This prospectus
supplement and the accompanying prospectus relate to the offer and sale from time to time of common units representing limited partner interests in Sunoco LP having an aggregate offering price of up to $400,000,000 through the managers named in this
prospectus supplement. These sales, if any, will be made pursuant to the terms of an equity distribution agreement between us and the managers, which was filed with the Securities and Exchange Commission on October 4, 2016 as an exhibit to a
Current Report on Form 8-K.
Under the terms of the equity distribution agreement, we also may sell common units to any manager as
principal for its own account at a price agreed upon at the time of the sale. If we sell common units to any such manager as principal, we will enter into a separate terms agreement with that manager and describe that agreement in a separate
prospectus supplement or pricing supplement if required.
Our common units trade on the New York Stock Exchange, or NYSE, under the symbol
SUN. The last reported sale price of our common units on October 3, 2016 was $29.19 per common unit. Sales of common units under this prospectus supplement, if any, will be made from time to time by means of ordinary brokers
transactions through the facilities of the NYSE at market prices, or as otherwise agreed between us and the managers, by means of any other existing trading market for our common units or to or through a market maker other than on an exchange.
The compensation to each manager for sales of common units under this prospectus supplement shall be up to, but shall not
exceed, 2.0% of the gross sales price per common unit sold by such manager. The net proceeds we receive from any sales under this prospectus supplement will be used as described under Use of Proceeds in this prospectus supplement. The
common units to which this prospectus supplement relates will be sold through only one manager on any given day.
We provide information to you about this offering of our common units in two separate
documents that are bound together: (1) this prospectus supplement, which describes the specific details regarding this offering, and (2) the accompanying prospectus, which provides general information, some of which may not apply to this
offering. Generally, when we refer to this prospectus, we are referring to both documents combined. If information in this prospectus supplement is inconsistent with the accompanying prospectus, you should rely on this prospectus
supplement.
You should carefully read this prospectus supplement and the accompanying prospectus, including the information incorporated
by reference in the prospectus, before you invest. These documents contain information you should consider when making your investment decision. None of Sunoco LP, RBC Capital Markets, LLC, Barclays Capital Inc., Citigroup Global Markets Inc.,
Credit Agricole Securities (USA) Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Mizuho Securities USA
Inc., Morgan Stanley & Co. LLC, MUFG Securities Americas Inc., Natixis Securities Americas LLC, SMBC Nikko Securities America, Inc., TD Securities (USA) LLC, UBS Securities LLC, Wells Fargo Securities, LLC or any of their respective
representatives is making any representation to you regarding the legality of an investment in our common units by you under applicable laws. You should consult with your own advisors as to legal, tax, business, financial and related aspects of an
investment in the common units.
DESCRIPTION OF OUR COMMON UNITS
The Common Units
The common units
represent limited partner interests in Sunoco LP. The holders of common units are entitled to participate in partnership distributions and exercise the rights and privileges available to limited partners under our partnership agreement. For a
description of the relative rights and preferences of holders of common units in and to partnership distributions, please read this section and Cash Distribution Policy and Restrictions on Distributions. For a description of the rights
and privileges of limited partners under our partnership agreement, including voting rights, please read The Partnership Agreement.
Our common units are listed on the NYSE under the symbol SUN.
Transfer Agent and Registrar
Duties
Computershare Trust Company, N.A. serves as registrar and transfer agent for our common units. We pay all fees charged by the transfer agent
for transfers of common units except the following that must be paid by our unitholders:
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surety bond premiums to replace lost or stolen certificates or to cover taxes and other governmental charges;
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special charges for services requested by a common unitholder; and
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other similar fees or charges.
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There is no charge to our unitholders for disbursements of our
cash distributions. We indemnify the transfer agent, its agents and each of their respective stockholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted for their activities in that
capacity, except for any liability due to any gross negligence or intentional misconduct of the indemnified person or entity.
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 has been appointed and has accepted the appointment within 30 days after notice 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
Common units are securities and are transferable according to the laws governing transfers of securities. In addition to other rights acquired
upon transfer, the transferor gives the transferee the right to become a substituted limited partner in our partnership for the transferred common units.
By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited
partner with respect to the common units transferred when such transfer and admission is reflected in our books and records. 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. Our general partner will cause any transfers to be recorded on our books and records no less frequently than quarterly. Each transferee:
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represents that the transferee has the capacity, power and authority to become bound by our partnership agreement;
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automatically agrees to be bound by the terms and conditions of, and is deemed to have executed, our partnership agreement; and
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gives the consents, waivers and approvals contained in our partnership agreement.
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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.
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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
Rationale for Our Cash Distribution Policy
Our partnership agreement requires us to distribute all of our available cash quarterly. Our cash distribution policy reflects a fundamental
judgment that our unitholders generally will be better served by our distributing rather than retaining our available cash. Our partnership agreement generally defines available cash as cash on hand at the end of a quarter after the payment of
expenses, less the amount of cash reserves established by our general partner to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our
unitholders for any one or more of the next four quarters. Our available cash also may include, if our general partner so determines, all or any portion of the cash on hand immediately prior to the date of distribution of available cash for the
quarter resulting from working capital borrowings made subsequent to the end of such quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute to our unitholders than would be the case if we
were subject to entity-level federal income tax.
Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy
There is no guarantee that we will distribute quarterly cash distributions to our unitholders. We do not have a legal obligation to pay our
minimum quarterly distribution or any other distribution except as provided in our partnership agreement. Our cash distribution policy may be changed at any time and is subject to certain restrictions and uncertainties, including the following:
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Our cash distribution policy is subject to restrictions on distributions under our revolving credit facility and the indenture governing our senior notes, which contain financial tests and covenants that we must
satisfy. Should we be unable to satisfy these covenants or if we are otherwise in default under our revolving credit facility, we will be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy.
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Our general partner has the authority to establish cash reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could
result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish.
Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.
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Prior to making any distribution on our common units, we reimburse our general partner and its affiliates for all direct and indirect expenses they incur on our behalf pursuant to our partnership agreement. Our
partnership agreement does not limit the amount of expenses for which our general partner and its affiliates may be reimbursed. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable
to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates reduces the amount of available cash.
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While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions contained therein, may be amended. Our
partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by our general partner and its affiliates, including ETP and ETE). As of March
31, 2016, ETP and ETE collectively owned, directly or indirectly, approximately 48% of our outstanding common units. Please read The Partnership AgreementAmendment of the Partnership Agreement.
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Even if our cash distribution policy is not modified or revoked, the decisions regarding the amount of distributions to pay under our cash distribution policy and whether to pay any distribution are made by our general
partner, taking into consideration the terms of our partnership agreement.
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Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the Delaware Act), we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our
assets.
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We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and
administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements or anticipated cash needs.
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Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be
restricted by, among other things, the provisions of existing and future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.
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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.
Distributions of Available Cash
General
Our partnership agreement
requires that, within 60 days after the end of each quarter we distribute all of our available cash to common unitholders of record on the applicable record date.
Definition of Available Cash
Available cash, for any quarter, generally consists of all cash and cash equivalents on hand at the end of that quarter:
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less
, the amount of cash reserves established by our general partner to:
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provide for the proper conduct of our business;
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comply with applicable law, any of our debt instruments or other agreements or any other obligation; or
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provide funds for distributions to our unitholders for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for the payment of distributions unless it determines
that the establishment of such reserves will not prevent us from distributing the minimum quarterly distribution on all common units for the current quarter);
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plus
, if our general partner so determines on the date of determination, all or any portion of the cash on hand immediately prior to the date of distribution of available cash for the quarter, including cash on
hand resulting from working capital borrowings made after the end of the quarter.
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The purpose and effect of the last bullet
point above is to allow our general partner, if it so decides, to use cash received by us after the end of the quarter but on or before the date of distribution of available cash for that quarter, including cash on hand resulting from working
capital borrowings made after the end of the quarter, to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are borrowings that are made under a credit agreement, commercial paper facility or similar
financing arrangement with the intent to repay such borrowings within twelve months from sources other than additional working capital borrowings, and that are used solely for working capital purposes or to pay distributions to partners.
PropCo available cash generally consists of all cash and cash equivalents on hand derived from or attributable to (i) any distribution
received by the Partnership from PropCo, or proceeds of any sale of the membership interests of PropCo received by the Partnership or (ii) any interest or principal payments received by the Partnership with respect to indebtedness of PropCo or its
subsidiaries.
Intent to Distribute the Minimum Quarterly Distribution
We intend to distribute to our common unitholders at least the minimum quarterly distribution of $0.4375 per unit, or $1.75 on an annualized
basis, to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. However, there is no guarantee that we will pay the
minimum quarterly distribution on our units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general
partner, taking into consideration the terms of our partnership agreement.
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Subordinated Units
Until the end of the subordination period on November 30, 2015, ETP owned, directly or indirectly, all of our subordinated units. The principal
difference between our common units and subordinated units was that in any quarter during the subordination period, holders of the subordinated units were not entitled to receive any distribution until the common units had received the minimum
quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters.
The subordination
period ended on November 30, 2015, the first business day after we earned and paid at least $1.75 (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date. Upon the ending of the subordination period, the 10,939,436 subordinated units owned by subsidiaries of ETP converted into 10,939,436 common units on a one-for-one basis.
Class C Units
On January 1, 2016,
we issued an aggregate of 16,410,780 Class C units (Class C Units) consisting of (i) 5,242,113 Class C Units that were issued to Aloha Petroleum, Ltd. (Aloha) as consideration for the contribution by Aloha to an indirect
wholly owned subsidiary of the Partnership of all of Alohas assets relating to the wholesale supply of fuel and lubricants; and (ii) 11,168,667 Class C Units that were issued to indirect wholly owned subsidiaries of the Partnership in exchange
for all of the outstanding Class A Units held by such subsidiaries.
Our Class C Units are entitled to receive quarterly distributions at
a rate of $0.8682 per Class C Unit. The distributions on the Class C Units are paid out of our available cash, except that the Class C Units do not share in distributions of PropCo available cash. The Class C Units are entitled to receive
distributions of available cash (other than PropCo available cash) prior to distributions of such cash being made on our common units. Any unpaid distributions on the Class C Units will accrue interest at a rate of 1.5% per annum until paid in full
in cash. The record date for the determination of holders entitled to receive distributions of the Class C Units will be the same as the record date for determination of common unit holders entitled to receive quarterly distributions.
General Partner Interest and Incentive Distribution Rights
Our general partner owns a non-economic general partner interest. ETE holds all of our incentive distribution rights, which entitles it to
receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from operating surplus (as defined below) in excess of $0.503125 per common unit per quarter. The maximum distribution of 50.0% does not include any distributions
that ETE may receive on any limited partner units that it owns. Please see Incentive Distribution Rights below for a more detailed description of our incentive distribution rights.
Operating Surplus and Capital Surplus
General
All cash distributed to our unitholders is characterized as being paid from either operating surplus or capital
surplus. Our partnership agreement requires that we distribute available cash from operating surplus differently than available cash from capital surplus. Operating surplus 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 generally be made first to the holders of Class C Units, pro rata, the amount of accrued and unpaid distributions, and then pro rata to all unitholders.
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Operating Surplus
We define operating surplus as:
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$25 million (as described below);
plus
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all of our cash receipts, 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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working capital borrowings made after the end of a period but on or before the date of distribution of operating surplus for that period;
plus
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cash distributions paid on equity issued (including incremental distributions on incentive distribution rights), to finance all or a portion of expansion capital expenditures in respect of the period from the date that
we enter into a binding obligation to commence the construction, acquisition or improvement of a capital asset until the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of;
plus
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cash distributions paid on 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 from the date that we enter into a binding obligation to commence the construction, acquisition or improvement of a capital asset
until the earlier to occur of the date the capital asset is placed in service and the date that it is abandoned or disposed of;
less
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all of our operating expenditures (as defined below);
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 twelve months after having been incurred, or repaid within such twelve-month period with the proceeds of additional working capital borrowings;
less
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any cash loss realized on the disposition of an investment capital expenditure.
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As described
above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a basket of $25 million that enables us, if we
choose, to distribute as operating surplus up to that amount of cash we receive 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 certain cash distributions on equity interests in operating surplus, as described above, 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 that amount of 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 twelve-month period
following the borrowing, it will be deemed repaid 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 deemed repayment.
We define operating expenditures as all of our cash expenditures,
including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made in the ordinary course of business under interest rate hedge agreements or commodity hedge agreements (provided that (1) payments
made in connection with the initial purchase of an interest rate hedge contract or a commodity hedge contract will be
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amortized over the life of the applicable interest rate hedge contract or commodity hedge contract and (2) payments made in connection with the termination of any interest rate hedge contract or
commodity hedge contract prior to its stipulated settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such contract), compensation of officers, directors and
employees of our general partner, repayment of working capital borrowings, debt service payments and maintenance capital expenditures (as discussed in further detail below), provided that operating expenditures do 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) 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); or
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repurchases of equity interests (other than repurchases to satisfy obligations under employee benefit plans) or reimbursements of our general partner for such purchases.
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Interim Capital Transactions
We
define cash from interim capital transactions to include proceeds from:
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borrowings other than working capital borrowings;
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sales of our equity and debt securities; and
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sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or assets sold or disposed of as part of normal retirement or replacement of
assets.
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Capital Surplus
Capital surplus is defined as any distribution of available cash in excess of our operating surplus. Although the cash proceeds from interim
capital transactions do not increase operating surplus, all distributions of available cash from whatever source are deemed to be from operating surplus until cumulative distributions of available cash exceed cumulative operating surplus.
Thereafter, all distributions of available cash are deemed to be from capital surplus to the extent they continue to exceed cumulative operating surplus.
Characterization of Cash Distributions
Our partnership agreement requires that we treat all available cash distributed by us as coming from operating surplus until the sum of all
available cash distributed since the closing of our initial public offering equals the operating surplus from the closing of our initial public offering through the end of the quarter immediately preceding that distribution. Our partnership
agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As described above, operating surplus includes a basket of $25 million, and therefore does not reflect actual cash
on hand that is available for distribution to our unitholders. Rather, this provision enables us, if we choose, to distribute as operating surplus up to that amount of cash we receive in the future from interim capital transactions that would
otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.
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Capital Expenditures
Maintenance capital expenditures reduce operating surplus, but expansion capital expenditures and investment capital expenditures do not. Under
our partnership agreement, maintenance capital expenditures are capital expenditures made to maintain our long-term operating income or operating capacity, while expansion capital expenditures are capital expenditures that we expect will increase
our operating income or operating capacity over the long term. Examples of maintenance capital expenditures include those expenditures we make to maintain existing contract volumes or renew existing distribution contracts, maintain our real estate
leased to third-party dealers in leaseable condition or maintain our company operated convenience stores. Maintenance capital expenditures also include interest (and related fees) on debt incurred and distributions in respect of equity issued
(including incremental distributions on incentive distribution rights), other than equity issued in any offering, to finance all or any portion of the construction or development of a replacement asset that are paid in respect of the period that
begins when we enter into a binding obligation to commence construction or development of a replacement asset and ending on the earlier to occur of the date that such replacement asset commences commercial service and the date that it is abandoned
or disposed of. Capital expenditures made solely for investment purposes are not considered maintenance capital expenditures.
Expansion
capital expenditures are capital expenditures made to increase our operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of new properties or equipment, to the extent such capital expenditures are
expected to expand our long-term operating capacity. Expansion capital expenditures also include interest (and related fees) on debt incurred and distributions in respect of equity issued (including incremental distributions on incentive
distribution rights) to finance all or any portion of the construction of a capital improvement paid in respect of the period that commences when we enter into a binding obligation to commence construction of a capital improvement and ending on the
earlier to occur of date such capital improvement commences commercial service and the date that it is disposed of or abandoned. Capital expenditures made solely for investment purposes are not be considered expansion capital expenditures.
Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital
expenditures. Investment capital expenditures largely 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 a capital asset for investment purposes or the development of assets that are in excess of
those needed for the maintenance of our existing operating capacity, but which are not expected to expand, for more than the short term, our operating capacity.
As described above, neither investment capital expenditures nor expansion capital expenditures are included in operating expenditures, and
thus do not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of the construction, acquisition or development of a capital improvement during
the period that begins when we enter into a binding obligation to commence construction, acquisition or development of a capital improvement and ending on the earlier to occur of the date such capital improvement commences commercial service and the
date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on the 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.
Capital expenditures that are made in part for maintenance capital purposes, investment capital purposes and/or expansion capital purposes are
allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditure by our general partner.
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Distributions of Available Cash From Operating Surplus
Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter in the following manner:
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first
, to the holders of our Class C Units to the extent of the distribution preference on the Class C Units, as described above under Distributions of Available CashClass C Units;
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second,
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
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thereafter
, in the manner described in Incentive Distribution Rights below.
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The preceding discussion is based on the assumption that we do not issue additional classes of equity interests.
Incentive Distribution Rights
Incentive distribution rights represent the right to receive an increasing percentage (15.0%, 25.0% and 50.0%) of quarterly distributions of
available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. ETE currently holds all of our incentive distribution rights, but may transfer these rights, subject to the
restrictions set forth in our partnership agreement.
The following discussion assumes that ETE continues to own the incentive
distribution rights.
If for any quarter we have distributed available cash from operating surplus to the holders of Class C Units to the
extent of the distribution preference on Class C Units, as described above under Distributions of Available CashClass C Units, then the common unitholders in an amount equal to the minimum quarterly distribution, then our
partnership agreement requires that we distribute any additional available cash from operating surplus for that quarter among the common unitholders and ETE (in its capacity as the holder of our incentive distribution rights) in the following
manner:
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first
, to all common unitholders, pro rata, until each common unitholder receives a total of $0.503125 per unit for that quarter (the first target distribution);
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second
, 85.0% to all common unitholders, pro rata, and 15.0% to ETE (in its capacity as the holder of our incentive distribution rights), until each common unitholder receives a total of $0.546875 per unit for
that quarter (the second target distribution);
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third
, 75.0% to all common unitholders, pro rata, and 25.0% to ETE (in its capacity as the holder of our incentive distribution rights), until each common unitholder receives a total of $0.65625 per unit for that
quarter (the third target distribution); and
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thereafter
, 50.0% to all common unitholders, pro rata, and 50.0% to ETE (in its capacity as the holder of our incentive distribution rights).
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ETEs Right to Reset Incentive Distribution Levels
ETE, as the current holder of all 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 minimum quarterly distribution amount and target distribution levels upon which the incentive distribution
payments to ETE would be based. If ETE transfers all or a portion of our 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 ETE holds all of the incentive distribution rights at the time that a reset election is made. The right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive
distributions are based may be exercised, without approval of our common unitholders or the conflicts committee of the board of directors of
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our general partner, at any time when we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the four most
recently completed fiscal quarters (and the amount of each such distribution did not exceed adjusted operating surplus for such quarter). The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum
quarterly distribution amount and the target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset target distribution levels until cash distributions per unit following this event increase as
described below. We anticipate that ETE would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the
existing levels of incentive distribution payments being made to ETE.
In connection with the resetting of the minimum quarterly
distribution amount and the target distribution levels and the corresponding relinquishment by ETE of incentive distribution payments based on the target distributions prior to the reset, ETE will be entitled to receive a number of newly issued
common units based on a predetermined formula described below that takes into account the cash parity value of the average of the cash distributions related to the incentive distribution rights received by ETE for the two quarters prior
to the reset event as compared to the average of the cash distributions per common unit during this period.
The number of common units
that ETE would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average of
the aggregate cash distributions received by ETE in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the cash distributed
per common unit during each of those two quarters.
Following a reset election, the minimum quarterly distribution amount will be reset to
an amount equal to the average of the cash distributions per common unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the reset minimum quarterly distribution) and the target
distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter, after payment of the distribution preference on the Class C Units and the
reset minimum quarterly distribution, as follows:
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first
, to all common unitholders, pro rata, until each common unitholder receives an amount per unit equal to 115.0% of the reset minimum quarterly distribution for that quarter;
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second
, 85.0% to all common unitholders, pro rata, and 15.0% to ETE (in its capacity as the holder of our incentive distribution rights), until each common unitholder receives an amount per unit equal to 125.0%
of the reset minimum quarterly distribution for the quarter;
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third
, 75.0% to all common unitholders, pro rata, and 25.0% to ETE (in its capacity as the holder of our incentive distribution rights), until each common unitholder receives an amount per unit equal to 150.0% of
the reset minimum quarterly distribution for the quarter; and
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thereafter
, 50.0% to all common unitholders, pro rata, and 50.0% to ETE (in its capacity as the holder of our incentive distribution rights).
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The following table illustrates the percentage allocation of available cash from operating
surplus between the common unitholders and ETE (in its capacity as the holder of our incentive distribution rights) at various cash distribution levels (1) pursuant to the cash distribution provisions of our partnership agreement currently in effect
as well as (2) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average of the quarterly cash distributions per common unit during the two fiscal quarters
immediately preceding the reset election was $0.70.
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Marginal Percentage
Interest in Distributions
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Total Quarterly
Distribution
Per Common
Unit
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Common
Unitholders
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ETE (in its
Capacity as
the Holder
of Our
Incentive
Distribution
Rights)
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Quarterly Distribution
Per Common Unit Following
Hypothetical Reset
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Minimum Quarterly Distribution
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$0.4375
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100.0%
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$0.70(1)
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First Target Distribution
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above $0.4375 up to $0.503125
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100.0%
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above $0.70(1) up to $0.805(2)
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Second Target Distribution
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above $0.503125 up to $0.546875
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85.0%
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15.0
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%
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above $0.805(2) up to $0.875(3)
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Third Target Distribution
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above $0.546875 up to $0.656250
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75.0%
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25.0
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%
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above $0.875(3) up to $1.05(4)
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Thereafter
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above $0.656250
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50.0%
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50.0
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%
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above $1.05(4)
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(1)
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This amount is equal to the hypothetical reset minimum quarterly distribution.
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(2)
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This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
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(3)
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This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
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(4)
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This amount is 150.0% of the hypothetical reset minimum quarterly distribution
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ETE will be
entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for
the prior four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.
Distributions From Capital Surplus
How
Distributions From Capital Surplus Will Be Made
Our partnership agreement requires that we make distributions of available cash
from capital surplus, if any, in the following manner once the required distributions of available cash (other than PropCo available cash) are made to the Class C unitholders:
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first
, to all common unitholders, pro rata, until the minimum quarterly distribution level has been reduced to zero as described below; and
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thereafter
, we will make all distributions of available cash from capital surplus as if they were from operating surplus.
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The preceding paragraph assumes that we do not issue additional classes of equity interests.
Effect of a Distribution From Capital Surplus
Our partnership agreement treats a distribution of capital surplus to common unitholders as the repayment of the initial unit price from our
initial public offering, which is a return of capital. Our initial public offering price less any distributions of capital surplus per unit is referred to as the unrecovered initial unit price. Each time a distribution of capital surplus
is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion that the distribution had to the fair market value of the common units immediately prior to the announcement of the distribution
(or the average of the closing prices for the 20 consecutive trading days immediately prior to the ex-dividend date). Because distributions of capital surplus will
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reduce the minimum quarterly distribution and target distribution levels after any of these distributions are made, it may be easier for ETE (in its capacity as the holder of our incentive
distribution rights) to receive incentive distributions.
Once we distribute capital surplus on a unit issued in our initial public
offering in an amount equal to the initial unit price, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels will be reduced to zero. Our partnership agreement specifies that we will then make
all future distributions from operating surplus first to the holders of our Class C Units to the extent of the distribution preference on the Class C Units, as described above under Distributions of Available CashClass C Units, and
then 50.0% to our common unitholders and 50.0% to ETE (in its capacity as the holder of our incentive distribution rights), assuming that ETE has not transferred the incentive distribution rights.
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels
In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we
combine our 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; and
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the unrecovered initial unit price.
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For example, if a two-for-one split of the common units
should occur, the minimum quarterly distribution, each target distribution level and the unrecovered initial unit price would be reduced to 50.0% of its initial level. Our partnership agreement provides that we will not make any adjustment by reason
of the issuance of additional units for cash or property.
In addition, if legislation is enacted or if existing law is modified or
interpreted by a governmental taxing authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum quarterly
distribution and the target distribution levels for each quarter may, in the sole discretion of our general partner, be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (reduced
by the amount of the estimated tax liability for such quarter) and the denominator of which is the sum of available cash for that quarter before any adjustment for estimated taxes. To the extent that the actual tax liability differs from the
estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.
Distributions of Cash Upon Liquidation
General
If we dissolve in
accordance with our 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 our 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 permit common unitholders to receive their
unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs. However, there may not be sufficient gain upon our liquidation to enable our common unitholders to fully recover all of these
amounts. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights.
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Manner of Adjustments for Gain
The manner of the adjustment for gain is set forth in our partnership agreement. We will generally allocate any gain to our partners in the
following manner:
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first
, to the holders of our Class C Units, pro rata, until the capital account for each Class C Unit is equal to the sum of: (1) the unrecovered initial unit price for that Class C Unit; and (2) the
unpaid amount of all accrued but unpaid distributions on that Class C Unit;
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second
, to our common unitholders, pro rata, until the capital account for each common unit is equal to the sum of: (1) the unrecovered initial unit price; and (2) the unpaid amount of the minimum
quarterly distribution for the quarter during which our liquidation occurs;
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third
, to all common unitholders, pro rata, until we allocate under this paragraph an amount per unit equal to: (1) the excess of the first target distribution per unit over the minimum quarterly
distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed to the
unitholders, pro rata, for each quarter of our existence;
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fourth
, 85.0% to all common unitholders, pro rata, and 15.0% to ETE (in its capacity as the holder of our incentive distribution rights), until we allocate under this paragraph an amount per unit equal to:
(1) the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus
in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, and 15.0% to ETE (in its capacity as the holder of our incentive distribution rights) for each quarter of our existence;
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fifth
, 75.0% to all common unitholders, pro rata, and 25.0% to ETE (in its capacity as the holder of our incentive distribution rights), until we allocate under this paragraph an amount per unit equal to:
(1) the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus
in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, and 25.0% to ETE (in its capacity as the holder of our incentive distribution rights) for each quarter of our existence; and
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thereafter
, 50.0% to all common unitholders, pro rata, and 50.0% to ETE (in its capacity as the holder of our incentive distribution rights).
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Notwithstanding the foregoing, if immediately prior to making allocations pursuant to the fourth, fifth and sixth clauses above, the capital
account of each common unit equals or exceeds the issue price of a Class C Unit ($48.5856), then we will allocate 1.0% of the remaining items of gain (other than gain attributable to the ownership or sale of our membership interests in PropCo or any
indebtedness of PropCo or its subsidiaries) to holders of Class C Units, pro rata.
Manner of Adjustments for Losses
We will generally allocate any loss to our unitholders in the following manner:
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first
, to our common unitholders, pro rata, until the capital accounts of the common unitholders have been reduced to zero; and
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thereafter
, to the holders of our Class C Units, pro rata, until the capital accounts of the Class C Units have been reduced to zero.
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provided, that Class C Units will not be allocated any items of loss attributable to the ownership or sale of our membership interests in PropCo or any
indebtedness of PropCo or its subsidiaries.
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Adjustments to Capital Accounts
We will make adjustments to capital accounts upon the issuance of additional units. In doing so, we generally will allocate any unrealized and,
for 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. By 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 based on their percentage ownership of us. In the event 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. The Class C
Units will not be allocated any items of gain or loss attributable to the Partnerships ownership or sale of the membership interests in PropCo or any indebtedness of PropCo or its subsidiaries.
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CONFLICTS OF INTEREST AND FIDUCIARY DUTIES
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 affiliates, including ETE and ETP, on the one hand, and us and our public unitholders, on the other hand. Conflicts may arise as a result
of the duties of our general partner to act for the benefit of its owners, which may conflict with our interests and the interests of our public unitholders. The directors and officers of our general partner, who are responsible for managing our
business, have fiduciary duties to manage our general partner in a manner beneficial to its owners. At the same time, our general partner has a duty under our partnership agreement to manage us in good faith.
Whenever a conflict of interest arises between our general partner, on the one hand, and us or any other public unitholder, on the other hand,
our general partner will resolve that conflict of interest. Our partnership agreement contains provisions that replace default fiduciary duties under applicable law with contractual corporate governance standards as set forth therein. Our
partnership agreement also restricts the remedies available to unitholders for actions taken that, without such replacement, might constitute breaches of fiduciary duty.
Our general partner will not be in breach of its obligations under our partnership agreement or its duties to us or our unitholders if the
resolution or course of action taken with respect to a conflict of interest is:
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approved by a majority of the members of the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or
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approved by the vote of a majority of the outstanding common units, excluding any units owned by our general partner or any of its affiliates, although our general partner is not obligated to seek such approval.
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Our general partner may, but is not required to, seek the approval of such resolution from the conflicts committee of its
board of directors or from our common unitholders. Because our partnership agreement only requires that the conflicts committee have at least one member, during any time that the conflicts committee only has one member, that single member of the
conflicts committee will be able to approve resolutions of conflicts of interest. It is possible that a single-member committee may not function as effectively as a multiple-member committee and, if we pursue a transaction with an affiliate while
the conflicts committee has only one member, our limited partners will be deemed to have approved that transaction through the approval of that single-member conflicts committee, in the same manner as would have occurred had the conflicts committee
consisted of more directors.
If our general partner does not seek approval from the conflicts committee or from a majority of the 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 any limited partner or the Partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the
resolution of a conflict of interest 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, a determination, other action or failure to act by our general partner, the board
of directors of our general partner or any committee thereof (including the conflicts committee) will be deemed to be in good faith unless our general partner, the board of directors of our general partner or any committee thereof
(including the conflicts committee) believed such determination, other action or failure to act was adverse to the interests of the Partnership. For the avoidance of doubt, any potential conflict of interest that exists or arises between our general
partner or its affiliates, on the one hand, and the Partnership or any other person who is bound by our partnership agreement, on the other hand, may be resolved by the conflicts committee or a vote of the common unitholders as
22
described above or as directed by the board of directors of our general partner, provided that the board of directors of our general partner makes, takes or declines to take any action to resolve
the conflict in accordance with the standard of care set forth in our partnership agreement.
Conflicts of interest could arise in the
situations described below, among others.
Our general partners affiliates, including ETE, ETP and their affiliates, are not prohibited from
engaging in other business or activities, including those in direct competition with us.
Our partnership agreement provides that
our general partner will be restricted from engaging in any business activities other than acting as our general partner or as the general partner or managing member of its affiliates, engaging in activities incidental to its ownership of interests
in us and its affiliates, acquiring, owning or disposing of debt securities or equity interests in us or its affiliates and providing management, advisory and administrative services to its affiliates or to other persons. Certain members of our
executive management team on whom we rely to manage important aspects of our business may, from time to time, face conflicts regarding the allocation of their time. In addition, except as provided in our partnership agreement, affiliates of our
general partner, including ETE and ETP, are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us.
Affiliates of our general partner, including ETE, ETP and their affiliates, may offer business opportunities or sell assets to parties other than us.
Our partnership agreement provides that affiliates of our general partner, including ETE and ETP, are permitted to engage in
separate businesses which directly compete with us and are not required to share or communicate or offer any potential business opportunities to us even if the opportunity is one that we might reasonably have pursued. Our partnership agreement
provides that affiliates of our general partner, including ETE and ETP, will not be liable to us or any unitholder for breach of any duty or obligation by reason of the fact that such person or entity pursued or acquired for itself any business
opportunity.
Our general partner is allowed to take into account the interests of parties other than us (such as ETE or ETP) in exercising certain
rights under our partnership agreement.
Our partnership agreement contains provisions that reduce the default standards to which
our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general
partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner.
Examples include the exercise of its call right, its voting rights with respect to the units it owns, its registration rights and the determination of whether to consent to any merger or consolidation of the Partnership or amendment of our
partnership agreement.
Our partnership agreement limits the liability and duties of our general partner and restricts the remedies available to us
and our common unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement limits the liability and duties of our general partner, while also restricting the remedies available to our common
unitholders for actions that, without these limitations, might constitute breaches of fiduciary duty. Delaware partnership law permits such contractual reductions of fiduciary duty. By purchasing common units, common unitholders consent to be bound
by the partnership agreement, and pursuant to our partnership agreement, each common unitholder consents to various actions and conflicts of interest contemplated in our partnership agreement that might otherwise constitute a breach of fiduciary or
other duties under Delaware law. For example:
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Our partnership agreement permits our general partner to make a number of decisions in its individual capacity,
as opposed to its capacity as general partner. This entitles our general partner to consider only
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23
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the interests and factors that it desires, with no duty or obligation to give consideration to the interests of, or factors affecting, our common unitholders. Decisions made by our general
partner in its individual capacity will be made by ETE, as the owner of our general partner, and not by the board of directors of our general partner. Examples of such decisions include:
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whether to exercise limited call rights;
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how to exercise voting rights with respect to any units it owns;
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whether to exercise registration rights; and
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whether to consent to any merger or consolidation, or amendment to our partnership agreement.
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Our partnership agreement provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as general partner so long as it acted in good faith, meaning it
believed that the decisions were not adverse to the interests of our partnership.
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Our partnership agreement provides that our general partner and the officers and directors of our general partner will not be liable for monetary damages to us for any acts or omissions unless there has been a final and
non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or those persons acted in bad faith or, in the case of a criminal matter, acted with knowledge that such persons conduct was criminal.
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Our partnership agreement provides that our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners with respect to any transaction involving
an affiliate if:
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the transaction with an affiliate or the resolution of a conflict of interest is:
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approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or
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approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates; or
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the board of directors of our general partner acted in good faith in taking any action or failing to act.
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If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee
then it will be presumed that, in making its decision, taking any action or failing to act, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the Partnership, the person bringing or
prosecuting such proceeding will have the burden of overcoming such presumption. By purchasing a common unit, a common unitholder will agree to become bound by the provisions in our partnership agreement, including the provisions discussed above.
Please read Fiduciary Duties.
Except in limited circumstances, our general partner has the power and authority to conduct our
business without unitholder approval.
Under our partnership agreement, our general partner has full power and authority to do all
things, other than those items that require unitholder approval or with respect to which our general partner has sought conflicts committee approval, on such terms as it determines to be necessary or appropriate to conduct our business including,
but not limited to, the following:
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the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into our securities, and the incurring of any other obligations;
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24
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the purchase, sale or other acquisition or disposition of our securities, or the issuance of additional options, rights, warrants and appreciation rights relating to our securities;
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the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of our assets;
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the negotiation, execution and performance of any contracts, conveyances or other instruments;
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the distribution of our cash;
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the selection and dismissal of employees and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring;
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the maintenance of insurance for our benefit and the benefit of our partners;
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the formation of, or acquisition of an interest in, the contribution of property to, and the making of loans to, any limited or general partnership, joint venture, corporation, limited liability company or other entity;
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the control of any matters affecting our rights and obligations, including the bringing and defending of actions at law or in equity, otherwise engaging in the conduct of litigation, arbitration or mediation and the
incurring of legal expense and the settlement of claims and litigation;
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the indemnification of any person against liabilities and contingencies to the extent permitted by law;
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the making of tax, regulatory and other filings, or the rendering of periodic or other reports to governmental or other agencies having jurisdiction over our business or assets; and
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the entering into of agreements with any of its affiliates to render services to us or to itself in the discharge of its duties as our general partner.
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Our partnership agreement provides that our general partner must act in good faith when making decisions on our behalf, and our
partnership agreement further provides that in order for a determination to be made in good faith, our general partner must believe that the determination is in our best interests. Please read The Partnership AgreementVoting
Rights for information regarding matters that require unitholder approval.
Our general partner determines the amount and timing of asset
purchases and sales, borrowings, repayment of indebtedness and issuances of additional partnership securities and the level of reserves, each of which can affect the amount of cash that is distributed to our unitholders.
The amount of cash that is available for distribution to our unitholders is affected by decisions of our general partner regarding such matters
as:
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amount and timing of asset purchases and sales;
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issuance of additional units; and
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the creation, reduction, or increase of reserves in any quarter.
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Our general partner
determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating
surplus. Please read Provisions of Our Partnership Agreement Relating to Cash DistributionsOperating Surplus and Capital SurplusCapital Expenditures for a discussion on when a capital expenditure constitutes a maintenance
capital expenditure or an expansion capital expenditure. This determination can affect the amount of cash that is distributed to our unitholders and to ETE (in its capacity as the holder of our incentive distribution rights).
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In addition, our general partner may use an amount, initially equal to $25 million, which
would not otherwise constitute available cash from operating surplus, in order to permit the payment of cash distributions on its units and ETEs incentive distribution rights. All of these actions may affect the amount of cash distributed to
our unitholders. Please read Provisions of Our Partnership Agreement Relating to Cash Distributions.
In addition, borrowings
by us and our affiliates do not constitute a breach of any duty owed by our general partner to our unitholders, including borrowings that have the purpose or effect of enabling ETE or its affiliates to receive distributions with respect to the
incentive distribution rights.
Our partnership agreement provides that we and our subsidiaries may borrow funds from our general partner
and its affiliates. Our general partner and its affiliates may borrow funds from us, or our operating company and its operating subsidiaries.
Cost
reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce cash available for distribution to our unitholders. The amount and timing of such reimbursements will be determined by our general
partner.
Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all
expenses they incur and payments they make on our behalf pursuant to our partnership agreement. Our partnership agreement does not limit the amount of expenses for which our general partner and its affiliates may be reimbursed. Our partnership
agreement provides that our general partner will determine in good faith the expenses that are allocable to us. Reimbursement of expenses and payment of fees to our general partner and its affiliates will reduce the amount of cash available to pay
distributions to our unitholders.
Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for
any services rendered to us or from entering into additional contractual arrangements with its affiliates on our behalf. There is no limitation on the amounts our general partner can cause us to pay it or its affiliates.
Our partnership agreement allows our general partner to determine, in good faith, any amounts to pay itself or its affiliates for any services
rendered to us. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Neither our partnership agreement nor any of the other agreements, contracts or arrangements between us, on the one
hand, and our general partner and its affiliates, on the other hand, are the result of arms-length negotiations. Similarly, agreements, contracts or arrangements between us and our general partner and its affiliates that are entered into in
the future may not be negotiated on an arms-length basis, although, in some circumstances, our general partner may determine that the conflicts committee of our general partner may make a determination on our behalf with respect to such
arrangements.
Our general partner has limited its liability regarding our obligations.
Other than with respect to our revolving credit facility and term loan agreement, our general partner has limited its liability under
contractual arrangements so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations
that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partners fiduciary duties, even if we could have obtained more
favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce
the amount of cash otherwise available for distribution to our unitholders.
Our general partner has a limited call right that may require common
unitholders to sell their common units at an undesirable time or price.
If at any time our general partner and its affiliates own
more than 80% of our common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire
26
all, but not less than all, of our common units held by unaffiliated persons at a price equal to the greater of (1) the average of the daily closing price of the common units over the 20
trading days preceding the date three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding
the date such notice is first mailed. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax
liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our
partnership agreement that prevents our general partner from issuing additional common units and exercising its call right See The Partnership AgreementLimited Call Right.
Common unitholders will have no right to enforce obligations of our general partner and its affiliates under agreements with us.
Any agreements between us, on the one hand, and our general partner and its affiliates, on the other, will not grant to the unitholders,
separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor. Common unitholders will have no right to enforce obligations of our general partner and its affiliates under agreements with us.
Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.
The attorneys, independent accountants and others who have performed services for us regarding this offering have been retained by our general
partner. Attorneys, independent accountants and others who perform services for us are selected by our general partner or the conflicts committee and may perform services for our general partner and its affiliates. We may retain separate counsel for
ourselves or the common unitholders in the event of a conflict of interest between our general partner and its affiliates, on the one hand, and us or the common unitholders, on the other, depending on the nature of the conflict. We do not intend to
do so in most cases.
ETE may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related
to its incentive distribution rights, without the approval of the conflicts committee of our general partners board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.
ETE has the right, at any time it has received incentive distributions at the highest level to which it is entitled (50%) for
each of the prior four consecutive whole fiscal quarters (and the amount of each such did not exceed adjusted operating surplus for each such quarter), to reset the initial target distribution levels at higher levels based on our cash distributions
at the time of the exercise of the reset election. Following a reset election by ETE, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to
correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution reflected by the current target distribution levels.
We anticipate that ETE would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be
sufficiently accretive to cash distributions per common unit without such conversion; however, it is possible that ETE could exercise this reset election at a time when we are experiencing declines in our aggregate cash distributions or at a time
when ETE expects that we will experience declines in our aggregate cash distributions in the foreseeable future. In such situations, ETE may be experiencing, or may expect to experience, declines in the cash distributions it receives related to its
incentive distribution rights and may therefore desire to be issued our common units, which are entitled to specified priorities with respect to our distributions and which therefore may be more advantageous for ETE to own in lieu of the right to
receive incentive distribution payments based on target distribution levels that are less certain to be achieved in the then
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current business environment. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had
we not issued new common units to ETE in connection with resetting the target distribution levels related to ETEs incentive distribution rights. Please read Provisions of Our Partnership Agreement Relating to Cash
DistributionsIncentive Distribution Rights.
Fiduciary Duties
Our general partner is accountable to us and our unitholders as a fiduciary. Fiduciary duties owed to unitholders by our general partner are
prescribed by law and our partnership agreement. The Delaware Act provides that Delaware limited partnerships may, in their partnership agreements, modify, restrict or expand the fiduciary duties otherwise owed by a general partner to limited
partners and the Partnership.
Our partnership agreement contains various provisions modifying and restricting the fiduciary duties that
might otherwise be owed by our general partner. We have adopted these restrictions to allow our general partner or its affiliates to engage in transactions with us that would otherwise be prohibited by state-law fiduciary duty 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 our general partners board of directors will have fiduciary duties to manage
our general partner in a manner that is beneficial to its owners, as well as to our unitholders.
Without these modifications, our general
partners ability to make decisions involving conflicts of interest would be restricted. The modifications to the fiduciary standards enable our general partner to take into consideration all parties involved in the proposed action. These
modifications also enable our general partner to attract and retain experienced and capable directors. However, these modifications disadvantage our public common unitholders because they restrict the remedies available to unitholders for actions
that, without those limitations, might constitute breaches of fiduciary duty, as described below, and permit our general partner to take into account the interests of third parties in addition to our interests when resolving conflicts of interest.
The following is a summary of the material restrictions of:
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the default fiduciary duties under by the Delaware Act;
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material modifications of these duties contained in our partnership agreement that replace the default fiduciary duties;
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certain rights and remedies of limited partners contained in the Delaware Act; and
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the standards contained in our partnership agreement that restrict those rights and remedies.
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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 about compliance with fiduciary duties or applicable law. For example, our partnership agreement provides that
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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 and will not be subject to any other
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
standards reduce the obligations to which our general partner would otherwise be held.
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If our general partner does not obtain approval from the conflicts committee or our common unitholders, excluding common units owned by our general partner or its affiliates, 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, which may include board members affected by the conflict of interest,
acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the Partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. These standards reduce the
obligations to which our general partner would otherwise be held.
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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 fiduciary duties or of a 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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The Delaware Act provides that, unless otherwise provided in a partnership agreement, a partner or other person shall not be liable to a limited partnership or to another partner or to another person that is a party to
or is otherwise bound by a partnership agreement for breach of fiduciary duty for the partners or other persons good faith reliance on the provisions of the partnership agreement. Under our partnership agreement, to the extent that, at
law or in equity an indemnitee has duties (including fiduciary duties) and liabilities relating thereto to us or to our partners, our general partner and any other indemnitee acting in connection with our business or affairs will not be liable to us
or to any partner for its good faith reliance on the provisions of our partnership agreement.
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Partnership agreement modified standard
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In addition to the other more specific provisions limiting the obligations of our general partner, our partnership agreement further provides that our
general partner and its officers and directors will not be liable for monetary damages to us or our limited partners for errors
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of judgment or for any acts or omissions unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that our general partner or its officers and
directors acted in bad faith or, in the case of a criminal matter, acted with knowledge that such persons conduct was unlawful.
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By purchasing our common units, each common unitholder automatically 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 our partnership agreement unenforceable against that person.
Under our partnership agreement, 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 these persons acted in bad faith. We must also provide this indemnification for criminal proceedings
unless our general partner or these other persons acted with knowledge that their conduct was unlawful. Thus, our general partner or these other persons could be indemnified for their negligent or grossly negligent acts if they meet 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 The Partnership AgreementIndemnification.
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THE PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership agreement. We will provide prospective investors with 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 available cash, please read Provisions of Our Partnership Agreement Relating to Cash Distributions and Cash Distribution Policy and Restrictions on Distributions;
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with regard to fiduciary duties of our general partner, please read Conflicts of Interest and Fiduciary Duties;
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with regard to transfer of common units, please read Description of Our Common UnitsTransfer of Common Units; and
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with regard to allocations of taxable income and taxable loss, please read Material Income Tax Consequences.
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Organization and Duration
Our
partnership was organized in June 2012 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.
Although our general partner has the ability to cause us and our subsidiaries to engage in activities other than the business of the wholesale
distribution of motor fuels and other petroleum products , the owning and leasing of real estate used as sites for convenience stores and the retail sale of motor fuel and the operation of convenience stores, our general partner has no plans to do
so and may decline to do so free of any fiduciary duty or obligation whatsoever to us or our limited partners, including any duty to act in good faith or in the best interests of us or our limited partners. 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 ETE in respect of 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.
Voting Rights
The following is a summary of the unitholder vote required for approval of the matters specified below. Matters that require the approval of a
unit majority require the approval of a majority of the common units, voting as a single class.
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In voting their common units, ETE, ETP and their affiliates have no fiduciary duty or obligation
whatsoever to us or our limited partners, including any duty to act in good faith or in the best interests of us or our limited partners.
The incentive distribution rights may be entitled to vote in certain circumstances. Class C Units do not have the right to vote on any matter
except as otherwise required by any non-waivable provision of law.
Issuance of additional units
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No approval right. Please read Issuance of Additional Partnership Interests.
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Amendment of our partnership agreement
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Certain amendments may be made by our general partner without the approval of our 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 in certain circumstances. 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 the holders of a majority of our common units, excluding common units held by our general partner and its affiliates, is required for the withdrawal of our general partner prior to September 30,
2022, 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 2/3% of the outstanding units, voting as a single class, including units held by our general partner and its affiliates. Please read Withdrawal or Removal of 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 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 Our 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 then outstanding, 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 approval of our
general partner.
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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 our partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of our partnership agreement or the duties, obligations or
liabilities among our limited partners or of our limited partners to us, or the rights or powers of, or restrictions on, our 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 fiduciary 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 Act; or
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asserting a claim governed by the internal affairs doctrine,
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will 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). 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 in connection with any such claims, suits, actions or
proceedings.
Limited Liability
Assuming that a limited partner does not participate in the control of our business within the meaning of the Delaware Act and that the limited
partner otherwise acts in conformity with the provisions of the partnership agreement, the limited partners liability under the Delaware Act will be limited, subject to possible exceptions, to the amount of capital the limited partner is
obligated to contribute to us for its common units plus the limited partners share of any undistributed profits and assets. If it were determined, however, that the right, or exercise of the right, by the limited partners as a group:
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to remove or replace 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 the general partner. This liability would extend to persons who
transact business with us who reasonably believe that the limited partner is a general partner. Neither 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.
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
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distribution was in violation of the Delaware Act shall be liable to the limited partnership for the amount of the distribution for three years. Under the Delaware Act, a substituted limited
partner of a limited partnership is liable for the obligations of its assignor to make contributions to the Partnership, except that such person is not obligated for liabilities unknown to such person at the time such person became a limited partner
and that could not be ascertained from our partnership agreement.
Our subsidiaries currently conduct business in several states and we
may have subsidiaries that conduct business in other states 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 to be 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 our 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 our limited partners.
Issuance of Additional
Partnership 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 our unitholders.
It is possible
that we will fund acquisitions through the issuance of additional common units or other partnership interests. Holders of any additional common units we issue will be entitled to share equally with the then-existing common unitholders in our
distributions of available cash. 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 special voting rights to which the common units are not entitled or be senior in right of distribution to the common units. In addition, our partnership agreement does not prohibit our subsidiaries from
issuing equity interests which 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 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 itself and its affiliates, including such interest represented by common units, that existed immediately prior to each issuance. The common unitholders will not have preemptive rights under
our partnership agreement to acquire additional common units or other partnership interests.
On January 1, 2016, we issued an
aggregate of 16,410,780 Class C Units consisting of (i) 5,242,113 Class C Units that were issued to Aloha as consideration for the contribution by Aloha to an indirect wholly owned subsidiary of the Partnership of all of Alohas assets
relating to the wholesale supply of fuel and lubricants; and (ii) 11,168,667 Class C Units that were issued to indirect wholly owned subsidiaries of the Partnership in
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exchange for all of the outstanding Class A Units held by such subsidiaries. For a complete description of our Class C Units, please see our Current Report on Form 8-K filed with the SEC on
January 5, 2016.
Amendment of the Partnership Agreement
General
Amendments to our
partnership agreement may be proposed only by or with the consent of our general partner. Our general partner, however, will have no duty or obligation to propose any amendment and may decline to do so free of any fiduciary duty or obligation
whatsoever to us or our limited partners, including any duty to act in good faith or in the best interests of us or our limited partners. In order to adopt a proposed amendment, other than the amendments discussed under No Unitholder
Approval 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 its consent, unless approved by at least a majority of the type or class of limited partner interests so affected; or
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enlarge the obligations of, restrict, change or modify 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 at its option.
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The provisions
of our partnership agreement preventing the amendments having the effects described in any of the clauses above can only be amended upon the approval of the holders of at least 90% of the outstanding units voting together as a single class
(including units owned by our general partner and its affiliates).
No Unitholder Approval
Our general partner may generally make amendments to our partnership agreement without the approval of any limited partner or assignee to
reflect:
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a change in our name, the location of our principal place of our business, our registered agent or our registered office;
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the admission, substitution, withdrawal or removal of partners in accordance with our partnership agreement;
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a change that our general partner determines to be necessary or appropriate to qualify or continue our qualification as a limited partnership or a partnership in which the limited partners have limited liability under
the laws of any state or to ensure that neither we nor 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 treated as
such);
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a change in our fiscal year or taxable year and related changes;
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an amendment that is necessary, in the opinion of our counsel, to prevent us or our general partner or its directors, officers, agents or trustees from in any manner being subjected to the provisions of the Investment
Company Act of 1940, the Investment Advisers Act of 1940, or plan asset regulations adopted under the Employee Retirement Income Security Act of 1974, or ERISA, whether or not substantially similar to plan asset regulations currently
applied or proposed;
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an amendment that our general partner determines to be necessary or appropriate in connection with the creation, authorization or issuance of any class or series of partnership interests or rights 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 to reflect and account for the formation by us of, or our investment in, any corporation, partnership, joint venture, limited liability
company or other entity, as otherwise permitted by our partnership agreement;
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an amendment that is necessary to require the limited partners to provide a statement, certification or other proof to us regarding whether such limited partner is subject to U.S. federal income taxation on the income
generated by us;
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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 or transferee in
connection with a merger or consolidation approved in connection with our partnership agreement, or if our general partner determines that those amendments:
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do not adversely affect the limited partners (or any particular class of limited partners) in any material respect;
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are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in
any federal or state statute;
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are necessary or appropriate to facilitate the trading of limited partner interests or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the limited partner interests are
or will be listed for trading;
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are necessary or appropriate for any action taken by our general partner relating to splits or combinations of units under the provisions of our partnership agreement; or
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are required to effect the intent expressed in the prospectus used in our initial public offering 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 would have a material adverse effect on the rights or preferences of any type or class of outstanding units in relation to
other classes of units will require the approval of at least a majority of the type or class of units so affected. Any amendment that would reduce or increase the voting percentage required to take any action other than to remove our general partner
or call a meeting of unitholders is required to be approved by the affirmative vote of limited partners whose aggregate outstanding units constitute not less than the voting requirement sought to be reduced or increased.
For amendments of the type not requiring unitholder approval, our general partner will not be required to obtain an opinion of counsel that an
amendment will neither result in a loss of limited liability to the limited
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partners nor result in our being treated as a taxable entity for federal income tax purposes in connection with any of the amendments. No other amendments to our partnership agreement will become
effective without the approval of holders of at least 90% of the outstanding units, voting as a single class, unless we first obtain an opinion of counsel to the effect that the amendment will not affect the limited liability under applicable law of
any of our limited partners.
Merger, Consolidation, Conversion, Sale or Other Disposition of Assets
A merger or consolidation of us requires the prior consent of our general partner. However, our general partner has no duty or obligation to
consent to any merger or consolidation and may decline to do so free of any fiduciary duty or obligation whatsoever to us or our limited partners, including any duty to act in good faith or in the best interest of us or our limited partners. Our
general partner may, however, 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 an amendment to our partnership agreement (other than an amendment that our general partner could adopt without the consent of other partners), each of our partnership interests will be an identical partnership
interest 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.
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. If the conditions specified in our partnership agreement are satisfied, our general partner may also 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 limited liability entity that has no assets, liabilities or operations, if the sole purpose of that conversion, merger or conveyance is to effect a mere change in our legal form into
another limited liability entity, our general partner has received an opinion of counsel regarding limited liability and tax matters and the governing instruments of the new entity provide the limited partners and our general partner with
substantially the same rights and obligations as those 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 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 pursuant to the provisions of the Delaware Act; 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 non-economic general partner interest in accordance
with our partnership agreement or withdrawal or removal following approval and admission of a successor.
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Upon a dissolution under the last clause above, the holders of a unit majority, may also elect,
within specific time limitations, to reconstitute us and continue our business on the same terms and conditions described in our partnership agreement by appointing as 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 the Delaware Act of any limited partner; and
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neither our partnership, the reconstituted limited partnership, our operating company nor any of our other 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 (to the extent not already so treated or taxed) upon the exercise of that right to continue.
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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 to 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 on or prior to September 30,
2022 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. After September 30, 2022, our general partner may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days advance 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 advance 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 non-economic general partner
interest in us without the approval of the unitholders. Please read Transfer of General Partner Interest and Transfer of Incentive Distribution Rights.
Upon withdrawal of our general partner under any circumstances, other than as a result of a transfer by our general partner of all or a part
of its non-economic 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 separate classes. The ownership of more than 33
1
⁄
3
% of the outstanding units by our general partner and its affiliates would give them the practical ability to prevent our general partners removal.
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
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have the option to purchase the general partner interest of the departing general partner and the incentive distribution rights of 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 of the departing general partner and the incentive distribution rights of 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 within 30 days after the effective date of the departing general partners withdrawal or removal, 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. If the departing general partner and the successor general partner cannot agree upon an expert within 45 days after the withdrawal or removal, then an expert
chosen by agreement of the experts selected by each of them will determine the fair market value.
If the option described above is not
exercised by either the departing general partner or the successor general partner, the departing general partners general partner interest and its incentive distribution rights will automatically convert into common units with a value 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 for the termination of any employees employed by the departing general partner or its affiliates for our benefit.
Transfer of General Partner Interest
Our
general partner may at its option transfer all or any part of its general partner interest without approval from the unitholders, so long as:
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the transferee agrees to assume the rights and duties of our general partner under our partnership agreement and agrees to be bound by the provisions of our partnership agreement;
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we receive an opinion of counsel that such transfer would not result in the loss of limited liability under the Delaware Act of any unitholders or cause us to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for U.S. federal income tax purposes (to the extent not already so treated or taxed); and
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such transferee also agrees to purchase all (or the appropriate portion thereof, if applicable) of the partnership or membership interest held by our general partner as the general partner or managing member, if any, of
any of our subsidiaries.
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In the case of a transfer of the general partner interest, the transferee or successor will be
subject to compliance with the terms of our partnership agreement and will be admitted as our general partner effective immediately prior to the transfer of the general partner interest.
Our general partner and its affiliates, including ETE and ETP, may, at any time, transfer common units or incentive distribution rights to one
or more persons, without unitholder approval.
Transfer of Ownership Interests in Our General Partner
At any time, the owner of our general partner, may sell or transfer all or part of its ownership interest in our general partner to an
affiliate or third party without the approval of our unitholders.
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Transfer of Incentive Distribution Rights
At any time, our general partner and its affiliates may sell or transfer all or a portion of their incentive distribution rights to an
affiliate or third party without the approval of our unitholders.
By transfer of incentive distribution rights in accordance with our
partnership agreement, each transferee of incentive distribution rights will be admitted as a limited partner with respect to the 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.
We may, at our discretion, treat the nominee holder of
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.
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 incentive distribution rights.
Until an 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.
Change of Management Provisions
Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove
Sunoco GP LLC as our general partner or from otherwise changing our management. Please read Withdrawal or Removal of Our General Partner for a discussion of certain consequences of the removal of our general partner. If any person
or group, other than our general partner and its affiliates, acquires beneficial ownership of 20% or more of any class of partnership interests, that person or group loses voting rights on all of such persons or groups partnership
interests. This loss of voting rights does not apply in certain circumstances. Please read Meetings; Voting.
Limited Call Right
If at any time our general partner and its affiliates own more than 80% of the then-issued and outstanding limited partner interests
of any class, our general partner will have the right, which it may assign in whole or in part to any of its affiliates or to us, to acquire all, but not less than all, of the limited partner interests of such class held by unaffiliated persons as
of a record date to be selected by our general partner, on at least 10 but not more than 60 days notice. The purchase price in the event of such a purchase is the greater of:
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the highest cash price paid by either of our general partner or any of its affiliates for any limited partner interests of such class purchased within the 90 days preceding the date on which our general partner
first mails notice of its election to purchase those limited partner interests; and
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the average of the daily closing prices per limited partner interest of such class for the 20 consecutive trading days immediately preceding the date three days before the date the notice is mailed.
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As a result of our general partners right to purchase outstanding limited partner
interests, a holder of limited partner interests may have his limited partner interests purchased at an undesirable time or price. The tax consequences to a unitholder of the exercise of this call right are the same as a sale by that unitholder of
his common units in the market. Please read Material Income Tax ConsequencesDisposition of Common Units.
Non-Taxpaying Holders;
Redemption
To avoid any adverse effect on the maximum applicable rates chargeable to customers by us or any of our future
subsidiaries, or in order to reverse an adverse determination that has occurred regarding such maximum rate, our partnership agreement provides our general partner the power to amend the agreement. If our general partner, with the advice of counsel,
determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes, coupled with the tax status (or lack of proof thereof) of one or more of our limited partners,
has, or is reasonably likely to have, a material adverse effect on the maximum applicable rates chargeable to customers by our subsidiaries, then our general partner may adopt such amendments to our partnership agreement as it determines necessary
or advisable to:
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obtain proof of the U.S. federal income tax status of our limited partners (and their owners, to the extent relevant); and
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permit us to redeem the units held by any person whose tax status has or is reasonably likely to have a material adverse effect on the maximum applicable rates or who fails to comply with the procedures instituted by
our general partner to obtain proof of the U.S. federal income tax status. The redemption price in the case of such a redemption will be the average of the daily closing prices per unit for the 20 consecutive trading days immediately prior to
the date set for redemption.
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Non-Citizen Assignees; Redemption
If our general partner, with the advice of counsel, determines we are subject to U.S. federal, state or local laws or regulations that, in the
reasonable determination of our general partner, create a substantial risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any limited partner, then our
general partner may adopt such amendments to our partnership agreement as it determines necessary or advisable to:
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obtain proof of the nationality, citizenship or other related status of our limited partners (and their owners, to the extent relevant); and
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permit us to redeem the units held by any person whose nationality, citizenship or other related status creates substantial risk of cancellation or forfeiture of any property or who fails to comply with the procedures
instituted by our general partner to obtain proof of the nationality, citizenship or other related status. The redemption price in the case of such a redemption will be the average of the daily closing prices per unit for the 20 consecutive
trading days immediately prior to the date set for redemption.
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Meetings; Voting
Except as described below regarding certain persons or groups owning 20% or more of any class of partnership interests then outstanding and,
except for Class C Units, record holders of limited partner interests on the record date are entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for which approvals may be solicited.
Our general partner does not anticipate that any meeting of our unitholders will be called in the foreseeable future. Any action that is
required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or without a meeting if consents in writing describing the action so taken are signed by holders of the number of units necessary to authorize
or take that action at a meeting. Meetings of the unitholders may be
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called by our general partner or by unitholders owning at least 20% of the outstanding units of the class for which a meeting is proposed. Unitholders may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding units of the class or classes for which a meeting has been called, represented in person or by proxy, will constitute a quorum, unless any action by the unitholders requires approval by holders
of a greater percentage of the units, in which case the quorum will be the greater percentage.
Each record holder of a unit has a vote
according to his percentage interest in us (excluding Class C unitholders), although additional limited partner interests having special voting rights could be issued. Please read Issuance of Additional Partnership Interests.
However, if at any time any person or group, other than our general partner and its affiliates, a direct transferee of our general partner or its affiliates or a purchaser specifically approved by our general partner, acquires, in the aggregate,
beneficial ownership of 20% or more of any class of partnership interests then outstanding, that person or group will lose voting rights on all of its partnership interests and the partnership interests may not be voted on any matter and will not be
considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. Common units held in nominee or street name account will be voted by the
broker or other nominee in accordance with the instruction of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise.
Any notice, demand, request, report or proxy material required or permitted to be given or made to record common unitholders under our
partnership agreement will be delivered to the record holder by us or by the transfer agent.
Voting Rights of Class C Units
The holders of Class C Units do not have any voting, consent or approval rights with respect to such Class C Units, except as otherwise
required by any non-waivable provision of law. With respect to any matter on which the holders of Class C Units are entitled to vote, each Class C Unit will be entitled to one vote on such matter and will vote together with the Common Units as a
single class.
Voting Rights of Incentive Distribution Rights
If a majority of the incentive distribution rights are held by our general partner and its affiliates, the holders of our incentive
distribution rights will have no right to vote in respect of such rights on any matter, unless otherwise required by law, and the holders of our incentive distribution rights, in their capacity as such, shall be deemed to have approved any matter
approved by our general partner.
If less than a majority of the incentive distribution rights are held by our general partner and its
affiliates, the incentive distribution rights will be entitled to vote on all matters submitted to a vote of unitholders, other than amendments and other matters that our general partner determines do not adversely affect the holders of our
incentive distribution rights in any material respect. On any matter in which the holders of our incentive distribution rights are entitled to vote, such holders will vote together with the common units as a single class (except in the case of any
amendment to our partnership agreement that would have a material adverse effect on the rights of any class and require the separate approval of the class affected under the provisions of our partnership agreement), and such incentive distribution
rights shall be treated in all respects as common units when sending notices of a meeting of our limited partners to vote on any matter (unless otherwise required by law), calculating required votes, determining the presence of a quorum or for other
similar purposes under our partnership agreement. The relative voting power of the holders of our incentive distribution rights and the common units will be set in the same proportion that the cumulative cash distributions, if any, in respect of the
incentive distribution rights for the four consecutive quarters prior to the record date for the vote bear to the cumulative cash distributions in respect of such class of units for such four quarters.
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Status as Limited Partner
By the transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited
partner with respect to the common units transferred when such transfer and admission is reflected in our books and records. Except as described under Limited Liability, the common units will be fully paid, and unitholders will
not be required to make additional contributions.
Indemnification
Under our partnership agreement, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law, from
and against all losses, claims, damages or similar liabilities:
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any departing general partner;
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any person who is or was an affiliate of our general partner or any departing general partner;
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any person who is or was a manager, managing member, general partner, director, officer, employee, agent, fiduciary or trustee of our partnership, our subsidiaries, our general partner, any departing general partner or
any of their affiliates;
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any person who is or was serving at the request of our general partner, any departing general partner or any of their affiliates as an officer, director, manager, managing member, general partner, employee, agent,
fiduciary or trustee of another person owing a fiduciary duty to us or our subsidiaries;
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any person who controls our general partner or any departing general partner; and
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any person designated by our general partner.
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Any indemnification under these provisions will
only be out of our assets. Unless our general partner otherwise agrees, it will not be personally liable for, or have any obligation to contribute or lend funds or assets to us to enable us to effectuate, indemnification. We may purchase insurance
against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against such liabilities under our partnership agreement.
Reimbursement of Expenses
Our
partnership agreement requires us to reimburse our general partner for all direct and indirect expenses it incurs or payments it makes on our behalf and all other expenses allocable to us or otherwise incurred by our general partner in connection
with operating our business. These expenses will include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our
general partner is entitled to determine the expenses that are allocable to us. Our partnership agreement does not limit the amount of expenses for which our general partner and its affiliates may be reimbursed.
Books and Reports
Our general partner is
required to keep appropriate books of our business at our principal offices. The books will be maintained for both tax and financial reporting purposes on an accrual basis. For tax and financial reporting purposes, our fiscal year is the calendar
year.
We furnish or make available to record holders of our units or other partnership interests, within 105 days after the close of
each fiscal year, an annual report containing audited financial statements and a report on those financial statements by our independent registered public accounting firm. Except for our fourth quarter, we also furnish or make available unaudited
financial information within 50 days after the close of each quarter. We are deemed to have made any such report available if we file such report with the SEC on EDGAR or make the report available on a publicly available website which we
maintain.
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We furnish each record holder of a unit with information reasonably required for U.S. federal,
state and local tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Our
ability to furnish this summary information to our unitholders depends on their cooperation in supplying us with specific information. Every unitholder will receive information to assist him in determining his U.S. federal and state tax liability
and in filing his U.S. federal and state income tax returns, regardless of whether he supplies us with the necessary information.
Right to Inspect Our
Books and Records
Our partnership agreement provides that a limited partner can, for a purpose reasonably related to his interest as a
limited partner, upon reasonable written demand stating the purpose of such demand and at his own expense, have furnished to him:
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true and full information regarding the status of our business and financial condition (provided that obligation shall be satisfied to the extent the limited partner is furnished our most recent annual report and any
subsequent quarterly or periodic reports required to be filed (or which would be required to be filed) with the SEC pursuant to Section 13 of the Exchange Act);
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a current list of the name and last known address of each record holder; and
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a copy of our partnership agreement, our certificate of limited partnership and all amendments thereto, together with copies of the executed copies of all powers of attorney under which they have been executed.
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Our general partner may, and intends to, keep confidential from the limited partners trade secrets or other information the
disclosure of which our general partner believes is not in our best interests, could damage us or our business or that we are required by law or by agreements with third parties to keep confidential.
Registration Rights
Under our
partnership agreement, we have agreed to register for resale under the Securities Act and applicable state securities laws any common units or other limited partner interests proposed to be sold by our general partner or any of its affiliates,
including ETE and ETP or their assignees, if an exemption from the registration requirements is not otherwise available. These registration rights continue for two years following any withdrawal or removal of our general partner. We are obligated to
pay all expenses incidental to the registration, excluding underwriting discounts.
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INVESTMENT IN SUNOCO LP BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to additional considerations because the investments of these plans are subject to
the fiduciary responsibility and prohibited transaction provisions of ERISA and restrictions imposed by Section 4975 of the Internal Revenue Code. For these purposes the term employee benefit plan includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified employee pension plans and tax deferred annuities or IRAs established or maintained by an employer or employee organization. Among other things, consideration should be
given to:
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whether the investment is prudent under Section 404(a)(1)(B) of ERISA;
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whether in making the investment, that plan will satisfy the diversification requirements of Section 404(a)(1)(C) of ERISA; and
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whether the investment will result in recognition of unrelated business taxable income by the plan and, if so, the potential after-tax investment return. Please read Material U.S. Federal Income Tax
ConsequencesTax-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 us is authorized by the appropriate governing instrument and is a proper investment for the plan or IRA.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit employee benefit plans, and also IRAs that are not
considered part of an employee benefit plan, from engaging in specified transactions involving plan assets with parties that are parties in interest under ERISA or disqualified persons under the Internal Revenue
Code with respect to the plan.
In addition to considering whether the purchase of common units is a prohibited transaction, a fiduciary
of an employee benefit plan should consider whether the plan will, by investing in us, be deemed to own an undivided interest in our assets, with the result that our operations would be subject to the regulatory restrictions of ERISA, including its
prohibited transaction rules, as well as the prohibited transaction rules of the Internal Revenue Code.
The Department of Labor
regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed plan assets under some circumstances. Under these regulations, an entitys assets
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 widely held by 100 or more investors independent of the issuer and each other, freely transferable and registered under some provisions of the federal
securities laws;
(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 less than 25% of the value
of each class of equity interest is held by the employee benefit plans referred to above, and IRAs that are subject to ERISA or Section 4975 of the Internal Revenue Code.
Our assets should not be considered plan assets under these regulations because it is expected that the investment will satisfy
the requirements in (1) and (2) above.
Plan fiduciaries contemplating a purchase of common units should consult with their own counsel
regarding the consequences under ERISA and the Internal Revenue Code in light of the serious penalties imposed on persons who engage in prohibited transactions or other violations.
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MATERIAL INCOME TAX CONSEQUENCES
This section is a summary of the material tax consequences that may be relevant to prospective unitholders who are individual citizens or
residents of the U.S. and, unless otherwise noted in the following discussion, is the opinion of Andrews Kurth LLP, counsel to our general partner and us, insofar as it relates to legal conclusions with respect to matters of U.S. federal income tax
law. This section is based upon current provisions of the Internal Revenue Code of 1986, as amended (the Internal Revenue Code), existing and proposed Treasury regulations promulgated under the Internal Revenue Code (the Treasury
Regulations) and current administrative rulings and court decisions, all of which are subject to change. Later changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. Unless the
context otherwise requires, references in this section to us or we are references to Sunoco LP and our operating subsidiaries.
The following discussion does not comment on all federal income tax matters affecting us or our unitholders and does not describe the
application of the alternative minimum tax that may be applicable to certain unitholders. Moreover, the discussion focuses on unitholders who are individual citizens or residents of the U.S. and has only limited application to corporations, estates,
entities treated as partnerships for U.S. federal income tax purposes, trusts, nonresident aliens, U.S. expatriates and former citizens or long-term residents of the United States or other unitholders subject to specialized tax treatment, such as
banks, insurance companies and other financial institutions, tax-exempt institutions, foreign persons (including, without limitation, controlled foreign corporations, passive foreign investment companies, foreign pension funds and non-U.S. persons
eligible for the benefits of an applicable income tax treaty with the United States), individual retirement accounts (IRAs), real estate investment trusts (REITs) or mutual funds, dealers in securities or currencies, traders in securities, U.S.
persons whose functional currency is not the U.S. dollar, persons holding their units as part of a straddle, hedge, conversion transaction or other risk reduction transaction, and persons deemed to
sell their units under the constructive sale provisions of the Internal Revenue Code. In addition, the discussion only comments to a limited extent on state, local and foreign tax consequences. Accordingly, we encourage each prospective unitholder
to consult his own tax advisor in analyzing the state, local and foreign tax consequences particular to him of the ownership or disposition of common units and potential changes in applicable tax laws.
No ruling has been requested from the IRS regarding our characterization as a partnership for tax purposes. Instead, we will rely on opinions
of Andrews Kurth LLP. Unlike a ruling, an opinion of counsel represents only that counsels best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made herein may not be sustained by a court if
contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the market for the common units and the prices at which common units trade. In addition, the costs of any contest with the IRS, principally legal,
accounting and related fees, will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders. Furthermore, the tax treatment of us, or of an investment in us, may be significantly
modified by future legislative or administrative changes or court decisions. Any modifications may or may not be retroactively applied.
All statements as to matters of federal income tax law and legal conclusions with respect thereto, but not as to factual matters, contained in
this section, unless otherwise noted, are the opinion of Andrews Kurth LLP and are based on the accuracy of the representations made by us and our general partner.
Notwithstanding the above, and for the reasons described below, Andrews Kurth LLP has not rendered an opinion with respect to the following
specific federal income tax issues: (i) the treatment of a unitholder whose common units are loaned to a short seller to cover a short sale of common units (please read Tax Consequences of Unit OwnershipTreatment of Short
Sales); (ii) whether all aspects of our method for allocating taxable income and losses is permitted by existing Treasury Regulations (please read Disposition of Common UnitsAllocations Between Transferors and
Transferees) and (iii) 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).
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Partnership Status
A partnership is not a taxable entity and incurs no federal income tax liability. Instead, each partner of a partnership is required to take
into account his share of items of income, gain, loss and deduction of the partnership in computing his federal income tax liability, regardless of whether cash distributions are made to him by the partnership. Distributions by a partnership to a
partner are generally not taxable to the partnership or the partner unless the amount of cash distributed to him is in excess of the partners adjusted basis in his partnership interest. Section 7704 of the Internal Revenue Code provides
that publicly traded partnerships will, as a general rule, be taxed as corporations. However, an exception, referred to as the Qualifying Income Exception, exists with respect to publicly traded partnerships of which 90% or more of the
gross income for every taxable year consists of qualifying income. Qualifying income includes (i) income and gains derived from the refining, transportation, storage, processing and marketing of crude oil, natural gas and products
thereof (including motor fuels), (ii) certain rents from the leasing of real property, (iii) interest (other than from a financial business), (iv) dividends, (v) gains from the sale of real property and (vi) gains from the sale or other disposition
of capital assets held for the production of income that otherwise constitutes qualifying income. We estimate that less than 5% of our current gross income is not qualifying income; however, this estimate could change from time to time. The portion
of our income that is qualifying income may change from time to time.
It is the opinion of Andrews Kurth LLP that, based upon the
Internal Revenue Code, its regulations, published revenue rulings and court decisions and the representations described below that Sunoco LP is classified as a partnership for federal income tax purposes.
In rendering its opinion, Andrews Kurth LLP has relied on factual representations made by us and our general partner. The representations made
by us and our general partner upon which Andrews Kurth LLP has relied include, but are not limited to, the following:
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With the exception of PropCo and any companies owned directly or indirectly by PropCo, neither Sunoco LP nor any of our partnership or limited liability company subsidiaries has elected or will elect to be treated as a
corporation for federal income tax purposes; and
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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 Andrews Kurth LLP has opined or will opine is
qualifying income within the meaning of Section 7704(d) of the Internal Revenue Code.
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We believe that
these representations have been true in the past and expect that these representations will continue to 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 if we had transferred all of our assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which we fail to meet the Qualifying Income Exception, in
return for stock in that corporation, and then distributed that stock to the unitholders in liquidation of their interests in us. This deemed contribution and liquidation should be tax-free to unitholders and us so long as we, at that time, do not
have liabilities in excess of the tax basis of our assets. Thereafter, we would be treated as a corporation for federal income tax purposes.
The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified
by administrative, legislative or judicial interpretation at any time. For example, on May 5, 2015, the Department of Treasury and the IRS issued proposed regulations that, if finalized in their current form, would restrict the types of natural
resource activities that generate qualifying income for publicly traded partnerships. We believe the income that we treat as qualifying income satisfies the requirements for qualifying income under the proposed regulations. However, the proposed
regulations could be changed before they are finalized and could take a position that is contrary to our interpretation of Section 7704 of the
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Internal Revenue Code. In addition, from time to time, the administration and members of the U.S. Congress propose and consider substantive changes to the existing U.S. federal income tax laws
that affect publicly traded partnerships. 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.
If we were treated as an association taxable as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception or otherwise, our items of income, gain, loss and deduction would be reflected only on our tax return rather than being passed through to our unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution made to a unitholder would be treated as taxable dividend income, to the extent of our current and accumulated earnings and profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the unitholders tax basis in his common units, or taxable capital gain, after the unitholders tax basis in his common units is reduced to zero. Accordingly, taxation as a corporation would
result in a material reduction in a unitholders cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the units.
The discussion below is based on Andrews Kurth LLPs opinion that Sunoco LP will be classified as a partnership for federal income tax purposes.
Tax Treatment of Income Earned Through Certain Subsidiaries
Andrews Kurth LLP is unable to opine as to the qualifying nature of the income generated by certain portions of our operations. As a result, we
currently conduct a portion of our business related to these operations in a separate subsidiary PropCo, and its subsidiaries including Aloha and Susser. Each of PropCo, Aloha and Susser is classified, or has elected to be treated, as an association
taxable as a corporation for U.S. federal income tax purposes. These subsidiaries file a consolidated federal corporate income tax return and are subject to corporate-level federal income tax on their taxable income at the corporate tax rate, which
is currently a maximum of 35%. These subsidiaries will also likely pay state income tax at varying rates on their taxable income. Any such entity level taxes will reduce the cash available for distribution to our unitholders. An individual
unitholders share of interest and dividend income from PropCo and its subsidiaries will constitute portfolio income that cannot be offset by the unitholders share of our other losses or deductions. Interest income from PropCo will be
taxed to unitholders at rates applicable to ordinary income. Distributions from PropCo will generally be taxed to unitholders as qualified dividend income to the extent of current and accumulated earnings and profits of PropCo
Limited Partner Status
Unitholders of
Sunoco LP will be treated as partners of Sunoco LP for federal income tax purposes. Also, unitholders whose common units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights
attendant to the ownership of their common units will be treated as partners of Sunoco LP for federal income tax purposes.
A beneficial
owner of common units whose units have been transferred to a short seller to complete a short sale would appear to lose his status as a partner with respect to those units for federal income tax purposes. Please read Tax Consequences of
Unit OwnershipTreatment of Short Sales.
Income, gains, losses or deductions would not appear to be reportable by a unitholder
who is not a partner for federal income tax purposes, and any cash distributions received by a unitholder who is not a partner for federal income tax purposes would therefore appear to be fully taxable as ordinary income. These holders are urged to
consult their tax advisors with respect to the tax consequences to them of holding common units in Sunoco LP. The references to unitholders in the discussion that follows are to persons who are treated as partners in Sunoco LP for
federal income tax purposes.
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Tax Consequences of Unit Ownership
Flow-Through of Taxable Income
Subject to the discussion below under Entity-Level Collections and aside from any taxes paid by PropCo, our subsidiary
treated as parent of the federal consolidated group of corporations, including Aloha and Susser, we will not pay any federal income tax. Instead, each unitholder will be required to report on his income tax return his share of our income, gains,
losses and deductions without regard to whether we make cash distributions to him. Consequently, we may allocate income to a unitholder even if he has not received a cash distribution. Each unitholder will be required to include in income his
allocable share of our income, gains, losses and deductions for our taxable year ending with or within his taxable year. Our taxable year ends on December 31.
Treatment of Distributions
Distributions by us to a unitholder generally will not be taxable to the unitholder for federal income tax purposes, except to the extent the
amount of any such cash distribution exceeds his tax basis in his common units immediately before the distribution. Our cash distributions in excess of a unitholders tax basis generally will be considered to be gain from the sale or exchange
of the common units, taxable in accordance with the rules described under Disposition of Common Units. Any reduction in a unitholders share of our liabilities for which no partner bears the economic risk of loss, known as
nonrecourse liabilities, will be treated as a distribution by us of cash to that unitholder. To the extent our distributions cause a unitholders at-risk amount to be less than zero at the end of any taxable year, he
must recapture any losses deducted in previous years. Please read Tax Consequences of Unit OwnershipLimitations on Deductibility of Losses.
A decrease in a unitholders percentage interest in us because of our issuance of additional common units will decrease his share of our
nonrecourse liabilities, and thus will result in a corresponding deemed distribution of cash. This deemed distribution may constitute a non-pro rata distribution. A non-pro rata distribution of money or property may result in ordinary income to a
unitholder, regardless of his tax basis in his common units, if the distribution reduces the unitholders share of our unrealized receivables, including depreciation recapture and/or substantially appreciated inventory
items, each as defined in the Internal Revenue Code, and collectively, Section 751 Assets. To that extent, the unitholder will be treated as having been distributed his proportionate share of the Section 751 Assets and
then having exchanged those assets with us in return for the non-pro rata portion of the actual distribution made to him. This latter deemed exchange will generally result in the unitholders realization of ordinary income, which will equal the
excess of (1) the non-pro rata portion of that distribution over (2) the unitholders tax basis (often zero) for the share of Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units
A
unitholders initial tax basis for his common units will be the amount he paid for the common units plus his share of our nonrecourse liabilities. That basis will be increased by his share of our income and by any increases in his share of our
nonrecourse liabilities. That basis will be decreased, but not below zero, by distributions from us, by the unitholders share of our losses, by any decreases in his share of our nonrecourse liabilities and by his share of our expenditures that
are not deductible in computing taxable income and are not required to be capitalized. A unitholder will generally have a share of our nonrecourse liabilities based on his share of our profits. Please read Disposition of Common
UnitsRecognition of Gain or Loss.
Limitations on Deductibility of Losses
The deduction by a unitholder of his share of our losses will be limited to the tax basis in his units and, in the case of an individual
unitholder, estate, trust, or corporate unitholder (if more than 50% of the value of the corporate unitholders stock is owned directly or indirectly by or for five or fewer individuals or some
tax-
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exempt organizations), to the amount for which the unitholder is considered to be at risk with respect to our activities, if that is less than his tax basis. A common unitholder
subject to these limitations must recapture losses deducted in previous years to the extent that distributions cause his at-risk amount to be less than zero at the end of any taxable year. Losses disallowed to a unitholder or recaptured as a result
of these limitations will carry forward and will be allowable as a deduction to the extent that his at-risk amount is subsequently increased, provided such losses do not exceed such common unitholders tax basis in his common units. Upon the
taxable disposition of a unit, any gain recognized by a unitholder can be offset by losses that were previously suspended by the at-risk limitation but may not be offset by losses suspended by the basis limitation. Any loss previously suspended by
the at-risk limitation in excess of that gain would no longer be utilizable.
In general, a unitholder will be at risk to the extent of
the tax basis of his units, excluding any portion of that basis attributable to his share of our nonrecourse liabilities, reduced by (i) any portion of that basis representing amounts otherwise protected against loss because of a guarantee,
stop loss agreement or other similar arrangement and (ii) any amount of money he borrows to acquire or hold his units, if the lender of those borrowed funds owns an interest in us, is related to the unitholder or can look only to the units for
repayment. A unitholders at-risk amount will increase or decrease as the tax basis of the unitholders units increases or decreases, other than tax basis increases or decreases attributable to increases or decreases in his share of our
nonrecourse liabilities.
In addition to the basis and at-risk limitations on the deductibility of losses, the passive loss limitations
generally provide that individuals, estates, trusts and some closely-held corporations and personal service corporations can deduct losses from passive activities, which are generally trade or business activities in which the taxpayer does not
materially participate, only to the extent of the taxpayers income from those passive activities. The passive loss limitations are applied separately with respect to each publicly traded partnership. Consequently, any passive losses we
generate will only be available to offset our passive income generated in the future and will not be available to offset income from other passive activities or investments, including our investments or a unitholders investments in other
publicly traded partnerships, or the unitholders salary, active business or other income. Passive losses that are not deductible because they exceed a unitholders share of income we generate may be deducted in full when he disposes of
his entire investment in us in a fully taxable transaction with an unrelated party. The passive loss limitations are applied after other applicable limitations on deductions, including the at-risk rules and the basis limitation.
A unitholders share of our net income may be offset by any of our suspended passive losses, but it may not be offset by any other
current or carryover losses from other passive activities, including those attributable to other publicly traded partnerships.
Limitations on
Interest Deductions
The deductibility of a non-corporate taxpayers investment interest expense is generally
limited to the amount of that taxpayers net investment income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income.
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The computation of a unitholders investment interest expense will take into account interest on any margin account borrowing or other
loan incurred to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment or (if applicable)
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qualified dividend income. The IRS has indicated that the net passive income earned by a publicly traded partnership will be treated as investment income to its unitholders. In addition, the
unitholders share of our portfolio income will be treated as investment income.
Entity-Level Collections
If we are required or elect under applicable law to pay any federal, state, local or foreign income tax on behalf of any unitholder or any
former unitholder, we are authorized to pay those taxes from our funds. That payment, if made, will be treated as a distribution of cash to the unitholder on whose behalf the payment was made. If the payment is made on behalf of a person whose
identity cannot be determined, we are authorized to treat the payment as a distribution to all current unitholders. We are authorized to amend our partnership agreement in the manner necessary to maintain uniformity of the intrinsic tax
characteristics of units and to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under our partnership agreement is maintained as nearly as is
practicable. Payments by us as described above could give rise to an overpayment of tax on behalf of an individual unitholder in which event the unitholder would be required to file a claim in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction
In general, if we have a net profit, our items of income, gain, loss and deduction will be allocated among our unitholders, other than holders
of our Class C Units, in accordance with their percentage interests in us. At any time that incentive distributions are made, gross income will be allocated to the recipients to the extent of these distributions. If we have a net loss, that loss
will be allocated to the unitholders, other than holders of our Class C Units, in accordance with their percentage interests in us, subject to any limitations on the allocation of net loss as provided in the applicable Treasury Regulations.
Specified items of our income, gain, loss and deduction will be allocated to account for any difference between the tax basis and fair market
value of any property contributed to us that exists at the time of such contribution, referred to in this discussion as the Contributed Property. The effect of these allocations, referred to as Section 704(c)
Allocations, to a unitholder purchasing common units from us in an offering will be essentially the same as if the tax bases of our assets were equal to their fair market values at the time of the offering. In the event we issue additional
common units or engage in certain other transactions in the future, reverse Section 704(c) Allocations, similar to the Section 704(c) Allocations described above, will be made to all of our unitholders immediately prior to such
issuance or other transactions to account for the difference between the book basis for purposes of maintaining capital accounts and the fair market value of all property held by us at the time of such issuance or future transaction. In
addition, items of recapture income will be allocated to the extent possible to the unitholder who was allocated the deduction giving rise to the treatment of that gain as recapture income in order to minimize the recognition of ordinary income by
some unitholders. Finally, although we do not expect that our operations will result in the creation of negative capital accounts, if negative capital accounts nevertheless result, items of our income and gain will be allocated in an amount and
manner sufficient to eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or
deduction, other than an allocation required by the Internal Revenue Code to eliminate the difference between a partners book capital account, credited with the fair market value of Contributed Property, and tax capital
account, credited with the tax basis of Contributed Property, referred to in this discussion as the Book-Tax Disparity, will generally be given effect for federal income tax purposes in determining a partners share of an item of
income, gain, loss or deduction only if the allocation has substantial economic effect. In any other case, a partners share of an item will be determined on the basis of his interest in us, which will be determined by taking into
account all the facts and circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon liquidation.
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Andrews Kurth
LLP is of the opinion that, with the exception of the issues described in Tax Consequences of Unit OwnershipSection 754 Election and Disposition of Common UnitsAllocations Between Transferors and
Transferees, allocations under our partnership agreement will be given effect for federal income tax purposes in determining a partners share of an item of income, gain, loss or deduction.
Treatment of Short Sales
A
unitholder whose units are loaned to a short seller to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during
the period of the loan and may recognize gain or loss from the disposition. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those units would be fully taxable; and
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while not entirely free from doubt, all of these distributions would appear to be ordinary income.
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Because there is no direct or indirect controlling authority on the issue relating to partnership interests, Andrews Kurth LLP has not
rendered an opinion regarding the tax treatment of a unitholder whose common units are loaned to a short seller to effect a short sale of common units; therefore, unitholders desiring to assure their status as partners and avoid the risk of gain
recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from borrowing and loaning their units. The IRS has
previously announced that it is studying issues relating to the tax treatment of short sales of partnership interests. Please read Disposition of Common UnitsRecognition of Gain or Loss.
Tax Rates
Under current law, the
highest marginal U.S. federal income tax rate applicable to ordinary income (including interest income) of individuals is 39.6% and the highest marginal U.S. federal income tax rate applicable to long-term capital gains (generally, capital gains on
certain assets held for more than twelve months) and qualified dividend income of individuals is 20%. Such rates are subject to change by new legislation at any time.
In addition, a 3.8% Medicare tax, or NIIT, is imposed on 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 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 the unitholder is
married and filing separately) or $200,000 (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 Internal Revenue Code. That election is irrevocable without the consent of the
IRS unless there is a constructive termination of the partnership. Please
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read Disposition of Common UnitsConstructive Termination. The election generally permits us to adjust a common unit purchasers tax basis in our assets, or inside
basis, under Section 743(b) of the Internal Revenue Code to reflect his purchase price. This election does not apply with respect to a person who purchases common units directly from us. The Section 743(b) adjustment belongs to the
purchaser and not to other unitholders. For purposes of this discussion, the inside basis in our assets with respect to a unitholder will be considered to have two components: (1) his share of our tax basis in our assets, or common basis, and
(2) his Section 743(b) adjustment to that basis.
We have adopted the remedial allocation method as to all our properties. Where
the remedial allocation method is adopted, the Treasury Regulations under Section 743 of the Internal Revenue Code require a portion of the Section 743(b) adjustment that is attributable to recovery property that is subject to depreciation
under Section 168 of the Internal Revenue Code and whose book basis is in excess of its tax basis to be depreciated over the remaining cost recovery period for the propertys unamortized Book-Tax Disparity. Under Treasury Regulation
Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject to depreciation under Section 167 of the Internal Revenue Code, rather than cost recovery deductions under Section 168, is generally required
to be depreciated using either the straight-line method or the 150% declining balance method. Under our partnership agreement, our general partner is authorized to take a position to preserve the uniformity of units even if that position is not
consistent with these and any other Treasury Regulations. Please read Uniformity of Units.
We depreciate the portion of
a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the propertys unamortized Book-Tax Disparity, or treat that portion as non-amortizable to the extent attributable to property that is not amortizable. This method is consistent with the methods
employed by other publicly traded partnerships but is arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets. To the extent this Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be
taken, we may take a depreciation or amortization position under which all purchasers acquiring units in the same month would receive depreciation or amortization, whether attributable to common basis or a Section 743(b) adjustment, based upon
the same applicable rate as if they had purchased a direct interest in our assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise be allowable to some unitholders. Please read
Uniformity of Units. A unitholders tax basis for his common units is reduced by his share of our deductions (whether or not such deductions were claimed on an individuals income tax return) so that any position we take
that understates deductions will overstate the common unitholders basis in his common units, which may cause the unitholder to understate gain or overstate loss on any sale of such units. Please read Disposition of Common
UnitsRecognition of Gain or Loss. Andrews Kurth LLP is unable to opine as to whether our method for taking into account Section 743 adjustments is sustainable for property subject to depreciation under Section 167 of the
Internal Revenue Code or if we use an aggregate approach as described above, as there is no direct or indirect controlling authority addressing the validity of these positions. Moreover, the IRS may challenge our position with respect to
depreciating or amortizing the Section 743(b) adjustment we take to preserve the uniformity of the units. If such a challenge were sustained, the gain from the sale of units might be increased without the benefit of additional deductions.
A Section 754 election is advantageous if the transferees tax basis in his units is higher than the units share of the
aggregate tax basis of our assets immediately prior to the transfer. In that case, as a result of the election, the transferee would have, among other items, a greater amount of depreciation deductions and his share of any gain or loss on a sale of
our assets would be less. Conversely, a Section 754 election is disadvantageous if the transferees tax basis in his units is lower than those units share of the aggregate tax basis of our assets immediately prior to the transfer.
Thus, the fair market value of the units may be affected either favorably or unfavorably by the election. A basis adjustment is required regardless of whether a Section 754 election is made
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in the case of a transfer of an interest in us if we have a substantial built-in loss immediately after the transfer, or if we distribute property and have a substantial basis reduction.
Generally, a built-in loss or a basis reduction is substantial if it exceeds $250,000.
The calculations involved in the Section 754
election are complex and will be made on the basis of assumptions as to the value of our assets and other matters. For example, the allocation of the Section 743(b) adjustment among our assets must be made in accordance with the Internal
Revenue Code. The IRS could seek to reallocate some or all of any Section 743(b) adjustment allocated by us to our tangible assets to goodwill instead. Goodwill, as an intangible asset, is generally nonamortizable or amortizable over a longer
period of time or under a less accelerated method than our tangible assets. We cannot assure you that the determinations we make will not be successfully challenged by the IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to be made, and should, in our opinion, the expense of compliance exceed the benefit of the election, we may seek permission from the IRS to revoke our Section 754
election. If permission is granted, a subsequent purchaser of units may be allocated more income than he would have been allocated had the election not been revoked.
Tax Treatment of Operations
Accounting Method and
Taxable Year
We use the year ending December 31 as our taxable year and the accrual method of accounting for federal income
tax purposes. Each unitholder will be required to include in income his share of our income, gain, loss and deduction for our taxable year ending within or with his taxable year. In addition, a unitholder who has a taxable year ending on a date
other than December 31 and who disposes of all of his units following the close of our taxable year but before the close of his taxable year must include his share of our income, gain, loss and deduction in income for his taxable year, with the
result that he will be required to include in income for his taxable year his share of more than twelve months of our income, gain, loss and deduction. Please read Disposition of Common UnitsAllocations Between Transferors and
Transferees.
Tax Basis, Depreciation and Amortization
The tax basis of our assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on
the disposition of these assets. The federal income tax burden associated with the difference between the fair market value of our assets and their tax basis immediately prior to an offering will be borne by unitholders holding interests in us prior
to such offering. Please read Tax Consequences of Unit OwnershipAllocation of Income, Gain, Loss and Deduction.
To the extent allowable, we may elect to use the depreciation and cost recovery methods, including bonus depreciation to the extent available,
that will result in the largest deductions being taken in the early years after assets subject to these allowances are placed in service. Please read Uniformity of Units. Property we subsequently acquire or construct may be
depreciated using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure
or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a 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 his interest in us. Please read
Tax Consequences of Unit OwnershipAllocation of Income, Gain, Loss and Deduction and Disposition of Common UnitsRecognition of Gain or Loss.
The costs we incur in selling our units (called syndication expenses) must be capitalized and cannot be deducted currently,
ratably or upon our termination. There are uncertainties regarding the classification of costs
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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.
Valuation and Tax Basis of Our Properties
The federal income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market
values, and the initial tax bases, of our assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we will make many of the relative fair market value estimates ourselves. These estimates and
determinations of basis are subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or determinations of basis are later found to be incorrect, the character and amount of items of income, gain,
loss or deductions previously reported by unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.
Disposition of Common Units
Recognition of Gain or
Loss
Gain or loss will be recognized on a sale of units equal to the difference between the amount realized and the
unitholders tax basis for the units sold. A unitholders amount realized will be measured by the sum of the cash or the fair market value of other property received by him plus his share of our nonrecourse liabilities. Because the amount
realized includes a unitholders share of our nonrecourse liabilities, the gain recognized on the sale of units could result in a tax liability in excess of any cash received from the sale.
Prior distributions from us that in the aggregate were in excess of cumulative net taxable income for a common unit and, therefore, decreased
a unitholders tax basis in that common unit will, in effect, become taxable income if the common unit is sold at a price greater than the unitholders tax basis in that common unit, even if the price received is less than his original
cost.
Except as noted below, gain or loss recognized by a unitholder, other than a dealer in units, on the sale or exchange
of a unit will generally be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of units held for more than twelve months will generally be taxed at the U.S. federal income tax rate applicable to long-term capital
gains. However, a portion of this gain or loss, which will likely be substantial, will be separately computed and taxed as ordinary income or loss under Section 751 of the Internal Revenue Code to the extent attributable to assets giving rise
to depreciation recapture or other unrealized receivables or to inventory items we own. The term unrealized receivables includes potential recapture items, including depreciation recapture. Ordinary income
attributable to unrealized receivables, inventory items and depreciation recapture may exceed net taxable gain realized upon the sale of a unit and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a
unitholder may recognize both ordinary income and a capital loss upon a sale of units. Capital losses may offset capital gains and no more than $3,000 of ordinary income, in the case of individuals, and may only be used to offset capital gains in
the case of corporations. Both ordinary income and capital gain recognized on a sale of units may be subject to the NIIT in certain circumstances. Please read Tax Consequences of Unit OwnershipTax Rates.
The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a
single adjusted tax basis for all those interests. Upon a sale or other disposition of less than all of those interests, a portion of that tax basis must be allocated to the interests sold using an equitable apportionment method, which
generally means that the tax basis allocated to the interest sold equals an amount that bears the same relation to the partners tax basis in his entire interest in the partnership as the value of the interest sold bears to the value of the
partners entire interest in the partnership. Treasury Regulations under Section 1223 of the Internal Revenue Code allow a selling unitholder who can identify common units transferred with an ascertainable holding period to elect to use
the actual holding period
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of the common units transferred. Thus, according to the ruling discussed above, a common unitholder will be unable to select high or low basis common units to sell as would be the case with
corporate stock, but, according to the Treasury Regulations, he may designate specific common units sold for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of common units
transferred must consistently use that identification method for all subsequent sales or exchanges of common units. A unitholder considering the purchase of additional units or a sale of common units purchased in separate transactions is urged to
consult his tax advisor as to the possible consequences of this ruling and application of the Treasury Regulations.
Specific provisions
of the Internal Revenue Code affect the taxation of some financial products and securities, including partnership interests, by treating a taxpayer as having sold an appreciated partnership interest, one in which gain would be recognized
if it were sold, assigned or terminated at its fair market value, if the taxpayer or related persons enter(s) into:
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an offsetting notional principal contract; or
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a futures or forward contract;
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in each case, with respect to the partnership interest or substantially
identical property.
Moreover, if a taxpayer has previously entered into a short sale, an offsetting notional principal contract or a
futures or forward contract with respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then acquires the partnership interest or substantially identical property. The
Secretary of the Treasury is also authorized to issue regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the preceding transactions as having constructively sold the financial
position.
Allocations Between Transferors and Transferees
In general, our taxable income and losses will be determined annually, prorated on a monthly basis and 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, which we refer to in this prospectus as the Allocation Date. However, gain or
loss realized on a sale or other disposition of our assets other than in the ordinary course of business will be allocated among the unitholders on the Allocation Date in the month in which that gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.
The U.S. Department of Treasury
and the IRS issued final Treasury Regulations that permit a publicly traded partnership to 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. Certain publicly traded partnerships, including us, will be required to apply the conventions provided by the Treasury Regulations for taxable years beginning on or after August 3, 2015. Accordingly, Andrews Kurth LLP is unable to opine
on the validity of our current method of allocating income and deductions between transferor and transferee unitholders. If the IRS were to successfully challenge our proration method, we may be required to change the allocation of items of income,
gain, loss and deduction among our unitholders. We are authorized to revise our method of allocation between transferor and transferee unitholders, as well as unitholders whose interests vary during a taxable year, to conform to a method permitted
under these Treasury Regulations. A unitholder who owns units at any time during a quarter and who disposes of them prior to the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and
deductions attributable to that quarter through the month of disposition but will not be entitled to receive that cash distribution.
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Notification Requirements
A unitholder who sells any of his units is generally required to notify us in writing of that sale within 30 days after the sale (or, if
earlier, January 15 of the year following the sale). A purchaser of units who purchases units from another unitholder is also generally required to notify us in writing of that purchase within 30 days after the purchase. Upon receiving
such notifications, we are required to notify the IRS of that transaction and to furnish specified information to the transferor and transferee. Failure to notify us of a purchase may, in some cases, lead to the imposition of penalties. However,
these reporting requirements do not apply to a sale by an individual who is a citizen of the U.S. and who effects the sale or exchange through a broker who will satisfy such requirements.
Constructive Termination
We will
be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining
whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us
filing two tax returns (and our unitholders could receive two schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In
the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income
for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for federal income tax purposes. If treated as a new
partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code, and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has announced a publicly
traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminates requests relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one
Schedule K-1 to unitholders for the year notwithstanding two partnership tax years.
Uniformity of Units
Because we cannot match transferors and transferees of units, we must maintain uniformity of the economic and tax characteristics of the units
to a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of federal income tax requirements, both statutory and regulatory. A lack of uniformity can result from a literal application of
Treasury Regulation Section 1.167(c)-1(a)(6). Any non-uniformity could have a negative impact on the value of the units. Please read Tax Consequences of Unit OwnershipSection 754 Election. We depreciate the portion
of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the propertys unamortized Book-Tax Disparity, or treat that portion as nonamortizable, to the extent attributable to property the common basis of which is not amortizable, consistent with the
regulations under Section 743 of the Internal Revenue Code, even though that position may be inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets.
Please read Tax Consequences of Unit OwnershipSection 754 Election. To the extent that the Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be
taken, we may adopt a depreciation and amortization position under which all purchasers acquiring units in the same month would receive depreciation and amortization deductions, whether attributable to common basis or a Section 743(b)
adjustment, based upon the same applicable rate as if
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they had purchased a direct interest in our assets. If this position is adopted, it may result in lower annual depreciation and amortization deductions than would otherwise be allowable to some
unitholders and risk the loss of depreciation and amortization deductions not taken in the year that these deductions are otherwise allowable. This position will not be adopted if we determine that the loss of depreciation and amortization
deductions will have a material adverse effect on the unitholders. If we choose not to utilize this aggregate method, we may use any other reasonable depreciation and amortization method to preserve the uniformity of the intrinsic tax
characteristics of any units that would not have a material adverse effect on the unitholders. In either case, and as stated above under Tax Consequences of Unit OwnershipSection 754 Election, Andrews Kurth LLP has not
rendered an opinion with respect to these methods. Moreover, the IRS may challenge any method of depreciating the Section 743(b) adjustment described in this paragraph. If this challenge were sustained, the uniformity of units might be
affected, and the gain from the sale of units might be increased without the benefit of additional deductions. Please read Disposition of Common UnitsRecognition of Gain or Loss.
Tax-Exempt Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt organizations, non-resident aliens, foreign corporations and other foreign
persons raises issues unique to those investors and, as described below to a limited extent, may have substantially adverse tax consequences to them. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before
investing in our common units. Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated business taxable
income. Virtually all of our income allocated to a unitholder that is a tax-exempt organization will be unrelated business taxable income and will be taxable to it.
Non-resident aliens and foreign corporations, trusts or estates that own units will be considered to be engaged in business in the U.S.
because of the ownership of units. As a consequence, they will be required to file federal tax returns to report their share of our income, gain, loss or deduction and pay federal income tax at regular rates on their share of our net income or gain.
Moreover, under rules applicable to publicly traded partnerships, our quarterly distribution to foreign unitholders will be subject to withholding at the highest applicable effective tax rate. Each foreign 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. A change in applicable law may require us to change
these procedures.
In addition, because a foreign corporation that owns units will be treated as engaged in a 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 federal income tax, on its share of our earnings and profits, as adjusted for changes in the foreign corporations U.S. net equity,
that is effectively connected with the conduct of a U.S. trade or business. That tax may be reduced or eliminated by an income tax treaty between the U.S. and the country in which the foreign corporate unitholder is a qualified resident.
In addition, this type of unitholder is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code.
A foreign unitholder who sells or otherwise disposes of a common 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 foreign unitholder. Under a ruling published by the IRS, interpreting the scope of effectively connected income, a
foreign unitholder would be considered to be engaged in a trade or business in the U.S. by virtue of the U.S. activities of the partnership, and part or all of that unitholders gain would be effectively connected with that unitholders
indirect U.S. trade or business. Moreover, under the Foreign Investment in Real Property Tax Act, a foreign unitholder generally will be subject to U.S. federal income tax upon the sale or disposition of a common unit if (i) he owned (directly
or constructively applying certain attribution rules) more than 5% of our common units at any time during the five-year period ending on
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the date of such disposition and (ii) 50% or more of the fair market value of all of our assets consisted of U.S. real property interests at any time during the shorter of the period during
which such unitholder held the common 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 and that percentage may change in the future. Therefore, foreign
unitholders may be subject to 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 calendar year, specific tax information, including a
Schedule K-1, which describes his share of our income, gain, loss and deduction for our preceding taxable year. In preparing this information, which will not be reviewed by counsel, we will take various accounting and reporting positions, some
of which have been mentioned earlier, to determine each unitholders share of income, gain, loss and deduction. We cannot assure you that those positions will yield a result that conforms to the requirements of the Internal Revenue Code,
Treasury Regulations or administrative interpretations of the IRS. Neither we nor Andrews Kurth LLP can assure prospective unitholders that the IRS will not successfully contend in court that those positions are impermissible. Any challenge by the
IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns. Adjustments resulting
from an IRS audit may require each unitholder to adjust a prior years tax liability, and possibly may result in an audit of his return. Any audit of a unitholders return could result in adjustments not related to our returns as well as
those related to our returns.
Partnerships generally are treated as separate entities for purposes of federal tax audits, judicial review
of administrative adjustments by the IRS and tax settlement proceedings. The tax treatment of partnership items of income, gain, loss and deduction are determined in a partnership proceeding rather than in separate proceedings with the partners. The
Internal Revenue Code requires that one partner be designated as the Tax Matters Partner for these purposes. Our partnership agreement names Sunoco GP LLC, or such other partner as designated by the general partner, as our Tax Matters
Partner.
The Tax Matters Partner will make some elections on our behalf and on behalf of unitholders. In addition, the Tax Matters
Partner can extend the statute of limitations for assessment of tax deficiencies against unitholders for items in our returns. The Tax Matters Partner may bind a unitholder with less than a 1% profits interest in us to a settlement with the IRS
unless that unitholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any unitholder having at least a 1% interest in profits or by any group of unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go forward, and each unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the treatment of any item on his federal income tax return that is not consistent
with the treatment of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a unitholder to substantial penalties.
Recently enacted legislation applicable to partnership tax years beginning after 2017 alters the procedures for auditing large partnerships
and for assessing and collecting taxes due (including penalties and interest) as a result of a partnership-level federal income tax audit. Under the new rules, unless we are eligible to (and do) elect to issue revised Schedules K-1 to our
partners with respect to an audited and adjusted return, the IRS may assess and collect taxes (including any applicable penalties and interest) directly from us in the year in which the audit is completed. If we are required to pay taxes, penalties
and interest as a result of audit adjustments, cash available
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for distribution to our unitholders may be substantially reduced. In addition, because payment would be due for the taxable year in which the audit is completed, unitholders during that
taxable year would bear the expense of the adjustment even if they were not unitholders during the audited tax year. Pursuant to this new legislation, we will designate a person (our general partner) to act as the partnership representative who
shall have the sole authority to act on behalf of the partnership with respect to dealings with the IRS under these new audit procedures.
FATCA
Withholding Requirements
Under Sections 1471 through 1474 of the Internal Revenue Code, of FATCA, a withholding agent may be
required to withhold 30% of any interest, dividends and other fixed or determinable annual or periodical gains, profits, and income from sources within the United States (FDAP Income) or gross proceeds from the sale or other disposition
of any property of a type which can produce interest or dividends from sources within the United States (Gross Proceeds) paid to a foreign financial institution or a non-financial foreign entity (each as defined
in the Internal Revenue Code) unless (a) in the case of a foreign financial institution, such institution enters into an agreement with the U.S. government to withhold on certain payments, perform diligence with respect to its account holders and
perform reporting with respect to its U.S. account holders (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners); (b) in the case of a non-financial
foreign entity, such entity certifies that it does not have any substantial United States owners (as defined in the Internal Revenue Code) or provides the withholding agent with a certification identifying its direct and indirect
substantial United States owners; or (c) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules and provides appropriate documentation. Foreign financial institutions located in
jurisdictions that have an intergovernmental agreement with the United States may be subject to different rules. For purposes of the FATCA rules, a foreign financial institution is defined broadly to include various types of investment
entities, including foreign hedge funds or private equity funds, foreign-broker-dealers, clearing organizations and investment companies.
These rules generally apply to payments to FDAP Income currently and generally will apply to payments of relevant Gross Proceeds made on or
after January 1, 2019. Accordingly, to the extent we have FDAP Income or have Gross Proceeds on or after January 1, 2019 that are not treated as effectively connected income, unitholders that are foreign financial institutions or non-financial
foreign entities or are persons (including United States persons, as defined in the Internal Revenue Code) that hold their units through such foreign entities, may be subject to FATCA withholding on distributions received from us or on
their distributive share of our income, pursuant to the rules discussed above.
Prospective unitholders should consult their own tax
advisors regarding the potential application of the FATCA withholding provisions on an investment in our common units.
Nominee Reporting
Persons who hold an interest in us as a nominee for another person are required to furnish to us:
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the name, address and taxpayer identification number of the beneficial owner and the nominee;
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whether the beneficial owner is:
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a person that is not a U.S. person;
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a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing; or
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the amount and description of units held, acquired or transferred for the beneficial owner; and
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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 dispositions.
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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 $3,000,000 per calendar year, is imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations, substantial understatements of income tax and substantial valuation misstatements, is imposed by the Internal Revenue Code. No penalty will be imposed, however, for any
portion of an underpayment if it is shown that there was a reasonable cause for that portion and that the taxpayer acted in good faith regarding that portion.
For individuals, a substantial understatement of income tax in any taxable year exists if the amount of the understatement exceeds the greater
of 10% of the tax required to be shown on the return for the taxable year or $5,000 ($10,000 for most corporations). The amount of any understatement subject to penalty generally is reduced if any portion is attributable to a position adopted on the
return:
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for which there is, or was, substantial authority; or
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as to which there is a reasonable basis and the pertinent facts of that position are disclosed on the return.
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If any item of income, gain, loss or deduction included in the distributive shares of unitholders might result in that kind of an
understatement of income for which no substantial authority exists, we must disclose the pertinent facts on our return. In addition, we will make a reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns and to take other actions as may be appropriate to permit unitholders to avoid liability for this penalty. More stringent rules apply to tax shelters, which we do not believe includes us, or any of
our investments, plans or arrangements.
A substantial valuation misstatement exists if (a) the value of any property, or the
adjusted basis of any property, claimed on a tax return is 150% or more of the amount determined to be the correct amount of the valuation or adjusted basis, (b) the price for any property or services (or for the use of property) claimed on any
such return with respect to any transaction between persons described in Internal Revenue Code Section 482 is 200% or more (or 50% or less) of the amount determined under Section 482 to be the correct amount of such price, or (c) the
net Internal Revenue Code Section 482 transfer price adjustment for the taxable year exceeds the lesser of $5 million or 10% of the taxpayers gross receipts. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most corporations). If the valuation claimed on a return is 200% or more than the correct valuation or certain other thresholds are met, the penalty imposed increases to 40%. We do
not anticipate making any valuation misstatements.
In addition, the 20% accuracy-related penalty also applies to any portion of an
underpayment of tax that is attributable to transactions lacking economic substance. To the extent that such transactions are not disclosed, the penalty imposed is increased to 40%. Additionally, there is no reasonable cause defense to the
imposition of this penalty to such transactions.
Reportable Transactions
If we were to engage in a reportable transaction, we (and possibly you and others) would be required to make a detailed disclosure
of the transaction to the IRS. A transaction may be a reportable transaction based
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upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the IRS as a listed transaction or that it produces certain kinds
of losses for partnerships, individuals, S corporations, and trusts in excess of $2 million in any single year, or $4 million in any combination of six successive tax years. Our participation in a reportable transaction could increase the
likelihood that our federal income tax information return (and possibly your tax return) would be audited by the IRS. Please read Administrative MattersInformation Returns and Audit Procedures.
Moreover, if we were to participate in a reportable transaction with a significant purpose to avoid or evade tax, or in any listed
transaction, you may be subject to the following additional consequences:
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accuracy-related penalties with a broader scope, significantly narrower exceptions, and potentially greater amounts than described above at Administrative MattersAccuracy-Related Penalties;
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for those persons otherwise entitled to deduct interest on federal tax deficiencies, nondeductibility of interest on any resulting tax liability; and
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in the case of a listed transaction, an extended statute of limitations.
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We do not expect to
engage in any reportable transactions.
Recent Legislative Developments
The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by
administrative, legislative or judicial interpretation at any time. For example, from time to time, the administration and members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly
traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for
federal income tax purposes. 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 any such changes could negatively impact the value of an investment in our
common units.
State, Local, Foreign and Other Tax Considerations
In addition to federal income taxes, unitholders may be subject to other taxes, including state, local and foreign 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 currently own property or do
business in a substantial number of states, many of which impose a personal income tax and impose an income tax on corporations and other entities. We may also own property or do business in other states in the future. Although an analysis of those
various taxes is not presented here, each prospective unitholder should consider their potential impact on his 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 the 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. Amounts withheld will be treated as if distributed to unitholders for purposes of determining the amounts distributed by us. Please read Tax Consequences of Unit
OwnershipEntity-Level Collections.
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 urge each prospective unitholder to consult, and depend on, its
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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 foreign, as well as U.S. federal tax returns that
may be required of it. Andrews Kurth LLP 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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PLAN OF DISTRIBUTION
Under this prospectus and any accompanying prospectus supplement, we may sell our common units in and outside the United States (1) through
one or more broker-dealers, (2) through underwriters, (3) through agents, (4) directly to investors, (5) through a combination of any of these methods of sale or (6) through any other methods permitted by applicable law. The prospectus supplement
will set forth the following information:
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the terms of the offering;
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the names of any underwriters or agents;
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the name or names of any managing underwriter or underwriters;
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the purchase price of our common units;
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the net proceeds we will receive from the sale of the common units;
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any delayed delivery arrangements;
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any underwriting discounts, commissions and other items constituting underwriters compensation;
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any discounts or concessions allowed or reallowed or paid to dealers; and
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any commissions paid to agents.
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We will fix a price of our common units at:
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market prices prevailing at the time of any sale under this registration statement;
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prices related to market prices; or
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We may change the price of the common units offered from time to time.
We will pay or allow distributors or sellers commissions that will not exceed those customary in the types of transactions
involved. Broker-dealers may act as agents or may purchase securities as principal and thereafter resell the common units from time to time:
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in or through one or more transactions or distributions;
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on the New York Stock Exchange;
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in the over-the-counter market; or
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in private transactions.
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