supplement.
You should rely only on the information incorporated by
reference or provided in this prospectus supplement and the
accompanying prospectus. We have not authorized anyone else to
provide you with any information. You should not assume that the
information incorporated by reference or provided in this
prospectus supplement or the accompanying prospectus is accurate
as of any date other than the date on the front of each document.
The information contained on our website is not part of this
prospectus supplement.
S-26
PROSPECTUS
DCP Midstream Partners,
LP
DCP Midstream Partners Finance
Corp.
Common Units
Debt Securities
We may offer, from time to time, in one or more series:
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common units representing limited partnership interests in DCP
Midstream Partners, LP; and
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debt securities, which may be either senior debt securities or
subordinated debt securities.
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DCP Midstream Partners Finance Corp. may act as co-issuer of the
debt securities.
The securities we may offer:
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will have a maximum aggregate offering price of $1,500,000,000;
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will be offered at prices and on terms to be set forth in one or
more accompanying prospectus supplements; and
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may be offered separately or together, or in separate series.
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Our common units are traded on the New York Stock Exchange under
the symbol DPM. We will provide information in the
prospectus supplement for the trading market, if any, for any
debt securities we may offer.
This prospectus provides you with a general description of the
securities we may offer. Each time we offer to sell securities
we will provide a prospectus supplement that will contain
specific information about those securities and the terms of
that offering. The prospectus supplement also may add, update or
change information contained in this prospectus. This prospectus
may be used to offer and sell securities only if accompanied by
a prospectus supplement. You should read this prospectus and any
prospectus supplement carefully before you invest. You should
also read the documents we refer to in the Where You Can
Find More Information section of this prospectus for
information on us and our financial statements.
Limited partnerships are inherently different than
corporations. You should carefully consider each of the factors
described under Risk Factors beginning on
page 6 of this prospectus before you make an investment in
our securities.
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.
The date of this prospectus is November 8, 2007
TABLE OF
CONTENTS
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You should rely only on the information contained or
incorporated by reference in this prospectus. We have not
authorized any other person to provide you with different
information. You should not assume that the information
incorporated by reference or provided in this prospectus is
accurate as of any date other than the date on the front of this
prospectus.
ii
GUIDE TO
READING THIS PROSPECTUS
This prospectus is part of a registration statement on
Form S-3
that we filed with the Securities and Exchange Commission, or
SEC, utilizing a shelf registration process or
continuous offering process. Under this shelf registration
process, we may, from time to time, sell up to $1,500,000,000 of
the securities described in this prospectus in one or more
offerings. Each time we offer securities, we will provide you
with this prospectus and a prospectus supplement that will
describe, among other things, the specific amounts and prices of
the securities being offered and the terms of the offering,
including, in the case of debt securities, the specific terms of
the securities.
That prospectus supplement may include additional risk factors
or other special considerations applicable to those securities
and may also add, update, or change information in this
prospectus. If there is any inconsistency between the
information in this prospectus and any prospectus supplement,
you should rely on the information in that prospectus supplement.
Throughout this prospectus, when we use the terms
we, us, or DCP, we are
referring either to DCP Midstream Partners, LP, the registrant
itself, or to DCP Midstream Partners, LP and its operating
subsidiaries collectively, as the context requires. References
in this prospectus to our general partner refer to
DCP Midstream GP, LP
and/or DCP
Midstream GP, LLC, the general partner of DCP Midstream GP, LP,
as appropriate.
WHERE YOU
CAN FIND MORE INFORMATION
We incorporate by reference information into this
prospectus, which means that we disclose important information
to you by referring you to another document filed separately
with the SEC. The information incorporated by reference is
deemed to be part of this prospectus, except for any information
superseded by information contained expressly in this
prospectus, and the information we file later with the SEC will
automatically supersede this information. You should not assume
that the information in this prospectus is current as of any
date other than the date on the front page of this prospectus.
Any information that we file under Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 after the
date of this prospectus, and that is deemed filed,
with the SEC will automatically update and supersede this
information. We incorporate by reference:
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Our Annual Report on
Form 10-K
for the year ended December 31, 2006;
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Our Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2007 and June 30,
2007;
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Our Current Reports on
Form 8-K
filed February 22, 2007, March 13, 2007,
April 20, 2007, May 2, 2007, May 10, 2007,
May 14, 2007, May 25, 2007, May 25, 2007,
June 20, 2007, June 25, 2007, June 27, 2007,
July 2, 2007 (as amended by our Current Reports on Form
8-K/A filed
on October 3, 2007 and October 16, 2007),
July 11, 2007, August 9, 2007, September 5, 2007,
September 17, 2007, October 10, 2007, October 17,
2007, October 17, 2007 and October 30, 2007; and
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The description of our common units contained in our
registration statement on
Form 8-A
filed on November 18, 2005, and any subsequent amendment or
report filed for the purpose of updating such description.
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You may request a copy of any document incorporated by reference
in this prospectus and any exhibit specifically incorporated by
reference in those documents, at no cost, by writing or
telephoning us at the following address or phone number:
DCP Midstream Partners, LP
Secretary
370 17th Street, Suite 2775
Denver, Colorado
(303) 633-2900
1
Additionally, you may read and copy any documents filed by us at
the SECs public reference room at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our
filings with the SEC are also available to the public from
commercial document retrieval services and at the SECs web
site at
http://www.sec.gov.
We also make available free of charge on our internet website at
http://www.dcppartners.com
our annual reports on
Form 10-K
and our quarterly reports on
Form 10-Q,
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with the
SEC. Information contained on our website is not incorporated by
reference into this prospectus and you should not consider
information contained on our website as part of this prospectus.
2
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus and our reports,
filings and other public announcements may from time to time
contain statements that do not directly or exclusively relate to
historical facts. Such statements are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. You can typically identify
forward-looking statements by the use of forward-looking words,
such as may, could, project,
believe, anticipate, expect,
estimate, potential, plan,
forecast and other similar words.
All statements that are not statements of historical facts,
including statements regarding our future financial position,
business strategy, budgets, projected costs and plans and
objectives of management for future operations, are
forward-looking statements.
These forward-looking statements reflect our intentions, plans,
expectations, assumptions and beliefs about future events and
are subject to risks, uncertainties and other factors, many of
which are outside our control. Important factors that could
cause actual results to differ materially from the expectations
expressed or implied in the forward-looking statements include
known and unknown risks. Known risks and uncertainties include,
but are not limited to, the risks set forth under Risk
Factors beginning on page 6 as well as the following
risks and uncertainties:
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the level and success of natural gas drilling around our assets,
and our ability to connect supplies to our gathering and
processing systems in light of competition;
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our ability to grow through acquisitions, contributions from our
parents, or organic growth projects, and the successful
integration and future performance of such assets;
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our ability to access the debt and equity markets, which will
depend on general market conditions, interest rates and our
ability to effectively hedge such rates with derivative
financial instruments to limit a portion of the adverse effects
of potential changes in interest rates, and the credit ratings
for our debt obligations;
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the extent of changes in commodity prices, our ability to
effectively hedge to limit a portion of the adverse impact of
potential changes in prices through derivative financial
instruments, and the potential impact of price on natural gas
drilling, demand for our services, and the volume of NGLs and
condensate extracted;
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our ability to purchase propane from our principal suppliers for
our wholesale propane logistics business;
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our ability to construct facilities in a timely fashion, which
is partially dependent on obtaining required building,
environmental and other permits issued by federal, state and
municipal governments, or agencies thereof, the availability of
specialized contractors and laborers, and the price of and
demand for supplies;
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the creditworthiness of counterparties to our transactions;
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weather and other natural phenomena, including their potential
impact on demand for the commodities we sell and our and
third-party-owned infrastructure;
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changes in laws and regulations, particularly with regard to
taxes, safety and protection of the environment or the increased
regulation of our industry;
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industry changes, including the impact of consolidations,
alternative energy sources, technological advances and changes
in competition;
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the amount of collateral required to be posted from time to time
in our transactions; and
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general economic, market and business conditions.
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In light of these risks, uncertainties and assumptions, the
events described in the forward-looking statements might not
occur or might occur to a different extent or at a different
time than we have described. We undertake no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
3
DCP
MIDSTREAM PARTNERS, LP
Overview
We are a Delaware limited partnership formed by DCP Midstream,
LLC (formerly known as Duke Energy Field Services, LLC) to
own, operate, acquire and develop a diversified portfolio of
complementary midstream energy assets. We are currently engaged
in the business of gathering, compressing, treating, processing,
transporting and selling natural gas, the business of producing,
transporting and selling propane and other natural gas liquids,
or NGLs, and the business of storing propane. Supported by our
relationship with DCP Midstream, LLC and its parents, Spectra
Energy Corp (the natural gas business which was spun off from
Duke Energy Corporation, or Duke Energy, effective
January 2, 2007), which we refer to as Spectra Energy, and
ConocoPhillips, we intend to acquire and construct additional
assets and we have a management team dedicated to executing our
growth strategy.
Our operations are organized into three business segments,
Natural Gas Services, Wholesale Propane Logistics and NGL
Logistics.
Our Natural Gas Services segment is comprised of the following:
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our North Louisiana system, which is an integrated pipeline
system located in northern Louisiana and southern Arkansas that
gathers, compresses, treats, processes, transports and sells
natural gas, and that sells NGLs. This system consists of the
following:
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the Minden processing plant and gathering system, which includes
a cryogenic natural gas processing plant supplied by
approximately 700 miles of natural gas gathering pipelines,
connected to approximately 460 receipt points, with throughput
and processing capacity of approximately 115 million cubic
feet per day, or
MMcf/d;
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the Ada processing plant and gathering system, which includes a
refrigeration natural gas processing plant supplied by
approximately 130 miles of natural gas gathering pipelines,
connected to approximately 210 receipt points, with throughput
capacity of approximately
80 MMcf/d; and
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the Pelico Pipeline, LLC system, or Pelico system, an
approximately
600-mile
intrastate natural gas gathering and transportation pipeline
with throughput capacity of approximately
250 MMcf/d
and connections to the Minden and Ada processing plants and
approximately 450 other receipt points. The Pelico system
delivers natural gas to multiple interstate and intrastate
pipelines, as well as directly to industrial and utility end-use
markets;
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our Southern Oklahoma Lindsay gathering system, or Lindsay, that
was acquired in May 2007, which consists of approximately
225 miles of pipeline and 9,500 horsepower of compression,
with throughput and processing capacity of approximately
25 MMcf/d;
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our equity interests that were acquired in July 2007, which
consist of the following:
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our 25% interest in DCP East Texas Holdings, LLC, or East Texas,
which operates a natural gas processing complex that is
connected to their gathering system as well as third party
gathering systems, and delivers residue gas to interstate and
intrastate pipelines; and
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our 40% interest in Discovery Producer Services LLC, or
Discovery, which constructs and operates a natural gas
processing plant, a natural gas liquids fractionator plant, a
natural gas pipeline that transports gas from the Gulf of Mexico
to our processing plant, and several laterals expanding their
presence in the Gulf;
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our gathering, processing and compression assets that were
acquired in August 2007, which consist of the following:
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our 70% operating interest in the
31-mile
Collbran Valley Gas Gathering system, or Collbran, which has
assets in the Piceance Basin that gather and process natural gas
from over 20,000 dedicated acres
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4
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in western Colorado, and a processing facility with a capacity
that is currently being expanded from
60 MMcf/d
to
120 MMcf/d;
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The Powder River Basin assets, which include the 1,324-mile
Douglas gas gathering system, that gathers approximately
30 MMcf/d
of gas and covers more than 4,000 square miles in Wyoming,
as well as an idle Painter Unit fractionator and Millis
terminal, and associated NGL pipelines in southwest Wyoming.
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Our Wholesale Propane Logistics segment, which we acquired in
November 2006, consists of the following:
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six owned propane rail terminals located in the Midwest and
northeastern United States, with aggregate storage capacity of
25 thousand barrels, or MBbls;
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one leased propane marine terminal located in Providence, Rhode
Island, with storage capacity of 450 MBbls;
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one propane pipeline terminal in Midland, Pennsylvania; and
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access to several open access pipeline terminals.
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Our NGL Logistics segment consists of the following:
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our Seabreeze pipeline, an approximately
68-mile
intrastate NGL pipeline in Texas with throughput capacity of 33
thousand barrels per day, or MBbls/d;
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our Wilbreeze pipeline, the construction of which was completed
in December 2006, an approximately
39-mile
intrastate NGL pipeline in Texas, which connects a DCP
Midstream, LLC gas processing plant to the Seabreeze pipeline
with throughput capacity of 11 MBbls/d; and
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our 45% interest in the Black Lake Pipe Line Company, or Black
Lake, the owner of an approximately
317-mile
interstate NGL pipeline in Louisiana and Texas with throughput
capacity of 40 MBbls/d.
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Partnership
Structure and Management
Our operations are conducted through, and our operating assets
are owned by, our subsidiaries. We own our interests in our
subsidiaries through our 100% ownership interest in our
operating partnership, DCP Midstream Operating, LP. DCP
Midstream GP, LLC is the general partner of our general partner,
DCP Midstream GP, LP, and has sole responsibility for conducting
our business and managing our operations. DCP Midstream Partners
Finance Corp., our wholly-owned subsidiary, has no material
assets or any liabilities other than as a co-issuer of our debt
securities. Its activities will be limited to co-issuing our
debt securities and engaging in other activities incidental
thereto.
Our principal executive office is located at 370
17th Street, Suite 2775, Denver, Colorado 80202. Our
telephone number is
(303) 633-2900.
Our common units are traded on the New York Stock Exchange under
the symbol DPM.
5
RISK
FACTORS
Limited partner interests are inherently different from
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in similar businesses. Before you
invest in our securities, you should carefully consider the
following risk factors as well as those contained in our most
recent Annual Report on
Form 10-K
and our Quarterly Reports on
Form 10-Q,
each of which is incorporated by reference herein, and those
that may be included in any applicable prospectus supplement,
together with all of the other information included in this
prospectus, any prospectus supplement and any other documents we
incorporate by reference.
If any of the following risks were actually to occur, our
business, financial condition or results of operations could be
materially adversely affected. In that case, we might not be
able to pay the minimum quarterly distribution on our common
units, the trading price of our common units could decline and
you could lose all or part of your investment.
Risks
Related to Our Business
We may
not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner, to enable
us to continue to make cash distributions to holders of our
common units and subordinated units at our current distribution
rate.
We may not have sufficient available cash from operating surplus
each quarter to enable us to continue to make cash distributions
at our current distribution rate. The amount of cash we can
distribute on our units principally depends upon the amount of
cash we generate from our operations, which will fluctuate from
quarter to quarter based on, among other things:
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the fees we charge and the margins we realize for our services;
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the prices of, level of production of, and demand for, natural
gas, propane, condensate and NGLs;
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the volume of natural gas we gather, treat, compress, process,
transport and sell, the volume of propane and NGLs we transport
and sell, and the volumes of propane we store;
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the relationship between natural gas and NGL prices;
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the level of competition from other midstream energy companies;
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the impact of weather conditions on the demand for natural gas
and propane;
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the level of our operating and maintenance and general and
administrative costs; and
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prevailing economic conditions.
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In addition, the actual amount of cash we will have available
for distribution will depend on other factors, some of which are
beyond our control, including:
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the level of capital expenditures we make;
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the cost and form of payment of acquisitions;
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our debt service requirements and other liabilities;
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fluctuations in our working capital needs;
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our ability to borrow funds and access capital markets;
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restrictions contained in our debt agreements;
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the amount of cash distributions we receive from our equity
interests; and
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the amount of cash reserves established by our general partner.
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6
We
have partial ownership interests in a number of joint venture
legal entities, including Discovery, East Texas and Black Lake,
which could adversely affect our ability to operate and control
these entities. In addition, we may be unable to control the
amount of cash we will receive from the operation of these
entities and we could be required to contribute significant cash
to fund our share of their operations, which could adversely
affect our ability to distribute cash to you.
Our inability to control the operations and management of joint
venture legal entities that we have a partial ownership interest
in may mean that we will not receive the amount of cash we
expect to be distributed to us. In addition, for entities where
we have a minority ownership interest, we will be unable to
control ongoing operational decisions, including the incurrence
of capital expenditures that we may be required to fund.
Specifically,
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We have limited ability to influence decisions with respect to
the operations of these entities and their subsidiaries,
including decisions with respect to incurrence of expenses and
distributions to us;
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These entities may establish reserves for working capital,
capital projects, environmental matters and legal proceedings
which would otherwise reduce cash available for distribution to
us;
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These entities may incur additional indebtedness, and principal
and interest made on such indebtedness may reduce cash otherwise
available for distribution to us; and
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These entities may require us to make additional capital
contributions to fund working capital and capital expenditures,
our funding of which could reduce the amount of cash otherwise
available for distribution.
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All of these things could significantly and adversely impact our
ability to distribute cash to you.
The
amount of cash we have available for distribution to holders of
our common units and subordinated units depends primarily on our
cash flow and not solely on profitability.
You should be aware that the amount of cash we have available
for distribution depends primarily upon our cash flow and not
solely on profitability, which will be affected by non-cash
items. As a result, we may make cash distributions during
periods when we record losses for financial accounting purposes
and may not make cash distributions during periods when we
record net earnings for financial accounting purposes.
Because
of the natural decline in production from existing wells, our
success depends on our ability to obtain new sources of supplies
of natural gas and NGLs, which are dependent on certain factors
beyond our control. Any decrease in supplies of natural gas or
NGLs could adversely affect our business, operating results and
our ability to make cash distributions.
Our gathering and transportation pipeline systems are connected
to or dependent on the level of production from natural gas
wells, from which production will naturally decline over time.
As a result, our cash flows associated with these wells will
also decline over time. In order to maintain or increase
throughput levels on our gathering and transportation pipeline
systems and NGL pipelines and the asset utilization rates at our
natural gas processing plants, we must continually obtain new
supplies. The primary factors affecting our ability to obtain
new supplies of natural gas and NGLs, and to attract new
customers to our assets include the level of successful drilling
activity near these systems, and our ability to compete for
volumes from successful new wells.
The level of drilling activity is dependent on economic and
business factors beyond our control. The primary factor that
impacts drilling decisions is natural gas prices. Currently,
natural gas prices are high in relation to historical prices.
For example, the rolling twelve-month average New York
Mercantile Exchange, or NYMEX, daily settlement price of natural
gas futures contracts has increased from $3.22 per MMBtu as of
December 31, 2002 to $7.75 per MMBtu as of
September 30, 2007. If the high price for natural gas were
to decline, the level of drilling activity could decrease. A
sustained decline in natural gas prices could result in a
decrease in exploration and development activities in the fields
served by our gathering and pipeline transportation systems and
our natural gas treating and processing plants, which would lead
to reduced
7
utilization of these assets. Other factors that impact
production decisions include producers capital budgets,
the ability of producers to obtain necessary drilling and other
governmental permits, access to drilling rigs and regulatory
changes. Because of these factors, even if new natural gas
reserves are discovered in areas served by our assets, producers
may choose not to develop those reserves. If we are not able to
obtain new supplies of natural gas to replace the natural
decline in volumes from existing wells due to reductions in
drilling activity or competition, throughput on our pipelines
and the utilization rates of our treating and processing
facilities would decline, which could have a material adverse
effect on our business, results of operations, financial
condition and ability to make cash distributions to you.
The
cash flow from our Natural Gas Services segment is affected by
natural gas, NGL and condensate prices, and decreases in these
prices could adversely affect our ability to make distributions
to holders of our common units and subordinated
units.
Our Natural Gas Services segment is affected by the level of
natural gas, NGL and condensate prices. NGL and condensate
prices generally fluctuate on a basis that correlates to
fluctuations in crude oil prices. In the past, the prices of
natural gas and crude oil have been extremely volatile, and we
expect this volatility to continue. The markets and prices for
natural gas, NGLs, condensate and crude oil depend upon factors
beyond our control. These factors include supply of and demand
for these commodities, which fluctuate with changes in market
and economic conditions and other factors, including:
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the impact of weather;
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the level of domestic and offshore production;
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the availability of imported natural gas, NGLs and crude oil;
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actions taken by foreign oil and gas producing nations;
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the availability of local, intrastate and interstate
transportation systems;
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the availability and marketing of competitive fuels;
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the impact of energy conservation efforts; and
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the extent of governmental regulation and taxation.
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Our primary natural gas gathering and processing arrangements
that expose us to commodity price risk are our
percentage-of-proceeds arrangements. Under
percentage-of-proceeds arrangements, we generally purchase
natural gas from producers for an agreed percentage of the
proceeds from the sale of residue gas and NGLs resulting from
our processing activities, and then sell the resulting residue
gas and NGLs at market prices. Under these types of
arrangements, our revenues and our cash flows increase or
decrease, whichever is applicable, as the price of natural gas
and NGLs fluctuate. We have hedged a significant portion of our
share of anticipated natural gas and NGL commodity price risk
associated with these arrangements through 2013. Additionally,
as part of our gathering operations, we recover and sell
condensate. The margins we earn from condensate sales are
directly correlated with crude oil prices. We have hedged a
significant portion of our share of anticipated condensate
commodity price risk through 2013.
Our
derivative activities may have a material adverse effect on our
earnings, profitability, cash flows and financial
condition.
We have mitigated a portion of our expected natural gas and NGL
commodity price risk relating to our percentage of proceeds
gathering and processing contracts through 2013 by entering into
derivative financial instruments relating to the future price of
natural gas and crude oil. In addition, we have mitigated a
portion of our expected condensate commodity price risk relating
to condensate recovered from our gathering operations through
2013 by entering into derivative financial instruments relating
to the future price of crude oil. Additionally, we have entered
into interest rate swap agreements to hedge a portion of the
variable rate revolving debt under our Credit Agreement to a
fixed rate obligation, thereby reducing the exposure to market
8
rate fluctuations. The intent of these arrangements is to reduce
the volatility in our cash flows resulting from fluctuations in
commodity prices and interest rates.
We will continue to evaluate whether to enter into any new
derivative arrangements, but there can be no assurance that we
will enter into any new derivative arrangement or that our
future derivative arrangements will be on terms similar to our
existing derivative arrangements. Also, we may seek in the
future to further limit our exposure to changes in natural gas,
NGL and condensate commodity prices and interest rates by using
financial derivative instruments and other derivative mechanisms
from time to time. To the extent we hedge our commodity price
and interest rate risk, we will forego the benefits we would
otherwise experience if commodity prices or interest rates were
to change in our favor.
Despite our risk management program, we remain exposed to risks
associated with fluctuations in commodity prices. The extent of
our commodity price risk is related largely to the effectiveness
and scope of our derivative activities. For example, the
derivative instruments we utilize are based on posted market
prices, which may differ significantly from the actual natural
gas, NGL and condensate prices that we realize in our
operations. Furthermore, we have entered into derivative
transactions related to only a portion of the volume of our
expected natural gas supply and production of NGLs and
condensate from our processing plants; as a result, we will
continue to have direct commodity price risk to the open
portion. Our actual future production may be significantly
higher or lower than we estimate at the time we entered into the
derivative transactions for that period. If the actual amount is
higher than we estimate, we will have greater commodity price
risk than we intended. If the actual amount is lower than the
amount that is subject to our derivative financial instruments,
we might be forced to satisfy all or a portion of our derivative
transactions without the benefit of the cash flow from our sale
of the underlying physical commodity, resulting in a reduction
of our liquidity.
As a result of these factors, our derivative activities may not
be as effective as we intend in reducing the volatility of our
cash flows, and in certain circumstances may actually increase
the volatility of our earnings and cash flows. In addition, even
though our management monitors our derivative activities, these
activities can result in substantial losses. Such losses could
occur under various circumstances, including if a counterparty
does not perform its obligations under the applicable derivative
arrangement, the derivative arrangement is imperfect or
ineffective, or our risk management policies and procedures are
not properly followed or do not work as planned. We cannot
assure you that the steps we take to monitor our risk management
activities will detect and prevent violations of our risk
management policies and procedures, particularly if deception or
other intentional misconduct is involved.
Effective July 1, 2007, we elected to discontinue using the
hedge method of accounting for our commodity cash flow hedges.
We will use the mark-to-market method of accounting for all
commodity cash flow hedges, which is expected to significantly
increase the volatility of our results of operations as we will
recognize, in current earnings, all non-cash gains and losses
from the mark-to-market on non-trading derivative activity.
We
typically do not obtain independent evaluations of natural gas
reserves dedicated to our gathering and pipeline systems;
therefore, volumes of natural gas on our systems in the future
could be less than we anticipate.
We typically do not obtain independent evaluations of natural
gas reserves connected to our systems due to the unwillingness
of producers to provide reserve information as well as the cost
of such evaluations. Accordingly, we do not have independent
estimates of total reserves dedicated to our systems or the
anticipated life of such reserves. If the total reserves or
estimated life of the reserves connected to our gathering
systems is less than we anticipate and we are unable to secure
additional sources of natural gas, then the volumes of natural
gas on our systems in the future could be less than we
anticipate. A decline in the volumes of natural gas on our
systems could have a material adverse effect on our business,
results of operations, financial condition and our ability to
make cash distributions to you.
9
We
depend on certain natural gas producer customers for a
significant portion of our supply of natural gas and NGLs. The
loss of any of these customers could result in a decline in our
volumes, revenues and cash available for
distribution.
We rely on certain natural gas producer customers for a
significant portion of our natural gas and NGL supply. We
identify primary suppliers as those individually representing
10% or more of our total natural gas supply. Our primary
suppliers of natural gas represented approximately 64% of the
natural gas supplied in our Natural Gas Services segment in the
six months ended June 30, 2007. In our NGL Logistics
segment, our largest NGL supplier is DCP Midstream, LLC, who
obtains NGLs from various third party producer customers. While
some of these customers are subject to long-term contracts, we
may be unable to negotiate extensions or replacements of these
contracts on favorable terms, if at all. The loss of all or even
a portion of the natural gas and NGL volumes supplied by these
customers, as a result of competition or otherwise, could have a
material adverse effect on our business, results of operations
and financial condition, unless we were able to acquire
comparable volumes from other sources.
If we
are not able to purchase propane from our principal suppliers,
our results of operations in our wholesale propane logistics
business would be adversely affected.
Most of our propane purchases are made under supply contracts
that have a term of between one to five years and provide
various pricing formulas. We identify primary suppliers as those
individually representing 10% or more of our total propane
supply. Our primary suppliers of propane represented
approximately 81% of our propane purchases in the six months
ended June 30, 2007. In the event that we are unable to
purchase propane from our significant suppliers, our failure to
obtain alternate sources of supply at competitive prices and on
a timely basis would hurt our ability to satisfy customer
demand, reduce our revenues and adversely affect our results of
operations
We may
not be able to grow or effectively manage our
growth.
A principal focus of our strategy is to continue to grow the per
unit distribution on our units by expanding our business. Our
future growth will depend upon a number of factors, some of
which we can control and some of which we cannot. These factors
include our ability to:
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identify businesses engaged in managing, operating or owning
pipelines, processing and storage assets or other midstream
assets for acquisitions, joint ventures and construction
projects;
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consummate accretive acquisitions or joint ventures and complete
construction projects;
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appropriately identify any liabilities associated with any
acquired businesses or assets;
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integrate any acquired or constructed businesses or assets
successfully with our existing operations and into our operating
and financial systems and controls;
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hire, train and retain qualified personnel to manage and operate
our growing business; and
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obtain required financing for our existing and new operations.
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A deficiency in any of these factors could adversely affect our
ability to achieve growth in the level of our cash flows or
realize benefits from acquisitions, joint ventures or
construction projects. In addition, competition from other
buyers could reduce our acquisition opportunities or cause us to
pay a higher price than we might otherwise pay. In addition, DCP
Midstream, LLC and its affiliates are not restricted from
competing with us. DCP Midstream, LLC and its affiliates may
acquire, construct or dispose of midstream or other assets in
the future without any obligation to offer us the opportunity to
purchase or construct those assets.
Furthermore, we have recently grown significantly through a
series of acquisitions. For example, in May 2007 we acquired the
Lindsay gathering system, in July 2007 we acquired a 25%
interest in East Texas and a 40% interest in Discovery and in
August we acquired certain subsidiaries of Momentum Energy Group
Inc. If we fail to properly integrate these acquired assets
successfully with our existing operations or we did not
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identify a significant liability associated with the acquired
assets, the anticipated benefits from these acquisitions may not
be fully realized.
We may
not successfully balance our purchases and sales of natural gas
and propane, which would increase our exposure to commodity
price risks.
We purchase from producers and other customers a substantial
amount of the natural gas that flows through our natural gas
gathering, processing and transportation systems for resale to
third parties, including natural gas marketers and end-users. In
addition, in our wholesale propane logistics business, we
purchase propane from a variety of sources and resell the
propane to retail distributors. We may not be successful in
balancing our purchases and sales. A producer or supplier could
fail to deliver contracted volumes or deliver in excess of
contracted volumes, or a purchaser could purchase less than
contracted volumes. Any of these actions could cause our
purchases and sales to be unbalanced. While we attempt to
balance our purchases and sales, if our purchases and sales are
unbalanced, we will face increased exposure to commodity price
risks and could have increased volatility in our operating
income and cash flows.
Our
NGL pipelines could be adversely affected by any decrease in NGL
prices relative to the price of natural gas.
The profitability of our NGL pipelines is dependent on the level
of production of NGLs from processing plants connected to our
NGL pipelines. When natural gas prices are high relative to NGL
prices, it is less profitable to process natural gas because of
the higher value of natural gas compared to the value of NGLs
and because of the increased cost (principally that of natural
gas as a feedstock and fuel) of separating the mixed NGLs from
the natural gas. As a result, we may experience periods in which
higher natural gas prices reduce the volume of natural gas
processed at plants connected to our NGL pipelines, which would
reduce the volumes and gross margins attributable to our NGL
pipelines.
If
third party pipelines and other facilities interconnected to our
natural gas and NGL pipelines and facilities become unavailable
to transport or produce natural gas and NGLs, our revenues and
cash available for distribution could be adversely
affected.
We depend upon third party pipelines and other facilities that
provide delivery options to and from our pipelines and
facilities for the benefit of our customers. For example, the
volumes of NGLs that are transported on our Seabreeze pipeline
and the Black Lake pipeline are dependent upon a number of
processing plants and NGL pipelines owned and operated by DCP
Midstream, LLC and other third parties. In addition, our Pelico
pipeline system is interconnected to several third-party
intrastate and interstate pipelines. Since we do not own or
operate any of these third-party pipelines or other facilities,
their continuing operation is not within our control. If any of
these third-party pipelines and other facilities become
unavailable to transport or produce natural gas and NGLs, our
revenues and cash available for distribution could be adversely
affected.
Our
wholesale propane logistics business would be adversely affected
if service at our terminals were interrupted.
Historically, a substantial portion of the propane we purchase
to support our wholesale propane logistics business is delivered
to us at our rail terminals or is delivered by ship to us at our
leased marine terminal in Providence, Rhode Island. We also rely
on shipments of propane via the Buckeye Pipeline for our Midland
Terminal and via TEPPCO Partners, LPs pipeline to open
access terminals. Any significant interruption in the service at
these terminals would adversely affect our ability to obtain
propane, which could reduce the amount of propane that we
distribute, our revenues or cash available for distribution.
Our
industry is highly competitive, and increased competitive
pressure could adversely affect our business and operating
results.
We compete with similar enterprises in our respective areas of
operation. Some of our competitors are large oil, natural gas
and petrochemical companies that have greater financial
resources and access to supplies
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of natural gas, propane and NGLs than we do. Some of these
competitors may expand or construct gathering, processing and
transportation systems that would create additional competition
for the services we provide to our customers. In addition, our
customers who are significant producers of natural gas may
develop their own gathering, processing and transportation
systems in lieu of using ours. Likewise, our customers who
produce NGLs may develop their own systems to transport NGLs in
lieu of using ours. Additionally, our wholesale propane
distribution customers may develop their own sources of propane
supply in lieu of seeking supplies from us. Our ability to renew
or replace existing contracts with our customers at rates
sufficient to maintain current revenues and cash flows could be
adversely affected by the activities of our competitors and our
customers. All of these competitive pressures could have a
material adverse effect on our business, results of operations,
financial condition and ability to make cash distributions.
Since
weather conditions may adversely affect the overall demand for
propane, our wholesale propane business is vulnerable to, and
could be adversely affected by, warm winters.
Weather conditions could have an impact on the demand for
wholesale propane because the end-users of propane depend on
propane principally for heating purposes. As a result, warm
weather conditions could adversely impact the demand for and
prices of propane. Actual weather conditions can substantially
change from one year to the next. Furthermore, since our
wholesale propane logistics business is located almost solely in
the northeast, warmer than normal temperatures in the northeast
can decrease the total volume of propane we sell. Such
conditions may also cause downward pressure on the price of
propane, which could result in a lower of cost or market
adjustment to the value of our inventory. Consequently, our
operating results may vary due to actual changes in temperature.
Competition
from alternative energy sources and energy efficiency and
technological advances may reduce the demand for propane, which
could reduce the volumes of propane that we
distribute.
Competition from alternative energy sources, including natural
gas and electricity, has been increasing as a result of reduced
regulation of many utilities, including natural gas and
electricity. In addition, propane competes with heating oil
primarily in residential applications. Propane is generally not
competitive with natural gas in areas where natural gas
pipelines already exist because natural gas is a less expensive
source of energy than propane. The gradual expansion of natural
gas distribution systems and availability of natural gas in the
northeast, which has historically depended upon propane, could
reduce the demand for propane, which could adversely affect the
volumes of propane that we distribute. In addition, stricter
conservation measures in the future or technological advances in
heating, conservation, energy generation or other devices could
reduce the demand for propane in the future, which could
adversely affect the volumes of propane that we distribute.
A
change in the jurisdictional characterization of some of our
assets by federal, state or local regulatory agencies or a
change in policy by those agencies may result in increased
regulation of our assets, which may cause our revenues to
decline and operating expenses to increase.
Our natural gas gathering and intrastate transportation
operations are generally, with the exception of Discovery,
exempt from FERC regulation under the NGA, except for
Section 311 as discussed below, but FERC regulation still
affects these businesses and the markets for products derived
from these businesses. FERCs policies and practices across
the range of its oil and natural gas regulatory activities,
including, for example, its policies on open access
transportation, ratemaking, capacity release and market center
promotion, indirectly affect intrastate markets. In recent
years, FERC has pursued pro-competitive policies in its
regulation of interstate oil and natural gas pipelines. However,
we cannot assure you that FERC will continue this approach as it
considers matters such as pipeline rates and rules and policies
that may affect rights of access to oil and natural gas
transportation capacity. In addition, the distinction between
FERC-regulated transmission services and federally unregulated
gathering services has been the subject of regular litigation,
so, in such a circumstance, the classification and regulation of
some of our gathering facilities and intrastate transportation
pipelines may be subject to change based on future
determinations by FERC and the courts.
In addition, the rates, terms and conditions of some of the
transportation services we provide on our Pelico pipeline system
and the EasTrans Limited Partnership (EasTrans) pipeline system
owned by East Texas,
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are subject to FERC regulation under Section 311 of the
NGPA. Under Section 311, rates charged for transportation
must be fair and equitable, and amounts collected in excess of
fair and equitable rates are subject to refund with interest.
The Pelico system is currently charging rates for its
Section 311 transportation services that were deemed fair
and equitable under a rate settlement with FERC. The EasTrans
system is currently charging rates for its Section 311
transportation services that were deemed fair and equitable
under an order approved by the Railroad Commission of Texas. In
December 2006, the Pelico system filed a new Section 311
rate case with the FERC. The settlement in the rate case, which
was approved on April 25, 2007, provided for an increase in
the maximum transportation rate that the Pelico system can
charge, to $0.2322 per MMBtu from $0.1965 per MMBtu, effective
December 1, 2006. There were no other changes to the Pelico
systems terms and conditions of service. The Black Lake
pipeline system is an interstate transporter of NGLs and is
subject to FERC jurisdiction under the Interstate Commerce Act
and the Elkins Act.
Other state and local regulations also affect our business. Our
non-proprietary gathering lines are subject to ratable take and
common purchaser statutes in Louisiana. Ratable take statutes
generally require gatherers to take, without undue
discrimination, oil or natural gas production that may be
tendered to the gatherer for handling. Similarly, common
purchaser statutes generally require gatherers to purchase
without undue discrimination as to source of supply or producer.
These statutes restrict our right as an owner of gathering
facilities to decide with whom we contract to purchase or
transport oil or natural gas. Federal law leaves any economic
regulation of natural gas gathering to the states. The states in
which we operate have adopted complaint-based regulation of oil
and natural gas gathering activities, which allows oil and
natural gas producers and shippers to file complaints with state
regulators in an effort to resolve grievances relating to oil
and natural gas gathering access and rate discrimination. Other
state regulations may not directly regulate our business, but
may nonetheless affect the availability of natural gas for
purchase, processing and sale, including state regulation of
production rates and maximum daily production allowable from gas
wells. While our proprietary gathering lines currently are
subject to limited state regulation, there is a risk that state
laws will be changed, which may give producers a stronger basis
to challenge proprietary status of a line, or the rates, terms
and conditions of a gathering line providing transportation
service.
Discoverys
interstate tariff rates are subject to review and possible
adjustment by federal regulators, which could have a material
adverse effect on our business and operating results. Moreover,
because Discovery is a non-corporate entity, it may be
disadvantaged in calculating its cost-of-service for rate-making
purposes.
The FERC, pursuant to the Natural Gas Act, regulates many
aspects of Discoverys interstate pipeline transportation
service, including the rates that Discovery is permitted to
charge for such service. Under the Natural Gas Act, interstate
transportation rates must be just and reasonable and not unduly
discriminatory. If the FERC fails to permit tariff rate
increases requested by Discovery, or if the FERC lowers the
tariff rates Discovery is permitted to charge its customers, on
its own initiative, or as a result of challenges raised by
Discoverys customers or third parties, Discoverys
tariff rates may be insufficient to recover the full cost of
providing interstate transportation service. The FERC could
require refund by Discovery of certain amounts exceeding those
rates determined by FERC to be lawful. An adverse decision by
the FERC in approving Discoverys regulated rates could
adversely affect our cash flows. Although the FERC generally
does not regulate the natural gas gathering operations of
Discovery under the Natural Gas Act, federal regulation
influences the parties that gather natural gas on the Discovery
gas gathering system.
Discoverys maximum regulated rate for mainline
transportation is scheduled to decrease in 2008. At that time,
Discovery may be required to reduce its mainline transportation
rate on all of its contracts that have rates above the new
maximum rate. This could reduce the revenues generated by
Discovery. Discovery may elect to file a rate case with the FERC
seeking to alter this scheduled maximum rate reduction. However,
if filed, a rate case may not be successful in preventing all or
part of the rate reduction. If Discovery makes such a filing, it
is possible that other aspects of Discoverys
cost-of-service and rate design could be reviewed, which could
result in additional reductions to its regulated rates.
Under current policy, the FERC permits pipelines to include, in
the cost-of-service used as the basis for calculating the
pipelines regulated rates, a tax allowance reflecting the
actual or potential income tax liability
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on public utility income attributable to all partnership or
limited liability company interests, if the ultimate owner of
the interest has an actual or potential income tax liability on
such income. Whether a pipelines owners have such actual
or potential income tax liability will be reviewed by the FERC
on a
case-by-case
basis. In a future rate case, Discovery may be required to
demonstrate the extent to which inclusion of an income tax
allowance in Discoverys cost-of-service is permitted under
the current income tax allowance policy.
We may
incur significant costs and liabilities in the future resulting
from a failure to comply with new or existing environmental
regulations or an accidental release of hazardous substances or
hydrocarbons into the environment.
Our operations are subject to stringent and complex federal,
state and local environmental laws and regulations. These
include, for example, (1) the federal Clean Air Act and
comparable state laws and regulations that impose obligations
related to air emissions; (2) the federal Resource
Conservation and Recovery Act, or RCRA, and comparable state
laws that impose requirements for the discharge of waste from
our facilities; and (3) the Comprehensive Environmental
Response Compensation and Liability Act of 1980, or CERCLA, also
known as Superfund, and comparable state laws that
regulate the cleanup of hazardous substances that may have been
released at properties currently or previously owned or operated
by us or locations to which we have sent waste for disposal.
Failure to comply with these laws and regulations or newly
adopted laws or regulations may trigger a variety of
administrative, civil and criminal enforcement measures,
including the assessment of monetary penalties, the imposition
of remedial requirements, and the issuance of orders enjoining
future operations. Certain environmental regulations, including
CERCLA and analogous state laws and regulations, impose strict,
joint and several liability for costs required to clean up and
restore sites where hazardous substances or hydrocarbons have
been disposed or otherwise released. Moreover, it is not
uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly
caused by the release of hazardous substances, hydrocarbons or
other waste products into the environment.
There is inherent risk of the incurrence of environmental costs
and liabilities in our business due to our handling of natural
gas and other petroleum products, air emissions related to our
operations, and historical industry operations and waste
disposal practices. For example, an accidental release from one
of our facilities could subject us to substantial liabilities
arising from environmental cleanup and restoration costs, claims
made by neighboring landowners and other third parties for
personal injury and property damage and fines or penalties for
related violations of environmental laws or regulations.
Moreover, the possibility exists that stricter laws, regulations
or enforcement policies could significantly increase our
compliance costs and the cost of any remediation that may become
necessary. We may not be able to recover these costs from
insurance or from indemnification from DCP Midstream, LLC.
We may
incur significant costs and liabilities resulting from pipeline
integrity programs and related repairs.
Pursuant to the Pipeline Safety Improvement Act of 2002, the
United States Department of Transportation, or DOT, has adopted
regulations requiring pipeline operators to develop integrity
management programs for transportation pipelines located where a
leak or rupture could do the most harm in high consequence
areas. The regulations require operators to:
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perform ongoing assessments of pipeline integrity;
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identify and characterize applicable threats to pipeline
segments that could impact a high consequence area;
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improve data collection, integration and analysis;
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repair and remediate the pipeline as necessary; and
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implement preventive and mitigating actions.
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We currently estimate that we will incur costs of approximately
$4.1 million between 2007 and 2011 to implement pipeline
integrity management program testing along certain segments of
our natural gas and NGL pipelines. This does not include the
costs, if any, of any repair, remediation, preventative or
mitigating actions that may be determined to be necessary as a
result of the testing program, which costs could be substantial.
While DCP Midstream, LLC has agreed to indemnify us for our pro
rata share of any capital contributions associated with certain
repair costs relating to the Black Lake pipeline resulting from
such testing program, the actual costs of making such repairs,
including any lost cash flows resulting from shutting down our
pipelines during the pendency of such repairs, could
substantially exceed the amount of such indemnity.
We currently transport all of the NGLs produced at our Minden
plant on the Black Lake pipeline. Accordingly, in the event that
the Black Lake pipeline becomes inoperable due to any necessary
repairs resulting from our integrity testing program or for any
other reason for any significant period of time, we would need
to transport NGLs by other means. The Minden plant has an
existing alternate pipeline connection that would permit the
transportation of NGLs to a local fractionator for processing
and distribution with sufficient pipeline takeaway and
fractionation capacity to handle all of the Minden plants
NGL production. We do not, however, currently have commercial
arrangements in place with the alternative pipeline. While we
believe we could establish alternate transportation
arrangements, there can be no assurance that we will in fact be
able to enter into such arrangements.
Our
construction of new assets may not result in revenue increases
and is subject to regulatory, environmental, political, legal
and economic risks, which could adversely affect our results of
operations and financial condition.
One of the ways we intend to grow our business is through the
construction of new midstream assets. The construction of
additions or modifications to our existing systems or propane
terminals, and the construction of new midstream assets involves
numerous regulatory, environmental, political and legal
uncertainties beyond our control and may require the expenditure
of significant amounts of capital. If we undertake these
projects, they may not be completed on schedule or at the
budgeted cost, or at all. Moreover, our revenues may not
increase immediately upon the expenditure of funds on a
particular project. For instance, if we construct a new pipeline
or terminal, the construction may occur over an extended period
of time, and we will not receive any material increases in
revenues until the project is completed. Moreover, we may
construct facilities to capture anticipated future growth in
production in a region in which such growth does not
materialize. Since we are not engaged in the exploration for and
development of natural gas and oil reserves, we often do not
have access to third party estimates of potential reserves in an
area prior to constructing facilities in such area. To the
extent we rely on estimates of future production in our decision
to construct additions to our systems, such estimates may prove
to be inaccurate because there are numerous uncertainties
inherent in estimating quantities of future production. As a
result, new facilities may not be able to attract enough
throughput to achieve our expected investment return, which
could adversely affect our results of operations and financial
condition. In addition, the construction of additions to our
existing gathering, transportation and propane terminal assets
may require us to obtain new rights-of-way prior to constructing
new facilities. We may be unable to obtain such rights-of-way to
connect new natural gas supplies to our existing gathering
lines, expand our network of propane terminals, or capitalize on
other attractive expansion opportunities. Additionally, it may
become more expensive for us to obtain new rights-of-way or to
renew existing rights-of-way. In addition, the construction of
additional propane terminals may require greater capital
investment if the commodity prices of certain supplies such as
steel increase. If the cost of renewing or obtaining new
rights-of-way increases, or the cost of constructing new
facilities is impacted by certain commodity prices, our cash
flows could be adversely affected.
If we
do not make acquisitions on economically acceptable terms, our
future growth will be limited.
Our ability to grow depends, in part, on our ability to make
acquisitions that result in an increase in the cash generated
from operations per unit. If we are unable to make these
accretive acquisitions either because we are: (1) unable to
identify attractive acquisition candidates or negotiate
acceptable purchase contracts with them; (2) unable to
obtain financing for these acquisitions on economically
acceptable terms; or (3) outbid by
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competitors, then our future growth and ability to increase
distributions will be limited. Furthermore, even if we do make
acquisitions that we believe will be accretive, these
acquisitions may nevertheless result in a decrease in the cash
generated from operations per unit. Additionally, net assets
contributed by DCP Midstream, LLC represent a transfer of net
assets between entities under common control, and are recognized
at DCP Midstream, LLCs basis in the net assets
transferred. The amount of the purchase price in excess of DCP
Midstream, LLCs basis in the net assets, if any, is
recognized as a reduction to partners equity.
Contributions from DCP Midstream, LLC may significantly increase
our debt to capitalization ratios.
Any acquisition involves potential risks, including, among other
things:
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mistaken assumptions about volumes, revenues and costs,
including synergies;
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an inability to integrate successfully the businesses we acquire;
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the assumption of unknown liabilities;
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limitations on rights to indemnity from the seller;
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mistaken assumptions about the overall costs of equity or debt;
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the diversion of managements and employees attention
from other business concerns;
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change in competitive landscape;
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unforeseen difficulties operating in new product areas or new
geographic areas; and
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customer or key employee losses at the acquired businesses.
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If we consummate any future acquisitions, our capitalization and
results of operations may change significantly, and you will not
have the opportunity to evaluate the economic, financial and
other relevant information that we will consider in determining
the application of these funds and other resources.
Our acquisition strategy is based, in part, on our expectation
of ongoing divestitures of energy assets by industry
participants. A material decrease in such divestitures would
limit our opportunities for future acquisitions and could
adversely affect our operations and cash flows available for
distribution to our unitholders.
We do
not own all of the land on which our pipelines, facilities and
rail terminals are located, which could disrupt our
operations.
We do not own all of the land on which our pipelines, facilities
and rail terminals have been constructed, and we are therefore
subject to the possibility of more onerous terms
and/or
increased costs to retain necessary land use if we do not have
valid rights of way or if such rights of way lapse or terminate.
We obtain the rights to construct and operate our pipelines,
surface sites and rail terminals on land owned by third parties
and governmental agencies for a specific period of time. Our
loss of these rights, through our inability to renew
right-of-way contracts or otherwise, could have a material
adverse effect on our business, results of operations and
financial condition and our ability to make cash distributions
to you.
Our
business involves many hazards and operational risks, some of
which may not be fully covered by insurance. If a significant
accident or event occurs that is not fully insured, our
operations and financial results could be adversely
affected.
Our operations are subject to many hazards inherent in the
gathering, compressing, treating, processing and transporting of
natural gas, propane and NGLs, and the storage of propane,
including:
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damage to pipelines, plants and terminals, related equipment and
surrounding properties caused by hurricanes, tornadoes, floods,
fires and other natural disasters and acts of terrorism;
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inadvertent damage from construction, farm and utility equipment;
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leaks of natural gas, propane, NGLs and other hydrocarbons or
losses of natural gas, propane or NGLs as a result of the
malfunction of equipment or facilities;
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contaminants in the pipeline system;
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fires and explosions; and
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other hazards that could also result in personal injury and loss
of life, pollution and suspension of operations.
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These risks could result in substantial losses due to personal
injury
and/or loss
of life, severe damage to and destruction of property and
equipment and pollution or other environmental damage and may
result in curtailment or suspension of our related operations. A
natural disaster or other hazard affecting the areas in which we
operate could have a material adverse effect on our operations.
We are not fully insured against all risks inherent to our
business. In accordance with typical industry practice, we do
not have any property insurance on any of our underground
pipeline systems that would cover damage to the pipelines. We
are not insured against all environmental accidents that might
occur, which may include toxic tort claims, other than those
considered to be sudden and accidental. If a significant
accident or event occurs that is not fully insured, it could
adversely affect our operations and financial condition. In
addition, we may not be able to maintain or obtain insurance of
the type and amount we desire at reasonable rates. As a result
of market conditions, premiums and deductibles for certain of
our insurance policies have increased substantially, and could
escalate further. In some instances, certain insurance could
become unavailable or available only for reduced amounts of
coverage.
Our
debt levels may limit our flexibility in obtaining additional
financing and in pursuing other business
opportunities.
On June 21, 2007, we entered into an Amended and Restated
Credit Agreement, or the Amended Credit Agreement, consisting of
a $600.0 million revolving credit facility and a
$250.0 million term loan facility for working capital and
other general corporate purposes. On June 21, 2007, we
borrowed $259.0 million from our revolving credit facility
under the Amended Credit Agreement to replace existing
borrowings under the existing Credit Agreement, of which
$10.0 million was repaid in June 2007. As of
September 30, 2007, the outstanding balance on the
revolving credit facility was $530 million and the
outstanding balance on the term loan facility was
$100 million.
We continue to have the ability to incur additional debt,
subject to limitations in our credit facility. Our level of debt
could have important consequences to us, including the following:
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our ability to obtain additional financing, if necessary, for
working capital, capital expenditures, acquisitions or other
purposes may be impaired or such financing may not be available
on favorable terms;
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we will need a portion of our cash flow to make interest
payments on our debt, reducing the funds that would otherwise be
available for operations, future business opportunities and
distributions to unitholders;
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our debt level will make us more vulnerable to competitive
pressures or a downturn in our business or the economy
generally; and
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our debt level may limit our flexibility in responding to
changing business and economic conditions.
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Our ability to obtain new debt funding or service our existing
debt will depend upon, among other things, our future financial
and operating performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and
other factors, some of which are beyond our control. In
addition, our ability to service debt under our revolving credit
facility will depend on market interest rates, since we
anticipate that the interest rates applicable to our borrowings
will fluctuate with movements in interest rate markets. If our
operating results are not sufficient to service our current or
future indebtedness, we will be forced to take actions such as
reducing distributions, reducing or delaying our business
activities, acquisitions, investments or
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capital expenditures, selling assets, restructuring or
refinancing our debt, or seeking additional equity capital. We
may not be able to effect any of these actions on satisfactory
terms, or at all. During 2006 we entered into interest rate swap
agreements to hedge the variable interest rate on
$125.0 million of the balance outstanding under our credit
agreement. During 2007 we entered into interest rate swap
agreements to hedge the variable interest rate on
$200.0 million of the balance outstanding under our credit
agreement.
Restrictions
in our credit facility will limit our ability to make
distributions to you and may limit our ability to capitalize on
acquisitions and other business opportunities.
Our credit facility contains covenants limiting our ability to
make distributions, incur indebtedness, grant liens, make
acquisitions, investments or dispositions and engage in
transactions with affiliates. Furthermore, our credit facility
contains covenants requiring us to maintain certain financial
ratios and tests. Any subsequent replacement of our credit
facility or any new indebtedness could have similar or greater
restrictions.
Increases
in interest rates could adversely impact our unit price and our
ability to issue additional equity to make acquisitions, incur
debt or for other purposes.
Interest rates on future credit facilities and debt offerings
could be higher than current levels, causing our financing costs
to increase accordingly. As with other yield-oriented
securities, our unit price is impacted by the level of our cash
distributions and implied distribution yield. The distribution
yield is often used by investors to compare and rank related
yield-oriented securities for investment decision-making
purposes. Therefore, changes in interest rates, either positive
or negative, may affect the yield requirements of investors who
invest in our units, and a rising interest rate environment
could have an adverse impact on our unit price and our ability
to issue additional equity to make acquisitions, incur debt or
for other purposes.
Due to
our lack of industry and geographic diversification, adverse
developments in our midstream operations or operating areas
would reduce our ability to make distributions to our
unitholders.
We rely on the cash flow generated from our midstream energy
businesses, and as a result, our financial condition depends
upon prices of, and continued demand for, natural gas, propane,
condensate and NGLs. Due to our lack of diversification in
industry type and location, an adverse development in one of
these businesses or operating areas would have a significantly
greater impact on our financial condition and results of
operations than if we maintained more diverse assets.
We are
exposed to the credit risks of our key producer customers and
propane purchasers, and any material nonpayment or
nonperformance by our key producer customers or our propane
purchasers could reduce our ability to make distributions to our
unitholders.
We are subject to risks of loss resulting from nonpayment or
nonperformance by our producer customers and propane purchasers.
Any material nonpayment or nonperformance by our key producer
customers or our propane purchasers could reduce our ability to
make distributions to our unitholders. Furthermore, some of our
producer customers or our propane purchasers may be highly
leveraged and subject to their own operating and regulatory
risks, which could increase the risk that they may default on
their obligations to us.
Terrorist
attacks, and the threat of terrorist attacks, have resulted in
increased costs to our business. Continued hostilities in the
Middle East or other sustained military campaigns may adversely
impact our results of operations.
The long-term impact of terrorist attacks, such as the attacks
that occurred on September 11, 2001 or the attacks in
London, and the threat of future terrorist attacks on our
industry in general, and on us in particular, is not known at
this time. Increased security measures taken by us as a
precaution against possible terrorist attacks have resulted in
increased costs to our business. Uncertainty surrounding
continued hostilities in the Middle East or other sustained
military campaigns may affect our operations in unpredictable
ways, including disruptions of crude oil supplies, propane
shipments or storage facilities, and markets for refined
products, and the possibility that infrastructure facilities
could be direct targets of, or indirect casualties of, an act of
terror.
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Changes in the insurance markets attributable to terrorist
attacks may make certain types of insurance more difficult for
us to obtain. Moreover, the insurance that may be available to
us may be significantly more expensive than our existing
insurance coverage. Instability in the financial markets as a
result of terrorism or war could also affect our ability to
raise capital.
Risks
Related to Debt Securities
We
have a holding company structure in which our subsidiaries
conduct our operations and own our operating
assets.
We are a holding company, and our subsidiaries conduct all of
our operations and own all of our operating assets. We have no
significant assets other than the membership interests and the
other equity interests in our subsidiaries. As a result, our
ability to make required payments on our debt securities depends
on the performance of our subsidiaries and their ability to
distribute funds to us. The ability of our subsidiaries to make
distributions to us may be restricted by, among other things,
our existing credit facility and applicable state limited
liability company and partnership laws and other laws and
regulations. If we are unable to obtain the funds necessary to
pay the principal amount at the maturity of our debt securities,
or to repurchase our debt securities upon an occurrence of a
change in control, we may be required to adopt one or more
alternatives, such as a refinancing of our debt securities. We
cannot assure you that we would be able to refinance our debt
securities.
We do
not have the same flexibility as other types of organizations to
accumulate cash which may limit cash available to service our
debt securities or to repay them at maturity.
Subject to the limitations on restricted payments contained in
the indenture governing our debt securities and in our credit
facility and other indebtedness, we distribute all of our
available cash each quarter to our limited partners
and our general partner. Available cash is defined
in our partnership agreement, and it generally means, for each
fiscal quarter, all cash on hand at the end of the quarter:
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less the amount of cash reserves established by our general
partner to:
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provide for the proper conduct of our business;
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comply with applicable law, any of our debt instruments or other
agreements; or
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provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters;
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plus, if our general partner so determines, all or a portion of
cash on hand on the date of determination of available cash for
the quarter.
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As a result, we do not accumulate significant amounts of cash
and thus do not have the same flexibility as corporations or
other entities that do not pay dividends or have complete
flexibility regarding the amounts they will distribute to their
equity holders. The timing and amount of our distributions could
significantly reduce the cash available to pay the principal,
premium (if any) and interest on our debt securities. The board
of directors of our general partner will determine the amount
and timing of such distributions and has broad discretion to
establish and make additions to our reserves or the reserves of
our operating subsidiaries as it determines are necessary or
appropriate.
Although our payment obligations to our unitholders will be
subordinate to our payment obligations to holders of our debt
securities, the value of our units will decrease in correlation
with decreases in the amount we distribute per unit.
Accordingly, if we experience a liquidity problem in the future,
we may not be able to issue equity to recapitalize.
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Risks
Inherent in an Investment in Our Common Units
DCP
Midstream, LLC controls our general partner, which has sole
responsibility for conducting our business and managing our
operations. DCP Midstream, LLC has conflicts of interest, which
may permit it to favor its own interests to your
detriment.
DCP Midstream, LLC owns and controls our general partner. Some
of our general partners directors, and some of its
executive officers, are directors or officers of DCP Midstream,
LLC or its parents. Therefore, conflicts of interest may arise
between DCP Midstream, LLC and its affiliates, including our
general partner, on the one hand, and us and our unitholders, on
the other hand. In resolving these conflicts of interest, our
general partner may favor its own interests and the interests of
its affiliates over the interests of our unitholders. These
conflicts include, among others, the following situations:
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neither our partnership agreement nor any other agreement
requires DCP Midstream, LLC to pursue a business strategy that
favors us. DCP Midstream, LLCs directors and officers have
a fiduciary duty to make these decisions in the best interests
of the owners of DCP Midstream, LLC, which may be contrary to
our interests;
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our general partner is allowed to take into account the
interests of parties other than us, such as DCP Midstream, LLC
and its affiliates, in resolving conflicts of interest;
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DCP Midstream, LLC and its affiliates, including Spectra Energy
and ConocoPhillips, are not limited in their ability to compete
with us. Please read DCP Midstream, LLC and
its affiliates are not limited in their ability to compete with
us below;
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our general partner may make a determination to receive a
quantity of our Class B units in exchange for resetting the
target distribution levels related to its incentive distribution
rights without the approval of the special committee of our
general partner or our unitholders;
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some officers of DCP Midstream, LLC who provide services to us
also will devote significant time to the business of DCP
Midstream, LLC, and will be compensated by DCP Midstream, LLC
for the services rendered to it;
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our general partner has limited its liability and reduced its
fiduciary duties, and has also restricted the remedies available
to our unitholders for actions that, without the limitations,
might constitute breaches of fiduciary duty;
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our general partner determines the amount and timing of asset
purchases and sales, borrowings, issuance of additional
partnership securities and reserves, each of which can affect
the amount of cash that is distributed to unitholders;
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our general partner determines the amount and timing of any
capital expenditures and whether a capital expenditure is a
maintenance capital expenditure, which reduces operating
surplus, or an expansion capital expenditure, which does not
reduce operating surplus. This determination can affect the
amount of cash that is distributed to our unitholders and the
ability of the subordinated units to convert to common units;
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our general partner determines which costs incurred by it and
its affiliates are reimbursable by us;
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our partnership agreement does not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered to us or entering into additional contractual
arrangements with any of these entities on our behalf;
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our general partner intends to limit its liability regarding our
contractual and other obligations and, in some circumstances, is
entitled to be indemnified by us;
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our general partner may exercise its limited right to call and
purchase common units if it and its affiliates own more than 80%
of the common units;
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our general partner controls the enforcement of obligations owed
to us by our general partner and its affiliates; and
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our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
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DCP
Midstream, LLC and its affiliates are not limited in their
ability to compete with us, which could cause conflicts of
interest and limit our ability to acquire additional assets or
businesses, which in turn could adversely affect our results of
operations and cash available for distribution to our
unitholders.
Neither our partnership agreement nor the Omnibus Agreement, as
amended, between us, DCP Midstream, LLC and others will prohibit
DCP Midstream, LLC and its affiliates, including Spectra Energy
and ConocoPhillips, from owning assets or engaging in businesses
that compete directly or indirectly with us. In addition, DCP
Midstream, LLC and its affiliates, including Spectra Energy and
ConocoPhillips, may acquire, construct or dispose of additional
midstream or other assets in the future, without any obligation
to offer us the opportunity to purchase or construct any of
those assets. Each of these entities is a large, established
participant in the midstream energy business, and each has
significantly greater resources and experience than we have,
which factors may make it more difficult for us to compete with
these entities with respect to commercial activities as well as
for acquisition candidates. As a result, competition from these
entities could adversely impact our results of operations and
cash available for distribution.
Cost
reimbursements due to our general partner and its affiliates for
services provided, which will be determined by our general
partner, will be substantial and will reduce our cash available
for distribution to you.
Pursuant to the Omnibus Agreement, as amended, we entered into
with DCP Midstream, LLC, our general partner and others, DCP
Midstream, LLC will receive reimbursement for the payment of
operating expenses related to our operations and for the
provision of various general and administrative services for our
benefit. Payments for these services will be substantial and
will reduce the amount of cash available for distribution to
unitholders. In addition, under Delaware partnership law, our
general partner has unlimited liability for our obligations,
such as our debts and environmental liabilities, except for our
contractual obligations that are expressly made without recourse
to our general partner. To the extent our general partner incurs
obligations on our behalf, we are obligated to reimburse or
indemnify it. If we are unable or unwilling to reimburse or
indemnify our general partner, our general partner may take
actions to cause us to make payments of these obligations and
liabilities. Any such payments could reduce the amount of cash
otherwise available for distribution to our unitholders.
Our
partnership agreement limits our general partners
fiduciary duties to holders of our common units and subordinated
units.
Although our general partner has a fiduciary duty to manage us
in a manner beneficial to us and our unitholders, the directors
and officers of our general partner have a fiduciary duty to
manage our general partner in a manner beneficial to its owner,
DCP Midstream, LLC. Our partnership agreement contains
provisions that reduce the standards to which our general
partner would otherwise be held by state fiduciary duty laws.
For example, our partnership agreement permits our general
partner to make a number of decisions either in its individual
capacity, as opposed to in its capacity as our general partner
or otherwise free of fiduciary duties to us and our unitholders.
This entitles our general partner to consider only the interests
and factors that it desires, and it has no duty or obligation to
give any consideration to any interest of, or factors affecting,
us, our affiliates or any limited partner. Examples include:
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the exercise of its right to reset the target distribution
levels of its incentive distribution rights at higher levels and
receive, in connection with this reset, a number of Class B
units that are convertible at any time following the first
anniversary of the issuance of these Class B units into
common units;
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its limited call right;
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its voting rights with respect to the units it owns;
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its registration rights; and
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its determination whether or not to consent to any merger or
consolidation of the partnership or amendment to the partnership
agreement.
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By purchasing a common unit, a common unitholder will agree to
become bound by the provisions in the partnership agreement,
including the provisions discussed above.
Our
partnership agreement restricts the remedies available to
holders of our common units and subordinated units for actions
taken by our general partner that might otherwise constitute
breaches of fiduciary duty.
Our partnership agreement contains provisions that restrict the
remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of
fiduciary duty. For example, our partnership agreement:
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provides that our general partner will not have any liability to
us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith, meaning it
believed the decision was in the best interests of our
partnership;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the special committee
of the board of directors of our general partner and not
involving a vote of unitholders must be on terms no less
favorable to us than those generally being provided to or
available from unrelated third parties or must be fair and
reasonable to us, as determined by our general partner in
good faith and that, in determining whether a transaction or
resolution is fair and reasonable, our general
partner may consider the totality of the relationships between
the parties involved, including other transactions that may be
particularly advantageous or beneficial to us; and
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for any acts or omissions unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that the general partner or
those other persons acted in bad faith or engaged in fraud or
willful misconduct or, in the case of a criminal matter, acted
with knowledge that the conduct was criminal.
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Our
general partner may elect to cause us to issue Class B
units to it in connection with a resetting of the target
distribution levels related to our general partners
incentive distribution rights without the approval of the
special committee of our general partner or holders of our
common units and subordinated units. This may result in lower
distributions to holders of our common units in certain
situations.
Our general partner has the right, at a time when there are no
subordinated units outstanding and it has received incentive
distributions at the highest level to which it is entitled (48%)
for each of the prior four consecutive fiscal quarters, to reset
the initial cash target distribution levels at higher levels
based on the distribution at the time of the exercise of the
reset election. Following a reset election by our general
partner, the minimum quarterly distribution amount will be reset
to an amount equal to the average cash distribution amount per
common unit for the two fiscal quarters immediately preceding
the reset election (such amount is referred to as the
reset minimum quarterly distribution) and the target
distribution levels will be reset to correspondingly higher
levels based on percentage increases above the reset minimum
quarterly distribution amount.
In connection with resetting these target distribution levels,
our general partner will be entitled to receive a number of
Class B units. The Class B units will be entitled to
the same cash distributions per unit as our common units and
will be convertible into an equal number of common units. The
number of Class B units to be issued will be equal to that
number of common units whose aggregate quarterly cash
distributions equaled the average of the distributions to our
general partner on the incentive distribution rights in the
prior two quarters. We anticipate that our general partner would
exercise this reset right in order to facilitate acquisitions
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or internal growth projects that would not be sufficiently
accretive to cash distributions per common unit without such
conversion; however, it is possible that our general partner
could exercise this reset election at a time when it is
experiencing, or may be expected to experience, declines in the
cash distributions it receives related to its incentive
distribution rights and may therefore desire to be issued our
Class B units, which are entitled to receive cash
distributions from us on the same priority as our common units,
rather than retain the right to receive incentive distributions
based on the initial target distribution levels. As a result, a
reset election may cause our common unitholders to experience
dilution in the amount of cash distributions that they would
have otherwise received had we not issued new Class B units
to our general partner in connection with resetting the target
distribution levels related to our general partner incentive
distribution rights.
Holders
of our common units have limited voting rights and are not
entitled to elect our general partner or its
directors.
Unlike the holders of common stock in a corporation, unitholders
have only limited voting rights on matters affecting our
business and, therefore, limited ability to influence
managements decisions regarding our business. Unitholders
will not elect our general partner or its board of directors,
and will have no right to elect our general partner or its board
of directors on an annual or other continuing basis. The board
of directors of our general partner will be chosen by the
members of our general partner. Furthermore, if the unitholders
were dissatisfied with the performance of our general partner,
they will have little ability to remove our general partner. As
a result of these limitations, the price at which the common
units will trade could be diminished because of the absence or
reduction of a takeover premium in the trading price.
Even
if holders of our common units are dissatisfied, they may be
unable to remove our general partner without its
consent.
The unitholders may be unable to remove our general partner
without its consent because our general partner and its
affiliates own sufficient units to be able to prevent its
removal. The vote of the holders of at least
662/3%
of all outstanding units voting together as a single class is
required to remove the general partner. As of September 30,
2007, our general partner and its affiliates owned approximately
34.4% of our aggregate outstanding common and subordinated
units. Also, if our general partner is removed without cause
during the subordination period and units held by our general
partner and its affiliates are not voted in favor of that
removal, all remaining subordinated units will automatically
convert into common units and any existing arrearages on our
common units will be extinguished. A removal of our general
partner under these circumstances would adversely affect our
common units by prematurely eliminating their distribution and
liquidation preference over our subordinated units, which would
otherwise have continued until we had met certain distribution
and performance tests. Cause is narrowly defined to mean that a
court of competent jurisdiction has entered a final,
non-appealable judgment finding the general partner liable for
actual fraud or willful or wanton misconduct in its capacity as
our general partner. Cause does not include most cases of
charges of poor management of the business, so the removal of
the general partner because of the unitholders
dissatisfaction with our general partners performance in
managing our partnership will most likely result in the
termination of the subordination period and conversion of all
subordinated units to common units.
Our
partnership agreement restricts the voting rights of unitholders
owning 20% or more of our common units.
Unitholders voting rights are further restricted by the
partnership agreement provision providing that any units held by
a person that owns 20% or more of any class of units then
outstanding, other than our general partner, its affiliates,
their transferees and persons who acquired such units with the
prior approval of the board of directors of our general partner,
cannot vote on any matter. Our partnership agreement also
contains provisions limiting the ability of unitholders to call
meetings or to acquire information about our operations, as well
as other provisions limiting the unitholders ability to
influence the manner or direction of management.
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If we
are deemed an investment company under the
Investment Company Act of 1940, it would adversely affect the
price of our common units and could have a material adverse
effect on our business.
Our current assets include a 25% interest in East Texas, a 40%
interest in Discovery, a 45% interest in Black Lake and
investments in certain commercial paper and other high grade
debt securities, some or all of which may be deemed to be
investment securities within the meaning of the
Investment Company Act of 1940. If a sufficient amount of our
assets are deemed to be investment securities within
the meaning of the Investment Company Act, we would either have
to register as an investment company under the Investment
Company Act, obtain exemptive relief from the Commission or
modify our organizational structure or our contract rights to
fall outside the definition of an investment company.
Registering as an investment company could, among other things,
materially limit our ability to engage in transactions with
affiliates, including the purchase and sale of certain
securities or other property to or from our affiliates, restrict
our ability to borrow funds or engage in other transactions
involving leverage and require us to add additional directors
who are independent of us or our affiliates. The occurrence of
some or all of these events would adversely affect the price of
our common units and could have a material adverse effect on our
business.
Moreover, treatment of us as an investment company would prevent
our qualification as a partnership for federal income tax
purposes in which case we would be treated as a corporation for
federal income tax purposes. As a result, we would pay federal
income tax on our taxable income at the corporate tax rate,
distributions to you would generally be taxed again as corporate
distributions and none of our income, gains, losses or
deductions would flow through to you. Because a tax would be
imposed upon us as a corporation, our cash available for
distribution to you would be substantially reduced. Therefore,
treatment of us as an investment company would result in a
material reduction in the anticipated cash flow and after-tax
return to the unitholders, likely causing a substantial
reduction in the value of our common units. For a discussion of
the federal income tax implications if we were treated as a
corporation in any taxable year, please read Material Tax
Consequences Partnership Status.
Additionally, as a result of our desire to avoid having to
register as an investment company under the Investment Company
Act, we may have to forego potential future acquisitions of
interests in companies that may be deemed to be investment
securities within the meaning of the Investment Company Act or
dispose of our current interests in East Texas, Discovery or
Black Lake.
Control
of our general partner may be transferred to a third party
without unitholder consent.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of the unitholders.
Furthermore, our partnership agreement does not restrict the
ability of the owners of our general partner from transferring
all or a portion of their respective ownership interest in our
general partner to a third party. The new owners of our general
partner would then be in a position to replace the board of
directors and officers of the general partner with its own
choices and thereby influence the decisions taken by the board
of directors and officers.
We may
issue additional units without your approval, which would dilute
your existing ownership interests.
Our partnership agreement does not limit the number of
additional limited partner interests that we may issue at any
time without the approval of our unitholders. The issuance by us
of additional common units or other equity securities of equal
or senior rank will have the following effects:
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our unitholders proportionate ownership interest in us
will decrease;
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the amount of cash available for distribution on each unit may
decrease;
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because a lower percentage of total outstanding units will be
subordinated units, the risk that a shortfall in the payment of
the minimum quarterly distribution will be borne by our common
unitholders will increase;
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the ratio of taxable income to distributions may increase;
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the relative voting strength of each previously outstanding unit
may be diminished; and
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the market price of the common units may decline.
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Affiliates
of our general partner may sell common units in the public or
private markets, which sales could have an adverse impact on the
trading price of the common units.
As of September 30, 2007, DCP Midstream, LLC and its
affiliates hold an aggregate of 1,103,594 common units and
7,142,857 subordinated units. All of the subordinated units will
convert into common units at the end of the subordination
period, as set forth in our partnership agreement, and some may
convert earlier. The sale of any of these units in the public or
private markets could have an adverse impact on the price of the
common units or on any trading market that may develop.
Our
general partner has a limited call right that may require you to
sell your units at an undesirable time or price.
If at any time our general partner and its affiliates own more
than 80% of the common units, our general partner will have the
right, but not the obligation, which it may assign to any of its
affiliates or to us, to acquire all, but not less than all, of
the common units held by unaffiliated persons at a price not
less than their then-current market price. As a result, you may
be required to sell your common units at an undesirable time or
price and may not receive any return on your investment. You may
also incur a tax liability upon a sale of your units.
The
liability of holders of limited partner interests may not be
limited if a court finds that unitholder action constitutes
control of our business.
A general partner of a partnership generally has unlimited
liability for the obligations of the partnership, except for
those contractual obligations of the partnership that are
expressly made without recourse to the general partner. Our
partnership is organized under Delaware law and we conduct
business in a number of other states. The limitations on the
liability of holders of limited partner interests for the
obligations of a limited partnership have not been clearly
established in some of the other states in which we do business.
Holders of limited partner interests could be liable for any and
all of our obligations as if such holder were a general partner
if:
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a court or government agency determined that we were conducting
business in a state but had not complied with that particular
states partnership statute; or
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the right of holders of limited partner interests to act with
other unitholders to remove or replace the general partner, to
approve some amendments to our partnership agreement or to take
other actions under our partnership agreement constitute
control of our business.
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Unitholders
may have liability to repay distributions that were wrongfully
distributed to them.
Under certain circumstances, unitholders may have to repay
amounts wrongfully returned or distributed to them. Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to you if the distribution would cause
our liabilities to exceed the fair value of our assets. Delaware
law provides that for a period of three years from the date of
the impermissible distribution, limited partners who received
the distribution and who knew at the time of the distribution
that it violated Delaware law will be liable to the limited
partnership for the distribution amount. Substituted limited
partners are liable for the obligations of the assignor to make
contributions to the partnership that are known to the
substituted limited partner at the time it became a limited
partner and for unknown obligations if the liabilities could be
determined from the partnership agreement. Liabilities to
partners on account of their partnership interest and
liabilities that are non-recourse to the partnership are not
counted for purposes of determining whether a distribution is
permitted.
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Tax Risks
to Common Unitholders
Our
tax treatment depends on our status as a partnership for federal
income tax purposes, as well as our not being subject to a
material amount of entity-level taxation by individual states.
If the Internal Revenue Service treats us as a corporation or we
become subject to a material amount of additional entity-level
taxation for state tax purposes, it would substantially reduce
the amount of cash available for distribution to our
unitholders.
The anticipated after-tax economic benefit of an investment in
the common units depends largely on our being treated as a
partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the
Internal Revenue Service, which we refer to as the IRS, on this
or any other tax matter affecting us.
Despite the fact that we are a limited partnership under
Delaware law, it is possible in certain circumstances for a
partnership such as ours to be treated as a corporation for
federal income tax purposes. Although we do not believe based
upon our current operations that we are so treated, a change in
our business (or a change in current law) could cause us to be
treated as a corporation for federal income tax purposes or
otherwise subject us to taxation as an entity.
If we were treated as a corporation for federal income tax
purposes, we would pay federal income tax on our taxable income
at the corporate tax rate, which is currently a maximum of 35%
and would likely pay state income tax at varying rates.
Distributions to the unitholder would generally be taxed again
as corporate distributions, and no income, gains, losses or
deductions would flow through to them. Because a tax would be
imposed upon us as a corporation, our cash available for
distribution to the unitholder would be substantially reduced.
Therefore, treatment of us as a corporation would result in a
material reduction in the anticipated cash flow and after-tax
return to the unitholders, likely causing a substantial
reduction in the value of our common units.
Current law may change so as to cause us to be treated as a
corporation for federal income tax purposes or otherwise subject
us to entity-level taxation. For example, at the federal level,
legislation has been proposed that would eliminate partnership
tax treatment for certain publicly traded partnerships. Although
such legislation would not apply to us as currently proposed, it
could be amended prior to enactment in a manner that does apply
to us. We are unable to predict whether any of these changes, or
other proposals will ultimately be enacted. Any such changes
could negatively impact the value of an investment in our common
units. In addition, because of widespread state budget deficits
and other reasons, several states are evaluating ways to subject
partnerships to entity-level taxation through the imposition of
state income, franchise and other forms of taxation.
Specifically, beginning in 2008, we will be required to pay
Texas franchise tax at a maximum effective rate of 0.7% of our
gross income apportioned to Texas in the prior year. Imposition
of such a tax on us by Texas and, if applicable, by any other
state will reduce, the cash available for distribution to the
unitholder. The partnership agreement provides that if a law is
enacted or existing law is modified or interpreted in a manner
that subjects us to taxation as a corporation or otherwise
subjects us to entity-level taxation for federal, state or local
income tax purposes, the minimum quarterly distribution amount
and the target distribution levels will be adjusted to reflect
the impact of that law on us.
If the
IRS contests the federal income tax positions we take, the
market for our common units may be adversely impacted, and the
cost of any IRS contest will reduce our cash available for
distribution to our unitholders.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes or
any other matter affecting us. The IRS may adopt positions that
differ from the conclusions of our counsel expressed in this
prospectus or from the positions we take. It may be necessary to
resort to administrative or court proceedings to sustain some or
all of our counsels conclusions or the positions we take.
A court may not agree with some or all of our counsels
conclusions or positions we take. Any contest with the IRS may
materially and adversely impact the market for our common units
and the price at which they trade. In addition, our costs of any
contest with the IRS will be borne indirectly by our unitholders
and our general partner because the costs will reduce our cash
available for distribution.
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The
unitholder may be required to pay taxes on income from us even
if the unitholder does not receive any cash distributions from
us.
Because our unitholders will be treated as partners to whom we
will allocate taxable income, which could be different in amount
than the cash we distribute, the unitholder will be required to
pay any federal income taxes and, in some cases, state and local
income taxes on your share of our taxable income even if you
receive no cash distributions from us. The unitholders may not
receive cash distributions from us equal to their share of our
taxable income or even equal to the tax liability that results
from that income.
Tax
gain or loss on disposition of common units could be more or
less than expected.
If the unitholder sells their common units, they will recognize
a gain or loss equal to the difference between the amount
realized and their tax basis in those common units. Because
distributions to the unitholders in excess of the total net
taxable income allocated to them for a common unit decreases
their tax basis in that common unit, the amount, if any, of such
prior excess distributions will, in effect, become taxable
income to them if the common unit is sold at a price greater
than their tax basis in that common unit, even if the price is
less than their original cost. Furthermore, a substantial
portion of the amount realized, whether or not representing
gain, may be taxed as ordinary income due to potential recapture
items, including depreciation recapture. In addition, because
the amount realized includes a unitholders share of our
nonrecourse liabilities, if the unitholder sells their units,
they may incur a tax liability in excess of the amount of cash
they receive from the sale. Please read Material Tax
Consequences Disposition of Common Units
Recognition of Gain or Loss for a further discussion of
the foregoing.
Tax-exempt
entities and
non-U.S.
persons face unique tax issues from owning common units that may
result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as
individual retirement accounts (known as IRAs), other retirement
plans and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations that are exempt from federal
income tax, including IRAs and other retirement plans, will be
unrelated business taxable income and will be taxable to them.
Distributions to
non-U.S. persons
will be reduced by withholding taxes at the highest applicable
effective tax rate, and
non-U.S. persons
will be required to file United States federal tax returns and
pay tax on their share of our taxable income. If the unitholder
is a tax-exempt entity or a
non-U.S. person,
they should consult their tax advisor before investing in our
common units.
We
will treat each purchaser of our common units as having the same
tax benefits without regard to the actual common units
purchased. The IRS may challenge this treatment, which could
adversely affect the value of the common units.
Because we cannot match transferors and transferees of common
units and because of other reasons, we will adopt depreciation
and amortization positions that may not conform to all aspects
of existing Treasury Regulations. A successful IRS challenge to
those positions could adversely affect the amount of tax
benefits available to the unitholder. It also could affect the
timing of these tax benefits or the amount of gain from the sale
of common units and could have a negative impact on the value of
our common units or result in audit adjustments to your tax
returns. Please read Material Tax Consequences
Tax Consequences of Unit Ownership
Section 754 Election for a further discussion of the
effect of the depreciation and amortization positions we adopted.
We
prorate our items of income, gain, loss and deduction between
transferors and transferees of our units each month based upon
the ownership of our units on the first day of each month,
instead of on the basis of the date a particular unit is
transferred. The IRS may challenge this treatment, which could
change the allocation of items of income, gain, loss and
deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between
transferors and transferees of our units each month based upon
the ownership of our units on the first day of each month,
instead of on the basis of
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the date a particular unit is transferred. The use of this
proration method may not be permitted under existing Treasury
regulations, and, accordingly, our counsel is unable to opine as
to the validity of this method. If the IRS were to challenge
this method or new Treasury regulations were issued, we may be
required to change the allocation of items of income, gain, loss
and deduction among our unitholders. Please read Material
Tax Consequences Disposition of Common
Units Allocations Between Transferors and
Transferees.
A
unitholder whose units are loaned to a short seller
to cover a short sale of units may be considered as having
disposed of those units. If so, he would no longer be treated
for tax purposes as a partner with respect to those units during
the period of the loan and may recognize gain or loss from the
disposition.
Because a unitholder whose units are loaned to a short
seller to cover a short sale of units may be considered as
having disposed of the loaned units, he may no longer be treated
for tax purposes as a partner with respect to those units during
the period of the loan to the short seller and the unitholder
may recognize gain or loss from such disposition. Moreover,
during the period of the loan to the short seller, any of our
income, gain, loss or deduction with respect to those units may
not be reportable by the unitholder and any cash distributions
received by the unitholder as to those units could be fully
taxable as ordinary income. Vinson & Elkins L.L.P. has
not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short
sale of common units; therefore, unitholders desiring to assure
their status as partners and avoid the risk of gain recognition
from a loan to a short seller are urged to modify any applicable
brokerage account agreements to prohibit their brokers from
borrowing their units.
We
have adopted certain valuation methodologies that may result in
a shift of income, gain, loss and deduction between the general
partner and the unitholders. The IRS may challenge this
treatment, which could adversely affect the value of the common
units.
When we issue additional units or engage in certain other
transactions, we determine the fair market value of our assets
and allocate any unrealized gain or loss attributable to our
assets to the capital accounts of our unitholders and our
general partner. Our methodology may be viewed as understating
the value of our assets. In that case, there may be a shift of
income, gain, loss and deduction between certain unitholders and
the general partner, which may be unfavorable to such
unitholders. Moreover, under our valuation methods, subsequent
purchasers of common units may have a greater portion of their
Internal Revenue Code Section 743(b) adjustment allocated
to our tangible assets and a lesser portion allocated to our
intangible assets. The IRS may challenge our valuation methods,
or our allocation of the Section 743(b) adjustment
attributable to our tangible and intangible assets, and
allocations of income, gain, loss and deduction between the
general partner and certain of our unitholders.
A successful IRS challenge to these methods or allocations could
adversely affect the amount of taxable income or loss being
allocated to our unitholders. It also could affect the amount of
gain from our unitholders sale of common units and could
have a negative impact on the value of the common units or
result in audit adjustments to our unitholders tax returns
without the benefit of additional deductions.
The
sale or exchange of 50% or more of our capital and profits
interests during any twelve-month period will result in the
termination of our partnership for federal income tax
purposes.
We will be considered to have terminated for federal income tax
purposes if there is a sale or exchange of 50% or more of the
total interests in our capital and profits within a twelve-month
period. Our termination would, among other things, result in the
closing of our taxable year for all unitholders, which would
result in us filing two tax returns (and our unitholders could
receive two
Schedule K-1s)
for one fiscal year and could result in a deferral of
depreciation deductions allowable in computing our taxable
income. 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 may result in more than twelve months of our
taxable income or loss being includable in his taxable income
for the year of termination. Our termination currently would not
affect our classification as a partnership for federal income
tax purposes, but instead, we would be treated as a new
partnership for tax purposes. If treated as a new partnership,
we must make new tax elections and could be subject to penalties
if we are unable to determine that a termination occurred.
Please read Material Tax Consequences
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Disposition of Common Units Constructive
Termination for a discussion of the consequences of our
termination for federal income tax purposes.
Unitholders
may be subject to state and local taxes and return filing
requirements in states where they do not reside as a result of
investing in our units.
In addition to federal income taxes, the unitholder may be
subject to other taxes, including foreign, state and local
taxes, unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we conduct business or own property, even if you do not
live in any of those jurisdictions. The unitholder may be
required to file foreign, state and local income tax returns and
pay state and local income taxes in some or all of these
jurisdictions. Further, the unitholder may be subject to
penalties for failure to comply with those requirements. We own
assets and conduct business in the states of Colorado, Wyoming,
Oklahoma, Louisiana, Texas, Arkansas, Pennsylvania, New York,
Vermont, Massachusetts, Rhode Island, Maine, Connecticut,
Indiana, Kentucky, Maryland, New Hampshire, Ohio, Virginia and
West Virginia. Each of these states, other than Texas and
Wyoming, currently imposes a personal income tax on individuals.
A majority of these states impose an income tax on corporations
and other entities. As we make acquisitions or expand our
business, we may own assets or do business in additional states
that impose a personal income tax. It is your responsibility to
file all United States federal, foreign, state and local tax
returns. Our counsel has not rendered an opinion on the foreign,
state or local tax consequences of an investment in the common
units.
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USE OF
PROCEEDS
Unless otherwise indicated to the contrary in an accompanying
prospectus supplement, we will use the net proceeds from the
sale of the securities covered by this prospectus for general
partnership purposes, which may include debt repayment, future
acquisitions, capital expenditures and additions to working
capital.
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RATIO OF
EARNINGS TO FIXED CHARGES
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DCP Midstream Partners, LP
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Year Ended December 31,
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Six Months Ended June 30,
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2002
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2003
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2004
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2005
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2006
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2007
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Ratio of earnings (loss) to fixed charges
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152.00
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168.00
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303.00
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32.60
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3.56
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2.34
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DESCRIPTION
OF THE COMMON UNITS
The
Units
We currently have outstanding common units and subordinated
units, which are separate classes of 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 in and to
partnership distributions, please read this section and
Our Cash Distribution Policy and Restrictions on
Distributions. For a general discussion of the expected
federal income tax consequences of owning and disposing of
common units, please read Material Tax Consequences.
Our outstanding common units are listed on the New York Stock
Exchange under the symbol DPM. Any additional common
units we issue will also be listed on the New York Stock
Exchange.
Subordinated
Units
Our subordinated units are a separate class of limited partner
interests in our partnership, and the rights of holders of
subordinated units to participate in distributions to partners
differ from, and are subordinated to, the rights of the holders
of our common units. During the subordination period, our
subordinated units will not be entitled to receive any
distributions until our common units have received the minimum
quarterly distribution plus any arrearages from prior quarters.
The term of the subordination period is described under
Our Cash Distribution Policy and Restrictions on
Distributions Subordination Period.
Class B
Units
Our general partner has the right, at a time when there are no
subordinated units outstanding and it has received incentive
distributions at the highest level to which it is entitled (48%)
for each of the prior four consecutive fiscal quarters, to reset
the initial cash target distribution levels at higher levels
based on the distribution at the time of the exercise of the
reset election. In connection with resetting these target
distribution levels, our general partner will be entitled to
receive a number of Class B units. The Class B units
will be entitled to the same cash distributions per unit as our
common units and will be convertible into an equal number of
common units. The number of Class B units to be issued will
be equal to that number of common units whose aggregate
quarterly cash distributions equaled the average of the
distributions to our general partner on the incentive
distribution rights in the prior two quarters. For a more
detailed description of our general partners right to
reset the target distribution levels upon which the incentive
distribution payments are based and the concurrent right of our
general partner to receive Class B units in connection with
this reset, please read Our Cash Distribution Policy and
Restrictions on Distributions General Partners
Rights to Reset Target Distribution Levels.
Class C
Units
On November 1, 2006, we issued to DCP LP Holdings, LP, a
wholly-owned subsidiary of DCP Midstream, LLC, 200,312
Class C units as partial consideration for the acquisition
of Gas Supply Resources, LLC, or GSR, by the Partnership. The
Class C units had the same liquidation preference, rights
to cash distributions and voting rights as the common units. On
July 2, 2007, the Class C units were converted to
common units.
Number of
Units
As of September 30, 2007, we had outstanding 16,840,326
common units, 7,142,857 subordinated units, no Class B
units and no Class C units. There is currently no
established public trading market for our subordinated units.
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Voting
Rights
The following is a summary of the unitholder vote required for
the matters specified below. Matters requiring the approval of a
unit majority require:
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during the subordination period, the approval of a majority of
the common units and Class C units, if any, excluding those
common units and Class C units held by our general partner
and its affiliates, and a majority of the subordinated units,
voting as separate classes; and
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after the subordination period, the approval of a majority of
the common units, Class C units, if any, and Class B
units, if any, voting as a class.
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In voting their common, Class C, Class B and
subordinated units, our general partner and its affiliates will
have no fiduciary duty or obligation whatsoever to us or the
limited partners, including any duty to act in good faith or in
the best interests of us or the limited partners.
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Issuance of additional units |
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No approval right. |
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Amendment of the partnership agreement |
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Certain amendments may be made by the general partner without
the approval of the unitholders. Other amendments generally
require the approval of a unit majority. Please read
Amendment of the Partnership Agreement. |
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Merger of our partnership or the sale of all or substantially
all of our assets |
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Unit majority in certain circumstances. Please read
Merger, Consolidation, Conversion, Sale or Other Disposition of
Assets. |
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Dissolution of our partnership |
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Unit majority. Please read Termination and
Dissolution. |
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Continuation of our business upon dissolution |
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Unit majority. Please read Termination and
Dissolution. |
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Withdrawal of the general partner |
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Under most circumstances, the approval of a majority of the
common units, excluding common units held by our general partner
and its affiliates, is required for the withdrawal of our
general partner prior to December 31, 2015 in a manner that
would cause a dissolution of our partnership. Please read
Withdrawal or Removal of the General
Partner. |
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Removal of the general partner |
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Not less than
662/3%
of the outstanding units, voting as a single class, including
units held by our general partner and its affiliates. Please
read Withdrawal or Removal of the General
Partner. |
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Transfer of the general partner interest |
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Our general partner may transfer all, but not less than all, of
its general partner interest in us without a vote of our
unitholders to an affiliate or another person in connection with
its merger or consolidation with or into, or sale of all or
substantially all of its assets, to such person. The approval of
a majority of the common units, excluding common units held by
the general partner and its affiliates, is required in other
circumstances for a transfer of the general partner interest to
a third party prior to December 31, 2015. See
Transfer of General Partner Units. |
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Transfer of incentive distribution rights |
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Except for transfers to an affiliate or another person as part
of our general partners merger or consolidation, sale of
all or substantially all of its assets or the sale of all of the
ownership interests in such holder, the approval of a majority
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excluding common units held by the general partner and its
affiliates, is required in most circumstances for a transfer of
the incentive distribution rights to a third party prior to
December 31, 2015. Please read Transfer
of Incentive Distribution Rights. |
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Transfer of ownership interests in our general partner |
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No approval required at any time. Please read
Transfer of Ownership Interests in the General
Partner. |
Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware Act
and that he otherwise acts in conformity with the provisions of
the partnership agreement, his liability under the Delaware Act
will be limited, subject to possible exceptions, 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, however, that the right, or exercise of the
right, by the limited partners as a group:
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to remove or replace the general partner;
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to approve some amendments to the partnership agreement; or
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to take other action under the partnership agreement;
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constituted participation in the control of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as the general
partner. This liability would extend to persons who transact
business with us who reasonably believe that the limited partner
is a general partner. Neither the partnership agreement nor the
Delaware Act specifically provides for legal recourse against
the general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this
does not mean that a limited partner could not seek legal
recourse, we know of no precedent for this type of a claim in
Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair
value of the assets of the limited partnership. 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 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 shall be liable to the limited
partnership for the amount of the distribution for three years.
Under the Delaware Act, a substituted limited partner of a
limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except that
such person is not obligated for liabilities unknown to him at
the time he became a limited partner and that could not be
ascertained from the partnership agreement.
Our subsidiaries conduct business in 20 states and we may
have subsidiaries that conduct business in other states in the
future. Maintenance of our limited liability as a limited
partner of the operating partnership may require compliance with
legal requirements in the jurisdictions in which the operating
partnership conducts business, including qualifying our
subsidiaries to do business there.
Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly
established in many jurisdictions. If, by virtue of our
partnership interest in our operating partnership or otherwise,
it were determined that we were conducting business in any state
without compliance with the applicable limited partnership or
limited liability company statute, or that the right or exercise
of the right by the limited partners as a group to remove or
replace the general partner, to approve some amendments to the
partnership agreement, or to take other action under the
partnership agreement constituted participation in the
control of our business for purposes of the statutes of
any relevant jurisdiction, then the limited partners could
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be held personally liable for our obligations under the law of
that jurisdiction to the same extent as the general partner
under the circumstances. We will operate in a manner that the
general partner considers reasonable and necessary or
appropriate to preserve the limited liability of the limited
partners.
Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities for the
consideration and on the terms and conditions determined by our
general partner without the approval of the unitholders.
It is possible that we will fund acquisitions through the
issuance of additional common units, subordinated units or other
partnership 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 common
units or other partnership securities 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, as determined by our general partner, may have
special voting rights to which the common units are not
entitled. In addition, our partnership agreement does not
prohibit the issuance by our subsidiaries of equity securities,
which may effectively rank senior to the common units.
Upon issuance of additional partnership securities (other than
the issuance of partnership securities issued in connection with
a reset of the incentive distribution target levels relating to
our general partners incentive distribution rights or the
issuance of partnership securities upon conversion of
outstanding partnership securities), our general partner will be
entitled, but not required, to make additional capital
contributions to the extent necessary to maintain its general
partner interest in us. The general partners 2% interest
in us was reduced to 1.5% as a result of the issuance of the
3,005,780 common units to certain private investors on
June 22, 2007 and the issuance of the 2,656,687 common
limited partner units in conjunction with the Momentum Energy
Group Inc., or MEG, acquisition on August 29, 2007. Our
general partners interest in us will be further reduced if
we issue additional units in the future and our general partner
does not contribute a proportionate amount of capital to us to
maintain its general partner interest. 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 partnership securities
whenever, and on the same terms that, we issue those securities
to persons other than our general partner and its affiliates, to
the extent necessary to maintain the percentage interest of the
general partner and its affiliates, including such interest
represented by common units and subordinated units, that existed
immediately prior to each issuance. The holders of common units
will not have preemptive rights to acquire additional common
units or other partnership securities.
Amendment
of the Partnership Agreement
General. Amendments to our partnership
agreement may be proposed only by or with the consent of our
general partner. However, our general partner will have no duty
or obligation to propose any amendment and may decline to do so
free of any fiduciary duty or obligation whatsoever to us or the
limited partners, including any duty to act in good faith or in
the best interests of us or the limited partners. In order to
adopt a proposed amendment, other than the amendments discussed
below, our general partner is required to 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. Except as described below,
an amendment must be approved by a unit majority.
Prohibited Amendments. No amendment may be
made that would:
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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; or
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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
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affiliates without the consent of our general partner, which
consent may be given or withheld at its option.
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The provision of our partnership agreement preventing the
amendments having the effects described in any of the clauses
above can be amended upon the approval of the holders of at
least 90% of the outstanding units voting together as a single
class (including units owned by our general partner and its
affiliates). As of September 30, 2007, our general partner
and its affiliates owned approximately 34% of the outstanding
common and subordinated units.
No Unitholder Approval. Our general partner
may generally make amendments to our partnership agreement
without the approval of any limited partner or assignee to
reflect:
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a change in our name, the location of our principal place of our
business, our registered agent or our registered office;
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the admission, substitution, withdrawal or removal of partners
in accordance with our partnership agreement;
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a change that our general partner determines to be necessary or
appropriate to qualify or continue our qualification as a
limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or
to ensure that neither we nor the operating partnership nor any
of its subsidiaries will be treated as an association taxable as
a corporation or otherwise taxed as an entity for federal income
tax purposes;
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an amendment that is necessary, in the opinion of our counsel,
to prevent us or our general partner or its directors, officers,
agents or trustees from in any manner being subjected to the
provisions of the Investment Company Act of 1940, the Investment
Advisors Act of 1940, or plan asset regulations
adopted under the Employee Retirement Income Security Act of
1974, or ERISA, whether or not substantially similar to plan
asset regulations currently applied or proposed;
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an amendment that our general partner determines to be necessary
or appropriate for the authorization of additional partnership
securities or rights to acquire partnership securities,
including any amendment that our general partner determines is
necessary or appropriate in connection with:
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the adjustments of the minimum quarterly distribution, first
target distribution, second target distribution and third target
distribution in connection with the reset of our general
partners incentive distribution rights as described under
Our Cash Distribution Policy and Restrictions on
Distributions General Partners Right to Reset
Incentive Distribution Levels; or
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the implementation of the provisions relating to our general
partners right to reset its incentive distribution rights
in exchange for Class B units; and
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any modification of the incentive distribution rights made in
connection with the issuance of additional partnership
securities or rights to acquire partnership securities, provided
that, any such modifications and related issuance of partnership
securities have received approval by a majority of the members
of the conflicts committee of our general partner;
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any amendment expressly permitted in our partnership agreement
to be made by our general partner acting alone;
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an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our
partnership agreement;
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any amendment that our general partner determines to be
necessary or appropriate for the formation by us of, or our
investment in, any corporation, partnership or other entity, as
otherwise permitted by our partnership agreement;
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a change in our fiscal year or taxable year and related changes;
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conversions into, mergers with or conveyances to another limited
liability entity that is newly formed and has no assets,
liabilities or operations at the time of the conversion, merger
or conveyance other than those it receives by way of the
conversion, merger or conveyance; or
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any other amendments substantially similar to any of the matters
described in the clauses above.
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In addition, our general partner may make amendments to our
partnership agreement without the approval of any limited
partner if our general partner determines that those amendments:
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do not adversely affect the limited partners (or any particular
class of limited partners) in any material respect;
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are necessary or appropriate to satisfy any requirements,
conditions 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;
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are necessary or appropriate to facilitate the trading of
limited partner interests or to comply with any rule,
regulation, guideline or requirement of any securities exchange
on which the limited partner interests are or will be listed for
trading;
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are necessary or appropriate for any action taken by our general
partner relating to splits or combinations of units under the
provisions of our partnership agreement; or
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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.
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Opinion of Counsel and Unitholder
Approval. Our general partner will not be
required to obtain an opinion of counsel that an amendment will
not result in a loss of limited liability to the limited
partners or result in our being treated as an entity for federal
income tax purposes in connection with any of the amendments. No
other amendments to our partnership agreement will become
effective without the approval of holders of at least 90% of the
outstanding units voting as a single class unless we first
obtain an opinion of counsel to the effect that the amendment
will not affect the limited liability under applicable law of
any of our limited partners.
In addition to the above restrictions, 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. Any
amendment that reduces the voting percentage required to take
any action is required to be approved by the affirmative vote of
limited partners whose aggregate outstanding units constitute
not less than the voting requirement sought to be reduced.
Merger,
Consolidation, Conversion, Sale or Other Disposition of
Assets
A merger, consolidation or conversion of us requires the prior
consent of our general partner. However, our general partner
will have no duty or obligation to consent to any merger,
consolidation or conversion and may decline to do so free of any
fiduciary duty or obligation whatsoever to us or the limited
partners, including any duty to act in good faith or in the best
interest of us or the limited partners.
In addition, the partnership agreement generally prohibits our
general partner without the prior approval of the holders of a
unit majority, from causing us to, among other things, sell,
exchange or otherwise dispose of all or substantially all of our
assets in a single transaction or a series of related
transactions, including by way of merger, consolidation or other
combination, or approving on our behalf the sale, exchange or
other disposition of all or substantially all of the assets of
our subsidiaries. Our general partner may, however, mortgage,
pledge, hypothecate or grant a security interest in all or
substantially all of our assets without that approval. Our
general partner may also sell all or substantially all of our
assets under a foreclosure or other realization upon those
encumbrances without that approval. Finally, our general partner
may consummate any merger without the prior approval of our
unitholders if we are the surviving entity in the transaction,
our general partner has received an opinion of counsel regarding
limited liability and tax matters, the transaction
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would not result in a material amendment to the partnership
agreement, each of our units will be an identical unit of our
partnership following the transaction, and the partnership
securities to be issued do not exceed 20% of our outstanding
partnership securities immediately prior to the transaction.
If the conditions specified in the partnership agreement are
satisfied, our general partner may convert us or any of our
subsidiaries into a new limited liability entity or merge us or
any of our subsidiaries into, or convey all of our assets to, a
newly formed entity if the sole purpose of that conversion,
merger or conveyance is to effect a mere change in our legal
form into another limited liability entity, our general partner
has received an opinion of counsel regarding limited liability
and tax matters, and the governing instruments of the new entity
provide the limited partners and the general partner with the
same rights and obligations as contained in the partnership
agreement. The unitholders are not entitled to dissenters
rights of appraisal under the partnership agreement or
applicable Delaware law in the event of a conversion, merger or
consolidation, a sale of substantially all of our assets or any
other similar transaction or event.
Termination
and Dissolution
We will continue as a limited partnership until terminated under
our partnership agreement. We will dissolve upon:
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the election of our general partner to dissolve us, if approved
by the holders of units representing a unit majority;
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there being no limited partners, unless we are continued without
dissolution in accordance with applicable Delaware law;
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the entry of a decree of judicial dissolution of our
partnership; or
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the withdrawal or removal of our general partner or any other
event that results in its ceasing to be our general partner
other than by reason of a transfer of its general partner
interest in accordance with our partnership agreement or
withdrawal or removal following approval and admission of a
successor.
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Upon a dissolution under the last clause above, the holders of a
unit majority may also elect, within specific time limitations,
to continue our business on the same terms and conditions
described in our partnership agreement by appointing as a
successor general partner an entity approved by the holders of
units representing a unit majority, subject to our receipt of an
opinion of counsel to the effect that:
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the action would not result in the loss of limited liability of
any limited partner; and
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neither our partnership, our operating partnership nor any of
our other subsidiaries would be treated as an association
taxable as a corporation or otherwise be taxable as an entity
for federal income tax purposes upon the exercise of that right
to continue.
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Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are continued as a new limited
partnership, the liquidator authorized to wind up our affairs
will, acting with all of the powers of our general partner that
are necessary or appropriate to liquidate our assets and apply
the proceeds of the liquidation as described in Our Cash
Distribution Policy and Restrictions on
Distributions 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 our
partners.
Withdrawal
or Removal of the General Partner
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior to
December 31, 2015 without obtaining the approval of the
holders of at least a majority of the outstanding common units,
excluding common units held by the general partner and its
affiliates, and furnishing an opinion of counsel regarding
limited liability and tax matters. On or after December 31,
2015, our general partner may withdraw as general partner
without first obtaining approval of any unitholder by
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giving 90 days written notice, and that withdrawal
will not constitute a violation of our partnership agreement.
Notwithstanding the information above, our general partner may
withdraw without unitholder approval upon 90 days
notice to the limited partners if at least 50% of the
outstanding common units are held or controlled by one person
and its affiliates other than the general partner and its
affiliates. In addition, the partnership agreement permits our
general partner in some instances to sell or otherwise transfer
all of its general partner interest in us without the approval
of the unitholders. Please read Transfer of General
Partner Units and Transfer of Incentive
Distribution Rights.
Upon withdrawal of our general partner under any circumstances,
other than as a result of a transfer by our general partner of
all or a part of its general partner interest in us, the holders
of a unit majority, voting as separate classes, may select a
successor to that 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, wound up and liquidated, unless within a specified
period after that withdrawal, the holders of a unit majority
agree in writing to continue our business and to appoint a
successor general partner. Please read
Termination and Dissolution.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
662/3%
of the outstanding units, voting together as a single class,
including units held by our general partner and its affiliates,
and we receive an opinion of counsel regarding limited liability
and tax matters. Any removal of our general partner is also
subject to the approval of a successor general partner by the
vote of the holders of a majority of the outstanding common
units, Class C units, if any, and Class B units, if
any, voting as a separate class, and subordinated units, voting
as a separate class. The ownership of more than
331/3%
of the outstanding units by our general partner and its
affiliates would give them the practical ability to prevent our
general partners removal.
Our partnership agreement also provides that if our general
partner is removed as our general partner under circumstances
where cause does not exist and units held by the general partner
and its affiliates are not voted in favor of that removal:
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the subordination period will end, and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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our general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests
based on the fair market value of those interests at that time.
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In the event of removal of a general partner under circumstances
where cause exists or withdrawal of a general partner where that
withdrawal violates our partnership agreement, a successor
general partner will have the option to purchase the general
partner interest 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 a general partner withdraws or is removed by the limited
partners, the departing general partner will have the option to
require the successor general partner to purchase the general
partner interest of the departing general partner and its
incentive distribution rights for fair market value. In each
case, this fair market value will be determined by agreement
between the departing general partner and the successor general
partner. If no agreement is reached, an independent investment
banking firm or other independent expert selected by the
departing general partner and the successor general partner will
determine the fair market value. Or, if the departing general
partner and the successor general partner cannot agree upon an
expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value.
If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partners general partner interest and
its incentive distribution rights will automatically convert
into common units equal to the fair market value of those
interests as determined by an investment banking firm or other
independent expert selected in the manner described in the
preceding paragraph.
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In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Transfer
of General Partner Units
Except for transfer by our general partner of all, but not less
than all, of its general partner units to:
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an affiliate of our general partner (other than an
individual); or
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another entity as part of the merger or consolidation of our
general partner with or into another entity or the transfer by
our general partner of all or substantially all of its assets to
another entity,
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our general partner may not transfer all or any of its general
partner units to another person prior to December 31, 2015
without 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. As a condition of this
transfer, the transferee must assume, among other things, the
rights and duties of our general partner, agree to be bound by
the provisions of our partnership agreement, and furnish an
opinion of counsel regarding limited liability and tax matters.
Our general partner and its affiliates may at any time, transfer
units to one or more persons, without unitholder approval,
except that they may not transfer subordinated units to us.
Transfer
of Ownership Interests in the General Partner
At any time, DCP Midstream, LLC and its affiliates may sell or
transfer all or part of their partnership interests in our
general partner, or their membership interest in DCP Midstream
GP, LLC, the general partner of our general partner, to an
affiliate or third party without the approval of our unitholders.
Transfer
of Incentive Distribution Rights
Our general partner or its affiliates or a subsequent holder may
transfer its incentive distribution rights to an affiliate of
the holder (other than an individual) or another entity as part
of the merger or consolidation of such holder with or into
another entity, the sale of all of the ownership interest in the
holder or the sale of all or substantially all of its assets to,
that entity without the prior approval of the unitholders. Prior
to December 31, 2015, other transfers of incentive
distribution rights will require the affirmative vote of holders
of a majority of the outstanding common units, excluding common
units held by our general partner and its affiliates. On or
after December 31, 2015, the incentive distribution rights
will be freely transferable.
Change of
Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove DCP Midstream GP, LP as our general partner or otherwise
change our 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 loses
voting rights on all of its units. This loss of voting rights
does not apply to any person or group that acquires the units
from our general partner or its affiliates and any transferees
of that person or group approved by our general partner or to
any person or group who acquires the units with the prior
approval of the board of directors of our general partner.
Our partnership agreement also provides that if our general
partner is removed as our general partner under circumstances
where cause does not exist and units held by our general partner
and its affiliates are not voted in favor of that removal:
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the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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our general partner will have the right to convert its general
partner units and its incentive distribution rights into common
units or to receive cash in exchange for those interests based
on the fair market value of those interests at that time.
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Limited
Call Right
If at any time our general partner and its affiliates own more
than 80% of the then-issued and outstanding limited partner
interests of any class, 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 limited
partner interests of the class held by unaffiliated persons as
of a record date to be selected by our general partner, on at
least 10 but not more than 60 days notice. The purchase
price in the event of this purchase is the greater of:
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the highest cash price paid by either of 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
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the current market price as of the date three days before the
date the notice is mailed.
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As a result of our general partners right to purchase
outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests
purchased at a price that may be lower than market prices at
various times prior to such purchase or lower than a unitholder
may anticipate the market price to be in the future. 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. Please read Material Tax
Consequences Disposition of Common Units.
Meetings;
Voting
Except as described below regarding a person or group owning 20%
or more of any class of units then outstanding, record holders
of units on the 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.
Our general partner does not anticipate that any meeting of
unitholders will be called in the foreseeable future. Any action
that is required or permitted 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 number of units necessary to
authorize or take that action at a meeting. 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 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.
Each record holder of a unit has a vote according to his
percentage interest in us, although additional limited partner
interests having special voting rights could be issued. Please
read Issuance of Additional Securities.
However, if at any time any person or group, other than our
general partner and its affiliates, or a direct or subsequently
approved transferee of our general partner or its affiliates,
acquires, in the aggregate, beneficial ownership of 20% or more
of any class of units then outstanding, that person or group
will lose voting rights on all of its units and the units may
not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of unitholders,
calculating required votes, determining the presence of a quorum
or for other similar purposes. Common 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
unless the arrangement between the beneficial owner and his
nominee provides otherwise. Except as our partnership agreement
otherwise provides, subordinated units will vote together with
common units, Class C, if any, and Class B units, if
any, as a single class.
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Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of common
units under our partnership agreement will be delivered to the
record holder by us or by the transfer agent.
Status as
Limited Partner
By transfer of common units in accordance with our partnership
agreement, each transferee of common units shall be admitted as
a limited partner with respect to the common units transferred
when such transfer and admission is reflected in our books and
records. Except as described under Limited
Liability, the common units will be fully paid, and
unitholders will not be required to make additional
contributions.
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 that we have an interest in because of the
nationality, citizenship or other related status of any limited
partner, we may redeem the units held by the limited partner at
their current market price. In order to avoid any cancellation
or forfeiture, our general partner may require each limited
partner to furnish information about his nationality,
citizenship or related status. If a limited partner fails to
furnish information about his nationality, citizenship or other
related status within 30 days after a request for the
information or our general partner determines after receipt of
the information that the limited partner is not an eligible
citizen, the limited partner may be treated as a non-citizen
assignee. A non-citizen assignee, is entitled to an interest
equivalent to that of a limited partner for the right to share
in allocations and distributions from us, including liquidating
distributions. 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 our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages or similar
events:
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our general partner;
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any departing general partner;
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any person who is or was an affiliate of a general partner or
any departing general partner;
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any person who is or was a director, officer, member, partner,
fiduciary or trustee of any entity set forth in the preceding
three bullet points;
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any person who is or was serving as director, officer, member,
partner, fiduciary or trustee of another person at the request
of our general partner or any departing general partner; and
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any person designated by our general partner.
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Any indemnification under these provisions will only be out of
our assets. Unless it otherwise agrees, our general partner will
not be personally liable for, or have any obligation to
contribute or lend funds or assets to us to enable us to
effectuate, indemnification. We may 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 our
partnership agreement.
Reimbursement
of Expenses
Our partnership agreement requires us to reimburse our general
partner for all direct and indirect expenses it incurs or
payments it makes on our behalf and all other expenses allocable
to us or otherwise incurred by our general partner in connection
with operating our business. These expenses include salary,
bonus, incentive compensation and other amounts paid to persons
who perform services for us or on our behalf and expenses
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allocated to our general partner by its affiliates. The general
partner is entitled to determine in good faith the expenses that
are allocable to us.
Books and
Reports
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. For tax and fiscal reporting purposes, our fiscal year is
the calendar year.
We will 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 will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive 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 written demand stating the purpose of
such demand and at his own expense, have furnished to him:
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a current list of the name and last known address of each
partner;
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a copy of our tax returns;
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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 partner became a partner;
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copies of our partnership agreement, our certificate of limited
partnership, related amendments and powers of attorney under
which they have been executed;
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information regarding the status of our business and financial
condition; and
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any other information regarding our affairs as is just and
reasonable.
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Our general partner may, and 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 that we are required by law or
by agreements with third parties to keep confidential.
Registration
Rights
Under our 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 or their assignees if an exemption from the
registration requirements is not otherwise available. These
registration rights continue for two years following any
withdrawal or removal of DCP Midstream GP, LP as general
partner. We are obligated to pay all expenses incidental to the
registration, excluding underwriting discounts and a structuring
fee.
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Transfer
of Common Units
By transfer of common units in accordance with our partnership
agreement, each transferee of common units shall be admitted as
a limited partner with respect to the common units transferred
when such transfer and admission is reflected in our books and
records. Each transferee:
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represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement;
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automatically agrees to be bound by the terms and conditions of,
and is deemed to have executed, our partnership
agreement; and
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gives the consents and approvals contained in our partnership
agreement, such as the approval of all transactions and
agreements that we entered into in connection with our formation
and our initial public offering.
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A transferee will become a substituted limited partner of our
partnership for the transferred common units automatically upon
the recording of the transfer on our books and records. Our
general partner will cause any transfers to be recorded on our
books and records no less frequently than quarterly.
We may, at our discretion, treat the nominee holder of a common
unit as the absolute owner. In that case, the beneficial
holders 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 transfers of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to become a substituted limited partner in
our partnership for the transferred common units.
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.
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OUR CASH
DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
General
Rationale for Our Cash Distribution
Policy. Our cash distribution policy reflects a
basic judgment that our unitholders will be better served by our
distributing our cash available after expenses and reserves
rather than retaining it. Because we believe we will generally
finance any non-maintenance capital investments from external
financing sources, we believe that our investors are best served
by our distributing all of our available cash. Because we are
not subject to an entity-level federal income tax, we have more
cash to distribute to you than would be the case were we subject
to tax. Our cash distribution policy is consistent with the
terms of our partnership agreement, which requires that we
distribute all of our available cash quarterly.
Limitations on Cash Distributions and Our Ability to Change
Our Cash Distribution Policy. There is no
guarantee that unitholders will receive quarterly distributions
from us. Our distribution policy is subject to certain
restrictions and may be changed at any time, including:
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Our distribution policy is subject to restrictions on
distributions under our credit facility. Specifically, the
agreement related to our credit facility contains material
financial tests and covenants that we must satisfy. Should we be
unable to satisfy these restrictions under our credit facility
or if we are otherwise in default under our credit facility, we
would be prohibited from making cash distributions to you
notwithstanding our stated cash distribution policy.
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The board of directors of our general partner will have the
authority to establish reserves for the prudent conduct of our
business and for future cash distributions to our unitholders,
and the establishment of those reserves could result in a
reduction in cash distributions to you from levels we currently
anticipate pursuant to our stated distribution policy.
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While our partnership agreement requires us to distribute all of
our available cash, our partnership agreement, including
provisions requiring us to make cash distributions contained
therein, may be amended. Although during the subordination
period, with certain exceptions, our partnership agreement may
not be amended without the approval of the public common
unitholders, our partnership agreement can be amended with the
approval of a majority of the outstanding common units and any
Class C units and any Class B units issued upon the
reset of incentive distribution rights, if any, voting as a
class (including common units held by affiliates of DCP
Midstream, LLC) after the subordination period has ended.
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Even if our cash distribution policy is not modified or revoked,
the amount of distributions we pay under our cash distribution
policy and the decision to make any distribution is determined
by our general partner, taking into consideration the terms of
our partnership agreement.
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Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to you if the distribution would cause
our liabilities to exceed the fair value of our assets.
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We may lack sufficient cash to pay distributions to our
unitholders due to increases in our general and administrative
expense, principal and interest payments on our outstanding
debt, tax expenses, working capital requirements and anticipated
cash needs.
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We have partial ownership interests in a number of joint venture
legal entities, including Discovery, East Texas, Collbran and
Black Lake. The governing agreement for these legal entities
contains the requirements and restrictions on distributing cash
from these joint ventures. We may be unable to control the
timing and the amount of cash we will receive from the operation
of these entities and we could be required to contribute
significant cash to fund our share of their operations, which
could adversely affect our ability to make distributions.
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Our Ability to Grow is Dependent on Our Ability to Access
External Expansion Capital. We expect that we
will distribute all of our available cash to our unitholders. As
a result, we expect that we will rely primarily upon external
financing sources, including commercial bank borrowings and the
issuance of debt and equity securities, to fund our acquisitions
and expansion capital expenditures. As a result, to the extent
we are unable
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to finance growth externally, our cash distribution policy will
significantly impair our ability to grow. In addition, because
we distribute all of our available cash, our growth may not be
as fast as businesses that reinvest their available cash to
expand ongoing operations. To the extent we issue additional
units in connection with any acquisitions or expansion capital
expenditures, the payment of distributions on those additional
units may increase the risk that we will be unable to maintain
or increase our per unit distribution level, which in turn may
impact the available cash that we have to distribute on each
unit. There are no limitations in our partnership agreement or
our credit facility on our ability to issue additional units,
including units ranking senior to the common units. The
incurrence of additional commercial borrowings or other debt to
finance our growth strategy would result in increased interest
expense, which in turn may impact the available cash that we
have to distribute to our unitholders.
Distributions
of Available Cash
General. Our partnership agreement requires
that, within 45 days after the end of each quarter,
beginning with the quarter ending December 31, 2005, we
distribute all of our available cash to unitholders of record on
the applicable record date.
Definition of Available Cash. Available cash,
for any quarter, consists of all cash on hand at the end of that
quarter:
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less the amount of cash reserves established by our general
partner to:
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provide for the proper conduct of our business;
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comply with applicable law, any of our debt instruments or other
agreements; or
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provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters;
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plus, if our general partner so determines, all or a portion of
cash on hand on the date of determination of available cash for
the quarter.
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Minimum Quarterly Distribution. The minimum
quarterly distribution, as defined in our partnership agreement,
is $0.35 per unit per quarter, or $1.40 per unit per year. Our
current quarterly distribution is $0.53 per unit, or $2.12 per
unit annualized. There is no guarantee that we will maintain our
current distribution or pay the minimum quarterly distribution
on the units in any quarter. Even if our cash distribution
policy is not modified or revoked, the amount of distributions
paid under our policy and the decision to make any distribution
is determined by our general partner, taking into consideration
the terms of our partnership agreement. We will be prohibited
from making any distributions to unitholders if it would cause
an event of default, or an event of default exists, under our
credit agreement.
General Partner Interest and Incentive Distribution
Rights. Initially, our general partner was
entitled to 2% of all quarterly distributions since inception
that we made. Our general partner has the right, but not the
obligation, to contribute a proportionate amount of capital to
us to maintain its 2% general partner interest. The general
partners 2% interest in us was reduced to 1.5% as a result
of the issuance of the 3,005,780 common units to certain private
investors on June 22, 2007 and the issuance of the
2,656,687 common limited partner units in conjunction with the
Momentum Energy Group Inc., or MEG, acquisition on
August 29, 2007. The general partners interest in
these distributions may be further reduced if we issue
additional units in the future and our general partner does not
contribute a proportionate amount of capital to us to maintain
its general partner interest.
Our general partner also currently holds incentive distribution
rights that entitle it to receive increasing percentages, up to
a maximum of 48% plus the general partners pro rata
interest, of the cash we distribute from operating surplus (as
defined below) in excess of $0.4025 per unit per quarter. The
maximum distribution of 48% plus the general partners pro
rata interest does not include any distributions that our
general partner may receive on limited partner units that it
owns. Please read General Partner Interest and
Incentive Distribution Rights for additional information.
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Operating
Surplus and Capital Surplus
General. All cash distributed to unitholders
will be characterized as either operating surplus or
capital surplus. Our partnership agreement requires
that we distribute available cash from operating surplus
differently than available cash from capital surplus.
Operating Surplus. Operating surplus consists
of:
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an amount equal to four times the amount needed for any one
quarter for us to pay a distribution on all of our units
(including the general partner units) and the incentive
distribution rights at the same
per-unit
amount as was distributed in the immediately preceding quarter;
plus
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all of our cash receipts since our initial public offering,
excluding cash from borrowings, sales of equity and debt
securities, sales or other dispositions of assets outside the
ordinary course of business, the termination of interest rate
swap agreements, capital contributions or corporate
reorganizations or restructurings; less
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all of our operating expenditures since our initial public
offering, but excluding the repayment of borrowings, and
including maintenance capital expenditures; less
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the amount of cash reserves established by our general partner
to provide funds for future operating expenditures.
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Maintenance capital expenditures represent cash expenditures
where we add on to or improve capital assets owned or acquire or
construct new capital assets if such expenditures are made to
maintain, including over the long term, our operating capacity
or revenues. Expansion capital expenditures represent cash
expenditures for acquisitions or capital improvements (where we
add on to or improve the capital assets owned, or acquire or
construct new gathering lines, treating facilities, processing
plants, fractionation facilities, pipelines, terminals, docks,
truck racks, tankage and other storage, distribution or
transportation facilities and related or similar midstream
assets) in each case if such addition, improvement, acquisition
or construction is made to increase our operating capacity or
revenues or those of our equity interests. Costs for repairs and
minor renewals to maintain facilities in operating condition and
that do not extend the useful life of existing assets will be
treated as operations and maintenance expenses as we incur them.
Our partnership agreement provides that our general partner
determines how to allocate a capital expenditure for the
acquisition or expansion of our assets between maintenance
capital expenditures and expansion capital expenditures.
Capital Surplus. Capital surplus consists of:
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borrowings;
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sales of our equity and debt securities; and
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sales or other dispositions of assets for cash, other than
inventory, accounts receivable and other current assets sold in
the ordinary course of business or as part of normal retirement
or replacement of assets.
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Characterization of Cash Distributions. Our
partnership agreement requires that we treat all available cash
distributed as coming from operating surplus until the sum of
all available cash distributed since our initial public offering
equals the operating surplus as of the most recent date of
determination of available cash. Our partnership agreement
requires that we treat any amount distributed in excess of
operating surplus, regardless of its source, as capital surplus.
As reflected above, operating surplus includes an amount equal
to four times the amount needed for any one quarter for us to
pay a distribution on all of our units (including the general
partner units) and the incentive distribution rights at the same
per-unit
amount as was distributed in the immediately preceding quarter.
This amount, which initially equals $25.0 million, does not
reflect actual cash on hand that is available for distribution
to our unitholders. Rather, it is a provision that will enable
us, if we choose, to distribute as operating surplus up to this
amount of cash we receive in the future from non-operating
sources, such as asset sales, issuances of securities, and
borrowings, that would otherwise be distributed as capital
surplus. We do not anticipate that we will make any
distributions from capital surplus.
47
Subordination
Period
General. Our partnership agreement provides
that, during the subordination period (which we define below and
in Appendix B), the common units will have the right to
receive distributions of available cash from operating surplus
each quarter in an amount equal to $0.35 per common unit, which
amount is defined in our partnership agreement as the minimum
quarterly distribution, plus any arrearages in the payment of
the minimum quarterly distribution on the common units from
prior quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units. These
units are deemed subordinated because for a period
of time, referred to as the subordination period, the
subordinated units will not be entitled to receive any
distributions until the common units have received the minimum
quarterly distribution plus any arrearages from prior quarters.
Furthermore, no arrearages will be paid on the subordinated
units. The practical effect of the subordinated units is to
increase the likelihood that during the subordination period
there will be available cash to be distributed on the common
units.
Subordination Period. The subordination period
will extend until the first day of any quarter beginning after
December 31, 2010 that each of the following tests are met:
|
|
|
|
|
distributions of available cash from operating surplus on each
of the outstanding common units, subordinated units and general
partner units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date;
|
|
|
|
the adjusted operating surplus (as defined below)
generated during each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distributions on all
of the outstanding common, subordinated units and general
partner units during those periods on a fully diluted basis
during those periods; and
|
|
|
|
there are no arrearages in payment of the minimum quarterly
distribution on the common units.
|
Expiration of the Subordination Period. When
the subordination period expires, each outstanding subordinated
unit will convert into one common unit and will then participate
pro rata with the other common units in distributions of
available cash. In addition, if the unitholders remove our
general partner other than for cause and units held by the
general partner and its affiliates are not voted in favor of
such removal:
|
|
|
|
|
the subordination period will end and each subordinated unit
will immediately convert into one common unit;
|
|
|
|
any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
|
|
|
|
the general partner will have the right to convert its general
partner units and its incentive distribution rights into common
units or to receive cash in exchange for those interests.
|
Early Conversion of Subordinated Units. If the
tests for ending the subordination period are satisfied for any
two consecutive, non-overlapping four-quarter periods ending on
or after December 31, 2007, 50% of the subordinated units
will convert into an equal number of common units. In addition
to the early conversion of subordinated units described above,
50% of the subordinated units will convert into an equal number
of common units if the following tests are met:
|
|
|
|
|
distributions of available cash from operating surplus on each
of the outstanding common units, subordinated units and general
partner units equaled or exceeded $1.75 (125% of the annualized
minimum quarterly distribution) for each of the two consecutive,
non-overlapping four-quarter periods ending on or after
December 31, 2008; and
|
|
|
|
the adjusted operating surplus generated during each of the two
consecutive, non-overlapping four-quarter periods immediately
preceding that date equaled or exceeded the sum of a
distribution of $1.75 per common unit (125% of the annualized
minimum quarterly distribution) on all of the outstanding
common, subordinated units and general partner units during
those periods on a fully diluted basis; and
|
|
|
|
there are no arrearages in payment of the minimum quarterly
distribution on the common units.
|
48
The second early conversion of subordinated units may not occur,
however, until at least one year following the end of the period
for the first early conversion of subordinated units.
Adjusted Operating Surplus. Adjusted operating
surplus is intended to reflect the cash generated from
operations during a particular period and therefore excludes net
drawdowns of reserves of cash generated in prior periods.
Adjusted operating surplus consists of:
|
|
|
|
|
operating surplus generated with respect to that period;
plus
|
|
|
|
any net decrease made in subsequent periods in cash reserves for
operating expenditures initially established with respect to
that period; less
|
|
|
|
any net decrease in cash reserves for operating expenditures
with respect to that period not relating to an operating
expenditure made with respect to that period; plus
|
|
|
|
any net increase in cash reserves for operating expenditures
with respect to that period required by any debt instrument for
the repayment of principal, interest or premium.
|
Distributions
of Available Cash from Operating Surplus during the
Subordination Period
Our partnership agreement requires that we make distributions of
available cash from operating surplus for any quarter during the
subordination period in the following manner:
|
|
|
|
|
first, to the common unitholders and the general partner,
in accordance with their pro rata interest, until we distribute
for each outstanding common unit an amount equal to the minimum
quarterly distribution for that quarter;
|
|
|
|
second, to the common unitholders and the general
partner, in accordance with their pro rata interest, until we
distribute for each outstanding common unit an amount equal to
any arrearages in payment of the minimum quarterly distribution
on the common units for any prior quarters during the
subordination period;
|
|
|
|
third, to the subordinated unitholders and the general
partner, in accordance with their pro rata interest, until we
distribute for each subordinated unit an amount equal to the
minimum quarterly distribution for that quarter; and
|
|
|
|
thereafter, in the manner described in General
Partner Interest and Incentive Distribution Rights below.
|
Distributions
of Available Cash from Operating Surplus after the Subordination
Period
Our partnership agreement requires that we make distributions of
available cash from operating surplus for any quarter after the
subordination period in the following manner:
|
|
|
|
|
first, to all unitholders and the general partner, in
accordance with their pro rata interest, until we distribute for
each outstanding unit an amount equal to the minimum quarterly
distribution for that quarter; and
|
|
|
|
thereafter, in the manner described in General
Partner Interest and Incentive Distribution Rights below.
|
General
Partner Interest and Incentive Distribution Rights
Our partnership agreement provides that our general partner
initially will be entitled to 2% of all distributions that we
make prior to our liquidation. Our general partner has the
right, but not the obligation, to contribute a proportionate
amount of capital to us to maintain its general partner interest
if we issue additional units. The general partners 2%
interest in us was reduced to 1.5% as a result of the issuance
of the 3,005,780 common units to certain private investors on
June 22, 2007 and the issuance of the 2,656,687 common
limited partner units in conjunction with the Momentum Energy
Group Inc., or MEG, acquisition on August 29, 2007. Our
general partners interest, and the percentage of our cash
distributions to which it is entitled, will be
49
proportionately and further reduced if we issue additional units
in the future and our general partner does not contribute a
proportionate amount of capital to us in order to maintain its
general partner interest. Our general partner will be entitled
to make a capital contribution in order to maintain its general
partner interest in the form of the contribution to us of common
units based on the current market value of the contributed
common units.
Incentive distribution rights represent the right to receive an
increasing percentage (13%, 23% and 48%) of quarterly
distributions of available cash from operating surplus after the
minimum quarterly distribution and the target distribution
levels have been achieved. Our general partner currently holds
the incentive distribution rights, but may transfer these rights
separately from its general partner interest, subject to
restrictions in the partnership agreement.
If for any quarter:
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|
|
|
|
we have distributed available cash from operating surplus to the
common and subordinated unitholders in an amount equal to the
minimum quarterly distribution; and
|
|
|
|
we have distributed available cash from operating surplus on
outstanding common units in an amount necessary to eliminate any
cumulative arrearages in payment of the minimum quarterly
distribution;
|
then, our partnership agreement requires that we distribute any
additional available cash from operating surplus for that
quarter among the unitholders and the general partner in the
following manner:
|
|
|
|
|
first, to all unitholders and the general partner, in
accordance with their pro rata interest, until each unitholder
receives a total of $0.4025 per unit for that quarter (the
first target distribution);
|
|
|
|
second, 13% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders pro rata, until each unitholder receives a total of
$0.4375 per unit for that quarter (the second target
distribution);
|
|
|
|
third, 23% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders pro rata until each unitholder receives a total of
$0.525 per unit for that quarter (the third target
distribution); and
|
|
|
|
thereafter, 48% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders (the fourth target distribution).
|
General
Partners Right to Reset Incentive Distribution
Levels
Our general partner, as the holder of our incentive distribution
rights, has the right under our partnership agreement to elect
to relinquish the right to receive incentive distribution
payments based on the initial cash target distribution levels
and to reset, at higher levels, the minimum quarterly
distribution amount and cash target distribution levels upon
which the incentive distribution payments to our general partner
would be set. Our general partners right to reset the
minimum quarterly distribution amount and the target
distribution levels upon which the incentive distributions
payable to our general partner are based may be exercised,
without approval of our unitholders or the conflicts committee
of our general partner, at any time when there are no
subordinated units outstanding and we have made cash
distributions to the holders of the incentive distribution
rights at the highest level of incentive distribution for each
of the prior four consecutive fiscal quarters. The reset minimum
quarterly distribution amount and target distribution levels
will be higher than the minimum quarterly distribution amount
and the target distribution levels prior to the reset such that
our general partner will not receive any incentive distributions
under the reset target distribution levels until cash
distributions per unit following this event increase as
described below. We anticipate that our general partner would
exercise this reset right in order to facilitate acquisitions or
internal growth projects that would otherwise not be
sufficiently accretive to cash distributions per common unit,
taking into account the existing levels of incentive
distribution payments being made to our general partner.
In connection with the resetting of the minimum quarterly
distribution amount and the target distribution levels and the
corresponding relinquishment by our general partner of incentive
distribution payments based on
50
the target cash distributions prior to the reset, our general
partner will be entitled to receive a number of newly issued
Class B units based on a predetermined formula described
below that takes into account the cash parity value
of the average cash distributions related to the incentive
distribution rights received by our general partner for the two
quarters prior to the reset event as compared to the average
cash distributions per common unit during this period.
The number of Class B units that our general partner would
be entitled to receive from us in connection with a resetting of
the minimum quarterly distribution amount and the target
distribution levels then in effect would be equal to
(x) the average amount of cash distributions received by
our general partner in respect of its incentive distribution
rights during the two consecutive fiscal quarters ended
immediately prior to the date of such reset election divided by
(y) the average of the amount of cash distributed per
common unit during each of these two quarters. Each Class B
unit will be convertible into one common unit at the election of
the holder of the Class B unit at any time following the
first anniversary of the issuance of these Class B units.
Following a reset election by our general partner, the minimum
quarterly distribution amount will be reset to an amount equal
to the average cash distribution amount per common unit for the
two fiscal quarters immediately preceding the reset election
(such amount is referred to as the reset minimum quarterly
distribution) and the target distribution levels will be
reset to be correspondingly higher such that we would distribute
all of our available cash from operating surplus for each
quarter thereafter as follows:
|
|
|
|
|
first, to all unitholders and the general partner, in
accordance with their pro rata interest, until each unitholder
receives an amount equal to 115% of the reset minimum quarterly
distribution for that quarter;
|
|
|
|
second, 13% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders pro rata until each unitholder receives an amount
per unit equal to 125% of the reset minimum quarterly
distribution for that quarter;
|
|
|
|
third, 23% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders pro rata until each unitholder receives an amount
per unit equal to 150% of the reset minimum quarterly
distribution for that quarter; and
|
|
|
|
thereafter, 48% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders.
|
The following table illustrates the percentage allocation of
available cash from operating surplus between the unitholders
and our general partner at various levels of cash distribution
levels pursuant to the cash distribution provision of our
partnership agreement as well as following a hypothetical reset
of the minimum quarterly distribution and target distribution
levels based on the assumptions that the general partner owns a
1.7% interest and the average quarterly cash distribution amount
per common unit during the two fiscal quarters immediately
preceding the reset election was $0.60.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
|
|
Marginal Percentage
|
|
|
Quarterly Distribution
|
|
|
Distribution
|
|
Interest in Distributions
|
|
|
per Unit
|
|
|
per Unit
|
|
|
|
|
General
|
|
|
Following
|
|
|
Prior to Reset
|
|
Unitholders
|
|
|
Partner
|
|
|
Hypothetical Reset
|
|
Minimum Quarterly Distribution
|
|
$0.35
|
|
|
98.3
|
%
|
|
|
1.7
|
%
|
|
$0.60
|
First Target Distribution
|
|
up to $0.4025
|
|
|
98.3
|
%
|
|
|
1.7
|
%
|
|
up to $0.69(1)
|
Second Target Distribution
|
|
above $0.4025 up to $0.4375
|
|
|
85.3
|
%
|
|
|
14.7
|
%
|
|
above $0.69(1) up to $0.75(2)
|
Third Target Distribution
|
|
above $0.4375 up to $0.525
|
|
|
75.3
|
%
|
|
|
24.7
|
%
|
|
above $0.75(2) up to $0.90(3)
|
Thereafter
|
|
above $0.525
|
|
|
50.3
|
%
|
|
|
49.7
|
%
|
|
above $0.90(3)
|
|
|
|
(1) |
|
This amount is 115% of the hypothetical reset minimum quarterly
distribution. |
|
(2) |
|
This amount is 125% of the hypothetical reset minimum quarterly
distribution. |
|
(3) |
|
This amount is 150% of the hypothetical reset minimum quarterly
distribution. |
51
The following table illustrates the total amount of available
cash from operating surplus that would be distributed to the
unitholders and the general partner, including in respect of
incentive distribution rights, or IDRs, based on an average of
the amounts distributed for a quarter for the two quarters
immediately prior to the reset. The table assumes that there are
45,000,000 common units, no Class C units and 918,367
general partner units, representing a 1.7% general partner
interest, outstanding, and that the average distribution to each
common unit is $0.60 for the two quarters prior to the reset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partner Cash Distributions
|
|
|
|
|
|
Common
|
|
|
Prior to Reset
|
|
|
|
|
|
Unitholders
|
|
|
|
|
|
1.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Distribution
|
|
Cash
|
|
|
|
|
|
General
|
|
|
|
|
|
|
|
|
|
|
|
|
per Unit
|
|
Distributions
|
|
|
Class B
|
|
|
Partner
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Prior to Reset
|
|
Prior to Reset
|
|
|
Units
|
|
|
Interest
|
|
|
IDRs
|
|
|
Total
|
|
|
Distribution
|
|
|
Minimum Quarterly Distribution
|
|
$0.35
|
|
$
|
15,750,000
|
|
|
$
|
|
|
|
$
|
272,380
|
|
|
$
|
|
|
|
$
|
272,380
|
|
|
$
|
16,022,380
|
|
First Target Distribution
|
|
up to $0.4025
|
|
|
2,362,500
|
|
|
|
|
|
|
|
40,857
|
|
|
|
|
|
|
|
40,857
|
|
|
|
2,403,357
|
|
Second Target Distribution
|
|
above $0.4025 up to $0.4375
|
|
|
1,575,000
|
|
|
|
|
|
|
|
31,389
|
|
|
|
240,035
|
|
|
|
271,424
|
|
|
|
1,846,424
|
|
Third Target Distribution
|
|
above $0.4375 up to $0.525
|
|
|
3,937,500
|
|
|
|
|
|
|
|
88,894
|
|
|
|
1,202,689
|
|
|
|
1,291,583
|
|
|
|
5,229,083
|
|
Thereafter
|
|
above $0.525
|
|
|
3,375,000
|
|
|
|
|
|
|
|
114,066
|
|
|
|
3,220,676
|
|
|
|
3,334,741
|
|
|
|
6,709,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,000,000
|
|
|
$
|
|
|
|
$
|
547,586
|
|
|
$
|
4,663,400
|
|
|
$
|
5,210,985
|
|
|
$
|
32,210,985
|
|
The following table illustrates the total amount of available
cash from operating surplus that would be distributed to the
unitholders and the general partner with respect to the quarter
in which the reset occurs. The table reflects that as a result
of the reset there are 45,000,000 common units, no Class C
units, 7,772,333 Class B units and 1,077,836 general
partner units, representing a 1.7% general partner interest,
outstanding, and that the average distribution to each common
unit is $0.60. The number of Class B units was calculated
by dividing (x) the $4,663,400 received by the general
partner in respect of its incentive distribution rights, or
IDRs, as the average of the amounts received by the general
partner in respect of its incentive distribution rights for the
two quarters prior to the reset as shown in the table above by
(y) the $0.60 of available cash from operating surplus
distributed to each common unit as the average distributed per
common unit for the two quarters prior to the reset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partner Cash Distributions
|
|
|
|
|
|
Common
|
|
|
After Reset
|
|
|
|
|
|
Unitholders
|
|
|
|
|
|
1.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Distribution
|
|
Cash
|
|
|
|
|
|
General
|
|
|
|
|
|
|
|
|
|
|
|
|
per Unit
|
|
Distributions
|
|
|
Class B
|
|
|
Partner
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
After Reset
|
|
After Reset
|
|
|
Units
|
|
|
Interest
|
|
|
IDRs
|
|
|
Total
|
|
|
Distribution
|
|
|
Minimum Quarterly Distribution
|
|
$0.60
|
|
$
|
27,000,000
|
|
|
$
|
4,663,400
|
|
|
$
|
547,586
|
|
|
$
|
|
|
|
$
|
5,210,985
|
|
|
$
|
32,210,985
|
|
First Target Distribution
|
|
up to $0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Target Distribution
|
|
above $0.69 up to $0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Target Distribution
|
|
above $0.75 up to $0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
above $0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,000,000
|
|
|
$
|
4,663,400
|
|
|
$
|
547,586
|
|
|
$
|
|
|
|
$
|
5,210,985
|
|
|
$
|
32,210,985
|
|
Our general partner will be entitled to cause the minimum
quarterly distribution amount and the target distribution levels
to be reset on more than one occasion, provided that it may not
make a reset election except at a time when it has received
incentive distributions for the prior four consecutive fiscal
quarters based on the highest level of incentive distributions
that it is entitled to receive under our partnership agreement.
52
Percentage
Allocations of Available Cash from Operating Surplus
The following table illustrates the percentage allocations of
available cash from operating surplus between the unitholders
and our general partner based on the specified target
distribution levels. The amounts set forth under Marginal
Percentage Interest in Distributions are the percentage
interests of our general partner and the unitholders in any
available cash from operating surplus we distribute up to and
including the corresponding amount in the column Total
Quarterly Distribution Per Unit, until available cash from
operating surplus we distribute reaches the next target
distribution level, if any. The percentage interests shown for
the unitholders and the general partner for the minimum
quarterly distribution are also applicable to quarterly
distribution amounts that are less than the minimum quarterly
distribution. The percentage interests set forth below for our
general partner assumes a 1.7% general partner interest and
assumes that our general partner has contributed any additional
capital to maintain its 1.7% general partner interest and has
not transferred its incentive distribution rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal Percentage
|
|
|
|
Total Quarterly
|
|
Interest in
|
|
|
|
Distribution
|
|
Distributions
|
|
|
|
per Unit
|
|
|
|
|
General
|
|
|
|
Target Amount
|
|
Unitholders
|
|
|
Partner
|
|
|
Minimum Quarterly Distribution
|
|
$0.35
|
|
|
98.3
|
%
|
|
|
1.7
|
%
|
First Target Distribution
|
|
up to $0.4025
|
|
|
98.3
|
%
|
|
|
1.7
|
%
|
Second Target Distribution
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above $0.4025 up to $0.4375
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85.3
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%
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14.7
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%
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Third Target Distribution
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above $0.4375 up to $0.525
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75.3
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%
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24.7
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%
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Thereafter
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above $0.525
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50.3
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%
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49.7
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%
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Distributions
from Capital Surplus
How Distributions from Capital Surplus Will Be
Made. Our partnership agreement requires that we
make distributions of available cash from capital surplus, if
any, in the following manner:
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first, to all unitholders and the general partner, in
accordance with their pro rata interest, until we distribute for
each common unit that was issued in our initial public offering,
an amount of available cash from capital surplus equal to the
initial public offering price;
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second, to the common unitholders and the general
partner, in accordance with their pro rata interest, until we
distribute for each common unit, an amount of available cash
from capital surplus equal to any unpaid arrearages in payment
of the minimum quarterly distribution on the common
units; and
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thereafter, we will make all distributions of available
cash from capital surplus as if they were from operating surplus.
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Effect of a Distribution from Capital
Surplus. Our partnership agreement treats a
distribution of capital surplus as the repayment of the initial
unit price from this initial public offering, which is a return
of capital. The initial public offering price less any
distributions of capital surplus per unit is referred to as the
unrecovered initial unit price. Each time a
distribution of capital surplus is made, the minimum quarterly
distribution and the target distribution levels will be reduced
in the same proportion as the corresponding reduction in the
unrecovered initial unit price. Because distributions of capital
surplus will reduce the minimum quarterly distribution, after
any of these distributions are made, it may be easier for the
general partner to receive incentive distributions and for the
subordinated units to convert into common units. However, any
distribution of capital surplus before the unrecovered initial
unit price is reduced to zero cannot be applied to the payment
of the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a unit issued in our
initial public offering in an amount equal to the initial unit
price, our partnership agreement specifies that the minimum
quarterly distribution and the target distribution levels will
be reduced to zero. Our partnership agreement specifies that we
then make all future distributions from operating surplus, with
48% being paid to the general partner, plus the general
partners pro rata interest, and the remainder being paid
to all unitholders. This assumes the general partner has not
transferred the incentive distribution rights.
53
Adjustment
to the Minimum Quarterly Distribution and Target Distribution
Levels
In addition to adjusting the minimum quarterly distribution and
target distribution levels to reflect a distribution of capital
surplus, if we combine our units into fewer units or subdivide
our units into a greater number of units, our partnership
agreement specifies that the following items will be
proportionately adjusted:
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the minimum quarterly distribution;
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target distribution levels;
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the unrecovered initial unit price;
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the number of common units issuable during the subordination
period without a unitholder vote; and
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the number of common units into which a subordinated unit is
convertible.
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For example, if a two-for-one split of the common units should
occur, the minimum quarterly distribution, the target
distribution levels and the unrecovered initial unit price would
each be reduced to 50% of its initial level, the number of
common units issuable during the subordination period without
unitholder vote would double and each subordinated unit would be
convertible into two common units. Our partnership agreement
provides that we not make any adjustment by reason of the
issuance of additional units for cash or property.
In addition, if legislation is enacted or if existing law is
modified or interpreted by a governmental taxing authority, so
that we become taxable as a corporation or otherwise subject to
taxation as an entity for federal, state or local income tax
purposes, our partnership agreement specifies that the minimum
quarterly distribution and the target distribution levels for
each quarter will be reduced by multiplying each distribution
level by a fraction, the numerator of which is available cash
for that quarter and the denominator of which is the sum of
available cash for that quarter plus the general partners
estimate of our aggregate liability for the quarter for such
income taxes payable by reason of such legislation or
interpretation. To the extent that the actual tax liability
differs from the estimated tax liability for any quarter, the
difference will be accounted for in subsequent quarters.
Distributions
of Cash Upon Liquidation
General. If we dissolve in accordance with the
partnership agreement, we will sell or otherwise dispose of our
assets in a process called liquidation. We will first apply the
proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and the
general partner, in accordance with their capital account
balances, as adjusted to reflect any gain or loss upon the sale
or other disposition of our assets in liquidation.
The allocations of gain and loss upon liquidation are intended,
to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding
subordinated units upon our liquidation, to the extent required
to permit common unitholders to receive their unrecovered
initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid
arrearages in payment of the minimum quarterly distribution on
the common units. However, there may not 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.
Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive
distribution rights of the general partner.
Manner of Adjustments for Gain. The manner of
the adjustment for gain is set forth in the partnership
agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any gain to the partners
in the following manner:
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first, to the 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;
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second, to the common unitholders and the general
partner, in accordance with their pro rata interest, until the
capital account for each common unit is equal to the sum of:
(1) the unrecovered initial unit price; (2) the amount
of the minimum quarterly distribution for the quarter during
which our liquidation occurs; and (3) any unpaid arrearages
in payment of the minimum quarterly distribution;
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54
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third, to the subordinated unitholders and the general
partner, in accordance with their pro rata interest, until the
capital account for each subordinated unit is equal to the sum
of: (1) the unrecovered initial unit price; and
(2) the amount of the minimum quarterly distribution for
the quarter during which our liquidation occurs;
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fourth, to all unitholders and the general partner, in
accordance with their pro rata interest, until we allocate under
this paragraph an amount per unit equal to: (1) the sum of
the excess of the first target distribution per unit over the
minimum quarterly distribution per unit for each quarter of our
existence; less (2) the cumulative amount per unit of any
distributions of available cash from operating surplus in excess
of the minimum quarterly distribution per unit that we
distributed to the unitholders and the general partner, in
accordance with their pro rata interest, for each quarter of our
existence;
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fifth, 13% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders pro rata, until we allocate under this paragraph an
amount per unit equal to: (1) the sum of the excess of the
second target distribution per unit over the first target
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the first
target distribution per unit that we distributed 13% to the
general partner, plus the general partners pro rata
interest, and the remainder to all unitholders pro rata for each
quarter of our existence;
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sixth, 23% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders pro rata, until we allocate under this paragraph an
amount per unit equal to: (1) the sum of the excess of the
third target distribution per unit over the second target
distribution per unit for each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the second
target distribution per unit that we distributed 23% to the
general partner, plus the general partners pro rata
interest, and the remainder to all unitholders pro rata for each
quarter of our existence; and
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thereafter, 48% to the general partner, plus the general
partners pro rata interest, and the remainder to all
unitholders.
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If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that clause (3) of the second
bullet point above and all of the third bullet point above will
no longer be applicable.
Manner of Adjustments for Losses. If our
liquidation occurs before the end of the subordination period,
we will generally allocate any loss to the general partner and
the unitholders in the following manner:
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first, to holders of subordinated units in proportion to
the positive balances in their capital accounts and the general
partner, in accordance with their pro rata interest, until the
capital accounts of the subordinated unitholders have been
reduced to zero;
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second, to the holders of common units in proportion to
the positive balances in their capital accounts and the general
partner, in accordance with their pro rata interest, until the
capital accounts of the common unitholders have been reduced to
zero; and
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thereafter, 100% to the general partner.
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If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that all of the first bullet point
above will no longer be applicable.
Adjustments to Capital Accounts. Our
partnership agreement requires that we make adjustments to
capital accounts upon the issuance of additional units. In this
regard, our partnership agreement specifies that we allocate any
unrealized and, for tax purposes, unrecognized gain or loss
resulting from the adjustments to the unitholders and the
general partner in the same manner as we allocate gain or loss
upon liquidation. In the event that we make positive adjustments
to the capital accounts upon the issuance of additional units,
our partnership agreement requires that we allocate any later
negative adjustments to the capital accounts resulting from the
issuance of additional units or upon our liquidation in a manner
which results, to the extent possible, in the general
partners capital account balances equaling the amount
which they would have been if no earlier positive adjustments to
the capital accounts had been made.
55
DESCRIPTION
OF DEBT SECURITIES
General
The debt securities will be:
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our direct general obligations;
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either senior debt securities or subordinated debt
securities; and
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issued under separate indentures among us and a trustee.
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DCP Midstream Partners, LP may issue debt securities in one or
more series, and DCP Midstream Partners Finance Corp. may be a
co-issuer of one or more series of debt securities. DCP
Midstream Partners Finance Corp. was incorporated under the laws
of the State of Delaware on April 18, 2007, is wholly-owned
by DCP Midstream Partners, LP, and has no material assets or any
liabilities other than as a co-issuer of debt securities. Its
activities will be limited to co-issuing debt securities and
engaging in other activities incidental thereto. When used in
this section Description of Debt Securities, the
terms we, us, our and
issuers refer jointly to DCP Midstream Partners, LP
and DCP Midstream Partners Finance Corp., and the terms
DCP Midstream Partners, LP and DCP Midstream
Partners Finance refer strictly to DCP Midstream Partners,
LP and DCP Midstream Partners Finance Corp., respectively.
If we offer senior debt securities, we will issue them under a
senior indenture. If we issue subordinated debt securities, we
will issue them under a subordinated indenture. The trustee
under each indenture (the Trustee) will be named in
the applicable prospectus supplement. A form of each indenture
is filed as an exhibit to the registration statement of which
this prospectus is a part. We have not restated either indenture
in its entirety in this description. You should read the
relevant indenture because it, and not this description,
controls your rights as holders of the debt securities.
Capitalized terms used in the summary have the meanings
specified in the indentures.
Specific
Terms of Each Series of Debt Securities in the Prospectus
Supplement
A prospectus supplement and a supplemental indenture or
authorizing resolutions relating to any series of debt
securities being offered will include specific terms relating to
the offering. These terms will include some or all of the
following:
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whether DCP Midstream Partners Finance will be a co-issuer of
the debt securities;
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whether the debt securities are senior or subordinated debt
securities;
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the title of the debt securities;
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the total principal amount of the debt securities;
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the assets, if any, that are pledged as security for the payment
of the debt securities;
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whether we will issue the debt securities in individual
certificates to each holder in registered form, or in the form
of temporary or permanent global securities held by a depository
on behalf of holders;
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the prices at which we will issue the debt securities;
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the portion of the principal amount that will be payable if the
maturity of the debt securities is accelerated;
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the currency or currency unit in which the debt securities will
be payable, if not U.S. dollars;
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the dates on which the principal of the debt securities will be
payable;
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the interest rate that the debt securities will bear and the
interest payment dates for the debt securities;
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any conversion or exchange provisions;
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any optional redemption provisions;
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56
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any sinking fund or other provisions that would obligate us to
repurchase or otherwise redeem the debt securities;
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any changes to or additional events of default or
covenants; and
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any other terms of the debt securities.
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We may offer and sell debt securities, including original issue
discount debt securities, at a substantial discount below their
principal amount. The prospectus supplement will describe
special U.S. federal income tax and any other
considerations applicable to those securities. In addition, the
prospectus supplement may describe certain special
U.S. federal income tax or other considerations applicable
to any debt securities that are denominated in a currency other
than U.S. dollars.
Guarantees
None of our subsidiaries will guarantee our obligations under
the debt securities.
Consolidation,
Merger or Asset Sale
Each indenture will, in general, allow us to consolidate or
merge with or into another domestic entity. It will also allow
each issuer to sell, lease, transfer or otherwise dispose of all
or substantially all of its assets to another domestic entity.
If this happens, the remaining or acquiring entity must assume
all of the issuers responsibilities and liabilities under
the indenture including the payment of all amounts due on the
debt securities and performance of the issuers covenants
in the indenture.
However, each indenture will impose certain requirements with
respect to any consolidation or merger with or into an entity,
or any sale, lease, transfer or other disposition of all or
substantially all of an issuers assets, including:
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the remaining or acquiring entity must be organized under the
laws of the United States, any state or the District of
Columbia; provided that DCP Midstream Partners Finance may not
merge, amalgamate or consolidate with or into another entity
other than a corporation satisfying such requirement for so long
as DCP Midstream Partners, LP is not a corporation;
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the remaining or acquiring entity must assume the issuers
obligations under the indenture; and
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immediately after giving effect to the transaction, no Default
or Event of Default (as defined under
Events of Default and Remedies below) may
exist.
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The remaining or acquiring entity will be substituted for the
issuer in the indenture with the same effect as if it had been
an original party to the indenture, and, except in the case of a
lease of all or substantially all of its assets, the issuer will
be relieved from any further obligations under the indenture.
No
Protection in the Event of a Change of Control
Unless otherwise set forth in the prospectus supplement, the
debt securities will not contain any provisions that protect the
holders of the debt securities in the event of a change of
control of us or in the event of a highly leveraged transaction,
whether or not such transaction results in a change of control
of us.
Modification
of Indentures
We may supplement or amend an indenture if the holders of a
majority in aggregate principal amount of the outstanding debt
securities of all series issued under the indenture affected by
the supplement or amendment consent to it. Further, the holders
of a majority in aggregate principal amount of the outstanding
debt securities of any series may waive past defaults under the
indenture and compliance by us with our covenants with respect
to the debt securities of that series only. Those holders may
not, however, waive any default in any payment on any debt
security of that series or compliance with a provision that
cannot be
57
supplemented or amended without the consent of each holder
affected. Without the consent of each outstanding debt security
affected, no modification of the indenture or waiver may:
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reduce the principal amount of debt securities whose holders
must consent to an amendment, supplement or waiver;
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reduce the principal of or change the fixed maturity of any debt
security;
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reduce or waive the premium payable upon redemption or alter or
waive the provisions with respect to the redemption of the debt
securities (except as may be permitted in the case of a
particular series of debt securities);
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reduce the rate of or change the time for payment of interest on
any debt security;
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waive a Default or an Event of Default in the payment of
principal of or premium, if any, or interest on the debt
securities (except a rescission of acceleration of the debt
securities by the holders of at least a majority in aggregate
principal amount of the debt securities and a waiver of the
payment default that resulted from such acceleration);
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except as otherwise permitted under the indenture, release any
security that may have been granted with respect to the debt
securities;
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make any debt security payable in currency other than that
stated in the debt securities;
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in the case of any subordinated debt security, make any change
in the subordination provisions that adversely affects the
rights of any holder under those provisions;
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make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of debt
securities to receive payments of principal of or premium, if
any, or interest on the debt securities;
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waive a redemption payment with respect to any debt security
(except as may be permitted in the case of a particular series
of debt securities); or
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make any change in the preceding amendment, supplement and
waiver provisions (except to increase any percentage set forth
therein).
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We may supplement or amend an indenture without the consent of
any holders of the debt securities in certain circumstances,
including:
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to establish the form of terms of any series of debt securities;
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to cure any ambiguity, defect or inconsistency;
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to provide for uncertificated notes in addition to or in place
of certified notes;
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to provide for the assumption of an issuers obligations to
holders of debt securities in the case of a merger or
consolidation or disposition of all or substantially all of such
issuers assets;
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in the case of any subordinated debt security, to make any
change in the subordination provisions that limits or terminates
the benefits applicable to any holder of Senior Indebtedness of
DCP Midstream Partners, LP;
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to make any changes that would provide any additional rights or
benefits to the holders of debt securities or that do not, taken
as a whole, adversely affect the rights under the indenture of
any holder of debt securities;
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to comply with requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust
Indenture Act;
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to evidence or provide for the acceptance of appointment under
the indenture of a successor Trustee;
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to add any additional Events of Default; or
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to secure the debt securities.
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58
Events of
Default and Remedies
Event of Default, when used in an indenture, will
mean any of the following with respect to the debt securities of
any series:
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failure to pay when due the principal of or any premium on any
debt security of that series;
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failure to pay, within 30 days of the due date, interest on
any debt security of that series;
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failure to pay when due any sinking fund payment with respect to
any debt securities of that series;
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failure on the part of the issuers to comply with the covenant
described under Consolidation, Merger or Asset
Sale;
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failure to perform any other covenant in the indenture that
continues for 60 days after written notice is given to the
issuers;
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certain events of bankruptcy, insolvency or reorganization of an
issuer; or
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any other Event of Default provided under the terms of the debt
securities of that series.
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An Event of Default for a particular series of debt securities
will not necessarily constitute an Event of Default for any
other series of debt securities issued under an indenture. The
Trustee may withhold notice to the holders of debt securities of
any default (except in the payment of principal, premium, if
any, or interest) if it considers such withholding of notice to
be in the best interests of the holders.
If an Event of Default described in the sixth bullet point above
occurs, the entire principal of, premium, if any, and accrued
interest on, all debt securities then outstanding will be due
and payable immediately, without any declaration or other act on
the part of the Trustee or any holders. If any other Event of
Default for any series of debt securities occurs and continues,
the Trustee or the holders of at least 25% in aggregate
principal amount of the debt securities of the series may
declare the entire principal of, and accrued interest on, all
the debt securities of that series to be due and payable
immediately. If this happens, subject to certain conditions, the
holders of a majority in the aggregate principal amount of the
debt securities of that series can rescind the declaration.
Other than its duties in case of a default, a Trustee is not
obligated to exercise any of its rights or powers under either
indenture at the request, order or direction of any holders,
unless the holders offer the Trustee reasonable security or
indemnity. If they provide this reasonable security or
indemnification, the holders of a majority in aggregate
principal amount of any series of debt securities may direct the
time, method and place of conducting any proceeding or any
remedy available to the Trustee, or exercising any power
conferred upon the Trustee, for that series of debt securities.
No Limit
on Amount of Debt Securities
Neither indenture will limit the amount of debt securities that
we may issue, unless we indicate otherwise in a prospectus
supplement. Each indenture will allow us to issue debt
securities of any series up to the aggregate principal amount
that we authorize.
Registration
of Notes
We will issue debt securities of a series only in registered
form, without coupons, unless otherwise indicated in the
prospectus supplement.
Minimum
Denominations
Unless the prospectus supplement states otherwise, the debt
securities will be issued only in principal amounts of $1,000
each or integral multiples of $1,000.
59
No
Personal Liability
None of the past, present or future partners, incorporators,
managers, members, directors, officers, employees, unitholders
or stockholders of either issuer or the general partner of DCP
Midstream Partners, LP will have any liability for the
obligations of the issuers under either indenture or the debt
securities or for any claim based on such obligations or their
creation. Each holder of debt securities by accepting a debt
security waives and releases all such liability. The waiver and
release are part of the consideration for the issuance of the
debt securities. The waiver may not be effective under federal
securities laws, however, and it is the view of the SEC that
such a waiver is against public policy.
Payment
and Transfer
The Trustee will initially act as paying agent and registrar
under each indenture. The issuers may change the paying agent or
registrar without prior notice to the holders of debt
securities, and the issuers or any of their subsidiaries may act
as paying agent or registrar.
If a holder of debt securities has given wire transfer
instructions to the issuers, the issuers will make all payments
on the debt securities in accordance with those instructions.
All other payments on the debt securities will be made at the
corporate trust office of the Trustee, unless the issuers elect
to make interest payments by check mailed to the holders at
their addresses set forth in the debt security register.
The Trustee and any paying agent will repay to us upon request
any funds held by them for payments on the debt securities that
remain unclaimed for two years after the date upon which that
payment has become due. After payment to us, holders entitled to
the money must look to us for payment as general creditors.
Exchange,
Registration and Transfer
Debt securities of any series will be exchangeable for other
debt securities of the same series, the same total principal
amount and the same terms but in different authorized
denominations in accordance with the indenture. Holders may
present debt securities for exchange or registration of transfer
at the office of the registrar. The registrar will effect the
transfer or exchange when it is satisfied with the documents of
title and identity of the person making the request. We will not
charge a service charge for any registration of transfer or
exchange of the debt securities. We may, however, require the
payment of any tax or other governmental charge payable for that
registration.
We will not be required:
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to issue, register the transfer of, or exchange debt securities
of a series either during a period beginning 15 business days
prior to the selection of debt securities of that series for
redemption and ending on the close of business on the day of
mailing of the relevant notice of redemption or repurchase, or
between a record date and the next succeeding interest payment
date; or
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to register the transfer of or exchange any debt security called
for redemption or repurchase, except the unredeemed portion of
any debt security we are redeeming or repurchasing in part.
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Provisions
Relating only to the Senior Debt Securities
The senior debt securities will rank equally in right of payment
with all of our other unsubordinated debt. The senior debt
securities will be effectively subordinated, however, to all of
our secured debt to the extent of the value of the collateral
for that debt. We will disclose the amount of our secured debt
in the prospectus supplement.
Provisions
Relating only to the Subordinated Debt Securities
Subordinated
Debt Securities Subordinated to Senior
Indebtedness
The subordinated debt securities will rank junior in right of
payment to all of the Senior Indebtedness of DCP Midstream
Partners, LP. Senior Indebtedness will be defined in
a supplemental indenture or authorizing
60
resolutions respecting any issuance of a series of subordinated
debt securities, and the definition will be set forth in the
prospectus supplement.
Payment
Blockages
The subordinated indenture will provide that no payment of
principal, interest and any premium on the subordinated debt
securities may be made in the event:
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we or our property is involved in any voluntary or involuntary
liquidation or bankruptcy;
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we fail to pay the principal, interest, any premium or any other
amounts on any Senior Indebtedness of DCP Midstream Partners, LP
within any applicable grace period or the maturity of such
Senior Indebtedness is accelerated following any other default,
subject to certain limited exceptions set forth in the
subordinated indenture; or
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any other default on any Senior Indebtedness of DCP Midstream
Partners, LP occurs that permits immediate acceleration of its
maturity, in which case a payment blockage on the subordinated
debt securities will be imposed for a maximum of 179 days
at any one time.
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No
Limitation on Amount of Senior Debt
The subordinated indenture will not limit the amount of Senior
Indebtedness that DCP Midstream Partners, LP may incur, unless
otherwise indicated in the prospectus supplement.
Book
Entry, Delivery and Form
The debt securities of a particular series may be issued in
whole or in part in the form of one or more global certificates
that will be deposited with the Trustee as custodian for The
Depository Trust Company, New York, New York
(DTC) This means that we will not issue certificates
to each holder. Instead, one or more global debt securities will
be issued to DTC, who will keep a computerized record of its
participants (for example, your broker) whose clients have
purchased the debt securities. The participant will then keep a
record of its clients who purchased the debt securities. Unless
it is exchanged in whole or in part for a certificated debt
security, a global debt security may not be transferred, except
that DTC, its nominees and their successors may transfer a
global debt security as a whole to one another.
Beneficial interests in global debt securities will be shown on,
and transfers of global debt securities will be made only
through, records maintained by DTC and its participants.
DTC has provided us the following information: DTC is a
limited-purpose trust company organized under the New York
Banking Law, a banking organization within the
meaning of the New York Banking Law, a member of the United
States Federal Reserve System, a clearing
corporation within the meaning of the New York
Uniform Commercial Code and a clearing agency
registered under the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC holds securities that its
participants (Direct Participants) deposit with DTC.
DTC also records the settlement among Direct Participants of
securities transactions, such as transfers and pledges, in
deposited securities through computerized records for Direct
Participants accounts. This eliminates the need to
exchange certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations.
DTCs book-entry system is also used by other organizations
such as securities brokers and dealers, banks and trust
companies that work through a Direct Participant. The rules that
apply to DTC and its participants are on file with the SEC.
DTC is owned by a number of its Direct Participants and by the
New York Stock Exchange, Inc., The American Stock Exchange, Inc.
and the National Association of Securities Dealers, Inc.
We will wire all payments on the global debt securities to
DTCs nominee. We and the Trustee will treat DTCs
nominee as the owner of the global debt securities for all
purposes. Accordingly, we, the Trustee and
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any paying agent will have no direct responsibility or liability
to pay amounts due on the global debt securities to owners of
beneficial interests in the global debt securities.
It is DTCs current practice, upon receipt of any payment
on the global debt securities, to credit Direct
Participants accounts on the payment date according to
their respective holdings of beneficial interests in the global
debt securities as shown on DTCs records. In addition, it
is DTCs current practice to assign any consenting or
voting rights to Direct Participants whose accounts are credited
with debt securities on a record date, by using an omnibus
proxy. Payments by participants to owners of beneficial
interests in the global debt securities, and voting by
participants, will be governed by the customary practices
between the participants and owners of beneficial interests, as
is the case with debt securities held for the account of
customers registered in street name. However,
payments will be the responsibility of the participants and not
of DTC, the Trustee or us.
Debt securities represented by a global debt security will be
exchangeable for certificated debt securities with the same
terms in authorized denominations only if:
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DTC notifies us that it is unwilling or unable to continue as
depositary or if DTC ceases to be a clearing agency registered
under applicable law and in either event a successor depositary
is not appointed by us within 90 days; or
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an Event of Default occurs and DTC notifies the Trustee of its
decision to exchange the global debt security for certificated
debt securities.
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Satisfaction
and Discharge; Defeasance
Each indenture will be discharged and will cease to be of
further effect as to all outstanding debt securities of any
series issued thereunder, when:
(a) either:
(1) all outstanding debt securities of that series that
have been authenticated (except lost, stolen or destroyed debt
securities that have been replaced or paid and debt securities
for whose payment money has theretofore been deposited in trust
and thereafter repaid to us) have been delivered to the Trustee
for cancellation; or
(2) all outstanding debt securities of that series that
have not been delivered to the Trustee for cancellation have
become due and payable by reason of the giving of a notice of
redemption or otherwise or will become due and payable at their
stated maturity within one year or are to be called for
redemption within one year under arrangements satisfactory to
the Trustee and in any case we have irrevocably deposited or
caused to be irrevocably deposited with the Trustee as trust
funds in trust cash in U.S. dollars, non-callable
U.S. Government Obligations or a combination thereof, in
such amounts as will be sufficient, without consideration of any
reinvestment of interest, to pay and discharge the entire
indebtedness of such debt securities not delivered to the
Trustee for cancellation, for principal, premium, if any, and
accrued interest to the date of such deposit (in the case of
debt securities that have been due and payable) or the stated
maturity or redemption date;
(b) we have paid or caused to be paid all other sums
payable by us under the indenture; and
(c) we have delivered an officers certificate and an
opinion of counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
The debt securities of a particular series will be subject to
legal or covenant defeasance to the extent, and upon the terms
and conditions, set forth in the prospectus supplement.
Governing
Law
Each indenture and all of the debt securities will be governed
by the laws of the State of New York.
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The
Trustee
We will enter into the indentures with a Trustee that is
qualified to act under the Trust Indenture Act of 1939, as
amended, and with any other trustees chosen by us and appointed
in a supplemental indenture for a particular series of debt
securities. We may maintain a banking relationship in the
ordinary course of business with our trustee and one or more of
its affiliates.
Resignation
or Removal of Trustee
If the Trustee has or acquires a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee must either
eliminate its conflicting interest or resign, to the extent and
in the manner provided by, and subject to the provisions of, the
Trust Indenture Act and the applicable indenture. Any
resignation will require the appointment of a successor trustee
under the applicable indenture in accordance with the terms and
conditions of such indenture.
The Trustee may resign or be removed by us with respect to one
or more series of debt securities and a successor Trustee may be
appointed to act with respect to any such series. The holders of
a majority in aggregate principal amount of the debt securities
of any series may remove the Trustee with respect to the debt
securities of such series.
Limitations
on Trustee if it is Our Creditor
Each indenture will contain certain limitations on the right of
the Trustee, in the event that it becomes a creditor of an
issuer, 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.
Annual
Trustee Report to Holders of Debt Securities
The Trustee is required to submit an annual report to the
holders of the debt securities regarding, among other things,
the Trustees eligibility to serve as such, the priority of
the Trustees claims regarding certain advances made by it,
and any action taken by the Trustee materially affecting the
debt securities.
Certificates
and Opinions to be Furnished to Trustee
Each indenture will provide that, in addition to other
certificates or opinions that may be specifically required by
other provisions of the indenture, every application by us for
action by the Trustee shall be accompanied by a certificate of
certain of our officers and an opinion of counsel (who may be
our counsel) stating that, in the opinion of the signers, all
conditions precedent to such action have been complied with
by us.
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MATERIAL
TAX CONSEQUENCES
This section is a summary of the material tax consequences that
may be relevant to prospective unitholders who are individual
citizens or residents of the United States and, unless otherwise
noted in the following discussion, is the opinion of
Vinson & Elkins L.L.P., counsel to our general partner
and us, insofar as it relates to legal conclusions with respect
to matters of United States federal income tax law. This section
is based upon current provisions of the Internal Revenue Code,
existing and proposed regulations to the extent noted and
current administrative rulings and court decisions, all of which
are subject to change. Later changes in these authorities may
cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise
requires, references in this section to us or
we are to DCP Midstream Partners and the operating
partnership.
This section does not address all federal income tax matters
that affect us or the unitholders. Furthermore, this section
focuses on unitholders who are individual citizens or residents
of the United States and has only limited application to
corporations, estates, trusts, non-resident aliens or other
unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, individual retirement
accounts (IRAs), real estate investment trusts (REITs) or mutual
funds. Accordingly, each prospective unitholder is urged to
consult, and depend on, his own tax advisor in analyzing the
federal, state, local and foreign tax consequences particular to
him of the ownership or disposition of common units.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Vinson & Elkins
L.L.P. and are based on the accuracy of the representations made
by us.
No ruling has been or will be requested from the IRS regarding
any matter that affects us or prospective unitholders. Instead,
we will rely on opinions and advice of Vinson & Elkins
L.L.P. Unlike a ruling, an opinion of counsel represents only
that counsels best legal judgment and does not bind the
IRS or the courts. Accordingly, the opinions and statements made
herein may not be sustained by a court if contested by the IRS.
Any contest of this sort with the IRS may materially and
adversely impact the market for the common units and the prices
at which common units trade. In addition, the costs of any
contest with the IRS, principally legal, accounting and related
fees, will result in a reduction in cash available for
distribution to our unitholders and our general partner and thus
will be borne directly or indirectly by the unitholders and the
general partner. Furthermore, the tax treatment of us, or of an
investment in us, may be significantly modified by future
legislative or administrative changes or court decisions. Any
modifications may or may not be retroactively applied.
For the reasons described below, Vinson & Elkins
L.L.P. has not rendered an opinion with respect to the following
specific federal income tax issues:
(1) the treatment of a unitholder whose common units are
loaned to a short seller to cover a short sale of common units
(please read Tax Consequences of Unit
Ownership Treatment of Short Sales);
(2) whether our monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations
(please read Disposition of Common
Units Allocations Between Transferors and
Transferees); and
(3) whether our method for depreciating Section 743
adjustments is sustainable in certain cases (please read
Tax Consequences of Unit Ownership
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 share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable to the
partner unless the amount of cash distributed to him is in
excess of his adjusted basis in his partnership interest.
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Section 7704 of the Internal Revenue Code provides that
publicly-traded partnerships will, as a general rule, be taxed
as corporations. However, an exception, referred to as the
Qualifying Income Exception, exists with respect to
publicly-traded partnerships of which 90% or more of the gross
income for every taxable year consists of qualifying
income. Qualifying income includes income and gains
derived from the transportation, storage and processing of crude
oil, natural gas and products thereof and fertilizer. Other
types of qualifying income include interest (other than from a
financial business), dividends, gains from the sale 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. We estimate that less than 7% 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 the
general partner and a review of the applicable legal
authorities, Vinson & Elkins L.L.P. is of the opinion
that at least 90% of our current gross income constitutes
qualifying income.
No ruling has been or will be sought from the IRS and the IRS
has made no determination as to our status or the status of the
operating partnership for federal income tax purposes or whether
our operations generate qualifying income under
Section 7704 of the Internal Revenue Code. Instead, we will
rely on the opinion of Vinson & Elkins L.L.P. on such
matters. It is the opinion of Vinson & Elkins L.L.P.
that, based upon the Internal Revenue Code, its regulations,
published revenue rulings and court decisions and the
representations set forth below, we will be classified as a
partnership and our operating company will be disregarded as an
entity separate from us for federal income tax purposes.
In rendering its opinion, Vinson & Elkins L.L.P. has
relied on factual representations made by us and the general
partner. The representations made by us and our general partner
upon which counsel has relied are:
(a) Neither we nor the operating company has elected or
will elect to be treated as a corporation;
(b) For each taxable year, more than 90% of our gross
income has been and will be income that Vinson &
Elkins L.L.P. has opined or will opine is qualifying
income within the meaning of Section 7704(d) of the
Internal Revenue Code; and
(c) Each hedging transaction that we treat as resulting in
qualifying income has been and will be appropriately identified
as a hedging transaction pursuant to applicable Treasury
Regulations, and has been and will be associated with oil, gas,
or products thereof that are held or to be held by us in
activities that Vinson & Elkins L.L.P. has opined or
will opine result in qualifying income.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery (in which case
the IRS may also require us to make adjustments with respect to
our unitholders or pay other amounts) 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 the unitholders in liquidation of their interests in us. This
deemed contribution and liquidation should be tax-free to
unitholders and us so long as we, at that time, do not have
liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal
income tax purposes.
If we were treated as an association taxable 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 unitholders tax basis in his common units,
or taxable capital gain, after the unitholders tax basis
in his common units is reduced to zero. Accordingly, taxation as
a corporation would result in a material reduction in a
unitholders cash flow and after-tax return and thus would
likely result in a substantial reduction of the value of the
units.
The remainder of this section is based on Vinson &
Elkins L.L.P.s opinion that we will be classified as a
partnership for federal income tax purposes.
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Unitholders who have become limited partners of DCP Midstream
Partners will be treated as partners of DCP Midstream Partners
for federal income tax purposes. Also:
(a) assignees who have executed and delivered transfer
applications, and are awaiting admission as limited
partners, and
(b) 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 partners of
DCP Midstream Partners for federal income tax purposes.
As there is no direct or indirect controlling authority
addressing the federal tax treatment of 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, the opinion of Vinson & Elkins
L.L.P. 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 status as a partner with respect to those
units for federal income tax purposes. Please read
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 appear to be fully taxable as ordinary income.
These holders are urged to consult their own tax advisors with
respect to their status as partners in DCP Midstream Partners
for federal income tax purposes.
Tax
Consequences of Unit Ownership
Flow-Through of Taxable Income. We will not
pay any federal income tax. Instead, each unitholder will be
required to report on his income tax return his share of our
income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by him.
Consequently, we may allocate income to a unitholder even if he
has not received a cash distribution. Each unitholder will be
required to include in income his allocable share of our income,
gains, losses and deductions for our taxable year ending with or
within his taxable year. Our taxable year ends on
December 31.
Treatment of Distributions. Cash distributions
made by us to a unitholder generally will not be taxable to him
for federal income tax purposes to the extent of his tax basis
in his common units immediately before the distribution. Cash
distributions made by us to a unitholder in an amount in excess
of his tax basis in his common units 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. To
the extent that cash distributions made by us cause a
unitholders at risk amount to be less than
zero at the end of any taxable year, he must recapture any
losses deducted in previous years. Please read
Limitations on Deductibility of Losses.
Any reduction in a unitholders share of our liabilities
for which no partner, including the general partner, bears the
economic risk of loss, known as nonrecourse
liabilities, will be treated as a distribution of cash to
that unitholder. A decrease in a unitholders percentage
interest in us because of our issuance of additional common
units will decrease his share of our nonrecourse liabilities,
and thus will result in a corresponding deemed distribution of
cash, which may constitute a non-pro rata distribution. A
non-pro rata distribution of money or property may result in
ordinary income to a unitholder, regardless of his tax basis in
his common units, if the distribution reduces the
unitholders share of our unrealized
receivables, including depreciation recapture,
and/or
substantially appreciated inventory items, both as
defined in Section 751 of the Internal Revenue Code, and
collectively, Section 751 Assets. To that
extent, he will be treated as having been distributed his
proportionate share of the Section 751 Assets and then
having exchanged those assets with us
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in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will
generally result in the unitholders realization of
ordinary income. That income will equal the excess of
(1) the non-pro rata portion of that distribution over
(2) the unitholders tax basis (generally zero) for
the share of Section 751 Assets deemed relinquished in the
exchange.
Basis of Common Units. A unitholders
initial tax basis for his common units will be the amount he
paid for the common units plus his share of our nonrecourse
liabilities. That basis will be increased by his share of our
income and by any increases in his share of our nonrecourse
liabilities. That basis will be decreased, but not below zero,
by distributions to him from us, by his share of our losses, by
any decreases in his share of our nonrecourse liabilities and by
his share of our expenditures that are not deductible in
computing taxable income and are not required to be capitalized.
A unitholder will have no share of our debt that is recourse to
the general partner, but will have a share, generally based on
his share of profits, of our nonrecourse liabilities. Please
read Disposition of Common Units
Recognition of Gain or Loss.
Limitations on Deductibility of Losses. The
deduction by a unitholder of his share of our losses will be
limited to the tax basis in his units and, in the case of an
individual unitholder, estate, trust, or a corporate unitholder
(if more than 50% of the value of the corporate
unitholders stock is owned directly or indirectly by or
for five or fewer individuals or certain 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 his tax basis. A unitholder
subject to these limitations 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 as a deduction in a later year to the extent that his
at-risk amount is subsequently increased provided such losses do
not exceed such unitholders tax basis in his units. 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 loss previously
suspended by the at-risk limitations in excess of that gain
would no longer be utilizable.
In general, a unitholder will be at risk to the extent of his
tax basis in his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by any amount of money he borrows to acquire or hold his
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, or any portion of that basis representing amounts
otherwise protected against loss because of a guarantee, stop
loss agreement or other similar arrangement. A unitholders
at-risk amount will increase or decrease as the tax basis of the
unitholders units increases or decreases, other than tax
basis increases or decreases attributable to increases or
decreases in his share of our nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, the passive loss limitations generally
provide that individuals, estates, trusts and some closely-held
corporations and personal service corporations are permitted to
deduct losses from passive activities, which are generally
defined as trade or business activities in which the taxpayer
does not materially participate, only to the extent of the
taxpayers 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 or a unitholders investments in
other publicly-traded partnerships, or salary or active business
income. Passive losses that are not deductible because they
exceed a unitholders share of income we generate may
generally be deducted in full when he disposes of his entire
investment in us in a fully taxable transaction with an
unrelated party. Further, a unitholders share of our net
income may be offset by any suspended passive losses from that
unitholders investment in us, but may not be offset by
that unitholders current or carryover losses from other
passive activities, including those attributable to other
publicly traded partnerships.
The passive loss limitations are applied after other applicable
limitations on deductions, including the at-risk rules and the
basis limitation.
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Limitations on Interest Deductions. The
deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributable to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders 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 or qualified
dividend income. The IRS has indicated that net passive income
earned by a publicly-traded partnership will be treated as
investment income to its unitholders. In addition, the
unitholders share of our portfolio income will be treated
as investment income.
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 the 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 unitholder on whose behalf the
payment was made. If the payment is made on behalf of a
unitholder whose identity cannot be determined, we are
authorized to treat the payment as a distribution to all current
unitholders. 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 the unitholder would be
required to file a claim in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and
Deduction. In general, if we have a net profit,
our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with
their percentage interests in us. At any time that distributions
are made to the common units in excess of distributions to the
subordinated units, or that incentive distributions are made to
the general partner, gross income will be allocated to the
recipients to the extent of those distributions. If we have a
net loss, that amount of loss will be allocated first to the
general partner and the unitholders in accordance with their
percentage interests in us to the extent of their positive
capital accounts and then to our general partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for the difference between the tax basis
and fair market value of our assets at the time of an offering,
referred to in this discussion as Contributed
Property. The effect of these allocations, referred to as
Section 704(c) Allocations, to a unitholder who purchases
common units from us in an offering will be essentially the same
as if the tax basis of our assets were equal to their fair
market value at the time of the offering. In the event we issue
additional common units or engage in certain other transactions
in the future Reverse Section 704(c)
Allocations, similar to the Section 704(c)
Allocations described above, will be made to all holders of
partnership interests immediately prior to such other
transactions to account for the difference between a
partners book capital account, credited with
the fair market value of our Contributed Property at that time,
and tax capital account, credited with the tax basis
of our Contributed Property, referred to in this discussion as
the Book-Tax Disparity. In addition, items of
recapture income will be allocated to the extent possible to the
unitholder 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 other 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.
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An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the Book-Tax Disparity will generally be given
effect for federal income tax purposes in determining a
partners share of an item of income, gain, loss or
deduction only if the allocation has substantial economic
effect. In any other case, a partners share of an item
will be determined on the basis of his interest in us, which
will be determined by taking into account all the facts and
circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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Vinson & Elkins L.L.P. is of the opinion that, with
the exception of the issues described in
Section 754 Election and
Disposition of Common Units
Allocations Between Transferors and Transferees,
allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a
unitholders share of an item of income, gain, loss or
deduction.
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 those
units. If so, he would no longer be treated for tax purposes as
a partner with respect to those units during the period of the
loan and may recognize gain or loss from the disposition. As a
result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Vinson & Elkins L.L.P. has not rendered an opinion
regarding the treatment of a unitholder where common units are
loaned to a short seller to cover a short sale of common units;
therefore, unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a
short seller should modify any applicable brokerage account
agreements to prohibit their brokers from loaning their units.
The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership
interests. Please also read Disposition of
Common Units Recognition of Gain or Loss.
Alternative Minimum Tax. Each unitholder will
be required to take into account his distributive share of any
items of our income, gain, loss or deduction for purposes of the
alternative minimum tax. The current minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption
amount and 28% on any additional alternative minimum taxable
income. Prospective unitholders are urged to consult with their
tax advisors as to the impact of an investment in units on their
liability for the alternative minimum tax.
Tax Rates. In general, the highest effective
United States federal income tax rate for individuals currently
is 35% and the maximum United States federal income tax rate for
net capital gains of an individual where the asset disposed of
was held for more than twelve months at the time of disposition
is currently 15% and is scheduled to remain at 15% for years
2008 through 2010 and then increase to 20% beginning
January 1, 2011.
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 will generally permit us to adjust a common
unit purchasers tax basis in our assets (inside
basis) under Section 743(b) of the Internal Revenue
Code to reflect his purchase price. The Section 743(b)
adjustment does not apply to a person who purchases common units
directly from us and it belongs only to the purchaser and not to
other unitholders. For purposes of this discussion, a
unitholders inside basis in our assets has two components:
(1) his share of our tax basis in our assets (common
basis) and (2) his Section 743(b) adjustment to
that basis.
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Where the remedial allocation method is adopted (which we have
adopted as to property other than certain goodwill properties),
the Treasury Regulations under Section 743 of the Internal
Revenue Code require a portion of the Section 743(b)
adjustment that is attributable to recovery property under
Section 168 of the Internal Revenue Code whose book basis
is in excess of its tax basis to be depreciated over the
remaining cost recovery period for the propertys
unamortized Book-Tax Disparity. Under Treasury Regulation
Section 1.167(c)-l(a)(6),
a Section 743(b) 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. If we elect a method other than the remedial method, the
depreciation and amortization methods and useful lives
associated with the Section 743(b) adjustment, therefore,
may differ from the methods and useful lives generally used to
depreciate the inside basis in such properties. Under our
partnership agreement, the general partner is authorized to take
a position to preserve the uniformity of units even if that
position is not consistent with these and any other Treasury
Regulations. Please read Tax Treatment of
Operations Uniformity of Units.
Although Vinson & Elkins L.L.P. is unable to opine as
to the validity of this approach because there is no direct or
indirect controlling authority on this issue, we intend to
depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of
Contributed Property, 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 propertys unamortized Book-Tax Disparity,
or treat that portion as
non-amortizable
to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the methods
employed by other publicly traded partnerships but is arguably
inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, 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 take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read
Tax Treatment of Operations
Uniformity of Units. A unitholders tax basis for his
common units is reduced by his share of our deductions (whether
or not such deductions were claimed on an individuals
income tax return) so that any position we take that understates
deductions will overstate the common unitholders basis in
his common units, which may cause the unitholder to understate
gain or overstate loss on any sale of such units. Please read
Disposition of Common Units
Recognition of Gain or Loss. The IRS may challenge our
position with respect to depreciating or amortizing the
Section 743(b) adjustment we take to preserve the
uniformity of the units. If such a challenge were sustained, the
gain from the sale of units might be increased without the
benefit of additional deductions.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
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, among other items, a
greater amount of depreciation and depletion deductions and his
share of any gain or loss on a sale of our assets would be less.
Conversely, a Section 754 election is disadvantageous if
the transferees tax basis in his units is lower than those
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 unfavorably by
the election. A basis adjustment is required regardless of
whether a Section 754 election is made in the case of a
transfer of an interest in us if we have a substantial built-in
loss immediately after the transfer, or if we distribute
property and have a substantial basis reduction. Generally a
built-in loss or a basis reduction is substantial if it exceeds
$250,000.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, 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 reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets to goodwill instead. Goodwill, as an intangible asset, is
generally nonamortizable or amortizable over a longer
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period of time or under a less accelerated method than our
tangible assets. We cannot assure you 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.
Tax
Treatment of Operations
Accounting Method and Taxable Year. We use the
year ending December 31 as our taxable year and the accrual
method of accounting for federal income tax purposes. Each
unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending
within or with his 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 units following the close of our
taxable year but before the close of his taxable year must
include his share of our income, gain, loss and deduction in
income for his taxable year, with the result that he will be
required to include in income for his taxable year his share of
more than one year of our income, gain, loss and deduction.
Please read Disposition of Common
Units Allocations Between Transferors and
Transferees.
Initial 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 our assets and their
tax basis immediately prior to an offering will be borne by the
general partner, its affiliates and our other unitholders
immediately prior to such offering. Please read
Tax Consequences of Unit Ownership
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 subject
to these allowances are placed in service. Because our general
partner may determine not to adopt the remedial method of
allocation with respect to any difference between the tax basis
and the fair market value of goodwill immediately prior to this
or any future offering, we may not be entitled to any
amortization deductions with respect to any goodwill conveyed to
us on formation or held by us at the time of any future
offering. Please read Uniformity of Units.
Property we subsequently acquire or construct may be 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
partner who has taken cost recovery or depreciation deductions
with respect to property we own will likely be required to
recapture some or all of those deductions as ordinary income
upon a sale of his interest in us. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction and
Disposition of Common Units
Recognition of Gain or Loss.
The costs incurred in selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which we may amortize, and as syndication
expenses, which we may not amortize. The underwriting discounts
and commissions we incur will be treated as syndication expenses.
Valuation and Tax Basis of Our Properties. The
federal income tax consequences of the ownership and disposition
of units will depend in part on our estimates of the relative
fair market values, and the initial tax bases, of our assets.
Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the
relative fair market value estimates ourselves. These estimates
and determinations of basis are subject to challenge and will
not be binding on the IRS or the courts. If the estimates of
fair market value or basis 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
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required to adjust their tax liability for prior years and incur
interest and penalties with respect to those adjustments.
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 unitholders tax basis for the
units sold. A unitholders amount realized will be measured
by the sum of the cash or the fair market value of other
property he receives plus his share of our nonrecourse
liabilities. Because the amount realized includes a
unitholders 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 unitholders tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholders tax basis in that common unit, even if the
price received is less than his original cost.
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 long term capital gain or loss. Capital gain
recognized by an individual on the sale of units held more than
twelve months will generally be taxed at a maximum rate of 15%
through December 31, 2010. However, a portion, which will
likely be substantial, of this gain or loss will be separately
computed and taxed as ordinary income or loss 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. The term unrealized receivables
includes potential recapture items, including depreciation
recapture. 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
the sale of a unit. Thus, a unitholder may recognize both
ordinary income and a capital loss upon a sale of units. Net
capital loss may offset capital gains and 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 for all those
interests. 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, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partners tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partners entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling, a common
unitholder will be unable to select high or low basis common
units to sell as would be the case with corporate stock, but,
according to the regulations, 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 common units transferred must consistently use
that identification method for all subsequent sales or exchanges
of common units. A unitholder considering the purchase of
additional units or a sale of common units purchased in separate
transactions is urged to 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(s) into:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract with respect to the partnership
interest or substantially identical property.
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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
the 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. In general, our taxable income and
losses will be determined annually, will be prorated on a
monthly basis and will be subsequently apportioned among the
unitholders in proportion to the number of units owned by each
of them as of the opening of the applicable exchange on the
first business day of the month (the Allocation
Date). However, gain or loss realized on a sale or other
disposition of our assets other than in the ordinary course of
business will be allocated among the unitholders on the
Allocation Date in 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 realized after the
date of transfer.
Although simplifying conventions are contemplated by the
Internal Revenue Code and most publicly traded partnerships use
similar simplifying conventions, the use of this method may not
be permitted under existing Treasury Regulations. Accordingly,
Vinson & Elkins L.L.P. is unable to opine on the
validity of this method of allocating income and deductions
between transferor and transferee unitholders. If this method is
not allowed under the Treasury Regulations, or only applies to
transfers of less than all of the unitholders interest,
our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of
allocation between transferor and transferee unitholders, as
well as unitholders whose interests vary during a taxable year,
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 items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who
sells any of his units is generally required to notify us in
writing of that sale within 30 days after the sale (or, if
earlier, January 15 of the year following the sale). A purchaser
of units who purchases units from another unitholder is also
generally required to notify us in writing of that purchase
within 30 days after the purchase. Upon receiving such
notifications, we are required to notify the IRS of that
transaction and to furnish specified information to the
transferor and transferee. Failure to notify us of a purchase
may, in some cases, lead to the imposition of penalties.
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 who will satisfy
such requirements.
Constructive Termination. We will be
considered to have been 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 twelve-month period. A constructive
termination results 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 may result in more than twelve
months of our taxable income or loss being includable in his
taxable income for the year of termination. A constructive
termination occurring on a date other than December 31 will
result in us filing two tax returns (and unitholders receiving
two
Schedule K-1s)
for one fiscal year and the cost of the preparation of these
returns will be borne by all common unitholders. 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 would 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.
Uniformity
of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable
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to completely comply with a number of federal income tax
requirements, both statutory and regulatory. A lack of
uniformity can result from a literal application of Treasury
Regulation Section 1.167(c)-1(a)(6).
Any non-uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of
Unit Ownership Section 754 Election.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, 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 propertys unamortized Book-Tax
Disparity, or treat that portion as nonamortizable, to the
extent attributable to property the common basis of which is not
amortizable, consistent with the regulations under
Section 743 of the Internal Revenue Code, even though that
position may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6)
which is not expected to directly apply to a material portion of
our assets. Please read Tax Consequences of
Unit Ownership Section 754 Election. To
the extent that the Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, 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 depreciation and amortization position under
which all purchasers acquiring units in the same month would
receive depreciation and amortization deductions, whether
attributable to a common basis or Section 743(b)
adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our property. If this position is
adopted, it may 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. This position will not be
adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on
the unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and
amortization method to preserve the uniformity of the intrinsic
tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any
method of depreciating the Section 743(b) adjustment
described in this paragraph. If this challenge were 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. Please read Disposition
of Common Units Recognition of Gain or Loss.
Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, and
other foreign persons raises issues unique to those investors
and, as described below, may have substantially adverse tax
consequences to them.
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 income
allocated to a unitholder which is a tax-exempt organization
will be unrelated business taxable income and will be taxable to
them.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence they will be required to file federal tax returns to
report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. Under rules applicable to publicly traded
partnerships, we will withhold tax, at the highest effective
applicable rate, from cash distributions made quarterly 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
or applicable substitute form in order to obtain credit for
these withholding taxes. A change in applicable law may require
us to change these procedures.
In addition, 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 the United States branch profits
tax at a rate of 30%, in addition to regular federal income tax,
on its share of our income and gain, as adjusted for changes in
the foreign corporations U.S. net equity,
which is effectively connected with the conduct of a United
States
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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 sale or disposition of that unit to
the extent that this gain is effectively connected with a United
States trade or business of the foreign unitholder. Because a
foreign unitholder is considered to be engaged in business in
the United States by virtue of the ownership of units, under
this ruling a foreign unitholder who sells or otherwise disposes
of a unit generally will be subject to federal income tax on
gain realized on the sale or disposition of units. Apart from
the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or 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 sale or disposition.
Administrative
Matters
Information Returns and Audit Procedures. We
intend to 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 share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take
various accounting and reporting positions, some of which have
been mentioned earlier, to determine his share of income, gain,
loss and deduction. We cannot assure you that those positions
will yield a result that conforms to the requirements of the
Internal Revenue Code, Treasury Regulations or administrative
interpretations of the IRS. Neither we nor counsel can assure
prospective unitholders that the IRS will not successfully
contend in court that those 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 an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of his own return. Any audit of
a unitholders return could result in adjustments not
related to our returns as well as those related to our returns.
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 requires that one partner be
designated as the Tax Matters Partner for these
purposes. The partnership agreement names the 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 or by any group of
unitholders having in the aggregate at least a 5% interest in
profits. 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 this 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:
(a) the name, address and taxpayer identification number of
the beneficial owner and the nominee;
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(b) whether the beneficial owner is
(1) a person that is not a United States person,
(2) a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing, or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(d) 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.
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 any 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.
For individuals 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. The amount of any
understatement subject to penalty generally is reduced if any
portion is attributable to a position adopted on the return:
(1) for which there is, or was, substantial
authority, or
(2) as to which there is a reasonable basis and the
relevant facts of that position are disclosed on the return.
If any item of income, gain, loss or deduction included in the
distributive shares of unitholders might result in that kind of
an understatement of income for which no
substantial authority exists but for which a
reasonable basis for the tax treatment of such item exists, we
must disclose the relevant facts on our return. In such a case,
we will make a reasonable effort to furnish sufficient
information for unitholders to make adequate disclosure on their
returns and to take other actions as may be appropriate to
permit unitholders to avoid liability for this penalty. More
stringent rules apply to tax shelters, a term that
in this context does not appear to include us.
A substantial valuation misstatement exists if the value of any
property, or the adjusted basis of any property, claimed on a
tax return is 150% or more of the amount determined to be the
correct amount of the valuation or adjusted basis. No penalty is
imposed unless the portion of the underpayment attributable to a
substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 200%
or more than the correct valuation, the penalty imposed
increases to 40%.
Reportable Transactions. If we were to engage
in a reportable transaction, we (and possibly you
and others) would be required to make a detailed disclosure of
the transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a listed transaction or
that it produces certain kinds of losses for partnerships,
individuals, S corporations, and trusts in excess of
$2 million in any single year, or $4 million in any
combination of tax years. Our participation in a reportable
transaction could increase the likelihood that our federal
income tax information return (and possibly your tax return)
would be audited by the IRS. Please read
Information Returns and Audit Procedures.
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Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions of the American Jobs Creation Act of 2004:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related
Penalties,
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
State,
Local and Other Tax Considerations
In addition to federal income taxes, you likely 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 or in
which you are a resident. We currently do business or own
property in the states of Colorado, Wyoming, Oklahoma,
Louisiana, Texas, Arkansas, Pennsylvania, New York, Vermont,
Massachusetts, Rhode Island, Maine, Connecticut, Indiana,
Kentucky, Maryland, New Hampshire, Ohio, Virginia and West
Virginia. Each of these states, except Texas and Wyoming,
currently impose a personal income tax on individuals. Most of
these states impose an income tax on corporations and other
entities. We may also own property or do business in other
states in the future. Although an analysis of those various
taxes is not presented here, each prospective unitholder is
urged to consider their potential impact on his investment in
us. You may not be required to file a return and pay taxes in
some states because your income from that state falls below the
filing and payment requirement. You will be required, however,
to file state income tax returns and to pay state income taxes
in many of the states in which we do business or own property,
and you may be subject 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 unitholders income tax
liability to the state, generally does not relieve a
non-resident unitholder from the obligation to file an income
tax return. Amounts withheld may be treated as if distributed to
unitholders for purposes of determining the amounts distributed
by us. Please read Tax Consequences of Unit
Ownership Entity-Level Collections. Based
on current law and our estimate of our future operations, the
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 investment in us. Vinson &
Elkins L.L.P. has not rendered an opinion on the state or local
tax consequences of an investment in us. We strongly recommend
that each prospective unitholder consult, and depend upon, his
own tax counsel or other advisor with regard to those matters.
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.
Tax
Consequences of Ownership of Debt Securities
A description of the material federal income tax consequences of
the acquisition, ownership and disposition of debt securities
will be set forth on the prospectus supplement relating to the
offering of debt securities.
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PLAN OF
DISTRIBUTION
We may sell securities described in this prospectus and any
accompanying prospectus supplement to one or more underwriters
for public offering and sale, and we also may sell securities to
investors directly or through one or more broker-dealers or
agents.
We will prepare a prospectus supplement for each offering that
will disclose the terms of the offering, including the name or
names of any underwriters, dealers or agents, the purchase price
of the securities and the proceeds to us from the sale, any
underwriting discounts and other items constituting compensation
to underwriters, dealers or agents.
We will fix a price or prices of our securities at:
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market prices prevailing at the time of any sale under this
registration statement;
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prices related to market prices; or
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negotiated prices.
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We may change the price of the securities offered from time to
time.
If we use underwriters or dealers in the sale, they will acquire
the securities for their own account and they may resell these
securities 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. The
securities may be offered to the public either through
underwriting syndicates represented by one or more managing
underwriters or directly by one or more of such firms. Unless
otherwise disclosed in the prospectus supplement, the
obligations of the underwriters to purchase securities will be
subject to certain conditions precedent, and the underwriters
will be obligated to purchase all of the securities offered by
the prospectus supplement if any are purchased. Any initial
public offering price and any discounts or concessions allowed
or reallowed or paid to dealers may be changed from time to time.
If a prospectus supplement so indicates, the underwriters may,
pursuant to Regulation M under the Securities Exchange Act
of 1934, engage in transactions, including stabilization bids or
the imposition of penalty bids, that may have the effect of
stabilizing or maintaining the market price of the securities at
a level above that which might otherwise prevail in the open
market.
We may sell the securities directly or through agents designated
by us from time to time. We will name any agent involved in the
offering and sale of the securities for which this prospectus is
delivered, and disclose any commissions payable by us to the
agent or the method by which the commissions can be determined,
in the prospectus supplement. Unless otherwise indicated in the
prospectus supplement, any agent will be acting on a best
efforts basis for the period of its appointment.
We may agree to indemnify underwriters, dealers and agents who
participate in the distribution of securities against certain
liabilities to which they may become subject in connection with
the sale of the securities, including liabilities arising under
the Securities Act of 1933.
Certain of the underwriters and their affiliates may be
customers of, may engage in transactions with and may perform
services for us or our affiliates in the ordinary course of
business.
A prospectus and accompanying prospectus supplement in
electronic form may be made available on the web sites
maintained by the underwriters. The underwriters may agree to
allocate a number of securities for sale to their online
brokerage account holders. Such allocations of securities for
internet distributions will be made on the same basis as other
allocations. In addition, securities may be sold by the
underwriters to securities dealers who resell securities to
online brokerage account holders.
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LEGAL
MATTERS
Vinson & Elkins L.L.P. will pass upon the validity of
the securities offered in this registration statement. If
certain legal matters in connection with an offering of the
securities made by this prospectus and a related prospectus
supplement are passed on by counsel for the underwriters of such
offering, that counsel will be named in the applicable
prospectus supplement related to that offering.
EXPERTS
The consolidated financial statements, the related consolidated
financial statement schedule, and managements report on
the effectiveness of internal control over financial reporting
incorporated in this prospectus by reference from DCP Midstream
Partners, LPs Annual Report on
Form 10-K
for the year ended December 31, 2006 have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their reports which are
incorporated herein by reference (which reports (1) express
an unqualified opinion on the consolidated financial statements
and financial statement schedule and include explanatory
paragraphs referring to the preparation of the portion of the
DCP Midstream Partners, LP consolidated financial statements
attributable to operations prior to December 7, 2005 from
the separate records of DCP Midstream, LLC (formerly Duke Energy
Field Services, LLC) and the basis of presentation of the
consolidated financial statements of DCP Midstream Partners, LP
to retroactively reflect DCP Midstream Partners, LPs
acquisition of the wholesale propane logistics business and the
preparation of the portion of the DCP Midstream Partners, LP
consolidated financial statements attributable to the wholesale
propane logistics business from the separate records maintained
by DCP Midstream, LLC, (2) express an unqualified opinion
on managements assessment regarding the effectiveness of
internal control over financial reporting, and (3) express
an unqualified opinion on the effectiveness of internal control
over financial reporting), and have been so incorporated in
reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated balance sheet of DCP Midstream GP, LP as of
December 31, 2006, incorporated in this prospectus by
reference from DCP Midstream Partners, LPs Current Report
on
Form 8-K
dated April 20, 2007, has been audited by
Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference, and
has been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
The consolidated balance sheet of DCP Midstream, LLC as of
December 31, 2006, incorporated in this prospectus by
reference from DCP Midstream Partners, LPs Current Report
on
Form 8-K
dated April 20, 2007, has been audited by
Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference, and
has been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
The combined financial statements of the East Texas Midstream
Business as of December 31, 2006 and 2005 and for each of
the three years in the period ended December 31, 2006,
incorporated in this prospectus by reference from DCP Midstream
Partners, LPs Current Report on
Form 8-K/A
dated October 16, 2007, have been audited by
Deloitte & Touche LLP, independent auditors, as stated
in their report, which has been incorporated herein by reference
(which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the preparation of the
combined financial statements of the East Texas Midstream
Business from the separate records maintained by DCP Midstream,
LLC), and has been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting
and auditing.
The consolidated financial statements of Momentum Energy Group,
Inc and Subsidiaries as of June 30, 2007, December 31,
2006, and 2005 and for the six month period ended June 30,
2007, the years ended December 31, 2006 and 2005, and for
the period August 24, 2004 (date of inception) through
December 31, 2004, incorporated in this prospectus by
reference from DCP Midstream Partners, LPs Current Report
on
Form 8-K/A
dated October 3, 2007, have been audited by
Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference, and
have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
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The supplemental consolidated financial statements and the
related supplemental consolidated financial statement schedule
of DCP Midstream Partners, LP (the Company), as of
December 31, 2006 and 2005 and for the three years in the
period ended December 31, 2006, which give retroactive
effect to the July 1, 2007 acquisition by the Company of a
25% limited liability interest in DCP East Texas Holdings, LLC
(East Texas), a 40% limited liability interest in
Discovery Producer Services, LLC (Discovery), and a
nontrading derivative instrument (the Swap) from DCP
Midstream, LLC (Midstream), which has been accounted
for in a manner similar to a pooling of interests as described
in Note 4 to the supplemental consolidated financial
statements, incorporated in this prospectus by reference from
the Companys Current Report on
Form 8-K
dated October 17, 2007, have been audited by
Deloitte & Touche LLP, as stated in their report,
based in part on the report of Ernst & Young LLP as it
relates to Discovery, which is incorporated herein by reference
(which report expresses an unqualified opinion on the
supplemental consolidated financial statements and financial
statement schedule and include explanatory paragraphs referring
to (1) the preparation of the portion of the Companys
supplemental consolidated financial statements attributable to
operations prior to December 7, 2005 from the separate
records of Midstream, and (2) the basis of presentation of
the supplemental consolidated financial statements of the
Company to retroactively reflect the Companys acquisition
of the wholesale propane logistics business and the preparation
of the portion of the Companys supplemental consolidated
financial statements attributable to the wholesale propane
logistics business from the separate records maintained by
Midstream, and (3) the preparation of the portion of the
Companys supplemental consolidated financial statements
attributable to East Texas, Discovery, and the Swap from the
separate records maintained by Midstream). Such supplemental
consolidated financial statements of the Company have been so
incorporated herein in reliance upon the respective reports of
such firms given upon their authority as experts in accounting
and auditing. All of the foregoing firms are independent
registered public accounting firms.
The supplemental consolidated balance sheet of DCP Midstream GP,
LP (the Company), as of December 31, 2006,
which gives retroactive effect to the July 1, 2007
acquisition by the Company of a 25% limited liability interest
in DCP East Texas Holdings, LLC (East Texas), a 40%
limited liability interest in Discovery Producer Services, LLC
(Discovery), and a nontrading derivative instrument
(the Swap) from DCP Midstream, LLC
(Midstream), which has been accounted for in a
manner similar to a pooling of interests as described in
Note 4 to the supplemental consolidated financial
statements, incorporated in this prospectus by reference from
DCP Midstream Partners, LPs Current Report on
Form 8-K
dated October 17, 2007, has been audited by
Deloitte & Touche LLP, as stated in their report,
based in part on the report of Ernst & Young LLP as it
relates to Discovery, which is incorporated herein by reference.
Such supplemental consolidated financial statements of the
Company have been so incorporated herein in reliance upon the
respective reports of such firms given upon their authority as
experts in accounting and auditing. Deloitte and Touche LLP are
independent auditors and Ernst & Young LLP are
independent registered public accountants.
The consolidated financial statements of Discovery Producer
Services LLC at December 31, 2006 and 2005, and for each of
the three years in the period ended December 31, 2006, have
been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report
thereon, appearing in DCP Midstream Partners, LPs Current
Report on
Form 8-K/A
dated October 3, 2007, incorporated by reference herein,
and is incorporated by reference in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
80
DCP Midstream Partners,
LP
4,250,000 Common
Units
Representing Limited Partner
Interests
PROSPECTUS SUPPLEMENT
March 12, 2008
Citi
Wachovia Securities
Lehman Brothers
Merrill Lynch &
Co.
Morgan Stanley
UBS Investment Bank
Credit Suisse