Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove Valero
Energy Partners GP LLC as our general partner or otherwise change our management. If any person or group other than our general partner and its affiliates acquires beneficial ownership of 20.0% or more of any class of units, that person or group
loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires the units from our general partner or its affiliates and any transferees of that person or group who are notified by our general
partner that they will not lose their voting rights or to any person or group who acquires the units with the prior approval of the board of directors of our general partner.
Our partnership agreement also provides that, if our general partner is removed as our general partner under circumstances where cause does
not exist and units held by our general partner and its affiliates are not voted in favor of that removal, our general partner will have the right to convert its general partner units and its incentive distribution rights into common units or to
receive cash in exchange for those interests based on the fair market value of those interests as of the effective date of its removal.
If at any time our general partner and its affiliates own more than 80.0% 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 this purchase is the greater of:
As a result of our general partners right to purchase outstanding limited partner interests, a holder of limited partner interests may
have its limited partner interests purchased at a price that may be lower than market prices at various times prior to such purchase or lower than a unitholder may anticipate the market price to be in the future. The tax consequences to a unitholder
of the exercise of this call right are the same as a sale by that unitholder of its common units in the market. Please read Material Federal Income Tax ConsequencesDisposition of Common Units.
Except as described
below regarding a person or group owning 20.0% or more of any class of units then outstanding, record holders of units on the record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for
which approvals may be solicited.
Our general partner does not anticipate that any meeting of unitholders will be called in the
foreseeable future. Any action that is required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or, if authorized by our general partner, without a meeting if consents in writing describing the action
so taken are signed by holders of the number of units that would be necessary to authorize or take that action at a meeting where all limited partners were present and voted. Meetings of the unitholders may be called by our general partner or by
unitholders owning at least 20.0% 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. The
units representing the general partner interest are units for distribution and allocation purposes, but do not entitle our general partner to any vote other than its rights as general partner under our partnership agreement, will not be entitled to
vote on any action required or permitted to be taken by the unitholders and will not count toward or be considered outstanding when calculating required votes, determining the presence of a quorum, or for similar purposes.
Each record holder of a unit has a vote according to its percentage interest in us, 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 and its affiliates or a transferee of such direct transferee who is notified by our general partner that it will not lose its voting rights, acquires, in the aggregate, beneficial ownership of 20.0% or more of any class of units then
outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes,
determining the presence of a quorum or for other similar purposes. Common units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of the beneficial owner unless the arrangement
between the beneficial owner and its nominee provides otherwise.
Any notice, demand, request, report or proxy material required or
permitted to be given or made to record holders of common units under our partnership agreement will be delivered to the record holder by us or by the transfer agent or an exchange agent.
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 register. Except as
described under Limited Liability, the common units will be fully paid, and unitholders will not be required to make additional contributions.
Under our
partnership agreement, an Eligible Holder is a limited partner whose (a) federal income tax status is not reasonably likely to have a material adverse effect on the rates that can be charged by us on assets that are subject to
regulation by FERC or an analogous regulatory body and (b) nationality, citizenship or other related status would not create a substantial risk of cancellation or forfeiture of any property in which we have an interest, in each case as
determined by our general partner with the advice of counsel.
If at any time our general partner determines, with the advice of counsel,
that one or more limited partners are not Eligible Holders (any such limited partner, an Ineligible Holder), then our general partner may request any limited partner to furnish to our general partner an executed certification or other
information about its federal income tax status and/or nationality, citizenship or related status. If a limited partner fails to furnish such certification or other requested information within 30 days (or such other period as our general partner
may determine) after a request for such certification or other information, or our general partner determines after receipt of the information that the limited partner is not an Eligible Holder, the limited partner may be treated as an Ineligible
Holder. An Ineligible Holder does not have the right to direct the voting of its units and may not receive distributions in kind upon our liquidation.
Furthermore, we have the right to redeem all of the common units of any holder that our general partner concludes is an Ineligible Holder or
fails to furnish the information requested by our general partner. The redemption price in the event of such redemption for each unit held by such unitholder will be the current market price of such unit (the date of determination of which shall be
the date fixed for redemption). The redemption
price will be paid, as determined by our general partner, in cash or by delivery of a promissory note. Any such promissory note will bear interest at the rate of 5.0% annually and be payable in
three equal annual installments of principal and accrued interest, commencing one year after the redemption date.
Indemnification
Under our partnership agreement, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law, from
and against all losses, claims, damages or similar events:
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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, fiduciary or trustee of us, our subsidiaries or any entity set forth in the preceding three bullet points;
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any person who is or was serving as manager, managing member, general partner, director, officer, fiduciary or trustee of another person owing a fiduciary duty to us or any of our subsidiaries at the request of our
general partner or any departing general partner or any of their affiliates; and
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any person designated by our general partner.
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Any indemnification under these provisions will
only be out of our assets. Unless it otherwise agrees, our general partner will not be personally liable for, or have any obligation to contribute or lend funds or assets to us to enable us to effectuate, indemnification. We will 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 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 in good faith the expenses that are allocable to us. The expenses for which we are required to reimburse our general partner are not subject to any caps or other limits.
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 financial reporting purposes on an accrual basis. For tax and fiscal reporting purposes, our fiscal year is the calendar year.
We will mail or make available to record holders of common units, 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 public accountants. Except for our fourth quarter, we will also mail or make available summary financial information within 50 days after the close
of each quarter.
We will furnish each record holder of a unit with information reasonably required for tax reporting purposes within 90
days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Our ability to furnish this summary information to unitholders
will depend on the cooperation of unitholders in supplying us with specific
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information. Every unitholder will receive information to assist him in determining its federal and state tax liability and filing its federal and state income tax returns, regardless of whether
it supplies us with information.
Right to Inspect Our Books and Records
Our partnership agreement provides that a limited partner can, for a purpose reasonably related to its interest as a limited partner, upon
reasonable written demand stating the purpose of such demand and at its own expense, have furnished to him:
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a current list of the name and last known address of each record holder;
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copies of our partnership agreement and our certificate of limited partnership and all amendments thereto; and
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certain information regarding the status of our business and financial condition.
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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 determines is not in our best interests or that we are required by law or by agreements with
third parties to keep confidential. Our partnership agreement limits the right to information that a limited partner would otherwise have under Delaware law.
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 partnership interests proposed to be sold by our general partner or any of its affiliates or their
assignees if an exemption from the registration requirements is not otherwise available. These registration rights will 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 and commissions.
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CASH DISTRIBUTION POLICY
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 45 days after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date.
Definition of Available Cash
Available cash generally means, for any quarter, 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 (including reserves for our future capital expenditures and anticipated future credit needs requirements and refunds of collected rates reasonably likely to be refunded as
a result of a settlement or hearing related to FERC rate proceedings or rate proceedings under applicable law subsequent to that quarter);
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comply with applicable law, any of our or our subsidiaries debt instruments or other agreements; or
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provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions if the
effect of the establishment of such reserves will prevent us from paying the minimum quarterly distribution on all common units for the current quarter);
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plus
, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the
end of such 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 from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working
capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners, and
with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.
Intent to Distribute the Minimum Quarterly Distribution
We intend to make minimum quarterly distributions to holders of our common units of at least $0.2125 per unit, or $0.85 per unit on an
annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. 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 we pay and the decision to make any distribution is determined by our general
partner, taking into consideration the terms of our partnership agreement.
General Partner Interest and Incentive Distribution
Rights
Our general partner is entitled to 2.0% of all quarterly distributions that we make prior to our liquidation. Our general
partner has the right, but not the obligation, to contribute up to a proportionate amount of capital to
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us to maintain its current general partner interest. The general partners 2.0% interest in these distributions will be reduced if we issue additional units in the future and our general
partner does not contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest.
In addition, our
general partner holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48.0%, of the cash we distribute from operating surplus (as defined below) in excess of $0.244375 per unit per quarter. The
maximum distribution of 48.0% does not include any distributions that our general partner or its affiliates may receive on common or general partner units that they own. Please read General Partner Interest and Incentive Distribution
Rights below for additional information.
Operating Surplus and Capital Surplus
General
All cash
distributed to unitholders is characterized as either being paid from operating surplus or capital surplus. We treat distributions of available cash from operating surplus differently than distributions of available cash from
capital surplus.
Operating Surplus
We define operating surplus as:
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$50.0 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 a commodity hedge or interest rate hedge prior to its specified
termination date shall be included in operating surplus in equal quarterly installments over the remaining scheduled life of such commodity hedge or interest rate hedge;
plus
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working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for that quarter;
plus
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cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued 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, development, replacement, improvement or expansion of a capital asset and ending on 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 (including incremental distributions on incentive distribution rights) paid in respect of equity issued to pay interest and related fees on debt incurred, or to pay distributions on equity issued, to
finance the expansion capital expenditures referred to in the prior bullet point;
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.
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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 provision that will enable us, if we choose, to distribute as operating surplus up to $50.0 million 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, as described above, certain cash distributions on equity interests in operating surplus will be to increase
operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.
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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 repayments are made. However, if working capital borrowings, which increase operating surplus, are not repaid during the twelve-month
period following the borrowing, they will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowings are in fact repaid, they will not be treated as a further reduction in
operating surplus because operating surplus will have been previously reduced by the deemed repayment.
We define interim capital
transactions as (i) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings and items purchased on open account or for a deferred purchase price in the ordinary course of business) and sales of debt
securities; (ii) issuances of equity securities; (iii) sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other
dispositions of assets as part of normal asset retirements or replacements; and (iv) capital contributions received by a group member.
We define operating expenditures as all of our cash expenditures, including, but not limited to, taxes, reimbursements of expenses of
our general partner and its affiliates, director, officer and employee compensation, debt service payments, payments made in the ordinary course of business under interest rate hedge contracts and commodity hedge contracts (provided that payments
made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its settlement or termination date specified therein will be included in operating expenditures in equal quarterly
installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract and amounts paid in connection with the initial purchase of a rate hedge contract or a commodity hedge contract will be amortized at the
life of such rate hedge contract or commodity hedge contract), maintenance capital expenditures (as discussed in further detail below), and repayment of working capital borrowings;
provided, however
, that operating expenditures will not
include:
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repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);
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payments of principal of and premium on indebtedness other than working capital borrowings;
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expansion capital expenditures;
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payment of transaction expenses (including taxes) relating to interim capital transactions;
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distributions to our partners; or
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repurchases of partnership interests (excluding repurchases we make to satisfy obligations under employee benefit plans).
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Capital Surplus
Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus.
Accordingly, except as described above, capital surplus would generally be generated by:
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borrowings other than working capital borrowings;
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sales of our equity and debt securities;
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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 as part of ordinary course retirement or replacement of assets; and
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capital contributions received.
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Characterization of Cash Distributions
Our partnership agreement requires that we treat all available cash distributed as coming from operating surplus until the sum of all available
cash distributed since the closing of our initial public offering equals our 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. Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from our initial public
offering and as a return of capital. We do not anticipate that we will make any distributions from capital surplus.
Capital Expenditures
Maintenance capital expenditures are cash expenditures (including expenditures for the construction or development of new capital assets or the
replacement, improvement or expansion of existing capital assets) made to maintain, over the long-term, our operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace
pipelines and terminals, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. Maintenance capital expenditures are included in operating expenditures and thus will reduce operating surplus.
Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our
operating income or operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of equipment and the construction, development or acquisition of additional pipeline or terminaling capacity to the extent
such capital expenditures are expected to expand our operating capacity or our operating income. Expansion capital expenditures include interest payments (and related fees) on debt incurred 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, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date that such
capital improvement commences commercial service and the date that such capital improvement is abandoned or disposed of.
Capital
expenditures that are made in part for maintenance capital purposes and in part for expansion capital purposes will be allocated as maintenance capital expenditures or expansion capital expenditures by our general partner.
Distributions of Available Cash from Operating Surplus
We will make distributions of available cash from operating surplus for any quarter in the following manner:
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first
, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and
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thereafter
, in the manner described in General Partner Interest and Incentive Distribution Rights below.
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The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not
issue additional classes of equity securities.
General Partner Interest and Incentive Distribution Rights
Our partnership agreement provides that our general partner is entitled, with respect to its general partner interest, to 2.0% of all
distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute up to a proportionate amount of capital to us in order to maintain its 2.0% general partner interest if we issue additional
units. Our general partners 2.0% interest, and the percentage of our
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cash distributions to which it is entitled from such 2.0% interest, will be proportionately reduced if we issue additional units in the future (other than the issuance of common units upon a
reset of the incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest. Our partnership agreement does not require that our general
partner fund its capital contribution with cash. It may instead fund its capital contribution by the contribution to us of common units or other property.
Incentive distribution rights represent the right to receive an increasing percentage (13.0%, 23.0% and 48.0%) of the quarterly distributions
of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately
from its general partner interest.
The following discussion assumes that our general partner maintains its 2.0% general partner interest
and that our general partner continues to own the incentive distribution rights.
If for any quarter we have distributed available cash
from operating surplus to the common unitholders in an amount equal to the minimum quarterly distribution, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the
following manner:
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first
, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $0.244375 per unit for that quarter (the first target distribution);
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second
, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives a total of $0.265625 per unit for that quarter (the second target distribution);
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third
, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives a total of $0.31875 per unit for that quarter (the third target distribution); and
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thereafter
, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.
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Percentage
Allocations of Available Cash from Operating Surplus
The following table illustrates the percentage allocations of available cash from
operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under Marginal Percentage Interest in Distributions are the percentage interests of our general
partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column Target Quarterly Distribution per Unit Target Amount. The percentage interests shown for
our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general
partner include its 2.0% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest and that our general partner has not transferred its incentive
distribution rights.
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Target Quarterly
Distribution per Unit
Target Amount
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Marginal Percentage
Interest in Distributions
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Unitholders
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General Partner
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Minimum Quarterly Distribution
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$0.2125
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98.0
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%
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2.0
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%
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First Target Distribution
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above $0.2125 up to $0.244375
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98.0
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%
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2.0
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%
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Second Target Distribution
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above $0.244375 up to $0.265625
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85.0
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%
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15.0
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%
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Third Target Distribution
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above $0.265625 up to $0.31875
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75.0
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%
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25.0
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%
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Thereafter
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$0.31875
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50.0
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%
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50.0
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%
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General Partners Right to Reset Incentive Distribution Levels
Right to Reset Incentive Distribution Levels
Our general partner, as the holder of our incentive distribution rights, has the right under our partnership agreement, subject to certain
conditions, 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 our general partner would be set. If our general partner transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of our incentive
distribution rights will be entitled to exercise this right. The following discussion assumes that our general partner holds all of the incentive distribution rights at the time that a reset election is made. Our general partners right to
reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or the conflicts committee, at
any time when there are no subordinated units outstanding, we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distributions for each of the four consecutive fiscal quarters
immediately preceding such time and the amount of each such distribution did not exceed the adjusted operating surplus for such quarter. If our general partner and its affiliates are not the holders of a majority of the incentive distribution rights
at the time an election is made to reset the minimum quarterly distribution amount and the target distribution levels, then the proposed reset will be subject to the prior written concurrence of the general partner that the conditions described
above have been satisfied. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that our general
partner will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner would exercise this reset
right in order to facilitate acquisitions or internal expansion projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made
to our general partner.
In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels
and the corresponding relinquishment by our general partner of incentive distribution payments based on the target distributions prior to the reset, our general partner 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 cash distributions related to the incentive distribution rights received by our general partner for the two quarters immediately preceding
the reset event as compared to the average cash distributions per common unit during that two-quarter period. In addition, our general partner will be issued the number of general partner units necessary to maintain our general partners
interest in us immediately prior to the reset election.
The number of common units that our general partner (or the then holder of the
incentive distribution rights, if other than our general partner) would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to
the quotient determined by dividing (x) the average aggregate amount of cash distributions received by our general partner in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the
date of such reset election by (y) the average of the aggregate amount of cash distributed per common unit during each of these two quarters.
Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount
per common unit for the two fiscal quarters immediately preceding the reset election (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 as follows:
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first
, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives an amount equal to 115.0% of the reset minimum quarterly distribution for that quarter;
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second
, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each 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 unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and
|
|
|
|
thereafter
, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.
|
The
following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner at various cash distribution levels (i) pursuant to the cash distribution provisions of our
partnership agreement in effect as of the date of this prospectus, as well as (ii) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash
distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $0.50.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Distribution
per Unit Prior to Reset
|
|
Marginal Percentage
Interest in Distribution
|
|
|
Quarter Distribution
per Unit
Following
Hypothetical Reset
|
|
|
Common
Unitholders
|
|
|
General
Partner
Units
|
|
|
Incentive
Distribution
Rights
|
|
|
Minimum Quarterly Distribution
|
|
$0.2125
|
|
|
98.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
$0.50
|
First Target Distribution
|
|
above $0.2125
up to $0.244375
|
|
|
98.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
above $0.50
up to $0.575(1)
|
Second Target Distribution
|
|
above $0.244375
up to $0.265625
|
|
|
85.0
|
%
|
|
|
2.0
|
%
|
|
|
13.0
|
%
|
|
above $0.575
up to $0.625(2)
|
Third Target Distribution
|
|
above $0.265625 up to $0.31875
|
|
|
75.0
|
%
|
|
|
2.0
|
%
|
|
|
23.0
|
%
|
|
above $0.625
up to $0.75(3)
|
Thereafter
|
|
above $0.31875
|
|
|
50.0
|
%
|
|
|
2.0
|
%
|
|
|
48.0
|
%
|
|
above $0.75
|
(1)
|
This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
|
(2)
|
This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
|
(3)
|
This amount is 150.0% of the hypothetical reset minimum quarterly distribution.
|
35
The following table illustrates the total amount of available cash from operating surplus that
would be distributed to the unitholders and our general partner and its affiliates, including in respect of incentive distribution rights, based on an average of the amounts distributed for the two quarters immediately prior to the reset. The table
assumes that immediately prior to the reset there would be 67,354,766 common units outstanding, our general partners 2.0% interest has been maintained, and the average distribution to each common unit would be $0.50 per quarter for the two
consecutive non-overlapping quarters prior to the reset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to Reset
|
|
|
|
|
|
|
|
|
Cash Distributions to
General Partner and its Affiliates
|
|
|
|
|
(in thousands, except per unit
amounts)
|
|
Quarterly
Distribution
per Unit
|
|
Cash
Distributions
to Public
Common
Unitholders
|
|
|
Common
Units
|
|
|
General
Partner
Units
|
|
|
Incentive
Distribution
Rights
|
|
|
Total
|
|
|
Total
Distributions
|
|
Minimum Quarterly Distribution
|
|
$0.2125
|
|
$
|
4,604
|
|
|
$
|
9,709
|
|
|
$
|
292
|
|
|
$
|
|
|
|
$
|
10,001
|
|
|
$
|
14,605
|
|
First Target Distribution
|
|
above $0.2125 up to $0.244375
|
|
|
691
|
|
|
|
1,456
|
|
|
|
44
|
|
|
|
|
|
|
|
1,500
|
|
|
|
2,191
|
|
Second Target Distribution
|
|
above $0.244375 up to $0.265625
|
|
|
460
|
|
|
|
971
|
|
|
|
34
|
|
|
|
219
|
|
|
|
1,224
|
|
|
|
1,684
|
|
Third Target Distribution
|
|
above $0.265625 up to $0.31875
|
|
|
1,152
|
|
|
|
2,427
|
|
|
|
95
|
|
|
|
1,097
|
|
|
|
3,619
|
|
|
|
4,771
|
|
Thereafter
|
|
above $0.31875
|
|
|
3,927
|
|
|
|
8,281
|
|
|
|
488
|
|
|
|
11,720
|
|
|
|
20,489
|
|
|
|
24,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,834
|
|
|
$
|
22,844
|
|
|
$
|
953
|
|
|
$
|
13,036
|
|
|
$
|
36,833
|
|
|
$
|
47,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the total amount of available cash from operating surplus that would be
distributed to the unitholders and the general partner and its affiliates, including in respect of incentive distribution rights, with respect to the quarter after the reset occurs. The table reflects that as a result of the reset there would be
93,426,673 common units outstanding, our general partner has maintained its 2.0% general partner interest, and that the average distribution to each common unit would be $0.50. The number of common units issued as a result of the reset was
calculated by dividing (i) $13,035,954 as the average of the amounts received by the general partner in respect of its incentive distribution rights for the two consecutive non-overlapping quarters prior to the reset as shown in the table
above, by (ii) the average of the cash distributions made on each common unit per quarter for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, or $0.50.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After Reset
|
|
(in thousands, except per unit
amounts)
|
|
Quarterly
Distribution
per
Unit
|
|
Cash
Distributions
to Public
Common
Unitholders
|
|
|
Cash Distributions to
General Partner and its Affiliates
|
|
|
|
|
|
|
|
Common
Units
|
|
|
General
Partner
Units
|
|
|
Incentive
Distribution
Rights
|
|
|
Total
|
|
|
Total
Distributions
|
|
Minimum Quarterly Distribution
|
|
$0.50
|
|
$
|
10,834
|
|
|
$
|
35,880
|
|
|
$
|
953
|
|
|
$
|
|
|
|
$
|
36,833
|
|
|
$
|
47,667
|
|
First Target Distribution
|
|
above $0.50 up to $0.575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Target Distribution
|
|
above $0.575 up to $0.625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Target Distribution
|
|
above $0.625 up to $0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
$0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,834
|
|
|
$
|
35,880
|
|
|
$
|
953
|
|
|
$
|
|
|
|
|
36,833
|
|
|
$
|
47,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Our general partner will be entitled to cause the minimum quarterly distribution amount and the
target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the immediately preceding four consecutive fiscal quarters based on
the highest level of incentive distributions that it is entitled to receive under our partnership agreement.
Adjusted Operating
Surplus
Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and
therefore excludes net drawdowns of reserves of cash established in prior periods. Adjusted operating surplus for a period consists of:
|
|
|
operating surplus generated with respect to that period (excluding any amounts attributable to the item described in the first bullet point under the caption Operating Surplus and Capital
SurplusOperating Surplus above); less
|
|
|
|
any net increase in working capital borrowings with respect to that period; less
|
|
|
|
any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus
|
|
|
|
any net decrease in working capital borrowings with respect to that period; plus
|
|
|
|
any net decrease made in subsequent periods to cash reserves for operating expenditures initially established with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus
in subsequent periods; plus
|
|
|
|
any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.
|
Distributions from Capital Surplus
How Distributions from Capital Surplus Will Be Made
We will make distributions of available cash from capital surplus, if any, in the following manner:
|
|
|
first
, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until the minimum quarterly distribution is reduced to zero, as described below under Effect of a Distribution from Capital
Surplus; and
|
|
|
|
thereafter
, as if such distributions were from operating surplus.
|
The preceding
discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity securities.
Effect of a Distribution from Capital Surplus
Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from our initial public offering,
which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the unrecovered initial unit price. Each time a distribution of capital surplus is made, the minimum
quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the minimum quarterly
distribution after any of these distributions are made, it may be easier for our general partner to receive incentive distributions. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be
applied to the payment of the minimum quarterly distribution.
Once we distribute capital surplus on a unit sold in our initial public
offering in an amount equal to the initial unit price, we will reduce the minimum quarterly distribution and the target distribution levels to zero.
37
Thereafter, we will make all future distributions from operating surplus, with 50.0% being paid to the unitholders, pro rata, and 2.0% to our general partner and 48.0% to the holder of our
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 units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:
|
|
|
the minimum quarterly distribution;
|
|
|
|
target distribution levels;
|
|
|
|
the unrecovered initial unit price; and
|
|
|
|
the number of general partner units comprising the general partner interest.
|
For example, if
a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50.0% of its initial level, and each general partner unit would
be split into two units. We will not make any adjustment by reason of the issuance of additional units for cash or property (including the issuance of additional units under any compensation or benefit plans).
In addition, if legislation is enacted or if the official interpretation of existing law is modified by a governmental 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 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 payable by reason of such legislation or
interpretation) and the denominator of which is the sum of available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) plus our general
partners estimate of our aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter,
the difference may 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 our general partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
Manner of Adjustments for Gain
The manner of the adjustment for gain is set forth in our partnership agreement. Upon liquidation, we will allocate any gain to the capital
accounts of our partners in the following manner:
|
|
|
first
, to our general partner to the extent of any negative balance in its capital account;
|
|
|
|
second
, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until the capital account for each common unit is equal to the sum of: (i) the unrecovered initial unit price; and
(ii) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;
|
|
|
|
third
, 98.0% to all common unitholders, pro rata, and 2.0% to our general partner, until we allocate under
this paragraph an amount per unit equal to: (i) the sum of the excess of the first target
|
38
|
distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (ii) 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 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, for each quarter of our existence;
|
|
|
|
fourth
, 85.0% to all common unitholders, pro rata, and 15.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (i) the sum of the excess of the second target
distribution per unit over the first target distribution per unit for each quarter of our existence; less (ii) 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 common unitholders, pro rata, and 15.0% to our general partner for each quarter of our existence;
|
|
|
|
fifth
, 75.0% to all common unitholders, pro rata, and 25.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (i) the sum of the excess of the third target
distribution per unit over the second target distribution per unit for each quarter of our existence; less (ii) 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 common unitholders, pro rata, and 25.0% to our general partner for each quarter of our existence; and
|
|
|
|
thereafter
, 50.0% to all common unitholders, pro rata, and 50.0% to our general partner.
|
The percentages set forth above are based on the assumption that our general partner maintains its 2.0% general partner interest, has not
transferred its incentive distribution rights and has not previously exercised its right to reset incentive distribution levels, and that we do not issue additional classes of equity securities.
Manner of Adjustments for Losses
Upon liquidation, we will generally allocate any loss to the capital accounts of our general partner and unitholders in the following manner:
|
|
|
first,
98.0% to the holders of common units in proportion to the positive balances in their capital accounts and 2.0% to our general partner, until the capital accounts of the common unitholders have been reduced
to zero; and
|
|
|
|
thereafter
, 100.0% to our general partner.
|
The percentages set forth above are based
on the assumption that our general partner maintains its 2.0% general partner interest and has not transferred its incentive distribution rights and that we do not issue additional classes of equity securities.
Adjustments to Capital Accounts
Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our
partnership agreement specifies that we allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the general partner in the same manner as we allocate gain upon liquidation. In the event
that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of
additional units or upon our liquidation in a manner which results, to the extent possible, in the partners capital account balances equaling the amount which they would have been if no earlier positive adjustments to the capital accounts had
been made. In contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the
unitholders and our general partner based on their respective percentage ownership of us. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units
will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders capital account balances equaling the
amounts they would have been if no earlier adjustments for loss had been made.
39
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
This section is a summary of the material tax considerations 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 Baker Botts L.L.P., 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 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 Valero Energy Partners LP and our operating subsidiaries.
The following discussion does not comment on all federal income tax matters affecting us or our 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 and non-U.S. persons eligible for the benefits of an applicable income tax treaty with the U.S.), 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 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.
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 Baker Botts L.L.P. and are based on the accuracy of the representations made by us.
No ruling has been requested from the IRS regarding our characterization as a partnership for tax purposes. Instead, we will rely on opinions
of Baker Botts L.L.P. Unlike a ruling, an opinion of counsel represents only that counsels best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made herein may not be sustained by a court if
contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the market for the common units and the prices at which common units trade. In addition, the costs of any contest with the IRS, principally legal,
accounting and related fees, will result in a reduction in our distributable cash flow and thus will be borne indirectly by our unitholders and our general partner. Furthermore, the tax treatment of us, or of an investment in us, may be
significantly modified by future legislative or administrative changes or court decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, Baker Botts L.L.P. 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
our monthly convention 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).
40
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 Code provides that publicly traded limited 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 limited partnerships of which 90% or more of the gross income for every taxable year consists of qualifying income.
Qualifying income includes income and gains derived from the transportation, processing, storage and marketing of crude oil, natural gas and products thereof. Other types of qualifying income include interest (other than from a financial business),
dividends, gains from the sale of real property and gains from the sale or other disposition of capital assets held for the production of income that otherwise constitutes qualifying income. We estimate that less than 5% of our current gross income
is not qualifying income; however, this estimate could change from time to time. Based upon and subject to this estimate, the factual representations made by us and our general partner and a review of the applicable legal authorities, Baker Botts
L.L.P. is of the opinion that at least 90% of our current gross income constitutes qualifying income. The portion of our income that is qualifying income may change from time to time.
No ruling has been or will be sought from the IRS and the IRS has made no determination as to our status or the status of our operating
subsidiaries for federal income tax purposes or whether our operations generate qualifying income under Section 7704 of the Code. Instead, we will rely on the opinion of Baker Botts L.L.P. on such matters. It is the opinion of Baker
Botts L.L.P. that, based upon the Code, Treasury Regulations, published revenue rulings and court decisions and the representations described below that:
|
|
|
we will be classified as a partnership for federal income tax purposes; and
|
|
|
|
each of our operating subsidiaries will be treated as a partnership or will be disregarded as an entity separate from us for federal income tax purposes.
|
In rendering its opinion, Baker Botts L.L.P. has relied on factual representations made by us and our general partner. The representations
made by us and our general partner upon which Baker Botts L.L.P. has relied include:
|
|
|
neither we nor any of the operating subsidiaries has elected or will elect to be treated as a corporation; and
|
|
|
|
for each taxable year, more than 90% of our gross income has been and will be income of the type that Baker Botts L.L.P. has opined or will opine is qualifying income within the meaning of
Section 7704(d) of the Code.
|
We believe these representations are true 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.
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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, then a nontaxable return of capital, to the extent of the
unitholders tax basis in his common units, and thereafter as taxable capital gain. 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 Baker Botts L.L.P.s opinion that we will
be classified as a partnership for federal income tax purposes.
Limited Partner Status
Unitholders who are admitted as limited partners of Valero Energy Partners LP will be treated as partners of Valero Energy Partners 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 Valero Energy Partners 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 Valero Energy Partners LP. The references to unitholders in the discussion that follows are to persons who are treated as partners in Valero Energy Partners LP for
federal income tax purposes.
Tax Consequences of Unit Ownership
Flow-through of Taxable Income
Subject to the discussion below under Tax Consequences of Unit OwnershipEntity-level Collections 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. The income we allocate to unitholders will generally be taxable as ordinary income. 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, including the general 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.
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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 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 (i) the non-pro rata portion of that distribution over (ii) the unitholders tax basis (generally zero) for the share of Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units
A unitholders initial tax basis for his common units will be the amount he paid for the common units plus his share of our nonrecourse
liabilities. That basis will be increased by his share of our income and by any increases in his share of our nonrecourse liabilities. That basis will be decreased, but not below zero, by distributions 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 have no share of our debt that is
recourse to our general partner to the extent of the general partners net value as defined in Treasury Regulations under Section 752 of the Code, but will have a share, generally based on his share of profits, of our
nonrecourse liabilities. 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-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
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activities. The passive loss limitations are applied separately with respect to each publicly traded limited 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 limited 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 limited 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) qualified dividend income. The IRS has indicated that the net passive income
earned by a publicly traded limited 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 our
general partner or any former unitholder, we are authorized to pay those taxes from our funds. That payment, if made, will be treated as a distribution of cash to the 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 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. Please Read
Tax Consequences of Unit OwnershipEntity-level Audits and Adjustments.
Entity-level Audits and Adjustments
Pursuant to the Bipartisan Budget Act of 2015, if the IRS makes audit adjustments to our income tax returns for tax years
beginning after 2017, it may collect any resulting taxes (including any applicable penalties and interest) directly from us. We will generally have the ability to shift any such tax liability to our general partner
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and our unitholders in accordance with their interests in us during the year under audit, but there can be no assurance that we will be able to do so under all circumstances. If we are required
to make payments of taxes, penalties and interest resulting from audit adjustments, our cash available for distribution to our unitholders might be substantially reduced.
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.
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 general partner and the
unitholders in accordance with their percentage interests in us. At any time that distributions are made to the common units in excess of distributions to the subordinated units, or incentive distributions are made to our general partner, gross
income will be allocated to the recipients to the extent of these distributions. If we have a net loss, that loss will be allocated first to our general partner and the unitholders in accordance with their percentage interests in us to the extent of
their positive capital accounts, as adjusted to take into account the unitholders share of nonrecourse debt, and, second, to our general partner.
Section 704(c) of the Code requires us to assign each asset contributed to us in connection with this offering a book basis
equal to the fair market value of the asset at the time of this offering. Purchasers of units in this offering are entitled to calculate tax depreciation and amortization deductions and other relevant tax items with respect to our assets based upon
that book basis, which effectively puts purchasers in this offering in the same position as if our assets had a tax basis equal to their fair market value at the time of this offering. In this context, we use the term book as
that term is used in Treasury Regulations under Section 704 of the Code. The book basis assigned to our assets for this purpose may not be the same as the book value of our property for financial reporting purposes.
Upon any issuance of units by us after this offering, rules similar to those of Section 704(c) described above will apply for the benefit
of recipients of units in that later issuance. This may have the effect of decreasing the amount of our tax depreciation or amortization deductions thereafter allocated to purchasers of units in this offering or of requiring purchasers of units in
this offering to thereafter recognize remedial income rather than depreciation and amortization deductions.
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 under the Section 704(c) principles described above, 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 flows; and
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the rights of all the partners to distributions of capital upon liquidation.
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Baker Botts L.L.P. 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, and Uniformity of Units, 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, Baker Botts L.L.P. has not
rendered an opinion regarding the tax treatment of a unitholder whose common units are loaned to a short seller to cover a short sale of common units; therefore, unitholders desiring to assure their status as partners and avoid the risk of gain
recognition from a loan to a short seller are urged to 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.
Alternative Minimum Tax
Each unitholder will be required to take into account his distributive share of any items of our income, gain, loss or deduction for purposes
of the alternative minimum tax. For 2016, the current minimum tax rate for non-corporate taxpayers is 26% on the first $186,300 of alternative minimum taxable income in excess of the exemption amount and 28% on any additional alternative minimum
taxable income. Prospective unitholders are urged to consult with their tax advisors as to the impact of an investment in units on their liability for the alternative minimum tax. Both the $186,300 amount and the exemption amount are adjusted for
inflation each year.
Tax Rates
The highest marginal U.S. federal income tax rate applicable to ordinary income of individuals currently 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) of individuals currently is 20%. Such rates are subject to change by new legislation at any time.
In addition, a 3.8% Medicare tax, or NIIT, on certain net investment income earned by individuals, estates and trusts currently applies. 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 and (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 and (ii) the excess adjusted gross income over the dollar
amount at which the highest income tax bracket applicable to an estate or trust begins. Prospective unitholders are urged to consult with their tax advisors as to the impact of the NIIT on an investment in our common units.
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Section 754 Election
We have made the election permitted by Section 754 of the Code. That election is irrevocable without the consent of the IRS unless there
is a constructive termination of the partnership. Please read Disposition of Common UnitsConstructive Termination. The election generally permits us to adjust a common unit purchasers tax basis in our assets
(inside basis) under Section 743(b) of the 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: (i) his share of our tax basis in our assets, or common basis, and
(ii) his Section 743(b) adjustment to that basis.
The timing of deductions attributable to a Section 743(b) adjustment to
our common basis will depend upon a number of factors, including the nature of the assets to which the adjustment is allocable, the extent to which the adjustment offsets any Section 704(c) type gain or loss with respect to an asset and certain
elections we make as to the manner in which we apply Section 704(c) principles with respect to an asset with respect to which the adjustment is allocable. Please read Allocation of Income, Gain, Loss and Deduction. The timing
of these deductions may affect the uniformity of our units. Please read Uniformity of Units.
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 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 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.
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Initial Tax Basis, Depreciation and Amortization
The tax basis of our assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on
the disposition of these assets. The federal income tax burden associated with the difference between the fair market value of our assets and their tax basis immediately prior to (i) this offering will be borne by our general partner and its
affiliates, and (ii) any other offering will be borne by our general partner and all of our unitholders as of that time. 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 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 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 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 with respect to the units sold. 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.
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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 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 Code allow a selling unitholder who can identify common units transferred with an ascertainable holding period to elect to use the actual holding
period of the common units transferred. Thus, according to the ruling 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 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.
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Allocations Between Transferors and Transferees
In general, our taxable income and losses will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned
among the unitholders in proportion to the number of units owned by each of them as of the opening of the applicable exchange on the first business day of the month, 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.
Although simplifying
conventions are contemplated by the Code and most publicly traded limited partnerships use similar simplifying conventions, the use of this method may not be permitted under existing Treasury Regulations. Recently, however, the Department of the
Treasury and the IRS issued Treasury Regulations pursuant to which a publicly traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. However, such Treasury Regulations
do not specifically authorize the use of the proration method we have currently adopted. Accordingly, Baker Botts L.L.P. is unable to opine on the validity of this method of allocating income and deductions between transferor and transferee
unitholders. If this method is not allowed under the Treasury Regulations, or only applies to transfers of less than all of the unitholders interest, our taxable income or losses might be reallocated among the unitholders. We are authorized to
revise our method of allocation between transferor and transferee unitholders, as well as unitholders whose interests vary during a taxable year, to conform to a method permitted under applicable law. If 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.
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 12-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 Code, and could be subject to penalties if
we are unable to determine that a termination occurred. The IRS has
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recently announced a publicly traded limited partnership technical termination relief program whereby, if a publicly traded limited partnership that technically terminated requests publicly
traded limited partnership technical termination 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. Any non-uniformity could have an impact upon the value of our units. The timing of deductions attributable to Section 743(b) adjustments to the common basis of our assets with respect to
persons purchasing units from another unitholder may affect the uniformity of our units. Please read Tax Consequences of Unit OwnershipSection 754 Election.
For example, some types of depreciable assets are not subject to the typical rules governing depreciation (under Section 168 of the Code)
or amortization (under Section 197 of the Code). If we were to acquire any assets of that type, the timing of a unit purchasers deductions with respect to Section 743(b) adjustments to the common basis of those assets might differ
depending upon when and to whom the unit he purchased was originally issued. We do not currently expect to acquire any assets of that type. However, if we were to acquire a material amount of assets of that type, we intend to adopt tax positions as
to those assets that will not result in any such lack of uniformity. Any such tax positions taken by us might result in allocations to some unitholders of smaller depreciation deductions than they would otherwise be entitled to receive. Baker Botts
L.L.P. has not rendered an opinion with respect to those types of tax positions. Moreover, the IRS might challenge those tax positions. If we took such a tax position and the IRS successfully challenged the position, the uniformity of our units
might be affected, and the gain from the sale of our 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 limited 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, Form 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
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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 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 common 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
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. Currently, more than 50% of our assets consist of U.S. real property interests and we do not expect that to change in the foreseeable 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 Code, Treasury Regulations or
administrative interpretations of the IRS. Neither we nor Baker Botts L.L.P. 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 Code requires
that one partner be designated as the Tax Matters Partner for these purposes. Our partnership agreement names our general partner as our Tax Matters Partner. The Tax Matters Partner has made and 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 a statement is timely filed with the IRS in accordance with applicable Treasury Regulations, either (i) to deny that authority to the Tax Matters Partner or (ii) to become a member
of a notice group (generally, a group of unitholders with an aggregate profits interest in us of 5% or more and that has requested treatment as a notice 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
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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.
Due to the recent enactment of the Bipartisan Budget Act of 2015, the audit procedures discussed above will change for partnership taxable
years beginning after December 31, 2017. Please read Tax Consequences of Unit OwnershipEntity-level Audits and Adjustments.
Additional Withholding Requirements
Withholding taxes may apply to certain types of payments made to foreign financial institutions (as specially defined in the Code)
and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on interest, dividends and other fixed or determinable annual or periodical gains, profits and income from sources within the U.S. (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 U.S. (Gross Proceeds) paid to a foreign financial institution or to a non-financial foreign
entity (as specially defined in the Code), unless (i) the foreign financial institution undertakes certain diligence and reporting, (ii) the non-financial foreign entity either certifies it does not have any substantial U.S. owners
or furnishes identifying information regarding each substantial U.S. owner or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial
institution and is subject to the diligence and reporting requirements in clause (i) above, it must enter into an agreement with the U.S. Treasury requiring, among other things, that it undertake to identify accounts held by certain U.S.
persons or U.S.-owned foreign entities, annually report certain information about such accounts, and withhold 30% on payments to noncompliant foreign financial institutions and certain other account holders. Foreign financial institutions located in
jurisdictions that have an intergovernmental agreement with the U.S. governing these requirements may be subject to different rules.
These rules generally are currently applicable to payments of FDAP Income and will apply to payments of relevant Gross Proceeds made on or
after January 1, 2019. Thus, to the extent we have FDAP Income, or Gross Proceeds on or after January 1, 2019, that are not treated as effectively connected with a U.S. trade or business (please read Tax-Exempt Organizations
and Other Investors), unitholders who are foreign financial institutions or certain other non-US entities may be subject to withholding on distributions they receive from us, or their distributive share of our income, pursuant to the rules
described above.
Prospective investors should consult their own tax advisors regarding the potential application of these withholding
provisions to their 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 per failure, which is generally capped at a maximum penalty per calendar year and the amount of which is adjusted for inflation each year, is imposed
by the Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.
Accuracy-Related Penalties
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 Code. Such penalty may be avoided, 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 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 Code
Section 482 transfer price adjustment for the taxable year exceeds the lesser of $5.0 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.
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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. Penalties may be imposed for failure to comply with these disclosure requirements. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of tax
avoidance transaction publicly identified by the IRS as a listed transaction or that it produces certain kinds of losses for partnerships, individuals, S corporations, and trusts in excess of $2 million in any single year, or $4 million
in any combination of six successive tax years (beginning with the year the transaction is entered into). 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, non-deductibility 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 Legal Developments
The present federal income tax treatment of publicly traded limited 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, members of Congress and the President propose and consider substantive changes to the existing federal income tax laws that affect
publicly traded limited 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. Please read Partnership Status. 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, you likely will be subject to other taxes, such as state, local and foreign income taxes, unincorporated
business taxes, and estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which we do business or own property or in which you are a resident. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his investment in us. We currently own property or do business in Arkansas, Louisiana, Mississippi, New Mexico, Oklahoma, Tennessee and Texas. Each of those states imposes an
income or franchise tax on corporations and other entities. Except for Texas, all of those states currently impose a personal income tax on individuals. We may also own property or do business in other jurisdictions in the future. Although you may
not be required to file a return and pay taxes in some jurisdictions because your income from that jurisdiction falls below the filing and payment requirement, you will be required to file income tax returns and to pay income taxes in many of these
jurisdictions in which we do business or own property and may be subject to penalties for failure to comply with those requirements. In some jurisdictions, tax losses may not produce a tax benefit in the year incurred and may not be available to
offset income in subsequent taxable years. 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
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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. Based on current law and our estimate of our
future operations, our general partner anticipates that any amounts required to be withheld will not be material.
It is the
responsibility of each unitholder to investigate the legal and tax consequences, under the laws of pertinent states, localities and foreign jurisdictions, of his investment in us. Accordingly, each prospective unitholder is urged to consult his 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 him. Baker Botts L.L.P. has not
rendered an opinion on the state, local or foreign tax consequences of an investment in us.
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