Transfer
Agent and Registrar
Duties
Wells Fargo Bank, N.A. serves as the registrar and transfer agent for the common units. We pay all fees charged by the transfer agent for transfers of common units except the following, which must be paid
by our unitholders:
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surety bond premiums to replace lost or stolen certificates, taxes and other governmental charges;
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special charges for services requested by a holder of a common unit; and
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other similar fees or charges.
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There will be no charge to our unitholders for disbursements of our cash distributions. We will indemnify the transfer agent, its agents and each of their stockholders, directors, officers and employees
against all claims and losses that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due to any gross negligence or intentional misconduct of the indemnified person or entity.
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Resignation or Removal
The transfer agent may resign, by notice to us, or be removed by us. The resignation or removal of the transfer agent will become
effective upon our appointment of a successor transfer agent and registrar and its acceptance of the appointment. If no successor is appointed or has not accepted its appointment within 30 days of the resignation or removal, our general partner may
act as the transfer agent and registrar until a successor is appointed.
Transfer of Common Units
Upon the transfer of a common unit in accordance with our partnership agreement, the transferee of the common unit shall be admitted as a
limited partner with respect to the common units transferred when such transfer and admission are reflected in our books and records. Each transferee:
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automatically becomes bound by the terms and conditions of our partnership agreement;
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represents that the transferee has the capacity, power and authority to enter into our partnership agreement; and
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makes the consents, acknowledgements, waivers and approvals contained in our partnership agreement.
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Our general partner will cause any transfers to be recorded on our books and records from time to time (or shall cause the transfer agent
to do so, as applicable). 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 any transfers are subject
to the laws governing the transfer 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 common
unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.
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OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership agreement, which has been filed with the SEC and is incorporated
by reference as an exhibit to the registration statement of which this prospectus is a part. The description of our partnership agreement contained herein does not purport to be complete and is qualified in its entirety by reference to the complete
text of our partnership agreement incorporated by reference herein. We urge you to read our partnership agreement, as our partnership agreement, and not this description, governs our common units. We will provide a copy of our partnership agreement
upon request at no charge.
We summarize the following provisions of our partnership agreement elsewhere in this prospectus:
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with regard to distributions of distributable cash flow, please read Provisions of Our Partnership Agreement Relating to Cash
Distributions;
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with regard to the transfer of common units, please read Description of the Common UnitsTransfer of Common Units; and
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with regard to allocations of taxable income and taxable loss, please read Material U.S. Federal Income Tax Considerations.
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Organization and Duration
Dominion Midstream was organized on March 11, 2014 and will have a perpetual existence unless terminated pursuant to the terms of our partnership agreement.
Purpose
Our purpose, as
set forth in our partnership agreement, is limited to any business activity that is approved by our general partner and that lawfully may be conducted by a limited partnership organized under Delaware law; provided that our general partner shall not
cause us to take any action that the general partner determines would be reasonably likely to cause us to be treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes.
Although our general partner has the ability to cause us and our subsidiaries to engage in activities other than the business of growing
a portfolio of natural gas terminalling, processing, storage, transportation and related assets, our general partner has no current plans to do so and may decline to do so free of any fiduciary or obligation whatsoever to us or the limited partners,
including any duty to act in the best interests of our partnership or our limited partners, other than the implied contractual covenant of good faith and fair dealing. Our general partner is generally authorized to perform all acts it determines to
be necessary or appropriate to carry out our purposes and to conduct our business.
Cash Distributions
Our partnership agreement specifies the manner in which we make cash distributions to holders of our common units and other partnership
securities as well as to our general partner in respect of its incentive distribution rights. For a description of these cash distribution provisions, please read Provisions of Our Partnership Agreement Relating to Cash Distributions.
Capital Contributions
Unitholders are not obligated to make additional capital contributions, except as described below under Limited Liability.
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Voting Rights
The following is a summary of the unitholder vote required for approval of the matters specified below. Matters that call for the approval of a unit majority require:
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during the subordination period (defined in the Subordination Period section under Provisions of Our Partnership Agreement Relating
to Cash Distributions), the approval of a majority of the common units, excluding those common units whose vote is beneficially owned by our general partner or 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.
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In voting their common and subordinated units, our general partner and its affiliates have no duty or obligation whatsoever to us or the
limited partners, including any duty to act in the best interests of us or the limited partners.
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 our 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 Dissolution.
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Continuation of our business upon dissolution
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Unit majority. Please read Dissolution.
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Withdrawal of our 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 June 30, 2024 in a manner that would cause a dissolution of our partnership. Please read Withdrawal or Removal of Our General Partner.
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Removal of our general partner
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Not less than 66
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3
% of the outstanding units, voting as a single class, including units held by our general partner and its affiliates. In
addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as
separate classes. Please read Withdrawal or Removal of Our General Partner.
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Transfer of our general partner interest
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No approval right. Please read Transfer of General Partner Interest.
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Transfer of Incentive Distribution Rights
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No approval right. Please read Transfer of Subordinated Units and Incentive Distribution Rights.
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Transfer of ownership interests in our general partner
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No approval right. Please read Transfer of Ownership Interests in the General Partner.
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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 specific prior approval of our general partner.
Applicable Law; Forum, Venue and Jurisdiction
Our partnership agreement is governed by Delaware law. Our partnership agreement requires that any claims, suits, actions or proceedings:
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arising out of or relating in any way to the partnership agreement (including any claims, suits or actions to interpret, apply or enforce the
provisions of the partnership agreement or the duties, obligations or liabilities among limited partners or of limited partners to us, or the rights or powers of, or restrictions on, the limited partners or us);
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brought in a derivative manner on our behalf;
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asserting a claim of breach of a duty owed by any director, officer or other employee of us or our general partner, or owed by our general partner, to
us or the limited partners;
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asserting a claim arising pursuant to any provision of the Delaware Revised Uniform Limited Partnership Act, as amended (the Delaware Act); or
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asserting a claim governed by the internal affairs doctrine;
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shall be exclusively brought in the Court of Chancery of the State of Delaware (or, if such court does not have subject matter jurisdiction thereof, any other court located in the State of Delaware with
subject matter jurisdiction), regardless of whether such claims, suits, actions or proceedings sound in contract, tort, fraud or otherwise, are based on common law, statutory, equitable, legal or other grounds, or are derivative or direct claims. By
purchasing a common unit, a limited partner is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of the Court of Chancery of the State of Delaware
(or such other court) in connection with any such claims, suits, actions or proceedings.
Limited Liability
Participation in the Control of Our Partnership
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 is 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. However, if it were
determined that the right, or exercise of the right, by the limited partners as a group:
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to remove or replace our general partner;
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to approve some amendments to our partnership agreement; or
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to take other action under our 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 our
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general partner. This liability would extend to persons who transact business with us under the reasonable belief that the limited partner is a general partner. Neither our partnership agreement
nor the Delaware Act specifically provides for legal recourse against our general partner if a limited partner were to lose limited liability through any fault of our 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.
Unlawful Partnership Distribution
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.
Failure to Comply with the Limited Liability Provisions of Jurisdictions in Which We Do Business
Our subsidiaries conduct business in several states, and we may have subsidiaries that conduct business in other states or countries in the future. Maintenance of our limited liability as owner of our
operating subsidiaries may require compliance with legal requirements in the jurisdictions in which the operating subsidiaries conduct business, including qualifying our subsidiaries to do business there.
Limitations on the liability of members or limited partners for the obligations of a limited liability company or limited partnership
have not been clearly established in many jurisdictions. If, by virtue of our ownership interest in our subsidiaries or otherwise, it were determined that we were conducting business in any jurisdiction 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 our general partner, to approve some amendments to our partnership agreement, or to take other
action under our partnership agreement constituted participation in the control of our business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for our obligations
under the law of that jurisdiction to the same extent as our general partner under the circumstances. We will operate in a manner that our general partner considers reasonable and necessary or appropriate to preserve the limited liability of the
limited partners.
Issuance of Additional Interests
Our partnership agreement authorizes us to issue an unlimited number of additional partnership interests for the consideration and on the terms and conditions determined by our general partner without the
approval of the unitholders.
We have funded acquisitions through the issuance of additional common units. It is possible that
we will fund future acquisitions through the issuance of additional common units, subordinated units or other partnership interests. Holders of any additional common units will be entitled to share equally with the then-existing common unitholders
in our distributions. In addition, the issuance of additional common units or other partnership interests may dilute the value of the interests of the then-existing common unitholders in our net assets.
In accordance with Delaware law and the provisions of our partnership agreement, we may also issue additional partnership interests that,
as determined by our general partner, may have rights to distributions or
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special voting rights to which the common units are not entitled. In addition, our partnership agreement does not prohibit our subsidiaries from issuing equity interests, which may effectively
rank senior to the common units.
Our general partner has 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 interests whenever, and on the same terms that, we issue partnership interests to persons other than our general partner and its affiliates, to the extent
necessary to maintain the percentage interest of our general partner and its affiliates, including such interest represented by common and subordinated units, that existed immediately prior to each issuance. The common unitholders do not have
preemptive rights under our partnership agreement to acquire additional common units or other partnership interests.
Amendment of the
Partnership Agreement
General
Amendments to our partnership agreement may be proposed only by our general partner. However, our general partner has no duty or obligation to propose any amendment and may decline to do so free of any
duty or obligation whatsoever to us or the limited partners, including any duty to act 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 to 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 his 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 affiliates without the consent of our general partner, which consent may be given or withheld in its sole discretion.
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The provision of our partnership agreement preventing the amendments having the effects described in the clauses above can be amended
upon the approval of the holders of at least 90.0% of the outstanding units, voting as a single class (including units owned by our general partner and its affiliates). As of September 30, 2015, an affiliate of our general partner owned
approximately 63.1% of our 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 to reflect:
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a change in our name, the location of our principal place of 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 other
entity in which the limited partners have limited liability under the laws of any state or to ensure that neither we nor any of our subsidiaries will be treated as an association taxable as a corporation or otherwise taxed as an entity for U.S.
federal income tax purposes (to the extent not already so treated or taxed);
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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, as amended, the Investment Advisers Act of 1940, as amended or plan asset regulations adopted under the Employee Retirement Income Security Act of
1974, as amended (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 in connection with the creation, authorization or issuance of
additional partnership interests or the right to acquire partnership interests;
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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, considered as a whole, 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
Any amendment that our general partner determines adversely affects in any material respect one or more particular classes of limited
partners, and is not permitted to be adopted by our general partner without limited partner approval, requires the approval of at least a majority of the class or classes so affected, but no vote is required by any class or classes of limited
partners that our general partner determines are not adversely affected in any material respect. Any such 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 requires the approval of at least a majority of the type or class of units so affected. Any such amendment that would reduce the voting percentage required to take any action other than to remove the general partner or call a
meeting of unitholders is
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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. Any such amendment that
would increase the percentage of units required to remove the general partner or call a meeting of unitholders must be approved by the affirmative vote of limited partners whose aggregate outstanding units constitute not less than the percentage
sought to be increased. For amendments of the type not requiring unitholder approval, our general partner is not required to obtain an opinion of counsel that an amendment will neither result in a loss of limited liability to the limited partners
nor result in our being treated as a taxable entity for U.S. 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.
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 has no duty or obligation to consent to any merger, consolidation or conversion
and may decline to do so free of any duty or obligation whatsoever to us or the limited partners, including any duty to act in the best interest of us or the limited partners.
In addition, our partnership agreement generally prohibits our general partner, without the prior approval of the holders of a unit majority, from causing us to 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. Our general partner may, however, mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of our assets without such approval. Our general partner may also sell all or substantially all of our assets under a foreclosure or other realization upon those encumbrances without such 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 would not result in a material amendment to the partnership agreement (other than an amendment that the general partner could adopt without the consent of other partners), each of our units will be an identical unit of our partnership
following the transaction and the partnership interests to be issued do not exceed 20% of our outstanding partnership interests (other than incentive distribution rights) immediately prior to the transaction.
If the conditions specified in our 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, we have received an opinion of counsel regarding limited liability and tax matters and the governing instruments of the new entity provide the limited partners and our general partner with the same rights and
obligations as contained in our partnership agreement. Our unitholders are not entitled to dissenters rights of appraisal under our 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.
Dissolution
We will continue as a limited partnership until dissolved 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 its withdrawal or removal following the 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 under Delaware law of any limited partner; and
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neither our partnership nor any of our subsidiaries would be treated as an association taxable as a corporation or otherwise be taxable as an entity
for U.S. federal income tax purposes upon the exercise of that right to continue (to the extent not already so treated or taxed).
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Liquidation and Distribution of Proceeds
Upon our dissolution, unless our
business is continued, the liquidator authorized to wind up our affairs will, acting with all of the powers of our general partner that are necessary or appropriate, liquidate our assets and apply the proceeds of the liquidation as described in
Provisions of Our Partnership Agreement Relating to Cash DistributionsDistributions 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
Our General Partner
Except as described below, our general partner has agreed not to withdraw voluntarily as our general
partner prior to June 30, 2024 without obtaining the approval of the holders of at least a majority of the outstanding common units, excluding common units held by our general partner and its affiliates, and furnishing an opinion of counsel
regarding limited liability and tax matters. On or after June 30, 2024, our general partner may withdraw as general partner without first obtaining approval of any unitholder by 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 our general partner and its affiliates. In addition, our 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 Interest.
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 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 Dissolution.
Our general partner may not be removed unless that removal is approved by the vote of the holders of not less than
66
2
/
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, voting as a class, and the outstanding subordinated units, voting as
a class. The ownership of more than
33
1
/
3
% of the outstanding units by our general partner and its
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affiliates gives them the ability to prevent our general partners removal. As of September 30, 2015, an affiliate of our general partner owned approximately 63.1% of our outstanding
common and subordinated units.
Our partnership agreement also provides that if our general partner is removed as our general
partner under circumstances where cause does not exist all subordinated units held by any person who did not, and whose affiliates did not, vote any units in favor of the removal of the general partner, will immediately and automatically convert
into common units on a one-for-one basis.
In the event of the removal of our general partner under circumstances where cause
exists or withdrawal of our 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 and its affiliates for a cash payment equal to the fair market value of those interests. Under all other circumstances where our general partner withdraws or is removed by the limited partners, the departing general partner will have
the option to require the successor general partner to purchase the general partner interest and the incentive distribution rights of the departing general partner and its affiliates 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 all its and its affiliates 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.
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 as a result of the termination of any employees employed for our benefit by the departing general partner or its affiliates.
Transfer of General Partner Interest
At any time, our general partner may
transfer all or any of its general partner interest to another person without the approval of our common unitholders. As a condition of this transfer, the transferee must, among other things, assume 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.
Transfer of Ownership Interests in the General Partner
At any time, the owners of our general partner may sell or transfer all or part of its ownership interests in our general partner to an affiliate or third-party without the approval of our unitholders.
Transfer of Subordinated Units and Incentive Distribution Rights
By transfer of subordinated units or incentive distribution rights in accordance with our partnership agreement, each transferee of
subordinated units or incentive distribution rights will be admitted as a limited partner with respect to the subordinated units or incentive distribution rights 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 becomes bound by the terms and conditions of our partnership agreement; and
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gives the consents, waivers and approvals contained in our partnership agreement.
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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 subordinated units or incentive distribution rights 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.
Subordinated units and incentive distribution rights are securities and any transfers are subject to the laws governing transfer of
securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a limited partner for the transferred subordinated units or incentive distribution rights.
Until a subordinated unit or incentive distribution right has been transferred on our books, we and the transfer agent may treat the
record holder of the unit or right as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.
Conflicts of Interest
Conflicts of interest exist and may arise in the
future as a result of the relationships between our general partner and its directors, officers and owners, on the one hand, and us and our limited partners, on the other hand.
Whenever a conflict arises between our general partner or its owners, on the one hand, and us or our limited partners, on the other hand,
the resolution, course of action or transaction in respect of such conflict of interest shall be conclusively deemed approved by us and all our limited partners and shall not constitute a breach of our partnership agreement, of any agreement
contemplated thereby or of any duty, if the resolution, course of action or transaction in respect of such conflict of interest is:
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approved by the conflicts committee of our general partner; or
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approved by the holders of a majority of the outstanding common units, excluding any such units owned by our general partner or any of its affiliates.
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Our general partner may, but is not required to, seek the approval of such resolutions or
courses of action from the conflicts committee of its board of directors or from the holders of a majority of the outstanding common units as described above. If our general partner does not seek approval from the conflicts committee or from holders
of common units as described above and the board of directors of our general partner approves the resolution or course of action taken with respect to the conflict of interest, then it will be presumed that, in making its decision, the board of
directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of us or any of our unitholders, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption and proving
that such decision was not in good faith. Unless the resolution of a conflict is specifically provided for in our partnership agreement, the board of directors of our general partner or the conflicts committee of the board of directors of our
general partner may consider any factors they determine in good faith to consider when resolving a conflict. An independent third-party is not required to evaluate the resolution. Under our partnership agreement, all determinations, other actions or
failures to act by our general partner, the board of directors of our general partner or any committee thereof (including the conflicts committee) will be presumed to be in good faith, and in any proceeding brought by or on behalf of us
or any of our unitholders, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption and proving that such decision was not in good faith.
Fiduciary Duties
Duties owed to unitholders by our general partner are
prescribed by law and in our partnership agreement. The Delaware Act provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to
limited partners and the partnership.
Our partnership agreement contains various provisions that eliminate and replace the
fiduciary duties that might otherwise be owed by our general partner. We have adopted these provisions to allow our general partner or its affiliates to engage in transactions with us that otherwise might be prohibited by state law fiduciary
standards and to take into account the interests of other parties in addition to our interests when resolving conflicts of interest. We believe this is appropriate and necessary because the board of directors of our general partner has a duty to
manage our partnership in good faith and a duty to manage our general partner in a manner beneficial to its owner. Without these modifications, our general partners ability to make decisions involving conflicts of interest would be restricted.
Replacing the fiduciary duty standards in this manner benefits our general partner by enabling it to take into consideration all parties involved in the proposed action. Replacing the fiduciary duty standards also strengthens the ability of our
general partner to attract and retain experienced and capable directors. Replacing the fiduciary duty standards represents a detriment to our public unitholders because it restricts the remedies available to our public unitholders for actions that,
without those limitations, might constitute breaches of fiduciary duty, as described below, and permits our general partner to take into account the interests of third parties in addition to our interests when resolving conflicts of interests.
The following is a summary of the fiduciary duties imposed on general partners of a limited partnership by the Delaware Act
in the absence of partnership agreement provisions to the contrary, the contractual duties of our general partner contained in our partnership agreement that replace the fiduciary duties that would otherwise be imposed by Delaware laws on our
general partner and the rights and remedies of our unitholders with respect to these contractual duties:
State law fiduciary duty standards
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Fiduciary duties are generally considered to include an obligation to act in good faith and with due care and loyalty. The duty of care, in the absence of a provision in a partnership agreement
providing otherwise, would generally require a general partner to act for the partnership in the same manner as a prudent person would act on his own behalf. The duty of loyalty, in the absence of a provision in a partnership agreement providing
otherwise, would generally require that any action taken or transaction engaged in be entirely fair to the partnership.
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Partnership agreement modified standards
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Our partnership agreement contains provisions that waive or consent to conduct by our general partner and its affiliates that might otherwise raise issues as to compliance with fiduciary duties
or applicable law. For example, our partnership agreement provides that when our general partner is acting in its capacity as our general partner, as opposed to in its individual capacity, it must act in good faith, meaning that it
believed its actions or omissions were not adverse to the interest of the partnership, and will not be subject to any higher standard under applicable law. In addition, when our general partner is acting in its individual capacity, as opposed to in
its capacity as our general partner, it may act without any fiduciary obligation to us or the unitholders whatsoever. These contractual standards replace the obligations to which our general partner would otherwise be held.
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In making decisions, other than one where our general partner is permitted to act in its sole discretion, it will be presumed that in making its decision our general
partner, the board of directors of our general partner or the conflicts committee of the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing
or prosecuting such proceeding will have the burden of overcoming such presumption and proving that such decision was not in good faith.
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Rights and remedies of unitholders
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The Delaware Act generally provides that a limited partner may institute legal action on behalf of a partnership to recover damages from a third-party where a general partner has refused to
institute the action or where an effort to cause a general partner to do so is not likely to succeed. These actions include actions against a general partner for breach of its duties or of the partnership agreement. In addition, the statutory or
case law of some jurisdictions may permit a limited partner to institute legal action on behalf of himself and all other similarly situated limited partners to recover damages from a general partner for violations of its fiduciary duties to the
limited partners.
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By purchasing our common units, the purchaser agrees to be bound by the provisions in our
partnership agreement, including the provisions discussed above. This is in accordance with the policy of the Delaware Act favoring the principle of freedom of contract and the enforceability of partnership agreements. The failure of a limited
partner to sign a partnership agreement does not render the partnership agreement unenforceable against that person.
We must
indemnify our general partner and its officers, directors, managers and certain other specified persons, to the fullest extent permitted by law, against liabilities, costs and expenses incurred by our general partner or these other persons. We must
provide this indemnification unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that such losses or liabilities were the result of the conduct of our general partner or such officer or director
engaged in by it in bad faith, willful misconduct or fraud, or, with respect to any criminal conduct, with the knowledge that its conduct was unlawful. Thus, our general partner could be indemnified for its negligent acts if it meets the
requirements set forth above. To the extent these provisions purport to include indemnification for liabilities arising under the Securities Act in the opinion of the SEC, such indemnification is contrary to public policy and, therefore,
unenforceable. Please read Indemnification.
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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH
DISTRIBUTIONS
Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash
distributions.
General
Cash Distribution Policy
Our partnership agreement does not require us to pay distributions at any time or in any amount. Instead, the board of directors of our general partner has adopted a cash distribution policy that, within
60 days after the end of each quarter, we intend to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.1750 per unit, or $0.70 per unit on an annualized basis, to the
extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates.
The board of directors of our general partner may change the foregoing distribution policy at any time and from time to time, and 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. There is no guarantee that we will pay the minimum quarterly distribution, or any distribution, on the units in any
quarter. However, our partnership agreement does contain provisions intended to motivate our general partner to make steady, increasing and sustainable distributions over time.
Operating Surplus and Capital Surplus
General
Any distributions we make will be characterized as made from operating surplus or capital surplus. Distributions
from operating surplus are made differently than cash distributions that we would make from capital surplus. Operating surplus distributions will be made to our unitholders and, if we make quarterly distributions above the first target distribution
level described below, to the holder of our incentive distribution rights. We do not anticipate that we will make any distributions from capital surplus. In such an event, however, any capital surplus distribution would be made pro rata to all
unitholders, but the incentive distribution rights would generally not participate in any capital surplus distributions with respect to those rights. Any distribution from capital surplus would result in a reduction of the minimum quarterly
distribution and target distribution levels and, if we reduce the minimum quarterly distribution to zero and eliminate any unpaid arrearages, thereafter capital surplus would be distributed as if it were operating surplus and the incentive
distribution rights would thereafter be entitled to participate in such distributions. Please read Distributions from Capital Surplus. In determining operating surplus and capital surplus, we will only take into account our
proportionate share of our consolidated subsidiaries that are not wholly-owned.
Operating Surplus
We define operating surplus as:
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all of our cash receipts after the closing of our initial public offering, excluding cash from interim capital transactions (as defined below),
provided that cash receipts from the termination of any hedge contract prior to its stipulated settlement or termination date will be included in equal quarterly installments over the remaining scheduled life of such hedge contract had it not been
terminated; plus
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cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights), other than equity issued in
our initial public offering, to finance all or a portion of expansion capital expenditures in respect of the period that commences when we enter into a binding
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obligation for the acquisition, construction, development or expansion and ending on the earlier to occur of the date of any acquisition, construction, development or expansion commences
commercial service and the date that it is disposed of or abandoned; plus
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cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights) to pay the construction
period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the expansion capital expenditures referred to above, in each case, in respect of the period that commences when we enter into a binding
obligation for the acquisition, construction, development or expansion and ending on the earlier to occur of the date of any acquisition, construction, development or expansion that commences commercial service and the date that it is disposed of or
abandoned; less
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all of our operating expenditures (as defined below) after the closing of our initial public offering; less
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the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less
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all working capital borrowings not repaid within 12 months after having been incurred or repaid within such 12-month period with the proceeds of
additional working capital borrowings; less
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any cash loss realized on disposition of an investment capital expenditure.
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Disbursements made, cash received (including working capital borrowings) or cash reserves established, increased or reduced after the end
of a period but on or before the date on which cash or cash equivalents will be distributed with respect to such period shall be deemed to have been made, received, established, increased or reduced, for purposes of determining operating surplus,
within such period if our general partner so determines. Cash received from our interest in any entity for which we account using the equity method will not be included to the extent it exceeds our proportionate share of such entitys operating
surplus (calculated as if the definition of operating surplus applied to such entity from the date of our acquisition of such an interest without any basket similar to that described in the first bullet above). Operating surplus does not reflect
cash generated by our operations. For example, it includes a basket of $45.0 million that will enable us, if we choose, to distribute as operating surplus cash we receive in the future from non-operating sources such as asset sales, issuances of
securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating
surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.
The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally
operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the 12-month period following the borrowing, it will be deducted from operating surplus at the end
of such period, thus decreasing operating surplus at such time. When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deduction.
We define operating expenditures in our partnership agreement, and it generally means all of our cash expenditures,
including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made under hedge contracts (provided that (1) with respect to amounts paid in connection with the initial purchase of a hedge
contract, such amounts will be amortized over the life of the applicable hedge contract and (2) payments made in connection with the termination of any hedge contract prior to the expiration of its stipulated settlement or termination date will
be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such hedge contract), officer compensation, repayment of working capital borrowings, interest on indebtedness and capital expenditures (as
discussed in further detail below), provided that operating expenditures will not include:
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repayment of working capital borrowings deducted from operating surplus pursuant to the penultimate bullet point of the definition of operating surplus
above when such repayment actually occurs;
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payments (including prepayments and prepayment penalties and the purchase price of indebtedness that is repurchased and cancelled) of principal of and
premium on indebtedness, other than working capital borrowings;
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expansion capital expenditures;
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investment capital expenditures;
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payment of transaction expenses relating to interim capital transactions;
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distributions to our partners (including distributions in respect of our incentive distribution rights);
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repurchases of equity interests except to fund obligations under employee benefit plans; or
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any other expenditures or payments using the proceeds of our initial public offering that are described in Use of Proceeds.
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Capital Surplus
Capital surplus is defined in our partnership agreement as any cash distributed in excess of our operating surplus. Accordingly, capital surplus would generally be generated only by the following (interim
capital transactions):
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borrowings (including sales of debt securities) other than working capital borrowings;
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sales of our equity interests; and
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sales or other dispositions of assets for cash, other than inventory, accounts receivable and other 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 provides that we treat all cash distributed as coming from operating surplus until the sum of all cash
distributed since the closing of our initial public offering (other than any distributions of proceeds of our initial public offering) equals the operating surplus from the closing of our initial public offering. Our partnership agreement provides
that we treat any amount distributed in excess of operating surplus, regardless of its source, as distributions of capital surplus.
Capital Expenditures
Maintenance capital expenditures reduce operating surplus, but expansion capital expenditures and investment capital expenditures do not.
Maintenance capital expenditures are cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long-term,
our operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to refurbish and replace pipelines, terminals and storage facilities, to maintain equipment reliability, integrity and safety and to address
environmental laws and regulations.
Expansion capital expenditures are those cash expenditures, including transaction
expenses, made to increase our operating capacity or operating income over the long-term. Examples of expansion capital expenditures include the acquisition of equipment, the development of a new facility or the expansion of an existing facility, in
each case, to the extent such expenditures are expected to expand our long-term operating capacity or increase our operating income. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions on
equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of such acquisition, construction, development or expansion in respect of the period that commences when we enter into a binding
obligation for the acquisition, construction,
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development or expansion and ending on the earlier to occur of the date any acquisition, construction, development or expansion commences commercial service and the date that it is disposed of or
abandoned. Expenditures made solely for investment purposes will not be considered expansion capital expenditures.
Investment
capital expenditures are those capital expenditures, including transaction expenses that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures
made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such
traditional investment capital expenditures, such as the acquisition of an asset for investment purposes or development of assets that are in excess of the maintenance of our existing operating capacity or operating income, but which are not
expected to expand, for more than the short term, our operating capacity or operating income.
As described above, neither
investment capital expenditures nor expansion capital expenditures are operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to
finance all or a portion of an acquisition, development or expansion in respect of a period that begins when we enter into a binding obligation for an acquisition, construction, development or expansion and ending on the earlier to occur of the date
on which such acquisition, construction, development or expansion commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on disposition of an investment
capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return
on principal.
Cash expenditures that are made in part for maintenance capital purposes, investment capital purposes or
expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditures by our general partner.
Subordination Period
General
Our partnership agreement provides that, during the subordination period (which we describe below), the common units will have the right
to receive distributions from operating surplus each quarter in an amount equal to $0.1750 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 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 distribution from operating surplus for any quarter until the common units have received the minimum quarterly distribution from operating surplus for such quarter plus
any arrearages in the payment of the minimum quarterly distribution 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 sufficient cash from operating surplus to pay the minimum quarterly distribution on the common units.
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Determination of Subordination Period
The subordination period began on the closing date of our initial public offering and will end when we satisfy one of the three tests set
forth in our partnership agreement.
The first test would be satisfied as of the first business day after the distribution to
unitholders in respect of any quarter, beginning with the quarter ending June 30, 2018, if each of the following has occurred:
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for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date, aggregate distributions from operating surplus
equaled or exceeded the aggregate minimum quarterly distribution on the outstanding common and subordinated units for each four-quarter period;
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for the same three consecutive, non-overlapping four quarter periods, the adjusted operating surplus (as described below) equaled or
exceeded the aggregate minimum quarterly distribution on the outstanding common and subordinated units on a fully diluted weighted average basis for each four-quarter period; and
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there are no arrearages in payment of the minimum quarterly distribution on the common units.
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The second test would be satisfied if each of the following has occurred:
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the liquefaction project (which is described in our partnership agreement) commences commercial service;
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for each of the two consecutive, non-overlapping four-quarter periods ending on December 31, 2016, aggregate distributions from operating surplus
equaled or exceeded the aggregate minimum quarterly distribution on the outstanding common and subordinated units for each four-quarter period;
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for the same two consecutive, non-overlapping four-quarter periods, the adjusted operating surplus (as described below) equaled or exceeded
the aggregate minimum quarterly distribution on the outstanding common and subordinated units on a fully diluted weighted average basis for each four-quarter period;
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for each completed quarter commencing after December 31, 2016, aggregate distributions from operating surplus equaled or exceeded the aggregate
minimum quarterly distribution on the outstanding common and subordinated units in each such quarter; and
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there are no arrearages in payment of the minimum quarterly distribution on the common units.
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The third test would be satisfied as of the first business day after the distribution to unitholders in respect of any quarter, beginning
with the quarter ending June 30, 2018, if each of the following has occurred:
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for one four-quarter period immediately preceding that date, aggregate distributions from operating surplus exceeded 150.0% of the aggregate minimum
quarterly distribution on the outstanding common units and subordinated units for such four-quarter period;
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for the same four-quarter period, the adjusted operating surplus (as described below) equaled or exceeded 150.0% of the aggregate minimum
quarterly distribution on the outstanding common and subordinated units during each quarter on a fully diluted weighted average basis, plus the related distribution on the incentive distribution rights; and
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there are no arrearages in payment of the minimum quarterly distributions on the common units.
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When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis and will then
participate pro rata with the other common units in distributions, and all common units will thereafter no longer be entitled to arrearages.
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Conversion upon Removal of the General Partner
In addition, if the unitholders remove our general partner other than for cause, the subordinated units held by any person will
immediately and automatically convert into common units on a one-for-one basis, provided (1) neither such person nor any of its affiliates voted any of its units in favor of the removal and (2) such person is not an affiliate of the
successor general partner.
Adjusted Operating Surplus
Adjusted operating surplus is intended generally to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net
drawdowns of reserves of cash generated in prior periods if not utilized to pay expenses during that period. Adjusted operating surplus for any period consists of:
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operating surplus generated with respect to that period (excluding any amounts attributable to the items described in the first bullet point under
Operating Surplus and Capital SurplusOperating Surplus above); less
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any net increase during that period in working capital borrowings; less
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any net decrease during that period in cash reserves for operating expenditures not relating to an operating expenditure made during that period; less
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any expenditures that are not operating expenditures solely because of the provision described in the last bullet point describing operating
expenditures above; plus
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any net decrease during that period in working capital borrowings; plus
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any net increase during that period in cash reserves for operating expenditures required by any debt instrument for the repayment of principal,
interest or premium; plus
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any net decrease made in subsequent periods in cash reserves for operating expenditures initially established during such period to the extent such
decrease results in a reduction of adjusted operating surplus in subsequent periods pursuant to the third bullet point above.
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Any disbursements received, cash received (including working capital borrowings) or cash reserves established, increased or reduced after the end of a period that the general partner determines to include
in operating surplus for such period shall also be deemed to have been made, received or established, increased or reduced in such period for purposes of determining adjusted operating surplus for such period.
Distributions from Operating Surplus during the Subordination Period
If we make a distribution from operating surplus for any quarter ending before the end of the subordination period, our partnership agreement requires that we make the distribution in the following
manner:
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first
, to the common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for
that quarter and any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters;
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second
, to the subordinated unitholders, pro rata, until we distribute for each subordinated unit an amount equal to the minimum quarterly
distribution for that quarter; and
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thereafter
, in the manner described in Incentive Distribution Rights below.
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Distributions from Operating Surplus after the Subordination Period
If we make distributions of cash from operating surplus for any quarter ending after the subordination period, our partnership agreement
requires that we make the distribution in the following manner:
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first
, to all common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for
that quarter; and
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thereafter
, in the manner described in Incentive Distribution Rights below.
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General Partner Interest
Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However,
our general partner holds all of the incentive distribution rights, which entitles it to receive the distributions described in Incentive Distribution Rights, and may, in the future, own common units or other equity interests in us and
will be entitled to receive distributions on any such other interests.
Incentive Distribution Rights
Incentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) of quarterly distributions
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.
If for any quarter:
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we have distributed cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution;
and
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we have distributed cash from operating surplus to the common unitholders in an amount necessary to eliminate any cumulative arrearages in payment of
the minimum quarterly distribution;
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then we will make additional distributions from operating surplus for that quarter
among the unitholders and the holders of the incentive distribution rights in the following manner:
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first
, to all unitholders, pro rata, until each unitholder receives a total of $0.2013 per unit for that quarter (the first target
distribution);
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second
, 85.0% to all common unitholders and subordinated unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights,
until each unitholder receives a total of $0.2188 per unit for that quarter (the second target distribution);
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third
, 75.0% to all common unitholders and subordinated unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights,
until each unitholder receives a total of $0.2625 per unit for that quarter (the third target distribution); and
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thereafter
, 50.0% to all common unitholders and subordinated unitholders, pro rata, and 50.0% to the holders of our incentive distribution
rights.
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Percentage Allocations of Distributions from Operating Surplus
The following table illustrates the percentage allocations of distributions from operating surplus between the unitholders and the holders
of our incentive distribution rights based on the specified target distribution levels. The amounts set forth under the column heading Marginal Percentage Interest in Distributions are the percentage interests of the holders of our
incentive distribution rights and the unitholders in any distributions from operating surplus we distribute up to and including the corresponding amount in the column Total
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Quarterly Distribution Per Unit. The percentage interests shown for our unitholders and the holders of our incentive distribution rights 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 assume there are no arrearages on common units.
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Total Quarterly Distribution Per
Unit
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Marginal Percentage
Interest in Distributions
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Unitholders
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Incentive
Distribution
Right
Holders
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Minimum Quarterly Distribution
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$0.1750
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100.0
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%
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0
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%
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First Target Distribution
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above $
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0.1750 up to $0.2013
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100.0
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%
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0
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%
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Second Target Distribution
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above $
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0.2013 up to $0.2188
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85.0
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%
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15.0
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%
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Third Target Distribution
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above $
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0.2188 up to $0.2625
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75.0
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%
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25.0
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%
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Thereafter
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above $0.2625
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50.0
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%
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50.0
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%
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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 target distribution levels and to reset, at higher levels, the target distribution levels upon which the incentive distribution payments would be set. If our
general partner transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes
that our general partner holds all of the incentive distribution rights at the time that a reset election is made.
The right
to reset the target distribution levels upon which the incentive distributions 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 in excess of the highest then-applicable target distribution for the prior four consecutive fiscal quarters. The reset target distribution levels will be higher than the most recent per unit
distribution level prior to the reset election and higher than the target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset target distribution levels until cash distributions per unit
following the reset event increase as described below. Because the reset target distribution levels will be higher than the most recent per unit distribution level prior to the reset, if we were to issue additional common units after the reset and
maintain the per unit distribution level, no additional incentive distributions would be payable. By contrast, if there were no such reset and we were to issue additional common units and maintain the per unit distribution level, additional
incentive distributions would have to be paid based on the additional number of outstanding common units and the percentage interest of the incentive distribution rights above the target distribution levels. Thus, the exercise of the reset right
would lower our cost of equity capital. 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.
In connection with
the resetting of the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target cash distributions prior to the reset, our general partner will be entitled to receive
a number of newly issued common units based on the formula described below that takes into account the cash parity value of the cash distributions related to the incentive distribution rights for the quarter prior to the reset event as
compared to the cash distribution per common unit in such quarter.
The number of common units to be issued in connection with
a resetting of the minimum quarterly distribution amount and the target distribution levels would equal the quotient determined by dividing (x) the
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amount of cash distributions received in respect of the incentive distribution rights for the fiscal quarter ended immediately prior to the date of such reset election by (y) the amount of
cash distributed per common unit with respect to such quarter.
Following a reset election, the reset minimum quarterly
distribution will be calculated and the target distribution levels will be reset to be correspondingly higher such that we would make distributions from operating surplus for each quarter thereafter as follows:
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first
, to all common unitholders, pro rata, until each unitholder receives an amount per unit for that quarter equal to 115.0% of the reset
minimum quarterly distribution;
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second
, 85.0% to all common unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until each unitholder receives
an amount per unit for that quarter equal to 125.0% of the reset minimum quarterly distribution;
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third
, 75.0% to all common unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until each unitholder receives
an amount per unit for that quarter equal to 150.0% of the reset minimum quarterly distribution; and
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thereafter
, 50.0% to all common unitholders, pro rata, and 50.0% to the holders of our incentive distribution rights.
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Because a reset election can only occur after the subordination period expires, the reset minimum quarterly
distribution will have no significance except as a baseline for the target distribution levels.
The holders of our incentive
distribution rights will be entitled to cause the target distribution levels to be reset on more than one occasion.
Distributions from
Capital Surplus
How Distributions from Capital Surplus Will Be Made
Our partnership agreement requires that we make distributions from capital surplus, if any, in the following manner:
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first
, to all common unitholders and subordinated unitholders, pro rata, until the minimum quarterly distribution is reduced to zero, as
described below;
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second
, to the common unitholders, pro rata, until we distribute for each common unit an amount 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 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 from capital surplus as the repayment of the initial unit price from our initial public offering, which is a return of capital. Each time a distribution
from capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the distribution from capital surplus to the fair market value of the common units immediately prior to the
announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution and target distribution levels after any of these distributions are made, it may be easier for our general partner to receive
incentive distributions and for the subordinated units to convert into common units. However, any distribution from capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum
quarterly distribution or any arrearages.
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Once we reduce the minimum quarterly distribution and target distribution levels to zero,
all future distributions will be made such that 50.0% is paid to all unitholders, pro rata, and 50.0% is paid to the holder or holders of our incentive distribution rights, pro rata.
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 from capital surplus, if we combine our common units into fewer common units or
subdivide our common units into a greater number of common 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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the target distribution levels;
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the initial unit price, as described below under Distributions of Cash Upon Liquidation;
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the per unit amount of any outstanding arrearages in payment of the minimum quarterly distribution on the common units; and
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the number of subordinated units.
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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 initial unit price would each be reduced to 50.0% of its
initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine or subdivide our subordinated units using the same ratio applied to the common units. We will
not make any adjustment by reason of the issuance of additional units for cash or property.
In addition, if as a result of a
change in law or interpretation thereof, we or any of our subsidiaries is treated as an association taxable as a corporation or is otherwise subject to additional taxation as an entity for U.S. federal, state, local or non-U.S. income or withholding
tax purposes, our general partner may, in its sole discretion, reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is cash for
that quarter (after deducting our general partners estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation) and the denominator of which is
the sum of (1) cash for that quarter, plus (2) our general partners estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation
thereof. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in distributions with respect to 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 holders of the incentive distribution rights, 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 units to payment of an
amount equal to the value contributed by unitholders for their units in our initial public offering, which we refer to as the initial unit price for each unit. The allocations of gain and loss upon liquidation are also intended, to the
extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to
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receive their 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 common unitholders to fully recover all of these amounts, even though there may be distributable cash flow 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.
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 generally allocate any gain to the partners in the following manner:
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first
, to our general partner to the extent of certain prior losses specially allocated to our general partner;
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second
, to the common unitholders, pro rata, until the capital account for each common unit is equal to the sum of: (1) the 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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third
, to the subordinated unitholders, pro rata, until the capital account for each subordinated unit is equal to the sum of: (1) the
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, pro rata, until we allocate under this bullet 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 from operating surplus in excess of the minimum quarterly
distribution per unit that we distributed to the unitholders, pro rata, for each quarter of our existence;
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fifth
, 85.0% to all unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until we allocate under this bullet 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 from
operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights for each quarter of our existence;
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sixth
, 75.0% to all unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until we allocate under this bullet 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 from
operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights for each quarter of our existence; and
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thereafter
, 50.0% to all unitholders, pro rata, and 50.0% to holders of our incentive distribution rights.
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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.
We may make special allocations of gain among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public
unitholders.
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Manner of Adjustments for Losses
If our liquidation occurs before the end of the subordination period, we will generally allocate any loss to our 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 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, until the capital accounts of the
common unitholders have been reduced to zero; and
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thereafter
, 100.0% to our 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.
We may make special allocations of loss among the partners in a manner to create economic uniformity among the
common units into which the subordinated units convert and the common units held by public unitholders.
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 U.S. federal income tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the holders of our incentive distribution rights
in the same manner as we allocate gain 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 generally allocate any later negative
adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner that results, to the extent possible, in the partners capital account balances equaling the amount that they would have
been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to
capital accounts upon the issuance of additional units to the unitholders and the holders of our incentive distribution rights based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we
generally will allocate any such loss equally with respect to our common and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional
units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders capital account balances
equaling the amounts they would have been if no earlier adjustments for loss had been made.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material U.S. federal income tax consequences that may be relevant to prospective unitholders and is based
upon current provisions of the Internal Revenue Code of 1986, as amended (the Code), existing and proposed Treasury Regulations thereunder, and current administrative rulings and court decisions, all of which are subject to change. Changes in these
authorities may cause the U.S. federal income tax consequences to a prospective unitholder to vary substantially from those described below, possibly on a retroactive basis. Unless the context otherwise requires, references in this section to
we or us are references to Dominion Midstream and its subsidiaries.
Legal conclusions contained in
this section, unless otherwise noted, are the opinion of Vinson & Elkins L.L.P. and are based on the accuracy of representations made by us to them for this purpose. However, this section does not address all U.S. federal income tax matters
that affect us or our unitholders and does not describe the application of the alternative minimum tax that may be applicable to certain unitholders. Furthermore, this section focuses on unitholders who are individual citizens or residents of the
United States (for U.S. federal income tax purposes), who have the U.S. dollar as their functional currency, who use the calendar year as their taxable year, and who hold units as capital assets (generally, property that is held for investment).
This section has limited applicability to corporations, partnerships (including entities treated as partnerships for U.S. federal income tax purposes), estates, trusts, non-resident aliens or other unitholders subject to specialized tax treatment,
such as tax-exempt institutions, non-U.S. persons, individual retirement accounts, (IRAs), employee benefit plans, real estate investment trusts or mutual funds.
Accordingly, we encourage each unitholder to consult the unitholders own
tax advisor in analyzing the federal, state, local and non-U.S. tax consequences particular to that unitholder resulting from ownership or disposition of units and potential changes in applicable tax laws.
We are relying on opinions and advice of Vinson & Elkins L.L.P. with respect to the matters described herein. An opinion of
counsel represents only that counsels best legal judgment and does not bind the IRS or a court. Accordingly, the opinions and statements made herein may not be sustained by a court if contested by the IRS. Any such contest of the matters
described herein may materially and adversely impact the market for units and the prices at which our units trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders because the costs will reduce our cash
available for distribution. Furthermore, the tax consequences of an investment in us may be significantly modified by future legislative or administrative changes or court decisions, which may be retroactively applied.
For the reasons described below, Vinson & Elkins L.L.P. has not rendered an opinion with respect to the following U.S. federal
income tax issues: (1) the treatment of a unitholder whose units are the subject of a securities loan (e.g., a loan to a short seller to cover a short sale of units) (please read Tax Consequences of Unit OwnershipTreatment of
Securities Loans); (2) whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations (please read Disposition of UnitsAllocations between Transferors and
Transferees); and (3) whether our method for taking into account Section 743 adjustments is sustainable in certain cases (please read Tax Consequences of Unit OwnershipSection 754 Election and
Uniformity of Units).
Taxation of Dominion Midstream
Partnership Status
We expect to be treated as a partnership for
U.S. federal income tax purposes and, therefore, generally will not be liable for entity-level U.S. federal income taxes. Instead, as described below, each of our unitholders will take into account its respective share of our items of income, gain,
loss and deduction in computing its U.S. federal income tax liability as if the unitholder had earned such income directly, even if we make no cash distributions to the unitholder.
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Section 7704 of the Code generally provides that publicly traded partnerships will be
treated as corporations for U.S. federal income tax purposes. However, if 90% or more of a partnerships gross income for every taxable year it is publicly traded consists of qualifying income, Dominion Midstream may continue to be
treated as a partnership for U.S. federal income tax purposes (the Qualifying Income Exception). Qualifying income includes income and gains derived from the transportation, storage, processing and marketing of certain natural resources, including
crude oil, natural gas and products thereof, as well as other types of income such as interest (other than from a financial business) and dividends. We estimate that less than 5% of our current gross income is not qualifying income; however, this
estimate could change from time to time.
Based upon factual representations made by us and our general partner,
Vinson & Elkins L.L.P. is of the opinion that we will be treated as a partnership for U.S. federal income tax purposes. The representations made by us and our general partner upon which Vinson & Elkins L.L.P. has relied in
rendering its opinion include, without limitation:
(a) Neither we nor any of our partnership or limited liability company
subsidiaries (including Cove Point) has elected to be treated as a corporation for U.S. federal income tax purposes;
(b) For
each taxable year since and including the year of our initial public offering, more than 90% of our gross income has been and will be income of a character that Vinson & Elkins L.L.P. has opined is qualifying income within the
meaning of Section 7704(d) of the 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, natural 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.
We believe that these representations
are true and will be true in the future.
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
transferring 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 as distributing that stock
to our unitholders in liquidation. This deemed contribution and liquidation should not result in the recognition of taxable income by our unitholders or us so long as our liabilities do not exceed the tax basis of our assets. Thereafter, we would be
treated as an association taxable as a corporation for U.S. federal income tax purposes.
The present U.S. federal income tax
treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative or legislative action or judicial interpretation at any time. For example, from time to time, members of the United
States Congress and the President propose and consider substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships, including the elimination of the Qualifying Income Exception upon which we rely for our
treatment as a partnership for U.S. federal income tax purposes.
In addition, the IRS has issued proposed regulations
regarding qualifying income under Section 7704(d)(1)(E) of the Code (the Proposed Regulations). We do not believe the Proposed Regulations affect our ability to qualify as a publicly traded partnership. However, there are no assurances that
final regulations will not include changes that interpret Section 7704(d)(1)(E) in a manner that is contrary to the Proposed Regulations, which could modify the amount of our gross income that we are able to treat as qualifying income for the
purposes of the Qualifying Income Exception. We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us and may be applied retroactively. Any such changes could
negatively impact the value of an investment in our units.
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If for any reason we are taxable as a corporation in any taxable year, our items of income,
gain, loss and deduction would be taken into account by us in determining the amount of our liability for U.S. federal income tax, rather than being passed through to our unitholders. Our taxation as a corporation would materially reduce the
distributable cash flow to unitholders and thus would likely substantially reduce the value of our units. Any distribution made to a unitholder at a time we are treated as a corporation would be (i) a taxable dividend to the extent of our
current or accumulated earnings and profits, then (ii) a nontaxable return of capital to the extent of the unitholders tax basis in its units, and thereafter (iii) taxable capital gain.
The remainder of this discussion is based on the opinion of Vinson & Elkins L.L.P. that we will be treated as a partnership for
U.S. federal income tax purposes.
Tax Consequences of Unit Ownership
Limited Partner Status
Unitholders who are admitted as limited
partners of Dominion Midstream, as well as unitholders whose 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 units, will be treated as
partners of Dominion Midstream for U.S. federal income tax purposes. For a discussion related to the risks of losing partner status as a result of securities loans, please read Treatment of Securities Loans. Unitholders who are not
treated as partners in us as described above are urged to consult their own tax advisors with respect to the tax consequences applicable to them under their particular circumstances.
Flow-Through of Taxable Income
Subject to the discussion below
under Entity-Level Collections of Unitholder Taxes with respect to payments we may be required to make on behalf of our unitholders, we will not pay any U.S. federal income tax. Rather, each unitholder will be required to report on
its U.S. federal income tax return each year its share of our income, gains, losses and deductions for our taxable year or years ending with or within its taxable year. Consequently, we may allocate income to a unitholder even if that unitholder has
not received a cash distribution.
Basis of Units
A unitholders tax basis in its units initially will be the amount paid for those units increased by the unitholders initial allocable share of our liabilities. That basis generally will be
(i) increased by the unitholders share of our income and any increases in such unitholders share of our liabilities, and (ii) decreased, but not below zero, by the amount of all distributions to the unitholder, the
unitholders share of our losses, and any decreases in the unitholders share of our liabilities. 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 of those interests.
Treatment of Distributions
Distributions made by us to a unitholder generally will not be taxable to the unitholder, unless such distributions exceed the
unitholders tax basis in its units, in which case the unitholder generally will recognize gain taxable in the manner described below under Disposition of Units.
Any reduction in a unitholders share of our liabilities will be treated as a distribution by us of cash to that
unitholder. A decrease in a unitholders percentage interest in us because of our issuance of additional units may decrease the unitholders share of our liabilities. For purposes of the foregoing, a unitholders share of our
nonrecourse liabilities (liabilities for which no partner bears the economic risk of loss) generally will be based upon that unitholders share of the unrealized appreciation (or depreciation) in our assets, to the extent thereof, with any
excess liabilities allocated based on the unitholders share of our profits. Please read Disposition of Units.
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A non-pro rata distribution of money or property (including a deemed distribution as a
result of the reallocation of our liabilities described above) may cause a unitholder to recognize ordinary income, if the distribution reduces the unitholders share of our unrealized receivables, including depreciation recapture
and substantially appreciated inventory items, both as defined in Section 751 of the Code (Section 751 Assets). To the extent of such reduction, the unitholder would be deemed to receive its proportionate share of the
Section 751 Assets and exchange such assets with us in return for a portion of the non-pro rata distribution. This deemed exchange generally will result in the unitholders recognition of ordinary income in an amount equal to the excess of
(i) the non-pro rata portion of that distribution over (ii) the unitholders tax basis (generally zero) in the Section 751 Assets deemed to be relinquished in the exchange.
Limitations on Deductibility of Losses
A unitholder may not be entitled to deduct the full amount of loss we allocate to it because its share of our losses will be limited to the lesser of (i) the unitholders tax basis in its units,
and (ii) in the case of a unitholder that is an individual, estate, trust or certain types of closely-held corporations, the amount for which the unitholder is considered to be at-risk with respect to our activities. In general, a
unitholder will be at-risk to the extent of its tax basis in its units, reduced by (1) any portion of that basis attributable to the unitholders share of our liabilities, (2) any portion of that basis representing amounts otherwise
protected against loss because of a guarantee, stop loss agreement or similar arrangement, and (3) any amount of money the unitholder borrows to acquire or hold its units, if the lender of those borrowed funds owns an interest in us, is related
to another unitholder or can look only to the units for repayment. A unitholder subject to the at-risk limitation must recapture losses deducted in previous years to the extent that distributions (including distributions deemed to result from a
reduction in a unitholders share of nonrecourse liabilities) cause the unitholders 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 the basis or at-risk limitations will carry forward and will be allowable as a deduction in a later year to the extent that the
unitholders tax basis or at-risk amount, whichever is the limiting factor, is subsequently increased. Upon a taxable disposition of units, any gain recognized by a unitholder can be offset by losses that were previously suspended by the
at-risk limitation but not losses suspended by the basis limitation. Any loss previously suspended by the at-risk limitation in excess of that gain can no longer be used and will not be available to offset a unitholders salary or active
business income.
In addition to the basis and at-risk limitations, a passive activity loss limitation generally limits the
deductibility of losses incurred by individuals, estates, trusts, some closely-held corporations and personal service corporations from passive activities (generally, trade or business activities in which the taxpayer does not materially
participate). The passive loss limitations are applied separately with respect to each publicly traded partnership. Consequently, any passive losses we generate will be available to offset only passive income generated by us. Passive losses that
exceed a unitholders share of passive income we generate may be deducted in full when the unitholder disposes of all of its units in a fully taxable transaction with an unrelated party. The passive loss rules generally are applied after other
applicable limitations on deductions, including the at-risk and basis limitations.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayers investment interest expense generally is limited to
the amount of that taxpayers net investment income. Investment interest expense includes:
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interest on indebtedness allocable to property held for investment;
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interest expense allocated against 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 allocable against 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. Net investment income generally does not include qualified dividend income or gains attributable to the disposition of property held for investment.
A unitholders share of a publicly traded partnerships portfolio income and, according to the IRS, net passive income will be treated as investment income for purposes of the investment interest expense limitation.
Entity-Level Collections of Unitholder Taxes
If we are required or elect under applicable law to pay any federal, state, local or non-U.S. tax on behalf of any current or former unitholder, we are authorized to treat the payment as a distribution of
cash to the relevant unitholder. Where the tax is payable on behalf of all unitholders or we cannot determine the specific unitholder on whose behalf the tax is payable, we are authorized to treat the payment as a distribution to all current
unitholders. Payments by us as described above could give rise to an overpayment of tax on behalf of a unitholder, in which event the unitholder may be entitled to claim a refund of the overpayment amount. Unitholders are urged to consult their tax
advisors to determine the consequences to them of any tax payment we make on their behalf.
Allocation of Income, Gain, Loss and
Deduction
Our items of income, gain, loss and deduction generally will be allocated among our 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 we make incentive distributions, gross income will be allocated to the recipients
to the extent of these distributions.
Specified items of our income, gain, loss and deduction will be allocated under
Section 704(c) of the Code (or the principles of Section 704(c) of the Code) to account for any difference between the tax basis and fair market value of our assets at the time such assets are contributed to us and at the time of any
subsequent offering of our units (a Book-Tax Disparity). As a result, the U.S. federal income tax burden associated with any Book-Tax Disparity immediately prior to an offering generally will be borne by the unitholders holding interests in us prior
to such offering. In addition, items of recapture income will be specially allocated to the extent possible to the unitholder who was allocated the deduction giving rise to that recapture income in order to minimize the recognition of ordinary
income by other unitholders.
An allocation of items of our income, gain, loss or deduction, other than an allocation required
by the Code to eliminate a Book-Tax Disparity, will generally be given effect for U.S. 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 the partners interest in us, which will be determined by taking into account all the facts and circumstances, including (i) the
partners relative contributions to us, (ii) the interests of all the partners in profits and losses, (iii) the interest of all the partners in cash flow and (iv) the rights of all the partners to distributions of capital upon
liquidation. Vinson & Elkins L.L.P. is of the opinion that, with the exception of the issues described in Section 754 Election and Disposition of UnitsAllocations Between Transferors and
Transferees, allocations of income, gain, loss or deduction under our partnership agreement will be given effect for U.S. federal income tax purposes.
Treatment of Securities Loans
A unitholder whose units are loaned
(for example, a loan to a short seller to cover a short sale of units) may be treated as having disposed of those units. If so, such unitholder would no longer be treated for tax
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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, (i) any of our income,
gain, loss or deduction allocated to those units would not be reportable by the lending unitholder, and (ii) any cash distributions received by the unitholder as to those units may be treated as ordinary taxable income.
Due to a lack of controlling authority, Vinson & Elkins L.L.P. has not rendered an opinion regarding the tax treatment of a
unitholder that enters into a securities loan with respect to its units. Unitholders desiring to assure their status as partners and avoid the risk of income recognition from a loan of their units are urged to consult their own tax advisors and
modify any applicable brokerage account agreements to prohibit their brokers from borrowing and lending their units. The IRS has announced that it is studying issues relating to the tax treatment of short sales of partnership interests. Please read
Disposition of UnitsRecognition of Gain or Loss.
Tax Rates
Under current law, the highest marginal U.S. federal income tax rates for individuals applicable to ordinary income and long-term capital
gains (generally, gains from the sale or exchange of certain investment assets held for more than one year) are 39.6% and 20%, respectively. These rates are subject to change by new legislation at any time.
In addition, a 3.8% net investment income tax applies to certain net investment income earned by individuals, estates, and trusts. For
these purposes, net investment income generally includes a unitholders allocable share of our income and gain realized by a unitholder from a sale of units. In the case of an individual, the tax will be imposed on the lesser of (i) the
unitholders net investment income from all investments, or (ii) the amount by which the unitholders modified adjusted gross income exceeds $250,000 (if the unitholder is married and filing jointly or a surviving spouse), $125,000
(if married filing separately) or $200,000 (if the unitholder is unmarried or in any other case). In the case of an estate or trust, the tax will be imposed on the lesser of (i) undistributed net investment income, or (ii) the excess
adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.
Section 754 Election
We have made the election permitted by Section 754 of the Code that permits us to adjust the tax bases in our assets as to specific purchasers of our units under Section 743(b) of the Code. That
election is irrevocable without the consent of the IRS. The Section 743(b) adjustment separately applies to each purchaser of units based upon the values and bases of our assets at the time of the relevant purchase, and the adjustment will
reflect the purchase price paid. The Section 743(b) adjustment does not apply to a person who purchases units directly from us.
Under our partnership agreement, we are authorized to take a position to preserve the uniformity of units even if that position is not consistent with applicable Treasury Regulations. A literal
application of Treasury Regulations governing a Section 743(b) adjustment attributable to properties depreciable under Section 167 of the Code may give rise to differences in the taxation of unitholders purchasing units from us and
unitholders purchasing from other unitholders. If we have any such properties, we intend to adopt methods employed by other publicly traded partnerships to preserve the uniformity of units, even if inconsistent with existing Treasury Regulations,
and Vinson & Elkins L.L.P. has not opined on the validity of this approach. Please read Uniformity of Units.
The IRS may challenge the positions we adopt with respect to depreciating or amortizing the Section 743(b) adjustment we take to preserve the uniformity of units due to lack of controlling authority.
Because a unitholders tax basis in its units is reduced by its share of our items of deduction or loss, any position we take that understates deductions will overstate a unitholders basis in its units, and may cause the unitholder to
understate gain or overstate loss on any sale of such units. Please read Disposition of UnitsRecognition of Gain or Loss. If a challenge to such treatment were sustained, the gain from the sale of units may be increased
without the benefit of additional deductions.
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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. The IRS could seek to reallocate some or all of any Section 743(b) adjustment we allocated to our assets subject to depreciation to goodwill or non-depreciable assets.
Goodwill, as an intangible asset, is generally amortizable over a longer period of time or under a less accelerated method than our tangible assets. We cannot assure any unitholder that the determinations we make will not be successfully challenged
by the IRS or that the resulting deductions will not be reduced or disallowed altogether. Should the IRS require a different tax 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 it would have been allocated had the election not been revoked.
Tax Treatment of Operations
Accounting Method and Taxable Year
We will use the year ending December 31 as our taxable year and the accrual method of accounting for U.S. federal income tax purposes. Each unitholder will be required to include in its tax return
its share of our income, gain, loss and deduction for each taxable year ending within or with its 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 its units after
December 31 but before the close of its taxable year must include its share of our income, gain, loss and deduction in income for its taxable year, with the result that it will be required to include in income for its taxable year its share of
more than 12 months of our income, gain, loss and deduction. Please read Disposition of UnitsAllocations Between Transferors and Transferees.
Tax Basis, Depreciation and Amortization
The tax bases of our
assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition of those assets. 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 deductions previously taken, may be subject to the recapture rules and taxed as ordinary income rather than capital gain. Similarly, a unitholder who has taken cost recovery or
depreciation deductions with respect to property we own will likely be required to recapture some or all of those deductions as ordinary income upon a sale of its interest in us. Please read Tax Consequences of Unit
OwnershipAllocation of Income, Gain, Loss and Deduction.
The costs we incur in offering and selling our units
(called syndication expenses) must be capitalized and cannot be deducted currently, ratably or upon our termination. While there are uncertainties regarding the classification of costs as organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us, the underwriting discounts and commissions we incur will be treated as syndication expenses. Please read Disposition of UnitsRecognition of Gain or Loss.
Valuation and Tax Basis of Our Properties
The U.S. 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 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 and tax basis determinations ourselves. These estimates and determinations of tax basis may be 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 deduction previously reported by unitholders
could change, and unitholders could be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.
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Disposition of Units
Recognition of Gain or Loss
A unitholder will be required to
recognize gain or loss on a sale of units equal to the difference between the unitholders amount realized and tax basis in the units sold. A unitholders amount realized generally will equal the sum of the cash and the fair market value
of other property it receives plus its share of our liabilities with respect to the units sold. Because the amount realized includes a unitholders share of our liabilities, the gain recognized on the sale of units could result in a tax
liability in excess of any cash received from the sale.
Except as noted below, gain or loss recognized by a unitholder on the
sale or exchange of a unit held for more than one year generally will be taxable as long-term capital gain or loss. However, gain or loss recognized on the disposition of units will be separately computed and taxed as ordinary income or loss under
Section 751 of the Code to the extent attributable to Section 751 Assets, such as depreciation recapture and our inventory items, regardless of whether such inventory item is substantially appreciated in value. Ordinary income
attributable to Section 751 Assets may exceed net taxable gain realized on 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
capital gain or loss upon a sale of units. Net capital loss may offset capital gains and, in the case of individuals, up to $3,000 of ordinary income per year. Both ordinary income and capital gain recognized on a sale of units may be subject to net
investment income tax in certain circumstances. Please read, Tax Consequences of Unit OwnershipTax Rates.
For purposes of calculating gain or loss on the sale of units, the unitholders adjusted tax basis will be adjusted by its allocable share of our income or loss in respect of its units for the year
of the sale. Furthermore, as described above, 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 of 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 its entire interest in Dominion Midstream as the value of the interest sold bears to the value of the partners entire interest in Dominion
Midstream.
Treasury Regulations under Section 1223 of the Code allow a selling unitholder who can identify units
transferred with an ascertainable holding period to elect to use the actual holding period of the units transferred. Thus, according to the ruling discussed in the preceding paragraph, a unitholder will be unable to select high or low basis units to
sell as would be the case with corporate stock, but, according to the Treasury Regulations, it may designate specific units sold for purposes of determining the holding period of the units transferred. A unitholder electing to use the actual holding
period of units transferred must consistently use that identification method for all subsequent sales or exchanges of our units. A unitholder considering the purchase of additional units or a sale of units purchased in separate transactions is urged
to consult its tax advisor as to the possible consequences of this ruling and application of the Treasury Regulations.
Specific provisions of the Code affect the taxation of some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an appreciated financial position, including a partnership interest with respect to which gain would be recognized if it were sold, assigned or terminated at its fair market value, in the event the
taxpayer or a related person enters into:
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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
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position if the taxpayer or a related person then acquires the partnership interest or substantially identical property. The Secretary of the Treasury is authorized to issue Treasury 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 or loss 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 or, in the discretion of the general partner, any other extraordinary item of income, gain, loss or
deduction will be allocated among the unitholders on the Allocation Date in the month in which such income, gain, loss or deduction 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 Code and most publicly traded
partnerships use similar simplifying conventions, the use of this method may not be permitted under existing Treasury Regulations. The Department of the Treasury and the IRS have issued proposed Treasury Regulations that provide a safe harbor
pursuant to which a publicly traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders, although such tax items must be prorated on a daily basis. Nonetheless, the proposed
regulations do not specifically authorize the use of the proration method we have adopted. Accordingly, Vinson & Elkins L.L.P. is unable to opine on the validity of this method of allocating income and deductions between transferee and
transferor unitholders. If this method is not allowed under the final Treasury Regulations, or only applies to transfers of less than all of the unitholders interest, our taxable income or losses could be reallocated among our unitholders. We
are authorized to revise our method of allocation between transferee and transferor unitholders, as well as among unitholders whose interests vary during a taxable year, to conform to a method permitted under future Treasury Regulations.
A unitholder who disposes of units prior to the record date set for a cash distribution for that quarter will be allocated items of our
income, gain, loss and deduction attributable to the month of disposition but will not be entitled to receive a cash distribution for that period.
Notification Requirements
A unitholder who sells or purchases any
of its units is generally required to notify us in writing of that transaction within 30 days after the transaction (or, if earlier, January 15 of the year following the transaction in the case of a seller). 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 transfer of units 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 through a broker who will satisfy such requirements.
Constructive Termination
We will be considered to have
constructively terminated as a partnership for U.S. federal income tax purposes upon the sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. For such purposes, multiple sales of the
same unit are counted only once. 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 the calendar year, the closing of our taxable year may
result in more than 12 months of our taxable income or loss being includable in such unitholders taxable income for the year of termination.
A constructive termination occurring on a date other than December 31 generally would require that we file two tax returns for one fiscal year, thereby increasing our administration and tax
preparation costs. However,
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pursuant to an IRS relief procedure the IRS may allow a constructively terminated partnership to provide a single Schedule K-1 for the calendar year in which a termination occurs. Following a
constructive termination, we would be required to make new tax elections, including a new election under Section 754 of the Code, and the termination would result in a deferral of our deductions for depreciation and thus increase the taxable
income allocable to unitholders. A termination could also result in penalties if we were unable to determine that the termination had occurred. Moreover, a termination may either accelerate the application of, or subject us to, any tax legislation
enacted before the termination that would not otherwise have been applied to us as a continuing partnership as opposed to a terminating partnership.
Uniformity of Units
Because we cannot match transferors and transferees of
units and for other reasons, 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 to completely comply with a number of U.S. federal income tax
requirements. Any non-uniformity could have a negative impact on the value of the units. Please read Tax Consequences of Unit OwnershipSection 754 Election.
Our partnership agreement permits our general partner to take positions in filing our tax returns that preserve the uniformity of our
units. These positions may include reducing the depreciation, amortization or loss deductions to which a unitholder would otherwise be entitled or reporting a slower amortization of Section 743(b) adjustments for some unitholders than that to
which they would otherwise be entitled. Vinson & Elkins L.L.P. is unable to opine as to the validity of such filing positions.
A unitholders basis in units is reduced by its share of our deductions (whether or not such deductions were claimed on an individual income tax return) so that any position that we take that
understates deductions will overstate the unitholders basis in its units, and may cause the unitholder to understate gain or overstate loss on any sale of such units. Please read Disposition of UnitsRecognition of Gain or
Loss above and Tax Consequences of Unit OwnershipSection 754 Election above. The IRS may challenge one or more of any positions we take to preserve the uniformity of units. If such a challenge were sustained, the
uniformity of units might be affected, and, under some circumstances, the gain from the sale of units might be increased without the benefit of additional deductions.
Tax-Exempt Organizations and Other Investors
Ownership of units by
employee benefit plans and other tax-exempt organizations, as well as by non-resident alien individuals, non-U.S. corporations and other non-U.S. persons (collectively, Non-U.S. Unitholders) raises issues unique to those investors and, as described
below, may have substantially adverse tax consequences to them. Prospective unitholders that are tax-exempt entities or Non-U.S. Unitholders should consult their tax advisors before investing in our units. Employee benefit plans and most other
tax-exempt organizations, including IRAs and other retirement plans, are subject to U.S. federal income tax on unrelated business taxable income. Virtually all of our income will be unrelated business taxable income and will be taxable to a
tax-exempt unitholder.
Non-U.S. Unitholders are taxed by the United States on income effectively connected with a U.S. trade
or business (effectively connected income) and on certain types of U.S.-source non-effectively connected income (such as dividends), unless exempted or further limited by an income tax treaty, and will be treated as engaged in business in the United
States because of their ownership of our units. Furthermore, it is probable that they will be deemed to conduct such activities through permanent establishments in the United States within the meaning of any applicable tax treaty. Consequently, they
will be required to file federal tax returns to report their share of our income, gain, loss or deduction and pay U.S. federal income tax on their share of our net income or gain. Moreover, under rules applicable to publicly traded partnerships,
distributions to Non-U.S. Unitholders are subject to withholding at the highest applicable effective tax rate. Each Non-U.S. Unitholder must obtain a taxpayer identification number from the IRS and submit that number to our transfer agent on a Form
W-8BEN, W-8BEN-E, or applicable substitute form in order to obtain credit for these withholding taxes.
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In addition, because a Non-U.S. Unitholder classified as a corporation will be treated as
engaged in a U.S. trade or business, that corporation may be subject to the U.S. branch profits tax at a rate of 30%, in addition to regular U.S. federal income tax, on its share of our income and gain as adjusted for changes in the foreign
corporations U.S. net equity to the extent reflected in the corporations earnings and profits. 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 Code.
A Non-U.S. Unitholder who sells or otherwise disposes of a unit will be subject to U.S. federal income tax on gain realized from the sale
or disposition of that unit to the extent the gain is effectively connected with a U.S. trade or business of the Non-U.S. Unitholder. Under a ruling published by the IRS interpreting the scope of effectively connected income, gain
recognized by a non-U.S. person from the sale of its interest in a partnership that is engaged in a trade or business in the United States will be considered to be effectively connected with a U.S. trade or business. Thus, part or all of a Non-U.S.
Unitholders gain from the sale or other disposition of its units may be treated as effectively connected with a unitholders indirect U.S. trade or business constituted by its investment in us. Moreover, under the Foreign Investment in
Real Property Tax Act, a Non-U.S. Unitholder generally will be subject to U.S. federal income tax upon the sale or disposition of a unit if (i) it owned (directly or indirectly constructively applying certain attribution rules) more than 5% of
our units at any time during the five-year period ending on the date of such disposition and (ii) 50% or more of the fair market value of our worldwide real property interests and other assets used or held for use in a trade or business
consisted of U.S. real property interests (which include U.S. real estate (including land, improvements, and certain associated personal property) and interests in certain entities holding U.S. real estate) at any time during the shorter of the
period during which such unitholder held the units or the five-year period ending on the date of disposition. More than 50% of our assets may consist of U.S. real property interests. Therefore, Non-U.S. Unitholders may be subject to U.S. federal
income tax on gain from the sale or disposition of their units.
Administrative Matters
Information Returns and Audit Procedures
We intend to furnish to each unitholder, within 90 days after the close of each taxable year, specific tax information, including a Schedule K-1, which describes its 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 each unitholders
share of income, gain, loss and deduction. We cannot assure our unitholders that those positions will yield a result that conforms to all of the requirements of the Code, Treasury Regulations, and administrative interpretations of the IRS.
The IRS may audit our U.S. federal income tax information returns. Neither we nor Vinson & Elkins L.L.P. can assure
prospective unitholders that the IRS will not successfully challenge the positions we adopt, and such a challenge could adversely affect the value of the units. Adjustments resulting from an IRS audit may require each unitholder to adjust a prior
years tax liability and may result in an audit of the unitholders own return. Any audit of a unitholders return could result in adjustments unrelated to our returns.
Publicly traded partnerships generally are treated as entities separate from their owners for purposes of U.S. federal income 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 of the
partners. The Code requires that one partner be designated as the Tax Matters Partner for purposes of these proceedings, and our partnership agreement designates our general partner as the Tax Matters Partner.
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
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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 may go forward, and each unitholder with an interest in the outcome may participate in that
action.
A unitholder must file a statement with the IRS identifying the treatment of any item on its U.S. 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:
(1) the name, address and taxpayer identification number of the beneficial owner and the nominee;
(2) a statement regarding whether the beneficial owner is:
(a) a non-U.S. person;
(b) a non-U.S. government, an international organization
or any wholly-owned agency or instrumentality of either of the foregoing; or
(c) a tax-exempt entity;
(3) the amount and description of units held, acquired or transferred for the beneficial owner; and
(4) 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 U.S. persons and specific information on units they acquire, hold or transfer for their own account. A penalty of $250 per failure, up to a maximum of $3 million per calendar year, is imposed by the
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
Certain penalties may be imposed as a
result 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. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there was a reasonable cause for the underpayment of that portion and that the taxpayer acted in good faith regarding the underpayment of that portion. We do not anticipate
that any accuracy-related penalties will be assessed against us.
State, Local and Other Tax Considerations
In addition to U.S. federal income taxes, unitholders may be subject to other taxes, including state and local income taxes,
unincorporated business taxes, and estate, inheritance or intangibles taxes that may be imposed by the various jurisdictions in which we conduct business or own property now or in the future or in which the unitholder is a resident. We will
initially conduct business (including through Cove Point) in Maryland, Virginia
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and Delaware. Each of those states imposes an income tax on corporations and other entities. Each of those states also imposes a personal income tax on individuals. In addition, we may also own
property or do business in other states in the future that impose income or similar taxes on nonresident individuals. Although an analysis of those various taxes is not presented here, each prospective unitholder should consider their potential
impact on its investment in us.
Although you may not be required to file a return and pay taxes in some jurisdictions because
your income from that jurisdiction falls below the filing and payment requirement, you will be required to file income tax returns and to pay income taxes in many of these jurisdictions in which we do business or own property and may be subject to
penalties for failure to comply with those requirements. Some of the jurisdictions 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 jurisdiction.
Withholding, the amount of which may be greater or less than a particular unitholders income tax liability to the jurisdiction, generally does not relieve a nonresident unitholder from the obligation to file an income tax return.
It is the responsibility of each unitholder to investigate the legal and tax consequences, under the laws of pertinent jurisdictions,
of its investment in us. We strongly recommend that each prospective unitholder consult, and depend upon, its own tax counsel or other advisor with regard to those matters. Further, it is the responsibility of each unitholder to file all state,
local and non-U.S., as well as U.S. federal tax returns that may be required of it. Vinson & Elkins L.L.P. has not rendered an opinion on the state, local, alternative minimum tax or non-U.S. tax consequences of an investment in us.
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INVESTMENT IN DOMINION MIDSTREAM PARTNERS, LP BY EMPLOYEE
BENEFIT PLANS
An investment in our common units by an employee benefit plan is subject to additional considerations
because the investments of these plans are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA and the prohibited transaction restrictions imposed by Section 4975 of the Code and may be subject to provisions
under certain other laws or regulations that are similar to ERISA or the Code (Similar Laws). For these purposes the term employee benefit plan includes, but is not limited to, qualified pension, profit-sharing and stock bonus plans,
certain Keogh plans, certain simplified employee pension plans and tax deferred annuities or IRAs established or maintained by an employer or employee organization.
General Fiduciary Matters
ERISA and the Code impose certain duties on
persons who are fiduciaries of an employee benefit plan that is subject to Title I of ERISA or Section 4975 of the Code (an ERISA Plan) and prohibit certain transactions involving the assets of an ERISA Plan and its fiduciaries or other
interested parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration of an ERISA Plan or the management or disposition of the assets of an ERISA Plan, or who renders investment advice
for a fee or other compensation to an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan. In considering an investment in our common units, among other things, consideration should be given to:
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whether the investment is prudent under Section 404(a)(1)(B) of ERISA and any other applicable Similar Laws;
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whether, in making the investment, the employee benefit plan will satisfy the diversification requirements of Section 404(a)(1)(C) of ERISA and
any other applicable Similar Laws;
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whether the investment is permitted under the terms of the applicable documents governing the employee benefit plan;
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whether making the investment will comply with the delegation of control and prohibited transaction provisions under Section 406 of ERISA,
Section 4975 of the Code and any other applicable Similar Laws (Please read Prohibited Transaction Issues);
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whether in making the investment, the employee benefit plan will be considered to hold, as plan assets, (1) only the investment in our common
units or (2) an undivided interest in our underlying assets (Please read Plan Asset Issues); and
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whether the investment will result in recognition of unrelated business taxable income by the employee benefit plan and, if so, the potential after-tax
investment return. Please read Material U.S. Federal Income Tax ConsiderationsTax-Exempt Organizations and Other Investors.
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The person with investment discretion with respect to the assets of an employee benefit plan, often called a fiduciary, should determine whether an investment in our common units is authorized by the
appropriate governing instruments and is a proper investment for the employee benefit plan or IRA.
Prohibited Transaction Issues
Section 406 of ERISA and Section 4975 of the Code prohibit employee benefit plans and certain IRAs that are not
considered part of an employee benefit plan from engaging in specified transactions involving plan assets with parties that are parties in interest under ERISA or disqualified persons under the Code with respect
to the employee benefit plan or IRA, unless an exemption is applicable. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and
the Code. In addition, the fiduciary of the ERISA Plan that engaged in such a prohibited transaction may be subject to excise taxes, penalties and liabilities under ERISA and the Code.
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Plan Asset Issues
In addition to considering whether the purchase of our common units is a prohibited transaction, a fiduciary of an employee benefit plan should consider whether the plan will, by investing in our common
units, be deemed to own an undivided interest in our assets, with the result that our general partner also would be a fiduciary of the plan and our operations would be subject to the regulatory restrictions of ERISA, including its prohibited
transaction rules, as well as the prohibited transaction rules of the Code and any other applicable Similar Laws.
The
Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed plan assets under certain circumstances. Under these regulations,
an entitys underlying assets generally would not be considered to be plan assets if, among other things:
(1)
the equity interests acquired by employee benefit plans are publicly offered securitiesi.e., the equity interests are part of a class of securities that are widely held by 100 or more investors independent of the issuer and each other,
freely transferable (as defined in the applicable Department of Labor regulations) and either part of a class of securities registered pursuant to certain provisions of the federal securities laws or sold to the plan as part of a public
offering under certain conditions;
(2) the entity is an operating companyi.e., it is primarily engaged in
the production or sale of a product or service other than the investment of capital either directly or through a majority-owned subsidiary or subsidiaries; or
(3) there is no significant investment by benefit plan investors, which is defined to mean that, immediately after the most recent acquisition of an equity interest in any entity by an employee benefit
plan, less than 25% of the total value of each class of equity interest, disregarding certain interests held by our general partner, its affiliates and certain other persons, is held by the employee benefit plans and IRAs referred to above.
The foregoing discussion of issues arising for employee benefit plan investments under ERISA, the Code and applicable Similar
Laws is general in nature and is not intended to be all inclusive, nor should it be construed as legal advice. Plan fiduciaries contemplating a purchase of our common units should consult with their own counsel regarding the consequences of such
purchase under ERISA, the Code and Similar Laws in light of the serious penalties, excise taxes and liabilities imposed on persons who engage in prohibited transactions or other violations.
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PLAN OF DISTRIBUTION
We may use this prospectus, any accompanying prospectus supplement and any related free writing prospectus to sell the common units
from time to time in one or more transactions as follows: (1) through agents, (2) through underwriters or dealers, (3) directly to one or more purchasers, (4) pursuant to delayed delivery contracts or forward contracts,
(5) through a combination of these methods or (6) through any other method permitted by applicable law.
By Agents
The common units may be sold, from time to time, through agents designated by us. Unless otherwise indicated in a prospectus
supplement, the agents will agree to use their reasonable best efforts to solicit purchases for the period of their appointment.