Filed Pursuant to Rule 424(b)(5)
Registration No. 333-222178
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 23, 2018)
Phillips 66 Partners LP
Common Units Representing Limited Partner
Interests
Having an Aggregate Offering Price of
Up to $250,000,000
This prospectus supplement and the
accompanying base prospectus relate to the offer and sale from time to time of common units representing limited partner
interests in Phillips 66 Partners LP having an aggregate offering price of up to $250,000,000. The issuance and sale of the
common units under this prospectus supplement, if any, will be made through one or more of RBC Capital Markets, LLC, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., BNP Paribas Securities Corp., BTIG, LLC, Citigroup
Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, HSBC
Securities (USA) Inc., J.P. Morgan Securities LLC, Jefferies LLC,
Mizuho Securities USA LLC, MUFG Securities Americas Inc., Scotia Capital (USA) Inc., SMBC Nikko Securities America, Inc.,
SunTrust Robinson Humphrey, Inc., TD Securities (USA) LLC, Wells Fargo Securities, LLC, and The Williams Capital Group,
L.P., as sales agents. These sales will be made over a period of time and from time to time in transactions at then-current
prices, pursuant to the terms of an equity distribution agreement between us and the sales agents that has been filed with
the Securities and Exchange Commission as an exhibit to a Current Report on Form 8-K.
Sales of common units under this prospectus
supplement, if any, will be made by means of ordinary brokers’ transactions through the facilities of the New York Stock
Exchange at market prices, in block transactions or as otherwise agreed between us and the sales agents. The sales agents are not
required to sell any specific dollar amount of units but will use their commercially reasonable efforts, as our agents and subject
to the terms of the equity distribution agreement, to sell the units offered as instructed by us. Under the terms of the equity
distribution agreement, we also may sell common units to our sales agents as principals for their own accounts at a price agreed
upon at the time of the sale. If we sell common units to any sales agent as principal, we will enter into a separate agreement
with such sales agent and we will describe that agreement in a separate prospectus supplement or pricing supplement.
Our common units trade on the New York Stock
Exchange under the symbol “PSXP.” The last reported sales price of our common units on the New York Stock Exchange
on February 23, 2018 was $50.42 per common unit.
Investing in our common units involves
risks. Limited partnerships are inherently different from corporations. You should consider carefully each of the factors described
under “Risk Factors” beginning on page S-3 of this prospectus supplement and on page 2 of the accompanying base
prospectus before you make an investment in our securities.
The compensation of the sales agents for
sales of units shall be at a fixed commission rate of up to 2% of the gross sales price per common unit. The net proceeds from
any sales under this prospectus supplement will be used as described under “Use of Proceeds” in this prospectus supplement.
None of the Securities and Exchange
Commission, any state securities commission or any other regulatory body has approved or disapproved the securities described
herein or determined if this prospectus supplement or the accompanying base prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
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RBC Capital Markets
BofA Merrill Lynch Barclays BNP PARIBAS BTIG Citigroup Credit Suisse
Deutsche Bank Securities Goldman
Sachs & Co. LLC HSBC J.P. Morgan Jefferies
Mizuho Securities
MUFG Scotia Howard Weil SMBC Nikko
SunTrust Robinson Humphrey TD
Securities Wells Fargo Securities The Williams Capital Group, L.P.
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Prospectus Supplement dated February 26,
2018.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first
part is this prospectus supplement, which describes the terms of this offering of common units. The second part is the accompanying
base prospectus, which provides more general information. Generally, when we use the term “prospectus,” we are referring
to both parts combined. If the information varies between this prospectus supplement and the accompanying base prospectus, you
should rely on the information in this prospectus supplement.
In making an investment decision, prospective
investors must rely on their own examination of the partnership and the terms of the offering, including the merits and risks involved.
Prospective investors should not construe anything in this prospectus as legal, business or tax advice. Each prospective investor
should consult its own advisors as needed to make its investment decision and to determine whether it is legally permitted to purchase
the securities under applicable laws and regulations.
Any statement made in this prospectus supplement,
the accompanying base prospectus, any free writing prospectus authorized by us or in a document incorporated or deemed to be incorporated
by reference into this prospectus supplement or the accompanying base prospectus will be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement contained in this prospectus supplement, or in any other free writing
prospectus authorized by us, or in any other subsequently filed document that is also incorporated by reference into this prospectus
supplement or the accompanying base prospectus modifies or supersedes that statement. Any statement so modified or superseded will
not be deemed, except as so modified or superseded, to constitute a part of this prospectus supplement or the accompanying base
prospectus. Please read “Incorporation by Reference” on page S-26 of this prospectus supplement.
This prospectus supplement, the accompanying
base prospectus and any free writing prospectus that we prepare or authorize contain and incorporate by reference information that
you should consider when making your investment decision. Neither we nor the sales agents have authorized anyone to provide you
with additional or different information. If anyone provides you with additional, different or inconsistent information, you should
not rely on it. We are offering to sell the common units, and seeking offers to buy the common units, only in jurisdictions where
offers and sales are permitted. You should not assume that the information contained in this prospectus supplement, the accompanying
base prospectus or any free writing prospectus is accurate as of any date other than the dates shown in these documents or that
any information we have incorporated by reference herein is accurate as of any date other than the date of the document incorporated
by reference. Our business, financial condition, results of operations and prospects may have changed since such dates.
Unless the context otherwise requires, references
in this prospectus supplement to the “Partnership” and uses of the first person refer to Phillips 66 Partners LP and
its subsidiaries. Our “general partner” refers to Phillips 66 Partners GP LLC. References to “Phillips 66”
refer collectively to Phillips 66 and its subsidiaries, other than us, our subsidiaries and our general partner.
FORWARD-LOOKING STATEMENTS
This prospectus supplement includes forward-looking
statements. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,”
“budget,” “continue,” “could,” “intend,” “may,” “plan,”
“potential,” “predict,” “seek,” “should,” “will,” “would,”
“expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,”
“outlook,” “effort,” “target” and similar expressions.
We based the forward-looking statements
on our current expectations, estimates and projections about us and the industries in which we operate in general. We caution you
that these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may
prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking
statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may
differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from
a variety of factors, including the following:
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the continued ability of Phillips 66 to satisfy its obligations under our commercial and other agreements;
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the volume of crude oil, natural gas liquids, or NGL, and refined petroleum products we transport, fractionate, process, terminal and store;
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the tariff rates with respect to volumes that we transport through our regulated assets, which rates are subject to review and possible adjustment by federal and state regulators;
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changes in revenue we realize under the loss allowance provisions of our regulated tariffs resulting from changes in underlying commodity prices;
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fluctuations in the prices for crude oil, NGL and refined petroleum products;
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changes in global economic conditions and the effects of a global economic downturn on the business of Phillips 66 and the business of its suppliers, customers, business partners and credit lenders;
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liabilities associated with the risks and operational hazards inherent in transporting, fractionating, processing, terminaling and storing crude oil, NGL and refined petroleum products;
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curtailment of operations due to severe weather disruption; riots, strikes, lockouts or other industrial disturbances; or failure of information technology systems due to various causes, including unauthorized access or attack;
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inability to obtain or maintain permits in a timely manner, if at all, including those necessary for capital projects, or the revocation or modification of existing permits;
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inability to comply with government regulations or make capital expenditures required to maintain compliance;
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failure to timely complete construction of announced and future capital projects;
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the operation, financing and distribution decisions of our joint ventures;
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costs or liabilities associated with federal, state, and local laws and regulations relating to environmental protection and safety, including spills, releases and pipeline integrity;
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costs associated with compliance with evolving environmental laws and regulations on climate change;
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costs associated with compliance with safety regulations, including pipeline integrity management program testing and related repairs;
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changes in the cost or availability of third-party vessels, pipelines, railcars and other means of delivering and transporting crude oil, NGL and refined petroleum products; and
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direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war.
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Other factors that could cause our actual
results to differ from our projected results are described under the caption “Risk Factors” and elsewhere in this prospectus
supplement, the accompanying base prospectus and in our reports filed from time to time with the Securities and Exchange Commission,
or the SEC, and incorporated by reference in this prospectus supplement.
Readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or
revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
SUMMARY
This summary provides a brief overview
of information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider
before investing in our common units. For a more complete understanding of this offering and our common units, you should read
the entire prospectus supplement, the accompanying base prospectus and the documents incorporated by reference, including our historical
financial statements and the notes to those financial statements, which are incorporated herein by reference. Please read “Where
You Can Find More Information” on page S-26 of this prospectus supplement. Please read “Risk Factors” beginning
on page S-3 of this prospectus supplement, on page 2 of the accompanying base prospectus and in the other documents incorporated
by reference to which that section refers for more information about important risks that you should consider before investing
in our common units.
About Phillips 66 Partners LP
We are a growth-oriented master limited
partnership formed to own, operate, develop and acquire primarily fee-based crude oil, refined petroleum products and NGL transportation,
processing, terminaling and storage facilities and systems. We are managed and operated by the executive officers of our general
partner, with oversight provided by its board of directors. Neither we nor our subsidiaries have any employees. Our general partner
has the sole responsibility for providing the employees and other personnel necessary to conduct our operations.
We primarily generate revenue by providing
fee-based transportation, processing, terminaling, storage and NGL fractionation services to Phillips 66 and other customers. Our
equity affiliates generate revenue primarily from transporting and terminaling NGL, refined petroleum products and crude oil. Because
we do not own any of the crude oil, refined petroleum products and NGL we handle and do not engage in the trading of NGL, crude
oil and refined petroleum products, we have limited direct exposure to risks associated with fluctuating commodity prices, although
these risks indirectly influence our activities and results of operations over the long term.
We have multiple commercial agreements with
Phillips 66, including transportation services agreements, terminal services agreements, storage services agreements, stevedoring
services agreements, a fractionation services agreement, a tolling services agreement and rail terminal services agreements. Under
many of these agreements, Phillips 66 commits to provide us with minimum quarterly throughput volumes or minimum monthly capacity
or service fees. We believe these agreements promote stable and predictable cash flows and they are the source of a substantial
portion of our revenue.
Our general partner, Phillips 66 Partners
GP LLC, is a Delaware limited liability company. We are managed and controlled by our general partner.
The Offering
Issuer
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Phillips 66 Partners LP, a Delaware limited partnership.
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Common units offered by us
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Common units having an aggregate offering price of up to $250,000,000.
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Manner of offering
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“At-the-market offering” that may be made from time to time through the sales agents. Please read “Plan of Distribution.”
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Use of proceeds
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We intend to use the net proceeds from this offering, after deducting the sales agents’ commissions and our offering expenses, for general partnership purposes. Please read “Use of Proceeds.”
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Cash distribution policy
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Our general partner has adopted a cash distribution policy that requires us to distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner. We refer to this cash as “available cash,” and it is defined in our partnership agreement. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions” in the accompanying base prospectus.
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On January 17, 2018, the board of directors of our general partner declared a quarterly cash distribution to our limited partners for the fourth quarter of 2017 of $0.678 per common unit, paid on February 13, 2018, to holders of record as of January 31, 2018. This distribution represents an increase of 5% over the 2017 third quarter distribution.
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If cash distributions to our unitholders exceed $0.244375 per unit in any quarter, our general partner will receive, in addition to distributions on its 2% general partner interest, increasing percentages, up to 48%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.”
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As of the date of this prospectus supplement, Phillips 66 owns an aggregate of 56.6% of our common units, which gives Phillips 66 the ability to prevent the removal of our general partner.
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Issue of additional units
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Our partnership agreement authorizes us to issue an unlimited number of additional common units without the approval of our unitholders. Please read “Our Partnership Agreement—Issuance of Additional Securities” in the accompanying base prospectus.
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Limited voting rights
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Our general partner manages and operates our partnership. Common unitholders have only limited voting rights on matters affecting our business. Common unitholders have no right to elect our general partner or its directors on an annual or continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding units voting together as a single class, including any units owned by our general partner and its affiliates.
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Material U.S. federal income tax consequences
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For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Consequences” in this prospectus supplement.
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Exchange listing
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Our common units are listed on the New York Stock Exchange (“NYSE”) under the symbol “PSXP.”
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Risk factors
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You should carefully read and consider the information beginning on page S-3 of this prospectus supplement, set forth under the heading “Risk Factors,” on page 2 of the accompanying base prospectus and all other information set forth in this prospectus, including the information incorporated by reference, before deciding to invest in our common units.
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Certain relationships
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Affiliates of the sales agents are lenders under our credit facility. If we use any net proceeds of the offering to repay borrowings under our credit facility, such affiliates may receive proceeds of the offering contemplated hereby. Please read “Plan of Distribution.”
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RISK FACTORS
An investment in our common units involves
risks. Before you invest in our common units, you should carefully consider the risk factors included under the caption “Risk
Factors” on page 2 of the accompanying base prospectus and the risk factors included in our Annual Report on Form 10-K for
the year ended December 31, 2017, as well as risks described in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and cautionary notes regarding forward-looking statements included or incorporated by
reference in this prospectus supplement and the accompanying base prospectus, together with all of the other information included
or incorporated by reference herein.
If any of these risks were to materialize,
our business, results of operations, cash flows and financial condition could be materially and adversely affected. In that case,
our ability to make distributions to our unitholders may be reduced, the trading price of our securities could decline and you
could lose all or part of your investment.
USE OF PROCEEDS
We intend to use the net proceeds of this
offering, after deducting the sales agents’ commissions and our offering expenses, for general partnership purposes, which
may include, among other things, repayment of indebtedness, acquisitions, capital expenditures and additions to working capital.
Affiliates of the sales agents are lenders
under our credit facility. As of the date of this prospectus, there were no borrowings under our credit facility. However, to the
extent we use proceeds from this offering to repay indebtedness that may be outstanding under our credit facility from time to
time, such affiliates may receive proceeds from this offering. Please read “Plan of Distribution” in this prospectus
supplement for further information. For a more complete description of our indebtedness as of December 31, 2017, please see our
Annual Report on Form 10-K for the year ended December 31, 2017, which is incorporated into this prospectus supplement by reference.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The tax consequences
to you of an investment in our common units will depend in part on your own tax circumstances. This section should be read in conjunction
with the risk factors included under the caption “Tax Risks” in our Annual Report on Form 10-K for the year ended December
31, 2017. This section is a summary of the material U.S. federal income tax consequences that may be relevant to prospective common
unitholders who are individual citizens or residents of the United States and, unless otherwise noted in the following discussion,
is the opinion of Latham & Watkins LLP, counsel to our general partner and us, insofar as it relates to legal conclusions
with respect to matters of U.S. federal income tax law. This section is based upon current provisions of the Internal Revenue Code
of 1986, as amended (the “Internal Revenue Code”), existing and proposed Treasury regulations promulgated under the
Internal Revenue Code (the “Treasury Regulations”) and current administrative rulings and court decisions, all of which
are subject to change. Later changes in these authorities may cause the tax consequences to vary substantially from the consequences
described below. Unless the context otherwise requires, references in this section to “us” or “we” are
references to Phillips 66 Partners LP and our operating subsidiaries.
The following
discussion does not comment on all federal income tax matters affecting us or our unitholders and does not describe the application
of the alternative minimum tax that may be applicable to certain unitholders. Moreover, the discussion focuses on unitholders who
are individual citizens or residents of the United States 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 foreign persons eligible for the benefits of an applicable income tax treaty with the
United States), individual retirement accounts (IRAs), real estate investment trusts (REITs) or mutual funds, dealers in securities
or currencies, traders in securities, U.S. persons whose “functional currency” is not the U.S. dollar, persons holding
their units as part of a “straddle,” “hedge,” “conversion transaction” or other risk reduction
transaction, persons subject to special tax accounting rules as a result of any item of gross income with respect to our common
units being taken into account in an applicable financial statement and persons deemed to sell their units under the constructive
sale provisions of the Internal Revenue Code. In addition, the discussion only comments, to a limited extent, on state, local,
and foreign tax consequences. Accordingly, we encourage each prospective common 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 laws, including the impact of the recently enacted U.S. tax reform legislation.
No ruling
has been requested from the Internal Revenue Service (the “IRS”) regarding our characterization as a partnership for
tax purposes. Instead, we will rely on opinions of Latham & Watkins LLP. Unlike a ruling, an opinion of counsel represents
only that counsel's 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 our common units, including the prices at which our common units trade. In addition, the costs of any contest
with the IRS, principally legal, accounting and related fees, will result in a reduction in cash available for distribution to
our unitholders and our general partner and thus will be borne 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.
All statements
as to matters of U.S. 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 Latham & Watkins LLP and are based on the accuracy of
the representations made by us and our general partner.
Notwithstanding
the above, and for the reasons described below, Latham & Watkins LLP has not rendered an opinion with respect to
the following specific federal income tax issues: (i) the treatment of a unitholder whose common units are loaned to a short
seller to cover a short sale of common units (please read “—Tax Consequences of Unit Ownership—Treatment
of Short Sales”); (ii) whether all aspects of our monthly method for allocating taxable income and losses is permitted
by existing Treasury Regulations (please read “—Disposition of Common Units—Allocations 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 Ownership—Section 754 Election” and “—Uniformity
of Units”).
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 partner's adjusted basis in his partnership interest. Section 7704 of the Internal Revenue Code provides that publicly
traded partnerships will, as a general rule, be taxed as corporations. However, an exception, referred to as the “Qualifying
Income Exception,” exists with respect to publicly traded partnerships of which 90% or more of the gross income for every
taxable year consists of “qualifying income.” Qualifying income includes income and gains derived from the transportation,
processing, storage and marketing of certain minerals and natural resources, including crude oil, natural gas and other products
of a type that are produced in a petroleum refinery or natural gas processing plant, the retail and wholesale marketing of propane,
the transportation of propane and natural gas liquids, certain related hedging activities, certain activities that are intrinsic
to other qualifying activities, and our allocable share of our subsidiaries’ income from these sources. Other types of qualifying
income include interest (other than from a financial business), dividends, real property rents, 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 4% 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, Latham & Watkins LLP 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.
The IRS has
made no determination as to our status or the status of our operating subsidiaries for federal income tax purposes.
Instead, we will rely on the opinion of Latham & Watkins LLP on such matters. It is the opinion of Latham &
Watkins LLP that, based upon the Internal Revenue Code, its regulations, published revenue rulings and court decisions
and the representations described below that:
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we will be classified as a partnership for federal income tax purposes;
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each of our subsidiaries, other than Phillips 66 Partners Finance
Corporation, will be treated as a partnership or will be disregarded as an entity separate from us for federal income tax purposes.
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In rendering its opinion, Latham &
Watkins LLP has relied on factual representations made by us and our general partner. The representations made by us and our
general partner upon which Latham & Watkins LLP has relied include:
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neither we nor any of our subsidiaries, other than Phillips 66 Partners
Finance Corporation, have elected or will elect to be treated, or is otherwise treated, as a corporation for federal income tax
purposes; and
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for each taxable year, more than 90% of our gross income has been
and will be income of the type that Latham & Watkins LLP has opined or will opine is “qualifying income”
within the meaning of Section 7704(d) of the Internal Revenue Code.
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We
believe that these representations have been true in the past, are true as of the date hereof 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.
If
we were treated as an association taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying
Income Exception or otherwise, our items of income, gain, loss and deduction would be reflected only on our tax return rather than
being passed through to our unitholders, and our net income would be taxed to us at corporate rates. In addition, any distribution
made to a unitholder would be treated as taxable dividend income, to the extent of our current and accumulated earnings and profits,
or, in the absence of earnings and profits, a nontaxable return of capital, to the extent of the unitholder's tax basis in his
common units, or taxable capital gain, after the unitholder's tax basis in his common units is reduced to zero. Accordingly, taxation
as a corporation would result in a material reduction in a unitholder's cash flow and after-tax return and thus would likely result
in a substantial reduction of the value of the units.
The discussion
below is based on Latham & Watkins LLP's opinion that we will be classified as a partnership for federal income tax
purposes.
Limited Partner Status
Unitholders
of Phillips 66 Partners LP will be treated as partners of Phillips 66 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 Phillips 66 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 Ownership—Treatment 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 Phillips 66 Partners LP. The references to “unitholders” in the discussion
that follows are to persons who are treated as partners in Phillips 66 Partners LP for federal income tax purposes.
Tax Consequences of Unit Ownership
Flow-Through of Taxable Income
Subject to the
discussion below under “—Entity-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.
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 unitholder's 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 unitholder's
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
unitholder's “at-risk” amount to be less than zero at the end of any taxable year, he must recapture any losses deducted
in previous years. Please read “—Limitations on Deductibility of Losses.”
A decrease in a
unitholder's 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 unitholder's share of our “unrealized receivables,”
including depreciation, recapture and/or substantially appreciated “inventory items,” each as defined in the Internal
Revenue Code, and collectively, “Section 751 Assets.” To that extent, the unitholder will be treated as having
been distributed his proportionate share of the Section 751 Assets and then having exchanged those assets with us in return
for the non-pro rata portion of the actual distribution made to him. This latter deemed exchange will generally result in the unitholder's
realization of ordinary income, which will equal the excess of (i) the non-pro rata portion of that distribution over (ii) the
unitholder's tax basis (often zero) for the share of Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units
A unitholder's
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, by any increases in his share of our nonrecourse liabilities and, on
the disposition of a common unit, by his share of certain items related to business interest not yet deductible by him due to
applicable limitations. Please read “—Limitations on Interest Deductions.” That basis will be decreased, but
not below zero, by distributions from us, by the unitholder's share of our losses, by any decreases in his share of our nonrecourse
liabilities, by his share of our excess business interest (generally, the excess of our business interest over the amount that
is deductible) 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
partner's “net value” as defined in the Treasury Regulations promulgated under Section 752 of the Internal Revenue
Code, but will have a share, generally based on his share of profits, of our nonrecourse liabilities. Please read “—Disposition
of Common Units—Recognition of Gain or Loss.”
Limitations on Deductibility of Losses
The deduction by
a unitholder of his share of our losses will be limited to the tax basis in his units and, in the case of an individual unitholder,
estate, trust, or corporate unitholder (if more than 50% of the value of the corporate unitholder's 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 unitholder's 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 unitholder's at-risk amount will increase or decrease as the tax basis of the unitholder's units increases or
decreases, other than tax basis increases or decreases attributable to increases or decreases in his 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 taxpayer's income from those passive
activities. The passive loss limitations are applied separately with respect to each publicly traded partnership. Consequently,
any passive losses we generate will only be available to offset our passive income generated in the future and will not be available
to offset income from other passive activities or investments, including our investments or a unitholder's investments in other
publicly traded partnerships, or the unitholder's salary, active business or other income. Passive losses that are not deductible
because they exceed a unitholder's 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 unitholder's
share of our net income may be offset by any of our suspended passive losses, but it may not be offset by any other current or
carryover losses from other passive activities, including those attributable to other publicly traded partnerships.
An additional loss
limitation may apply to certain of our unitholders for taxable years beginning after December 31, 2017, and before January 1, 2026.
A non-corporate unitholder will not be allowed to take a deduction for certain excess business losses in such taxable years. An
excess business loss is the excess (if any) of a taxpayer's aggregate deductions for the taxable year that are attributable to
the trades or businesses of such taxpayer (determined without regard to the excess business loss limitation) over the aggregate
gross income or gain of such taxpayer for the taxable year that is attributable to such trades or businesses plus a threshold amount.
The threshold amount is equal to $250,000, or $500,000 for taxpayers filing a joint return. Any losses disallowed in a taxable
year due to the excess business loss limitation may be used by the applicable unitholder in the following taxable year if certain
conditions are met. Unitholders to which this excess business loss limitation applies will take their allocable share of our items
of income, gain, loss and deduction into account in determining this limitation. This excess business loss limitation will be applied
to a non-corporate unitholder after the passive loss limitations and may limit such unitholders’ ability to utilize any losses
we generate allocable to such unitholder that are not otherwise limited by the basis, at-risk and passive loss limitations described
above.
Limitations on Interest Deductions
Our ability to
deduct interest paid or accrued on indebtedness properly allocable to a trade or business, “business interest,” may
be limited in certain circumstances. Should our ability to deduct business interest be limited, the amount of taxable income allocated
to our unitholders in the taxable year in which the limitation is in effect may increase. However, in certain circumstances, a
unitholder may be able to utilize a portion of a business interest deduction subject to this limitation in future taxable years.
Prospective unitholders should consult their tax advisors regarding the impact of this business interest deduction limitation on
an investment in our common units.
In addition, the
deductibility of a non-corporate taxpayer's “investment interest expense” is generally limited to the amount of that
taxpayer's “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 unitholder's investment interest expense will take into account interest on any margin account borrowing or other
loan incurred to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts
treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with
the production of investment income, but generally does not include gains attributable to the disposition of property held for
investment or (if applicable) qualified dividend income. The IRS has indicated that the net passive income earned by a publicly
traded partnership will be treated as investment income to its unitholders. In addition, the unitholder's 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.
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 common
unitholders in accordance with their percentage interests in us. At any time that incentive distributions are made to our general
partner, gross income will be allocated to the recipients to the extent of these distributions. If we have a net loss, that loss
will be allocated first to our general partner and the common unitholders in accordance with their percentage interests in us to
the extent of their positive capital accounts, as adjusted for certain items in accordance with applicable Treasury Regulations,
and, second, to our general partner.
Specified items
of our income, gain, loss and deduction will be allocated to account for any difference between the tax basis and fair market value
of any property contributed to us that exists at the time of such contribution, referred to in this discussion as the “Contributed
Property.” The effect of these allocations, referred to as Section 704(c) Allocations, to a unitholder purchasing common
units from us in an offering will be essentially the same as if the tax bases of our assets were equal to their fair market values
at the time of the offering. In the event we issue additional common units or engage in certain other transactions in the future,
“reverse Section 704(c) Allocations,” similar to the Section 704(c) Allocations described above, will be
made to the general partner and all of our common unitholders immediately prior to such issuance or other transactions to account
for the difference between the “book” basis for purposes of maintaining capital accounts and the fair market value
of all property held by us at the time of such issuance or future transaction. However, it may not be administratively feasible to make the relevant adjustments to “book” basis and the relevant
reverse Section 704(c) Allocations each time we issue common units, particularly in the case of small or frequent common unit
issuances. If that is the case, we may use simplifying conventions to make those adjustments and allocations, which may include
the aggregation of certain issuances of common units. Latham & Watkins LLP is unable to opine as to the validity of such
conventions. 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 (subject to certain adjustments), if negative capital accounts
(subject to certain adjustments) nevertheless result, items of our income and gain will be allocated in an amount and manner sufficient
to eliminate such negative balance as quickly as possible.
An allocation of
items of our income, gain, loss or deduction, other than an allocation required by the Internal Revenue Code to eliminate the difference
between a partner's “book” capital account, credited with the fair market value of Contributed Property, and “tax”
capital account, credited with the tax basis of Contributed Property, referred to in this discussion as the “Book-Tax Disparity,”
will generally be given effect for federal income tax purposes in determining a partner's share of an item of income, gain, loss
or deduction only if the allocation has “substantial economic effect.” In any other case, a partner's share of an item
will be determined on the basis of his interest in us, which will be determined by taking into account all the facts and circumstances,
including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon liquidation.
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Latham &
Watkins LLP is of the opinion that, with the exception of the issues described in “—Section 754 Election”
and “—Disposition of Common Units—Allocations Between Transferors and Transferees,” allocations under our
Partnership Agreement will be given effect for federal income tax purposes in determining a partner's 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, Latham & Watkins LLP
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 also read “—Disposition
of Common Units—Recognition of Gain or Loss.”
Tax Rates
Currently, the
highest marginal U.S. federal income tax rate applicable to ordinary income of individuals is 37% 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 is 20%. Such rates are subject to change by new legislation at any time.
In
addition, a 3.8% Medicare tax (NIIT) is imposed on certain net investment income earned by individuals, estates and trusts. For
these purposes, net investment income generally includes a unitholder's 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 unitholder's net investment
income or (ii) the amount by which the unitholder's modified adjusted gross income exceeds $250,000 (if the unitholder is
married and filing jointly or a surviving spouse), $125,000 (if the unitholder is married and filing separately) or $200,000 (in
any other case). In the case of an estate or trust, the tax will be imposed on the lesser of (i) undistributed net investment
income, or (ii) the excess adjusted gross income over the dollar amount at which the highest income tax bracket applicable
to an estate or trust begins for such taxable year. The U.S. Department of the Treasury and the IRS have issued Treasury Regulations
that provide guidance regarding the NIIT. Prospective common unitholders are urged to consult with their tax advisors as to the
impact of the NIIT on an investment in our common units.
For taxable years
beginning after December 31, 2017, and ending on or before December 31, 2025, a non-corporate unitholder is entitled to a deduction
equal to 20% of its “qualified business income” attributable to us, subject to certain limitations. For purposes of
this deduction, a unitholder’s “qualified business income” attributable to us is equal to the sum of:
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the net amount of such unitholder’s allocable share of certain
of our items of income, gain, deduction and loss (generally excluding certain items related to our investment activities, including
capital gains and dividends, which are subject to a federal income tax rate of 20%); and
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any gain recognized by such unitholder on the disposition of its units
to the extent such gain is attributable to certain Section 751 assets, including depreciation recapture and “inventory items”
we own.
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Prospective unitholders should consult
their tax advisors regarding the application of this deduction and its interaction with the overall deduction for qualified business
income.
Section 754 Election
We have made the
election permitted by Section 754 of the Internal Revenue Code. That election is irrevocable without the consent of the IRS.
The election generally permits us to adjust a common unit purchaser's tax basis in our assets (“inside basis”) under
Section 743(b) of the Internal Revenue Code to reflect his purchase price. This election does not apply with respect to a
person who purchases common units directly from us. The Section 743(b) adjustment belongs to the purchaser and not to other
unitholders. For purposes of this discussion, the inside basis in our assets with respect to a unitholder will be considered to
have two components: (i) his share of our tax basis in our assets (“common basis”) and (ii) his Section 743(b)
adjustment to that basis.
We have adopted
the remedial allocation method as to all our properties. Where the remedial allocation method is adopted, the Treasury Regulations
under Section 743 of the Internal Revenue Code require a portion of the Section 743(b) adjustment that is attributable
to recovery property that is subject to depreciation under Section 168 of the Internal Revenue Code and whose book basis is
in excess of its tax basis to be depreciated over the remaining cost recovery period for the property's unamortized Book-Tax Disparity.
Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Internal Revenue Code, rather than cost recovery deductions under Section 168, is generally
required to be depreciated using either the straight-line method or the 150% declining balance method. Under our Partnership Agreement,
our general partner is authorized to take a position to preserve the uniformity of units even if that position is not consistent
with these and any other Treasury Regulations. Please read “—Uniformity of Units.”
We
depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed
Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation
or amortization method and useful life applied to the property's unamortized Book-Tax Disparity, or treat that portion as non-amortizable
to the extent attributable to property that is not amortizable. This method is consistent with the methods employed by other publicly
traded partnerships but is arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected
to directly apply to a material portion of our assets. To the extent this Section 743(b) adjustment is attributable to appreciation
in value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative
history. If we determine that this position cannot reasonably be taken, we may take a depreciation or amortization position under
which all purchasers acquiring units in the same month would receive depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our
assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise
be allowable to some unitholders. Please read “—Uniformity of Units.” A unitholder's tax basis for his common
units is reduced by his share of our deductions (whether or not such deductions were claimed on an individual's income tax return)
so that any position we take that understates deductions will overstate such unitholder's basis in his common units, which may
cause the unitholder to understate gain or overstate loss on any sale of such units. Please read “—Disposition of Common
Units—Recognition of Gain or Loss.” Latham & Watkins LLP is unable to opine as to whether our method
for taking into account Section 743 adjustments is sustainable for property subject to depreciation under Section 167
of the Internal Revenue Code or if we use an aggregate approach as described above, as there is no direct or indirect controlling
authority addressing the validity of these positions. Moreover, the IRS may challenge our position with respect to depreciating
or amortizing the Section 743(b) adjustment we take to preserve the uniformity of the units. If such a challenge were sustained,
the gain from the sale of units might be increased without the benefit of additional deductions.
A Section 754
election is advantageous if the transferee's tax basis in his units is higher than the units' share of the aggregate tax basis
of our assets immediately prior to the transfer. Conversely, a Section 754 election is disadvantageous if the transferee's
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. Generally, a built-in loss is substantial if (i) it exceeds $250,000
or (ii) the transferee would be allocated a net loss in excess of $250,000 on a hypothetical sale of our assets for their fair
market value immediately after a transfer of the interest at issue. In addition, a basis adjustment is required regardless of whether
a Section 754 election is made if we distribute property and have a substantial basis reduction. A substantial basis reduction
exists if, on a liquidating distribution of property to a unitholder, there would be a negative basis adjustment to our assets
in excess of $250,000 if a Section 754 election were in place.
The calculations
involved in the Section 754 election are complex and will be made on the basis of assumptions as to the value of our assets
and other matters. For example, the allocation of the Section 743(b) adjustment among our assets must be made in accordance
with the Internal Revenue Code. The IRS could seek to reallocate some or all of any Section 743(b) adjustment allocated by
us to our tangible assets to goodwill instead. Goodwill, as an intangible asset, is generally nonamortizable or amortizable over
a longer period of time or under a less accelerated method than our tangible assets. We cannot assure you that the determinations
we make will not be successfully challenged by the IRS and that the deductions resulting from them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment to be made, and should, in our opinion, the expense of compliance
exceed the benefit of the election, we may seek permission from the IRS to revoke our Section 754 election. If permission
is granted, a subsequent purchaser of units may be allocated more income than he would have been allocated had the election not
been revoked.
Tax Treatment of Operations
Accounting Method and Taxable Year
We use the year
ending December 31 as our taxable year and the accrual method of accounting for federal income tax purposes. Each unitholder
will be required to include in income his share of our income, gain, loss and deduction for our taxable year ending within or with
his taxable year. In addition, a unitholder who has a taxable year ending on a date other than December 31 and who disposes
of all of his units following the close of our taxable year but before the close of his taxable year must include his share of
our income, gain, loss and deduction in income for his taxable year, with the result that he will be required to include in income
for his taxable year his share of more than twelve months of our income, gain, loss and deduction. Please read “—Disposition
of Common Units—Allocations Between Transferors and Transferees.”
Tax Basis, Depreciation and Amortization
The tax basis of
our assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the
disposition of these assets. The federal income tax burden associated with the difference between the fair market value of our
assets and their tax basis immediately prior to an offering will be borne by our unitholders holding interests in us prior to any
such offering. Please read “—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction.”
To the extent allowable,
we may use the depreciation and cost recovery methods, including bonus depreciation to the extent available, that will result in
the largest deductions being taken in the early years after assets subject to these allowances are placed in service. Please read
“—Uniformity of Units.” Property we subsequently acquire or construct may be depreciated using accelerated methods
permitted by the Internal Revenue Code.
If we dispose of
depreciable property by sale, foreclosure or otherwise, all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income
rather than capital gain. Similarly, a unitholder who has taken cost recovery or depreciation deductions with respect to property
we own will likely be required to recapture some or all of those deductions as ordinary income upon a sale of his interest in us.
Please read “—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction” and “—Disposition
of Common Units—Recognition 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 U.S. federal
income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market
values, and the initial tax bases, of our assets. Although we may from time to time consult with professional appraisers regarding
valuation matters, we will make many of the relative fair market value estimates ourselves. These estimates and determinations
of basis are subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or determinations
of basis are later found to be incorrect, the character and amount of items of income, gain, loss or deductions previously reported
by unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest
and penalties with respect to those adjustments.
Disposition of Common Units
Recognition of Gain or Loss
Gain or loss will
be recognized on a sale of units equal to the difference between the amount realized and the unitholder's tax basis for the units
sold. A unitholder's amount realized will be measured by the sum of the cash or the fair market value of other property received
by him plus his share of our nonrecourse liabilities. Because the amount realized includes a unitholder's share of our nonrecourse
liabilities, the gain recognized on the sale of units could result in a tax liability in excess of any cash received from the sale.
Prior distributions
from us that in the aggregate were in excess of cumulative net taxable income for a common unit and, therefore, decreased a unitholder's
tax basis in that common unit will, in effect, become taxable income if the common unit is sold at a price greater than the unitholder's
tax basis in that common unit, even if the price received is less than his original cost.
Except as noted
below, gain or loss recognized by a unitholder, other than a “dealer” in units, on the sale or exchange of a unit will
generally be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of units held for more than
twelve months will generally be taxed at the U.S. federal income tax rate applicable to long-term capital gains. However, a portion
of this gain or loss, which will likely be substantial, will be separately computed and taxed as ordinary income or loss under
Section 751 of the Internal Revenue Code to the extent attributable to assets giving rise to “unrealized receivables,”
including potential recapture items such as depreciation recapture, or to “inventory gains” we own. Ordinary income
attributable to unrealized receivables and inventory items 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. Ordinary income recognized
by a unitholder on disposition of our units may be reduced by such unitholder’s deduction for qualified business income.
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 Ownership—Tax 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 partner's tax basis in his
entire interest in the partnership as the value of the interest sold bears to the value of the partner's entire interest in the
partnership. Treasury Regulations under Section 1223 of the Internal Revenue Code allow a selling unitholder who can identify
common units transferred with an ascertainable holding period to elect to use the actual holding period of the common units transferred.
Thus, according to the ruling discussed above, a common unitholder will be unable to select high or low basis common units to sell
as would be the case with corporate stock, but, according to the Treasury Regulations, he may designate specific common units sold
for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of
common units transferred must consistently use that identification method for all subsequent sales or exchanges of common units.
A unitholder considering the purchase of additional units or a sale of common units purchased in separate transactions is urged
to consult his tax advisor as to the possible consequences of this ruling and application of the Treasury Regulations.
Specific provisions
of the Internal Revenue Code affect the taxation of some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an “appreciated” partnership interest, one in which gain would be recognized if
it were sold, assigned or terminated at its fair market value, if the taxpayer or related persons enter(s) into:
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an offsetting notional principal contract; or
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a futures or forward contract;
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in each case, with respect to
the partnership interest or substantially identical property.
Moreover, if a
taxpayer has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person
then acquires the partnership interest or substantially identical property. The Secretary of the Treasury is also authorized to
issue regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors
and Transferees
In general, our
taxable income and losses will be determined annually, will be prorated on a monthly basis in proportion to the number of days
in each month and will be subsequently apportioned among our 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 our unitholders on the Allocation Date in the month in which that gain
or loss is recognized. As a result, a unitholder transferring units may be allocated income, gain, loss and deduction realized
after the date of transfer.
The U.S. Department
of Treasury and the IRS have issued Treasury Regulations that permit publicly traded partnerships to use a monthly simplifying
convention that is similar to ours, but they do not specifically authorize all aspects of the proration method we have adopted.
Accordingly, Latham & Watkins LLP 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, 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.
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 United States and who effects the sale or exchange through a broker who
will satisfy such requirements.
Uniformity of Units
Because we cannot
match transferors and transferees of units, we must maintain uniformity of the economic and tax characteristics of the units to
a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of federal income
tax requirements, both statutory and regulatory. A lack of uniformity can result from a literal application of Treasury Regulation
Section 1.167(c)-1(a)(6). Any non-uniformity could have a negative impact on the value of the units. Please read “—Tax
Consequences of Unit Ownership—Section 754 Election.” We depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity,
using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the
property's unamortized Book-Tax Disparity, or treat that portion as nonamortizable, to the extent attributable to property the
common basis of which is not amortizable, consistent with the regulations under Section 743 of the Internal Revenue Code,
even though that position may be inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to
directly apply to a material portion of our assets. Please read “—Tax Consequences of Unit Ownership—Section 754
Election.” To the extent that the Section 743(b) adjustment is attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine
that this position cannot reasonably be taken, we may adopt a depreciation and amortization position under which all purchasers
acquiring units in the same month would receive depreciation and amortization deductions, whether attributable to common basis
or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our assets.
If this position is adopted, it may result in lower annual depreciation and amortization deductions than would otherwise be allowable
to some unitholders and risk the loss of depreciation and amortization deductions not taken in the year that these deductions
are otherwise allowable. This position will not be adopted if we determine that the loss of depreciation and amortization deductions
will have a material adverse effect on the unitholders. If we choose not to utilize this aggregate method, we may use any other
reasonable depreciation and amortization method to preserve the uniformity of the intrinsic tax characteristics of any units that
would not have a material adverse effect on the unitholders. In either case, and as stated above under “—Tax Consequences
of Unit Ownership—Section 754 Election,” Latham & Watkins LLP has not rendered an opinion with
respect to these methods. Moreover, the IRS may challenge any method of depreciating the Section 743(b) adjustment described
in this paragraph. If this challenge were sustained, the uniformity of units might be affected, and the gain from the sale of
units might be increased without the benefit of additional deductions. Please read “—Disposition of Common Units—Recognition
of Gain or Loss.” In addition, as described above under “—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction,”
if we aggregate multiple issuances of common units for purposes of making adjustments to “book” basis and the
related tax allocations, we will treat each of our common units as having the same capital account balance, regardless of
the price actually paid by each purchaser of common units in the aggregated offerings. Latham & Watkins LLP is unable
to opine as to the validity of such an approach. We do not expect the number of affected common units, or the differences
between the purchase price of a common unit and the initial capital account balance assigned to the common unit, to be material,
and we do not expect this convention will have a material effect upon the trading of our common units.
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 foreign 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 IRAs 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 United States because
of the ownership of units. As a consequence, they will be required to file federal tax returns to report their share of our income,
gain, loss or deduction and pay U.S. federal income tax at regular rates on their share of our net income or gain. Moreover, under
rules applicable to publicly traded partnerships, our quarterly distribution to foreign unitholders will be subject to withholding
at the highest applicable effective tax rate. Each foreign unitholder must obtain a taxpayer identification number from the IRS
and submit that number to our transfer agent on a Form W-8BEN, W-8BEN-E or applicable substitute form in order to obtain credit
for these withholding taxes. A change in applicable law may require us to change these procedures.
In addition, because
a foreign corporation that owns units will be treated as engaged in a U.S. trade or business, that corporation may be subject to
the U.S. branch profits tax at a rate of 30%, in addition to regular U.S. federal income tax, on its share of our earnings and
profits, as adjusted for changes in the foreign corporation's “U.S. net equity,” that is effectively connected with
the conduct of a U.S. trade or business. That tax may be reduced or eliminated by an income tax treaty between the United States
and the country in which the foreign corporate unitholder is a “qualified resident.” In addition, this type of unitholder
is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code.
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. Gain on the
sale or disposition of a common unit will be treated as effectively connected with a U.S. trade or business to the extent that
a foreign unitholder would recognize gain effectively connected with a U.S. trade or business upon the hypothetical sale of our
assets at fair market value on the date of the sale or exchange of that unit. Such gain shall be reduced by certain amounts treated
as effectively connected with a U.S. trade or business attributable to certain real property interests.
Under the Foreign
Investment in Real Property Tax Act, a foreign common unitholder (other than certain “qualified foreign pension funds”
(or an entity all of the interests of which are held by such a qualified foreign pension fund), which generally are entities or
arrangements that are established and regulated by foreign law to provide retirement or other pension benefits to employees, do
not have a single participant or beneficiary that is entitled to more than 5% of the assets or income of the entity or arrangement
and are subject to certain preferential tax treatment under the laws of the applicable foreign country) 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 U.S. federal income tax on gain from the sale or disposition of their units.
Upon the sale,
exchange or other disposition of a common unit by a foreign unitholder, the transferee is generally required to withhold 10% of
the amount realized on such sale, exchange or other disposition if any portion of the gain on such sale, exchange or other disposition
would be treated as effectively connected with a U.S. trade or business. If the transferee fails to satisfy this withholding requirement,
we will be required to deduct and withhold such amount (plus interest) from future distributions to the transferee. Because the
“amount realized” would include a unitholder’s share of our nonrecourse liabilities, 10% of the amount realized
could exceed the total cash purchase price for such disposed units. Due to this fact, our inability to match transferors and transferees
of units and other uncertainty surrounding the application of these withholding rules, the U.S. Department of the Treasury and
the IRS have currently suspended these rules for transfers of certain publicly traded partnership interests, including transfers
of our units, until regulations or other guidance has been issued. It is unclear when such regulations or other guidance will be
issued.
Additional withholding
requirements may also affect certain foreign unitholders. Please read “—Administrative Matters—Additional Withholding
Requirements.”
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 unitholder's share of income, gain, loss and deduction. We cannot assure you that those positions will
yield a result that conforms to the requirements of the Internal Revenue Code, Treasury Regulations or administrative interpretations
of the IRS. Neither we nor Latham & Watkins LLP can assure prospective common 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
year's tax liability, and possibly may result in an audit of his return. Any audit of a unitholder's return could result in adjustments
not related to our returns as well as those related to our returns.
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. For taxable years beginning on or before December 31, 2017, the
Internal Revenue Code requires that one partner be designated as the “Tax Matters Partner” for these purposes. Our
Partnership Agreement names Phillips 66 Partners GP LLC 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 that unitholder
elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review, by which all the unitholders are bound, of a final partnership administrative adjustment and, if the Tax
Matters Partner fails to seek judicial review, judicial review may be sought by any unitholder having at least a 1% interest in
profits or by any group of unitholders having in the aggregate at least a 5% interest in profits. However, only one action for
judicial review will go forward, and each unitholder with an interest in the outcome may participate.
A unitholder must
file a statement with the IRS identifying the treatment of any item on his federal income tax return that is not consistent
with the treatment of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a
unitholder to substantial penalties.
Pursuant to the
Bipartisan Budget Act of 2015, for taxable years beginning after December 31, 2017, if the IRS makes audit adjustments to our income
tax returns, it may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment
directly from us. Similarly, for such taxable years, if the IRS makes audit adjustments to income tax returns filed by an entity
in which we are a member or partner, it may assess and collect any taxes (including penalties and interest) resulting from such
audit adjustment directly from such entity. Generally, we expect to elect to have our general partner and its unitholders take
any such audit adjustment into account in accordance with their interests in us during the taxable year under audit, but there
can be no assurance that such election will be effective in all circumstances. If, as a result of any such audit adjustment, we
are required to make payments of taxes, penalties and interest, our cash available for distribution to our common unitholders might
be substantially reduced.
Additionally, pursuant
to the Bipartisan Budget Act of 2015, the Internal Revenue Code will no longer require that we designate a Tax Matters Partner.
Instead, for taxable years beginning after December 31, 2017, we will be required to designate a partner, or other person, with
a substantial presence in the United States as the partnership representative (“Partnership Representative”). The Partnership
Representative will have the sole authority to act on our behalf for purposes of, among other things, U.S. federal income tax audits
and judicial review of administrative adjustments by the IRS. If we do not make such a designation, the IRS can select any person
as the Partnership Representative. We currently anticipate that we will designate our general partner as our Partnership Representative.
Further, any actions taken by us or by the Partnership Representative on our behalf with respect to, among other things, U.S. federal
income tax audits and judicial review of administrative adjustments by the IRS, will be binding on us and all of our unitholders.
Additional Withholding Requirements
Withholding taxes
may apply to certain types of payments made to “foreign financial institutions” (as specially defined in the Internal
Revenue Code) and certain other foreign 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 United States (“FDAP Income”),
or gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends from sources
within the United States (“Gross Proceeds”) paid to a foreign financial institution or to a “non-financial foreign
entity” (as specially defined in the Internal Revenue 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.
Department of 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 United States governing these requirements may be subject to different rules.
These rules generally
apply to payments of FDAP Income currently and generally will apply to payments of relevant Gross Proceeds made on or after January 1,
2019. Thus, to the extent we have FDAP Income or have 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 foreign entities, or persons that hold their common units through such
foreign 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 common
unitholders 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 of $260 per failure, up to a maximum of $3,218,500 per calendar
year, is imposed by the Internal Revenue Code for failure to report that information to us. The nominee is required to supply the
beneficial owner of the units with the information furnished to us.
Accuracy-Related Penalties
Certain penalties
may be imposed on taxpayers as a result of an underpayment of tax that is attributable to one or more specified causes, including:
(i) negligence or disregard of rules or regulations, (ii) substantial understatements of income tax, (iii) substantial valuation
misstatements and (iv) the disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing
to meet the requirements of any similar rule of law. Except with respect to the disallowance of claimed tax benefits by reason
of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, however, no penalty
will be imposed for any portion of any such underpayment if it is shown that there was a reasonable cause for the underpayment
of that portion and that the taxpayer acted in good faith regarding the underpayment of that portion.
With respect to
substantial understatements of income tax, the amount of any understatement subject to penalty generally is reduced by that portion
of the understatement which is attributable to a position adopted on the return: (A) for which there is, or was, “substantial
authority”; or (B) as to which there is a reasonable basis and the relevant facts of that position are adequately disclosed
on the return. If any item of income, gain, loss or deduction included in the distributive shares of unitholders might result in
that kind of an “understatement” of income for which no “substantial authority” exists, we must adequately
disclose the relevant 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.
Recent Legislative Developments
The present federal
income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative,
legislative or judicial interpretation at any time. For example, from time to time, members of Congress and the President propose
and consider substantive changes to the existing federal income tax laws that affect the tax treatment of publicly traded partnerships
and our common unitholders.
Recently, the President
signed into law comprehensive U.S. federal tax reform legislation that significantly reforms the Internal Revenue Code. This legislation,
among other things, contains significant changes to the taxation of our operations and an investment in our common units, including
a partial limitation on the deductibility of certain business interest expenses, a deduction for our unitholders relating to certain
income from partnerships, immediate deductions for certain new investments instead of deductions for depreciation over time and
the modification or repeal of many business deductions and credits. We continue to examine the impact of this tax reform legislation,
and as its overall impact is uncertain, we note that this tax reform legislation could adversely affect the value of an investment
in our common units. Prospective common unitholders are urged to consult their tax advisors regarding the impact of this tax reform
legislation on an investment in our common units.
Additional modifications
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 will likely 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
common unitholder should consider their potential impact on his investment in us. We currently own property or do business in many
states. Several of these states impose a personal income tax on individuals; certain of these states also impose an income tax
on corporations and other entities. 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 a particular unitholder's 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 Ownership—Entity-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 common 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. Latham & Watkins LLP has not rendered an opinion on the
state tax, local tax, alternative minimum tax or foreign tax consequences of an investment in us.
PLAN OF DISTRIBUTION
We have entered into an equity distribution
agreement with the sales agents under which we may offer and sell, from time to time, common units having an aggregate offering
price of up to $250,000,000. Subject to the terms of the equity distribution agreement, at our request, the sales agents will use
their reasonable efforts, as our agents, to sell the common units offered pursuant to this prospectus supplement on a daily basis
or as otherwise agreed upon by us and any sales agent.
Sales of the common units, if any, will
be made by means of ordinary brokers’ transactions through the NYSE at market prices, in block transactions or as otherwise
agreed between us and any sales agent. The sales agents, as our agents, will not engage in any prohibited stabilizing transactions.
Under the terms of the equity distribution
agreement, we may sell common units to any sales agent as principal for its own account at a price agreed upon at the time of the
sale. If we sell common units to any such sales agent as principal, we will enter into a separate terms agreement with such sales
agent and we will describe that agreement in a separate prospectus supplement or pricing supplement.
We will designate the maximum number of
common units to be sold through each sales agent, on a daily basis or otherwise as we and such sales agent agree. Subject to the
terms and conditions of the equity distribution agreement, each sales agent will use its reasonable efforts to sell, as our agent
and on our behalf, all of the designated common units. We may instruct the sales agents not to sell common units if the sales cannot
be effected at or above the price designated by us in any such instruction. We or the sales agents may suspend the offering of
common units pursuant to the equity distribution agreement by notifying the other party.
We will report in a prospectus supplement
and/or our filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) at least quarterly the
number of common units sold through the sales agents under the equity distribution agreement and the net proceeds to us and the
compensation paid to the sales agents with respect to the sales of our common units pursuant to the equity distribution agreement.
The commission to be paid to each sales
agent for units sold through it pursuant to the equity distribution agreement shall be at a fixed rate of up to 2% of the gross
sales price per unit. We have also agreed to reimburse the sales agents for certain of their expenses. The remaining sales proceeds,
after deducting the applicable commission and any expenses payable by us and any transaction fees imposed by any governmental or
self-regulatory organization in connection with the sales, will equal our net proceeds from the sale of the common units.
Settlement for sales of common units are
expected to occur on the second business day following the date on which any sales were made in return for payment of the net proceeds
to us. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.
In connection with the sale of the common
units on our behalf, the sales agents may be deemed to be “underwriters” within the meaning of the Securities Act of
1933, as amended (the “Securities Act”), and the compensation paid to the sales agents may be deemed to be underwriting
commissions or discounts. We have agreed to provide indemnification and contribution to the sales agents against certain liabilities,
including civil liabilities under the Securities Act.
Because the Financial Industry Regulatory
Authority, Inc., or FINRA, views the common units offered hereby as interests in a direct participation program, this offering
is being made in compliance with FINRA Rule 2310.
If we or any sales agent has reason to believe
that our common units are no longer an “actively traded security” as defined under Rule 101(c)(1) of Regulation M under
the Exchange Act, that party will promptly notify the other and sales of common units pursuant to the equity distribution agreement
or any terms agreement will be suspended until in our collective judgment that or other exemptive provisions have been satisfied.
The offering of common units pursuant to
the equity distribution agreement will terminate upon the earlier of (1) the sale of all common units subject to the equity
distribution agreement or (2) the termination of the equity distribution agreement by us or by the sales agents.
Other Relationships
Some of the sales agents and their affiliates
have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business
with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.
In addition, affiliates of certain of the sales agents are lenders under our credit facility.
Additionally, affiliates of certain of the sales agents are lenders, and in some cases agents or managers for the lenders, under
certain credit facilities of Phillips 66. We may use a portion of the net proceeds from the offering to repay amounts outstanding
under our credit facility from time to time. To the extent we use proceeds from this offering to repay indebtedness under our credit
facility, such affiliates may receive a portion of the net proceeds from this offering.
In addition, in the ordinary course of their
business activities, the sales agents and their affiliates may make or hold a broad array of investments and actively trade debt
and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account
and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of
ours or our affiliates. The sales agents and their affiliates may also make investment recommendations and/or publish or express
independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they
acquire, long and/or short positions in such securities and instruments.
LEGAL MATTERS
The validity of the common units and certain
other legal matters will be passed upon for us by Latham & Watkins LLP, Houston, Texas. The sales agents have been
represented in connection with this offering by Cravath, Swaine & Moore LLP, New York, New York.
EXPERTS
The consolidated financial
statements of Phillips 66 Partners LP at December 31, 2017 and 2016, and for each of the three years in the period ended
December 31, 2017, and the effectiveness of Phillips 66 Partners LP’s internal control over financial reporting as of
December 31, 2017, appearing in Phillips 66 Partners LP’s Annual Report on Form 10-K for the year ended December 31,
2017, have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their
reports thereon, included therein, and incorporated herein by reference, which as to the consolidated financial statements
for each of the three years in the period ended December 31, 2017, are based in part on the reports of Deloitte & Touche
LLP, independent registered public accounting firm, and, for the year ended December 31, 2017, is based in part on the report
of Grant Thornton LLP, independent registered public accounting firm. The consolidated financial statements of DCP Sand
Hills Pipeline, LLC (which Phillips 66 Partners LP accounts for using the equity method of accounting) as of and for the
years ended December 31, 2017 and 2016, and for the period from March 2, 2015 through December 31, 2015 (not separately
included or incorporated by reference herein), and the consolidated financial statements of DCP Southern Hills Pipeline, LLC (which
Phillips 66 Partners LP accounts for using the equity method of accounting) as of December 31, 2017 and 2016, and for each of
the three years in the period ended December 31, 2017 (not separately
included or incorporated by reference herein), have been audited by Deloitte & Touche LLP, as stated in their
reports, which are incorporated herein by reference. The consolidated financial statements of Dakota Access, LLC (which
Phillips 66 Partners LP accounts for using the equity method of accounting) as of December 31, 2017 and for the year then
ended (not separately
included or incorporated by reference herein), have been audited by Grant Thornton LLP, as stated in their report, which is incorporated herein by reference. The
consolidated financial statements of Phillips 66 Partners LP, referred to above, are incorporated herein by reference in
reliance upon such reports given on the authority of such firms as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with
the SEC under the Securities Act that registers the offer and sale from time to time of our common units, including the common
units covered by this prospectus supplement. The registration statement, including the attached exhibits, contains additional relevant
information about us and our securities. In addition, we file annual, quarterly and current reports with the SEC. Our SEC filings
are available over the internet at the SEC’s website at
http://www.sec.gov
. You also can read and copy any document
we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for more information on the public reference room and its copy charges.
INCORPORATION BY REFERENCE
The SEC allows us to “incorporate
by reference” the information we have filed with the SEC. This means that we can disclose important information to you without
actually including the specific information in this prospectus supplement or the accompanying base prospectus by referring you
to other documents filed separately with the SEC. The information incorporated by reference is an important part of this prospectus
supplement and the accompanying base prospectus. Information that we later provide to the SEC, and that is deemed to be “filed”
with the SEC, will automatically update information previously filed with the SEC and may replace information in this prospectus
supplement and the accompanying base prospectus and information previously filed with the SEC.
We incorporate by reference in this prospectus
supplement the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act (excluding information deemed to be furnished and not filed with the SEC), until all the common units offered
hereby are sold:
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our annual report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 23, 2018;
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our current reports on Form 8-K as filed with the SEC on January 17, 2018, February 21, 2018 and February 26, 2018 (excluding any information furnished pursuant to Item 2.02 or Item 7.01 of any such Current Report on Form 8-K); and
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the description of our common units in our Registration Statement on Form 8-A (File No. 001-36011), as filed with the SEC on July 18, 2013, and including any other amendments or reports filed for the purpose of updating such description.
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You may request a copy of any document
incorporated by reference in this prospectus supplement and any exhibit specifically incorporated by reference in those documents,
at no cost, by writing or telephoning us at the following address or phone number:
Phillips 66 Partners LP
411 S. Keeler
Bartlesville, Oklahoma 74003
Telephone: 1-918-977-2245
We also make available, free of charge on
our internet website at
www.phillips66partners.com
, our annual reports on Form 10-K, our quarterly reports on Form 10-Q,
our current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into
this prospectus supplement and you should not consider information contained on our website as part of this prospectus supplement.
PROSPECTUS
$250,000,000
Phillips 66 Partners LP
Common Units Representing
Limited Partner Interests
We may offer and sell
up to $250,000,000 in aggregate offering price of common units representing limited partner interests in Phillips 66 Partners LP
from time to time in amounts, at prices and on terms to be determined by market conditions and other factors at the time of our
offerings.
We may offer and sell
the common units to or through one or more underwriters, dealers or agents, or directly to purchasers, on a continuous or delayed
basis. This prospectus describes the terms of the common units and the general manner in which we will offer the common units.
The specific manner in which we will offer the common units and arrangements with any underwriters, dealers or agents will be included
in the prospectus supplement that relates to that offering.
Our common units are
traded on the New York Stock Exchange, or the NYSE, under the symbol “PSXP.”
Investing in our
securities involves risks. You should carefully consider the factors described under “
Risk Factors
” beginning
on page 2 of this prospectus and any similar section contained in the applicable prospectus supplement before you make an
investment in our securities.
Neither the Securities
and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this
prospectus is January 23, 2018.
TABLE OF CONTENTS
In making your investment
decision, you should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized
anyone to provide you with any other information. If anyone provides you with different or inconsistent information, you should
not rely on it.
You should not assume
that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.
You should not assume that the information contained in the documents incorporated by reference in this prospectus is accurate
as of any date other than the respective dates of those documents. Our business, financial condition, results of operations and
prospects may have changed since those dates.
ABOUT THIS PROSPECTUS
This prospectus is
part of a registration statement on Form S-3 that we have filed with the Securities and Exchange Commission, or the SEC, under
the Securities Act of 1933, as amended, or the Securities Act, utilizing a “shelf” registration process. Under this
shelf registration process, we may, from time to time, sell up to $250,000,000 of our common units in one or more offerings.
This prospectus provides
you with a general description of Phillips 66 Partners LP and the common units that are registered hereunder that may be offered
by us. Each time we sell any common units offered by this prospectus, we will provide a prospectus supplement that will contain
specific information about the terms of that offering and the common units being offered. To the extent information in this prospectus
is inconsistent with the information contained in a prospectus supplement, you should rely on the information in the prospectus
supplement.
A prospectus supplement
may include additional risk factors or other special considerations applicable to those common units and may also add, update or
change information in this prospectus. Additional information, including our financial statements and the notes thereto, is incorporated
in this prospectus by reference to our reports filed with the SEC. Please read “Where You Can Find More Information.”
You are urged to read carefully this prospectus and any prospectus supplement relating to the common units offered to you, together
with the additional information described under the heading “Where You Can Find More Information,” before investing
in our common units.
This prospectus contains
summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents
for complete information. All of the summaries are qualified in their entirety by reference to the actual documents. Copies of
some documents referred to herein have been filed or will be filed or incorporated by reference as exhibits to the registration
statement of which this prospectus is a part, and you may obtain copies of those documents as described under the heading “Where
You Can Find More Information.”
Unless the context
otherwise requires, references in this prospectus to “Phillips 66 Partners LP,” “the Partnership,”
“we,” “our,” “us,” or like terms refer to Phillips 66 Partners LP and our subsidiaries.
“Phillips 66” refers to Phillips 66 and its consolidated subsidiaries, other than Phillips 66 Partners LP, our
subsidiaries and our general partner. References to “our general partner” refer to Phillips 66 Partners GP LLC.
WHERE YOU CAN FIND
MORE INFORMATION
We have filed a registration
statement with the SEC under the Securities Act that registers the common units offered by this prospectus. The registration statement,
including the attached exhibits, contains additional relevant information about us. The rules and regulations of the SEC allow
us to omit some information included in the registration statement from this prospectus.
The SEC allows us to
“incorporate by reference” the information we have filed with the SEC. This means that we can disclose important information
to you without actually including the specific information in this prospectus by referring you to other documents filed separately
with the SEC. These other documents contain important information about us, our financial condition and our results of operations.
The information incorporated by reference is an important part of this prospectus. Information that we file later with the SEC
will automatically update and may replace information in this prospectus and information previously filed with the SEC.
We incorporate by reference
the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, including any such filings that are made after the date of the registration
statement of which this prospectus forms a part but prior to the effectiveness of such registration statement, but excluding any
information in those documents that is deemed by the rules of the SEC to be furnished not filed, until the termination of the registration
statement:
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our annual report on Form 10-K for the year ended December 31,
2016, which was filed with the SEC on February 17, 2017;
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our Quarterly Reports on Form 10-Q for the quarters ended March
31, 2017, June 30, 2017 and September 30, 2017, which were filed with the SEC on May 5, 2017, August 1, 2017 and October 27, 2017,
respectively;
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our Current Reports on Form 8-K as filed with the SEC on January 18,
2017, February 3, 2017, April 19, 2017, April 28, 2017, July 19, 2017, September 25, 2017, October 10, 2017 (as amended by the
Current Report on Form 8-K/A filed with the SEC on December 8, 2017), October 13, 2017, October 18, 2017, November 3, 2017, November
20, 2017 and December 12, 2017 (excluding any information furnished pursuant to Items 2.02 or 7.01 of any such Current Report on
Form 8-K); and
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the description of our common units contained in our registration
statement on Form 8-A (File No. 001-36011) filed with the SEC on July 18, 2013, and including any other amendments
or reports filed for the purpose of updating such description.
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Our principal executive
offices are located at 2331 CityWest Boulevard, Houston, Texas 77042, and our telephone number is (855) 283-9237. Our common
units trade on the New York Stock Exchange under the symbol “PSXP.” We file annual, quarterly and other reports and
other information with the SEC. You may read and copy any document that we file with the SEC at the SEC's Public Reference Room
at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public on the SEC's website at
http://www.sec.gov.
We
also make available, free of charge on our website at
http://www.phillips66partners.com,
all materials that we
electronically file with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, Section 16 reports, and amendments to these reports as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. The information on our website, however, is not, and should not be deemed to
be, a part of this prospectus. You may request a copy of any document incorporated by reference in this prospectus (including exhibits
to those documents specifically incorporated by reference in this prospectus), free of charge by contacting us at:
Phillips 66 Partners LP
Attention: Investor
Relations
2331 CityWest Boulevard
Houston, Texas 77042
(855) 283-9237
investorrelations@p66partners.com
We also post on our
website our governance guidelines, code of business ethics and conduct, and the charter for the audit committee of our general
partner’s board of directors.
FORWARD-LOOKING
STATEMENTS
Some of the statements
and information included in this prospectus, any prospectus supplement and the information incorporated by reference in this prospectus
or any prospectus supplement may contain forward-looking statements. You can identify our forward-looking statements by the words
“anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,”
“intend,” “may,” “plan,” “potential,” “predict,” “seek,”
“should,” “will,” “would,” “expect,” “objective,” “projection,”
“forecast,” “goal,” “guidance,” “outlook,” “effort,” “target”
and similar expressions.
We based the forward-looking
statements on our current expectations, estimates and projections about us and the industries in which we operate in general. We
caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith,
may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking
statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may
differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from
a variety of factors, including the following:
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The continued ability of Phillips 66 to satisfy its obligations under
our commercial and other agreements.
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The volume of crude oil, natural gas liquids (“NGL”) and
refined petroleum products we transport, fractionate, process, terminal and store.
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The tariff rates with respect to volumes that we transport through
our regulated assets, which rates are subject to review and possible adjustment by federal and state regulators.
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Changes in revenue we realize under the loss allowance provisions
of our regulated tariffs resulting from changes in underlying commodity prices.
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Fluctuations in the prices for crude oil, NGL and refined petroleum
products.
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Changes in global economic conditions and the effects of a global
economic downturn on the business of Phillips 66 and the business of its suppliers, customers, business partners and credit lenders.
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Liabilities associated with the risks and operational hazards
inherent in transporting, fractionating, processing, terminaling and storing crude oil, NGL and refined petroleum
products.
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Curtailment of operations due to severe weather disruption; riots,
strikes, lockouts or other industrial disturbances; or failure of information technology systems due to various causes, including
unauthorized access or attack.
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Inability to obtain or maintain permits in a timely manner, if at
all, including those necessary for capital projects, or the revocation or modification of existing permits.
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Inability to comply with government regulations or make capital expenditures
required to maintain compliance.
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Failure to timely complete construction of announced and future capital
projects.
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The operation, financing and distribution decisions of our joint ventures.
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Costs or liabilities associated with federal, state, and local laws
and regulations relating to environmental protection and safety, including spills, releases and pipeline integrity.
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Costs associated with compliance with evolving environmental laws
and regulations on climate change.
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Costs associated with compliance with safety regulations, including
pipeline integrity management program testing and related repairs.
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Changes in the cost or availability of third-party vessels, pipelines,
railcars and other means of delivering and transporting crude oil, NGL and refined petroleum products.
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Direct or indirect effects on our business resulting from actual or
threatened terrorist incidents or acts of war.
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When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary statements set forth in this prospectus and any prospectus
supplement, as well as other written and oral statements made or incorporated by reference from time to time by us in other reports
and filings with the SEC. All forward-looking statements included in this prospectus, any prospectus supplement and all subsequent
written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by these cautionary statements. The forward-looking statements speak only as of the date made, other than as required
by law, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
ABOUT PHILLIPS 66
PARTNERS LP
We are a
growth-oriented master limited partnership formed to own, operate, develop and acquire primarily fee-based crude oil, refined
petroleum product and NGL pipelines and terminals, as well as other transportation and midstream assets. We are managed and
operated by the executive officers of our general partner, with oversight provided by its board of directors. Neither we nor
our subsidiaries have any employees. Our general partner has the sole responsibility for providing the employees and other
personnel necessary to conduct our operations.
We primarily generate
revenue by providing fee-based transportation, processing, terminaling, storage and NGL fractionation services to Phillips 66 and
other customers. Our equity affiliates generate revenue primarily from transporting and terminaling NGL, refined petroleum products
and crude oil. Because we do not own any of the crude oil, refined petroleum products and NGL we handle and do not engage in the
trading of NGL, crude oil and refined petroleum products, we have limited direct exposure to risks associated with fluctuating
commodity prices, although these risks indirectly influence our activities and results of operations over the long term.
We have multiple commercial
agreements with Phillips 66, including transportation services agreements, terminal services agreements, storage services agreements,
stevedoring services agreements, a fractionation services agreement, a tolling services agreement and rail terminal services agreements.
Under many of these agreements, Phillips 66 commits to provide us with minimum quarterly throughput volumes or minimum monthly
capacity or service fees. We believe these agreements promote stable and predictable cash flows and they are the source of a substantial
portion of our revenue.
Our general partner,
Phillips 66 Partners GP LLC, is a Delaware limited liability company. We are managed and controlled by our general partner.
RISK FACTORS
An investment in our
securities involves risks. Before you invest in our securities, you should carefully consider the risk factors included in our
most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and
those that may be included in or incorporated by reference in any applicable prospectus supplement, as well as risks described
in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and cautionary notes regarding
forward-looking statements included or incorporated by reference in this prospectus, together with all of the other information
included or incorporated by reference in this prospectus, any prospectus supplement and the documents we incorporate by reference.
If any of these risks
were to materialize, our business, results of operations, cash flows and financial condition could be materially adversely affected.
In that case, our ability to make distributions to our unitholders may be reduced, the trading price of our securities could decline
and you could lose all or part of your investment.
USE OF PROCEEDS
Unless otherwise indicated
to the contrary in an applicable prospectus supplement, we will use the net proceeds from the sale of the securities covered by
this prospectus for general partnership purposes, which may include debt repayment, future acquisitions, capital expenditures and
additions to working capital.
Any allocation of the
net proceeds of an offering of securities to a specific purpose will be determined at the time of the offering and will be described
in a prospectus supplement.
DESCRIPTION OF OUR
COMMON UNITS
The following description of our common units
is not complete and may not contain all of the information you should consider before investing in our common units. This description
is summarized from, and qualified in its entirety by reference to, our Second Amended and Restated Agreement of Limited Partnership,
dated as of October 6, 2017, which we refer to herein as the “Partnership Agreement.” We urge you to read the full
text of the Partnership Agreement, which has been publicly filed with the SEC, as the Partnership Agreement, and not this prospectus,
governs the Partnership, the common units and the Series A preferred units (as defined below).
The common units represent limited partner interests
in us. The holders of common units are entitled to participate in partnership distributions and are entitled to exercise the rights
and privileges available to limited partners under our Partnership Agreement.
On October 6, 2017, we issued 13,819,791 newly
created Series A Convertible Preferred Units representing limited partnership interests in us, which we refer to herein as the
“Series A preferred units.” For a description of the relative rights and preferences of holders of common units and
Series A preferred units in and to partnership distributions, please read this section and “Provisions Of Our Partnership
Agreement Relating To Cash Distributions.” For a description of the rights and privileges of holders of common units and
Series A preferred units under the Partnership Agreement, including voting rights, please read “Our Partnership Agreement.”
Units Outstanding
As of December 20,
2017, we had 121,571,959 common units outstanding, of which 68,760,137 were held by affiliates of our general partner (excluding
common units held by officers and directors of our general partner or Phillips 66). As of December 20, 2017, the common units represented
an aggregate 98% limited partner interest in us and the 2,480,051 general partner units held by our general partner represented
a 2.0% general partner interest in us. In addition, as of December 20, 2017 we had 13,819,791 Series A preferred units outstanding
that were held by private investors. The Series A preferred units are not deemed to represent any percentage interest in us unless
or until they are converted into common units under certain circumstances described below. As of December 20, 2017, on an as-converted
basis and assuming a one-to-one conversion ratio, the Series A preferred units constituted an approximate 10% limited partner interest
in us.
Exchange Listing
Our common units are
listed on the NYSE under the symbol “PSXP” and any additional common units we issue will also be listed on the NYSE
under such symbol.
Transfer
Agent and Registrar
American Stock Transfer &
Trust Company, LLC serves as registrar and transfer agent for our common units. We pay all fees charged by the transfer agent
for transfers of common units, except for the following, which must be paid by unitholders:
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surety bond premiums to replace lost or stolen certificates, or to
cover related taxes and other governmental charges;
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special charges for services requested by a holder of a common unit;
and
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other similar fees or charges.
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There is no charge
to unitholders for disbursements of our cash distributions. We will indemnify the transfer agent, its agents and each of their
stockholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted for
its activities in that capacity, except for any liability due to any gross negligence or intentional misconduct of the indemnified
person or entity.
The transfer agent
may resign, by notice to us, or be removed by us. The resignation or removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its acceptance of the appointment. If no successor has been appointed
and has accepted the appointment within 30 days after notice of the resignation or removal, our general partner may act as
the transfer agent and registrar until a successor is appointed.
Transfer
of Common Units
Upon the transfer of
a common unit 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 are reflected in our books and records. Each transferee:
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automatically agrees to be bound by the terms and conditions of, and
is deemed to have executed, our Partnership Agreement;
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represents and warrants that the transferee has the right, power,
authority, and capacity to enter into our Partnership Agreement; and
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gives the consents, waivers and approvals contained in our Partnership
Agreement.
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Our general partner
will cause any transfers to be recorded on our books and records no less frequently than quarterly.
We may, at our discretion,
treat the nominee holder of a common unit as the absolute owner. In that case, the beneficial holder's rights are limited solely
to those that it has against the nominee holder as a result of any agreement between the beneficial owner and the nominee holder.
Common units are securities
and any transfers are subject to the laws governing the transfer of securities. In addition to other rights acquired upon transfer,
the transferor gives the transferee the right to become a substituted limited partner in our partnership for the transferred common
units.
Until a common unit
has been transferred on our books, we and the transfer agent may treat the record holder of the common unit as the absolute owner
for all purposes, except as otherwise required by law or stock exchange regulations.
PROVISIONS
OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS
Set forth
below is a summary of the significant provisions of our Partnership Agreement that relate to cash distributions.
Distributions of Available
Cash
General
Our Partnership
Agreement requires that, within 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, future acquisitions, anticipated future debt service 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 distributing the minimum quarterly
distribution on all common units and any cumulative arrearages on such 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 12 months with funds
other than from additional working capital borrowings.
Intent to distribute
the minimum quarterly distribution
We intend
to make at least the minimum quarterly distribution to the holders of our common units of $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. Our most recent
quarterly distribution declared by the board of directors of our general partner, which was for the three months ended September
30, 2017, was $0.646 per unit, or $2.584 per unit on an annualized basis. However, there is no guarantee that we will pay the minimum
quarterly distribution on our units in any quarter. The amount of distributions paid under our cash distribution policy and the
decision to make any distribution will be determined by our general partner, in accordance with the terms of our Partnership Agreement.
General partner interest
and incentive distribution rights
As of
the date of this prospectus, our general partner is entitled to approximately 2% of all quarterly distributions that we make prior
to our liquidation, other than with respect to any distributions we make on our Series A preferred units. Our general partner has
the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner
interest. The general partner 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% general partner interest.
Our general
partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of
48%, of the available cash we distribute from operating surplus (as defined below) in excess of $0.244375 per unit per quarter.
The maximum distribution of 48% does not include any distributions that our general partner or its affiliates may receive on common
units or general partner units that they own. Please read “—General Partner Interest and Incentive Distribution Rights”
for additional information.
Series A preferred unit
distributions
The holders
of Series A preferred units are entitled to receive cumulative quarterly distributions equal to $0.678375 per unit for any quarter
ending on or before September 30, 2020, and thereafter the quarterly distributions on each Series A preferred unit will equal the
greater of $0.678375 per unit and the amount that would have been distributed with respect to such Series A preferred unit if it
had been converted into common units at the then applicable conversion rate (as defined below). We may not pay any distributions
for any quarter on any securities that rank junior to the Series A preferred units, including any common units and the incentive
distribution rights, unless the distribution payable to the Series A preferred units with respect to such quarter, together with
any previously accrued but unpaid distributions to the Series A preferred units, have been paid in full.
Operating Surplus and Capital
Surplus
General
All cash
distributed to unitholders will be 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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$60.0 million (as described below);
plus
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all of our cash receipts, excluding cash
from interim capital transactions (as defined below), and the termination of commodity hedge or interest rate hedge contracts,
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;
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 12-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 operations. For example, it includes a provision that will enable us, if we choose, to distribute
as operating surplus up to $60.0 million of cash we receive in the future from non-operating sources such as asset sales,
issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect
of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating
surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount
of any such cash that we receive from non-operating sources.
The proceeds
of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures
(as described below) and thus reduce operating surplus when 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 (1) 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,
(2) sales of equity securities, and (3) 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.
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, officer, director 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 an interest rate hedge contract or a commodity hedge contract will be amortized over the life of such interest 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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·
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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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·
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payments (including prepayments and prepayment
penalties) of principal of and premium on indebtedness other than working capital borrowings;
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·
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expansion capital expenditures;
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·
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payment of transaction expenses (including
taxes) relating to interim capital transactions;
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·
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distributions to our partners; or
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·
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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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·
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sales of our equity and debt securities;
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·
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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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·
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capital contributions received.
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Characterization of
cash distributions
All available
cash distributed by us on any date from any source will be treated as distributed from operating surplus until the sum of all available
cash distributed equals our cumulative operating surplus. We anticipate that distributions from operating surplus will generally
not represent a return of capital. However, operating surplus, as defined in our Partnership Agreement, includes certain components,
including a $60.0 million cash basket, that represent non-operating sources of cash. Consequently, it is possible that all
or a portion of specific distributions from operating surplus may represent a return of capital. Any available cash distributed
by us in excess of our cumulative operating surplus will be deemed to be capital surplus under our Partnership Agreement. 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
storage facilities, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.
Expansion
capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating
capacity or operating income over the long term. Examples of expansion capital expenditures include the acquisition of equipment,
or the construction, development or acquisition of additional pipeline or storage capacity, to the extent such capital expenditures
are expected to expand our long-term operating capacity or 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
on
Series A Preferred Units
Our
Series A preferred units have the right to receive cumulative distributions prior to any other distributions made in respect of
any other partnership interests in us in the amounts described herein. Commencing with the quarter ending on December 31, 2017
and continuing through the applicable Series A conversion date, the record holder of each
Series
A preferred unit
as of an applicable record date for each quarter will be entitled to receive cumulative
distributions in respect of such quarter equal to the sum of (1) the Series A Distribution Amount (as defined below) for such quarter
and (2) any previously accrued but unpaid distributions with respect to such Series A preferred unit. With respect to any quarter
ending prior to September 30, 2019 (the “Series A PIK Distribution Period”), our general partner has the option to
pay such distribution in cash, in-kind in the form of additional Series A preferred units (“Series A PIK Units”), or
in a combination thereof. Distributions made after the Series A PIK Distribution Period shall be paid in cash. If we fail to pay
in full the Series A Distribution Amount during the Series A PIK Distribution Period, the unitholders entitled to such unpaid portion
of the Series A Distribution Amount shall be deemed to have nonetheless received the amount of such unpaid portion in the form
of Series A PIK units. If we fail to pay in full the Series A Distribution Amount after the Series A PIK Distribution Period, the
amount of the unpaid portion of the Series A Distribution Amount will continue to accrue and accumulate until such amount is paid
in full, and shall be paid to the Series A preferred unitholders before any distribution can be made to holders of junior securities
or Series A Parity Securities (defined below), including our general partner (with respect to the incentive distribution rights)
or common unitholders (with respect to the common units).
As
used herein, “Series A Distribution Amount” means (1) with respect to any quarter ending on or before September 30,
2020, an amount per Series A preferred unit equal to $0.678375 for such quarter, and (2) with respect to any quarter ending after
September 30, 2020, an amount per quarter per Series A preferred unit equal to the greater of (a) $0.678375 and (b) an amount equal
to the distributions that would have been payable with respect to such Series A preferred unit if such Series A preferred unit
had converted immediately prior to the record date for such quarter in respect of which such distributions are being paid into
the number of common units into which such Series A preferred unit would be convertible at the then applicable conversion rate.
Distributions of Available
Cash from Operating Surplus
After
payment of the cumulative quarterly distributions on the Series A preferred units, assuming our general partner maintains its 2%
general partner interest and we do not issue additional classes of equity securities, we will make distributions of available cash
from operating surplus for any quarter in the following manner:
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first
, 98% to all unitholders, pro
rata, and 2% 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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·
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thereafter
, in the manner described
in “—General Partner Interest and Incentive Distribution Rights” below.
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General Partner Interest
and Incentive Distribution Rights
Our Partnership
Agreement provides that, after paying the full amount of the Series A Distribution Amount on all Series A preferred units (the
“Series A Quarterly Distribution”) and any previously accrued and unpaid distributions with respect to the Series A
preferred units, our general partner initially will be entitled to 2% of all distributions that we make prior to our liquidation.
Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us in order to maintain
its 2% general partner interest if we issue additional units. Our general partner’s 2% interest, and the percentage of our
cash distributions to which it is entitled from such 2% 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% general partner interest. Our Partnership
Agreement does not require that our general partner fund its capital contribution with cash. Our general partner 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%, 23% and 48%) of quarterly distributions of available
cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our
general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner
interest.
The following
discussion assumes that our general partner maintains its 2% general partner interest, and that our general partner continues to
own the incentive distribution rights.
If for
any quarter we have:
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paid the full Series A Distribution Amount
and any previously accrued and unpaid distributions with respect to the Series A preferred units;
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·
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distributed available cash from operating
surplus to the common unitholders in an amount equal to the minimum quarterly distribution; and
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·
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distributed available cash from operating
surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly
distribution;
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then, we will distribute any
additional available cash from operating surplus for that quarter among the common unitholders and our general partner in the following
manner:
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first
, 98% to all common unitholders,
pro rata, and 2% to our general partner, until each common unitholder receives a total of $0.244375 per common unit for that quarter
(the “first target distribution”);
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·
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second
, 85% to all common unitholders,
pro rata, and 15% to our general partner, until each common unitholder receives a total of $0.265625 per common unit for that quarter
(the “second target distribution”);
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·
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third
, 75% to all common unitholders,
pro rata, and 25% to our general partner, until each common unitholder receives a total of $0.318750 per common unit for that quarter
(the “third target distribution”); and
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·
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thereafter
, 50% to all common unitholders,
pro rata, and 50% 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 common unitholders and our general
partner based on the specified target distribution levels. The amounts set forth under “Marginal percentage interest in distributions”
are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute
up to and including the corresponding amount in the column “Total quarterly distribution per unit target amount.” The
percentage interests shown for our common 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% general partner interest and assume that our general partner has contributed any additional
capital necessary to maintain its 2% general partner interest, our general partner has not transferred its incentive distribution
rights and that there are no arrearages on common units.
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Marginal percentage
interest in
distributions
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Total quarterly distribution per unit
target amount
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Common
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
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%
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2
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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
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%
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2
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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
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%
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15
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%
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Third Target Distribution
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above $0.265625 up to $0.318750
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75
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%
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25
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%
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Thereafter
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above $0.318750
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50
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%
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50
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%
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General Partner's Right
to Reset Incentive Distribution Levels
Our general
partner, as the initial 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 partner's 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 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 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 our 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 the holder of the incentive distribution rights will not
receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this
event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate
acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit,
taking into account the existing levels of incentive distribution payments being made to our general partner.
In connection
with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment
by our general partner of incentive distribution payments based on 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 partner's 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,
following payment of the full Series A Distribution Amount and any previously accrued and unpaid distributions with respect to
the Series A preferred units, we would distribute all of our available cash from operating surplus for each quarter thereafter
as follows:
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first
, 98% to all common unitholders,
pro rata, and 2% to our general partner, until each common unitholder receives an amount equal to 115% of the reset minimum quarterly
distribution for that quarter;
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·
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second
, 85% to all common unitholders,
pro rata, and 15% to our general partner, until each common unitholder receives an amount per unit equal to 125% of the reset minimum
quarterly distribution for the quarter;
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·
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third
, 75% to all common unitholders,
pro rata, and 25% to our general partner, until each common unitholder receives an amount per unit equal to 150% of the reset minimum
quarterly distribution for the quarter; and
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·
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thereafter
, 50% to all common unitholders,
pro rata, and 50% to our general partner.
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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.
Distributions from Capital
Surplus
How distributions from
capital surplus will be made
Assuming
our general partner maintains its 2% general partner interest and we do not issue additional classes of equity securities, following
payment of the full Series A Distribution Amount and any previously accrued and unpaid distributions with respect to the Series
A preferred units, we will make distributions of available cash from capital surplus, if any, in the following manner:
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first,
98% to all common unitholders, pro rata, and 2% to our
general partner, until we distribute for each common unit that was issued in our initial public offering, an amount of available
cash from capital surplus equal to the initial public offering price;
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·
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second
, 98% to all common unitholders,
pro rata, and 2% to our general partner, until we distribute for each common unit, an amount of available cash from capital surplus
equal to any unpaid arrearages in payment of the minimum quarterly distribution on the outstanding common units; and
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|
·
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thereafter
, as if they were from operating surplus.
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Effect of a distribution
from capital surplus
Our Partnership
Agreement treats a distribution of capital surplus as the repayment of the initial unit price from 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, the effects of distributions of capital surplus may make it 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 or any arrearages.
Once we
distribute capital surplus on a unit issued in our initial public offering in an amount equal to the initial unit price, we will
reduce the minimum quarterly distribution and the target distribution levels to zero. Then, after distributing an amount of capital
surplus for each common unit equal to any unpaid arrearages of the minimum quarterly distributions on outstanding common units
and paying the full Series A Distribution Amount and any previously accrued and unpaid distributions with respect to the Series
A preferred units, we will make all future distributions from operating surplus, with 50% being paid to the common unitholders,
pro rata, and 2% to our general partner and 48% 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:
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·
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the minimum quarterly distribution;
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|
·
|
target distribution levels;
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·
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the unrecovered initial unit price;
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|
·
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the number of general partner units comprising
our general partner interest; and
|
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·
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the arrearages per common unit in payment
of the minimum quarterly distribution on the common units.
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For example,
if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and
the unrecovered initial unit price would each be reduced to 50% 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 additional
common units issued 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 partner's 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. Next, we will distribute proceeds to the holders
of the Series A preferred units, prior and in preference to any distribution of 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.
The allocations
of gain and loss upon liquidation are intended, to the extent possible, to cause the capital accounts of the holders to reflect
the different distributions intended for the difference classes of units, and, in particular, to implement any intended preference
in liquidation to the holders of Series A preferred units over the capital accounts of holders of common units. However, there
may not be sufficient gain upon our liquidation to enable the holders of common units or other partnership units to fully recover
these amounts, even though there may be cash available for distribution. Any further net gain recognized upon liquidation will
be allocated in a manner that takes into account the incentive distribution rights of our general partner.
Any cash
or cash equivalents available for distribution upon liquidation shall be distributed to the holders of the Series A preferred units
up to the positive balances of their capital accounts prior to any distribution of cash or cash equivalents to the holders of common
units.
Manner of adjustments
for gain
The manner
of the adjustment for gain is set forth in our Partnership Agreement. We will allocate any gain to our partners in the following
manner:
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first
, to our general partner to the
extent of any negative balance in its capital account;
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|
·
|
second,
to the Series A preferred
unitholders, pro rata, until the capital accounts for each Series A preferred unit is equal to the Series A Issue Price of $54.27,
plus any arrearages per Series A preferred unit in payment of the quarterly distributions on the Series A preferred unit or, if
greater, the product of (a) the per unit capital account with respect to an initial common unit then outstanding and (b) the then
applicable conversion rate;
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|
·
|
third
, 98% to the common unitholders,
pro rata, and 2% to our general partner, until the capital account for each common unit is equal to the sum of:
|
|
(1)
|
the unrecovered initial unit price; and
|
|
(2)
|
the amount of the minimum quarterly distribution for the quarter during which our liquidation
occurs;
|
|
·
|
fourth
, 98% to the common unitholders,
pro rata, and 2% to our general partner, until we allocate under this paragraph an amount per unit equal to:
|
|
(1)
|
the sum of the excess of the first target distribution per unit over the minimum quarterly
distribution per unit for each quarter of our existence;
less
|
|
(2)
|
the cumulative amount per unit of any distributions of available cash from operating
surplus in excess of the minimum quarterly distribution per unit that we distributed 98% to the unitholders, pro rata, and 2% to
our general partner, for each quarter of our existence;
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|
·
|
fifth
, 85% to the common unitholders,
pro rata, and 15% to our general partner, until we allocate under this paragraph an amount per unit equal to:
|
|
(1)
|
the sum of the excess of the second target distribution per unit over the first target
distribution per unit for each quarter of our existence;
less
|
|
(2)
|
the cumulative amount per unit of any distributions of available cash from operating
surplus in excess of the first target distribution per unit that we distributed 85% to the unitholders, pro rata, and 15% to our
general partner for each quarter of our existence;
|
|
·
|
sixth
, 75% to the common unitholders,
pro rata, and 25% to our general partner, until we allocate under this paragraph an amount per unit equal to:
|
|
(1)
|
the sum of the excess of the third target distribution per unit over the second target
distribution per unit for each quarter of our existence;
less
|
|
(2)
|
the cumulative amount per unit of any distributions of available cash from operating
surplus in excess of the second target distribution per unit that we distributed 75% to the unitholders, pro rata, and 25% to our
general partner for each quarter of our existence; and
|
|
·
|
thereafter
, 50% to the common unitholders,
pro rata, and 50% to our general partner.
|
The percentages
set forth above are based on the assumption that our general partner maintains its 2% general partner interest and has not transferred
its incentive distribution rights and that we do not issue additional classes of equity securities.
Manner of adjustments
for losses
After
making allocations of loss to our general partner and the unitholders (other than Series A preferred unitholders) in a manner intended
to offset the reverse order of allocations of gains that have previously been allocated, we will generally allocate any loss to
our general partner and unitholders in the following manner:
|
·
|
first
, 98% to the holders of common
units in proportion to the positive balances in their capital accounts and 2% to our general partner, until the capital accounts
of the common unitholders have been reduced to zero;
|
|
·
|
second,
to the Series A preferred
unitholders, to the extent of and in proportion to the positive balances in their capital accounts; and
|
|
·
|
thereafter
, 100% to our general partner.
|
The percentages
set forth above are based on the assumption that our general partner maintains its 2% 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 our 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 that results, to the extent possible, in the partners' capital account balances equaling the amount that they would
have been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and
except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital
accounts upon the issuance of additional units to the unitholders and 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.
OUR
PARTNERSHIP AGREEMENT
The following
is a summary of the material provisions of our Partnership Agreement. We will provide prospective investors with a copy of our
Partnership Agreement upon request at no charge. Capitalized terms used but not defined herein shall have the meanings ascribed
to them in our Partnership Agreement.
We summarize
the following provisions of our Partnership Agreement elsewhere in this prospectus:
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·
|
with regard to distributions of available
cash, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions;”
|
|
·
|
with regard to the transfer of common units,
please read “Description of Common Units—Transfer of Common Units;” and
|
|
·
|
with regard to allocations of taxable income
and taxable loss, please read “Material U.S. Federal Income Tax Consequences.”
|
Organization and Duration
We were
organized on February 20, 2013, and will have a perpetual existence unless terminated pursuant to the terms of our Partnership
Agreement.
Purpose
Our purpose
under the Partnership Agreement is limited to any business activity that is approved by our general partner and that lawfully may
be conducted by a limited partnership organized under Delaware law; provided that our general partner shall not cause us to engage,
directly or indirectly, in any business activity that our general partner determines would be reasonably likely to cause us to
be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes.
Although
our general partner has the ability to cause us and our subsidiaries to engage in activities other than the business of owning,
operating, developing and acquiring crude oil, refined petroleum product and NGL pipelines and other midstream assets, our general
partner has no current plans to do so and may decline to do so free of any duty or obligation whatsoever to us or the limited partners,
including any duty to act in the best interests of our partnership or our limited partners, other than the implied contractual
covenant of good faith and fair dealing. Our general partner is authorized in general to perform all acts it determines to be necessary
or appropriate to carry out our purposes and to conduct our business.
Capital Contributions
Unitholders
are not obligated to make additional capital contributions, except as described below under “—Limited Liability.”
For a discussion of our general partner's right to contribute capital to maintain its 2% general partner interest if we issue additional
units, please read “—Issuance of Additional Securities.”
Voting Rights
The following
is a summary of the unitholder vote required for the matters specified below. Matters that require the approval of a “unit
majority” require the approval of a majority of the outstanding common units, and, to the extent outstanding, the Series
A preferred units, voting together with the common units as a single class on an as-converted basis (whether or not the Series
A preferred units are convertible as of such time). Except as provided in our Partnership Agreement, the outstanding Series A preferred
units will have voting rights identical to the voting rights of the common units and will vote with the common units as a single
class, so that each outstanding Series A preferred unit will be entitled to one vote for each common unit into which such Series
A preferred unit would be converted at the then applicable conversion rate (regardless of whether the Series A preferred units
are then convertible) on each matter with respect to which each common unit is entitled to vote. In addition, the affirmative vote
of the Series A Required Voting Percentage will be necessary to amend our Partnership Agreement or our certificate of limited partnership
(including by merger or otherwise) in a manner that is adverse (other than in a
de minimis
manner) to any of the rights,
preferences and privileges of the Series A preferred units. In addition, the partnership shall not declare or pay any distribution
from capital surplus without the affirmative vote of 66 2/3% of the outstanding Series A preferred units (the “Series A Required
Voting Percentage”).
In voting
their common units, our general partner and its affiliates will have no duty or obligation whatsoever to us or the limited partners,
including any duty to act in the best interests of us or the limited partners, other than the implied contractual covenant of good
faith and fair dealing.
Issuance of additional units
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No common unitholder approval rights. The Series A Required Voting Percentage is required for issuances of any class or series of partnership interests in us that, with respect to the payment of distributions and distribution of assets upon liquidation, dissolution and winding up, ranks senior to the Series A preferred units (“Series A Senior Securities”) or, subject to certain limitations, any class or series of partnership interests in us that, with respect to the payment of distributions and distribution of assets upon liquidation, dissolution and winding up, ranks
pari passu
with the Series A preferred units (“Series A Parity Securities”) (with certain limited exceptions) or additional Series A preferred units (other than Series A PIK Units).
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Amendment of our Partnership Agreement
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Certain amendments may be made by our general partner without the approval of the unitholders. Other amendments generally require the approval of a unit majority. Amendments that would be adverse (other than in a
de minimis
manner) to any of the rights, preferences and privileges of the Series A preferred units require the approval of the Series A Required Voting Percentage. Please read “—Amendment of Our Partnership Agreement.”
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Merger of our partnership or the sale of all or substantially all of our assets
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Unit majority. Please read “—Merger, Consolidation, Conversion, Sale or Other Disposition of Assets.”
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Dissolution of our partnership
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Unit majority. Please read “—Termination and Dissolution.”
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Continuation of our business upon dissolution
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Unit majority. Please read “—Termination and Dissolution.”
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Withdrawal of our general partner
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Under most circumstances, the approval of unitholders holding at least a majority of the outstanding common units and Series A preferred units (on an as-converted basis at the then applicable conversion rate), voting as a single class, excluding units held by our general partner and its affiliates, is required for the withdrawal of our general partner prior to September 30, 2023, in a manner that would cause a dissolution of our partnership. Please read “—Withdrawal or Removal of Our General Partner.”
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Removal of our general partner
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Not less than 66-2/3% of the outstanding common and Series A preferred units (on an as-converted basis at the then applicable conversion rate), voting as a single class, including units held by our general partner and its affiliates. Please read “—Withdrawal or Removal of Our General Partner.”
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Transfer of our general partner interest
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Our general partner may transfer all, but not less than all, of its general partner interest in us without a vote of our unitholders to an affiliate or another person in connection with its merger or consolidation with or into, or sale of all or substantially all of its assets to, such person. The approval of a majority of the outstanding common units and Series A preferred units (on an as-converted basis at the then applicable conversion rate), voting as a single class, excluding units held by our general partner and its affiliates, is required in other circumstances for a transfer of our general partner interest to a third party prior to September 30, 2023. Please read “—Transfer of General Partner Interest.”
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Transfer of incentive distribution rights
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Our general partner may transfer any or all of its incentive distribution rights to an affiliate or another person without a vote of our unitholders. Please read “—Transfer of Incentive Distribution Rights.”
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Reset of incentive distribution levels
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No approval right.
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Transfer of ownership interests in our general partner
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No approval right. Please read “—Transfer of Ownership Interests in Our General Partner.”
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Limited Liability
Assuming
that a limited partner does not participate in the control of our business within the meaning of the Delaware Revised Uniform Limited
Partnership Act, or the Delaware Act, and that it otherwise acts in conformity with the provisions of our Partnership Agreement,
its liability under the Delaware Act will be limited, subject to possible exceptions, to the amount of capital it is obligated
to contribute to us for its common units plus its share of any undistributed profits and assets. If it were determined, however,
that the right, or exercise of the right of, by the limited partners as a group:
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to remove or replace our general partner;
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to approve some amendments to our Partnership
Agreement; or
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to take other action under our Partnership
Agreement;
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constituted “participation
in the control” of our business for the purposes of the Delaware Act, then the limited partners could be held personally
liable for our obligations under the laws of Delaware, to the same extent as our general partner. This liability would extend to
persons who transact business with us who reasonably believe that a limited partner is a general partner. Neither our Partnership
Agreement nor the Delaware Act specifically provides for legal recourse against our general partner if a limited partner were to
lose limited liability through any fault of our general partner. While this does not mean that a limited partner could not seek
legal recourse, we know of no precedent for this type of a claim in Delaware case law.
Under
the Delaware Act, a limited partnership may not make a distribution to a partner if, after the distribution, all liabilities of
the limited partnership, other than liabilities to partners on account of their limited partner interests and liabilities for which
the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of the assets of the
limited partnership, except that the fair value of property that is subject to a liability for which the recourse of creditors
is limited is included in the assets of the limited partnership only to the extent that the fair value of that property exceeds
that liability. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware Act provides
that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets
of the limited partnership only to the extent that the fair value of that property exceeds the nonrecourse liability. The Delaware
Act provides that a limited partner who receives a distribution and knew at the time of the distribution that the distribution
was in violation of the Delaware Act shall be liable to the limited partnership for the amount of the distribution for three years.
Under the Delaware Act, a substituted limited partner of a limited partnership is liable for the obligations of its assignor to
make contributions to the partnership, except that such person is not obligated for liabilities unknown to it at the time it became
a limited partner and that could not be ascertained from the Partnership Agreement.
Our subsidiaries
conduct business in several states and we may have subsidiaries that conduct business in other states in the future. Maintenance
of our limited liability as a member of our operating company may require compliance with legal requirements in the jurisdictions
in which our operating company conducts business, including qualifying our subsidiaries to do business there.
Limitations
on the liability of members or limited partners for the obligations of a limited liability company or limited partnership have
not been clearly established in many jurisdictions. If, by virtue of our ownership interests in our operating subsidiaries or otherwise,
it were determined that we were conducting business in any state without compliance with the applicable limited partnership or
limited liability company statute, or that the right or exercise of the right by the limited partners as a group to remove or replace
our general partner, to approve some amendments to our Partnership Agreement, or to take other action under our Partnership Agreement
constituted “participation in the control” of our business for purposes of the statutes of any relevant jurisdiction,
then the limited partners could be held personally liable for our obligations under the law of that jurisdiction to the same extent
as our general partner under the circumstances. We will operate in a manner that our general partner considers reasonable and necessary
or appropriate to preserve the limited liability of the limited partners.
Issuance of Additional
Securities
Our Partnership
Agreement authorizes us to issue an unlimited number of additional partnership interests for the consideration and on the terms
and conditions determined by our general partner without the approval of the unitholders, provided that the approval of the Series
A Required Voting Percentage is required prior to the issuance of any Series A Senior Securities, Series A Parity Securities (subject
to certain exceptions) or Series A preferred units (other than Series A PIK Units).
It is
possible that we will fund acquisitions through the issuance of additional common units or other partnership interests. Holders
of any additional common units we issue will be entitled to share equally with the then-existing holders of common units in our
distributions of available cash. In addition, the issuance of additional common units or other partnership interests may dilute
the value of the interests of the then-existing holders of common units in our net assets.
In accordance
with Delaware law and the provisions of our Partnership Agreement, we may also issue additional partnership interests that, as
determined by our general partner, may have special voting rights to which the common units are not entitled. In addition, our
Partnership Agreement does not prohibit the issuance by our subsidiaries of equity interests, which may effectively rank senior
to the common units.
Upon issuance
of additional limited partner interests (other than the issuance of common units in connection with a reset of the incentive distribution
target levels or the issuance of common units upon conversion of outstanding partnership interests), our general partner will be
entitled, but not required, to make additional capital contributions to the extent necessary to maintain its 2% general partner
interest in us. Our general partner's 2% interest in us 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% general partner interest. Moreover, our
general partner will have the right, which it may from time to time assign in whole or in part to any of its affiliates, to purchase
common units or other partnership interests whenever, and on the same terms that, we issue those interests to persons other than
our general partner and its affiliates, to the extent necessary to maintain the percentage interest of our general partner and
its affiliates, including such interest represented by common units, that existed immediately prior to each issuance. The other
holders of common units will not have preemptive rights to acquire additional common units or other partnership interests.
Amendment of Our Partnership
Agreement
General
Amendments
to our Partnership Agreement may be proposed only by our general partner. However, our general partner will have no duty or obligation
to propose any amendment and may decline to do so free of any duty or obligation whatsoever to us or our limited partners, including
any duty to act in the best interests of us or the limited partners, other than the implied contractual covenant of good faith
and fair dealing. In order to adopt a proposed amendment, other than the amendments discussed below, our general partner is required
to seek written approval of the holders of the number of units required to approve the amendment or call a meeting of the limited
partners to consider and vote upon the proposed amendment. Except as described below, an amendment must be approved by the holders
of at least a unit majority. In addition, any amendment that is adverse (other than in a
de minimis
manner) to any of the
rights, preferences and privileges of the Series A preferred units must be approved by the affirmative vote of the Series A Required
Voting Percentage.
Prohibited amendments
No amendment
may be made that would, among other actions:
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enlarge the obligations of any limited partner
without its consent, unless such is deemed to have occurred as a result of an amendment approved by at least a majority of the
type or class of limited partner interests so affected; or
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enlarge the obligations of, restrict in any
way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by us to our
general partner or any of its affiliates without its consent, which consent may be given or withheld at its option.
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The provisions
of our Partnership Agreement preventing the amendments having the effects described in any of the clauses above can be amended
upon the approval of the holders of at least 90% of the outstanding common units and Series A preferred units (on an as-converted
basis at the then applicable conversion rate), voting together as a single class (including units owned by our general partner
and its affiliates). As of the date of this prospectus, our general partner and its affiliates own approximately 56.6% of our total
outstanding common units and approximately 50.8% of the combined number of outstanding common units and Series A preferred units
(on an as-converted basis at the then applicable conversion rate).
No unitholder approval
Subject
to the right of the holders of Series A preferred units to approve by the consent of the Series A Required Voting Percentage any
amendment that is adverse (other than in a
de minimis
manner) to any of the rights, preferences and privileges of the Series
A preferred units, our general partner may generally make amendments to our Partnership Agreement without the approval of any limited
partner to reflect:
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a change in our name, the location of our
principal office, our registered agent or our registered office;
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the admission, substitution, withdrawal or
removal of partners in accordance with our Partnership Agreement;
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a change that our general partner determines
to be necessary or appropriate to qualify or continue our qualification as a limited partnership or a partnership in which the
limited partners have limited liability under the laws of any state or to ensure that neither we nor any of our subsidiaries will
be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes;
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an amendment that is necessary, in the opinion
of our counsel, to prevent us or our general partner or its directors, officers, agents or trustees from, in any manner, being
subjected to the provisions of the Investment Company Act of 1940, the Investment Advisors Act of 1940, or “plan asset”
regulations adopted under the Employee Retirement Income Security Act of 1974 (“ERISA”), each as amended, whether or
not substantially similar to plan asset regulations currently applied or proposed by the U.S. Department of Labor;
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an amendment that our general partner determines
to be necessary or appropriate in connection with the authorization or issuance of additional partnership interests;
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any amendment expressly permitted in our
Partnership Agreement to be made by our general partner acting alone;
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an amendment effected, necessitated or contemplated
by a merger agreement or plan of conversion that has been approved under the terms of our Partnership Agreement;
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any amendment that our general partner determines
to be necessary or appropriate to reflect and account for the formation by us of, or our investment in, any corporation, partnership
or other entity, in connection with our conduct of activities permitted by our Partnership Agreement;
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a change in our fiscal year or taxable year
and any other changes that our general partner determines to be necessary or appropriate as a result of such change;
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mergers with, conveyances to or conversions
into another limited liability entity that is newly formed and has no assets, liabilities or operations at the time of the merger,
conveyance or conversion other than those it receives by way of the merger, conveyance or conversion; or
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any other amendments substantially similar
to any of the matters described in the clauses above.
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In addition,
subject to the right of the holders of Series A preferred units to approve by the consent of the Series A Required Voting Percentage
any amendment that is adverse (other than in a de minimis manner) to any of the rights, preferences and privileges of the Series
A preferred units, our general partner may make amendments to our Partnership Agreement without the approval of any limited partner
if our general partner determines that those amendments:
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do not adversely affect in any material respect
the limited partners considered as a whole or any particular class of partnership interests as compared to other classes of partnership
interests;
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are necessary or appropriate to satisfy any
requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state
agency or judicial authority or contained in any federal or state statute;
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are necessary or appropriate to facilitate
the trading of limited partner interests or to comply with any rule, regulation, guideline or requirement of any securities exchange
on which the limited partner interests are or will be listed or admitted to trading;
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are necessary or appropriate for any action
taken by our general partner relating to splits or combinations of units under the provisions of our Partnership Agreement; or
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are required to effect the intent expressed
in this prospectus or the intent of the provisions of our Partnership Agreement or are otherwise contemplated by our Partnership
Agreement.
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Opinion of counsel and
unitholder approval
For amendments
of the type not requiring unitholder approval, our general partner will not be required to obtain an opinion of counsel to the
effect that an amendment will not affect the limited liability of any limited partner under Delaware law. No other amendments to
our Partnership Agreement will become effective without the approval of holders of at least 90% of the outstanding common units
and Series A preferred units (on an as-converted basis at the then applicable conversion rate), voting as a single class, unless
we first obtain such an opinion of counsel.
In addition
to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or
class of partnership interests in relation to other classes of partnership interests will require the approval of at least a majority
of the type or class of partnership interests so affected. Any amendment that would reduce the percentage of units required to
take any action, other than to remove our general partner or call a meeting of unitholders, must be approved by the affirmative
vote of limited partners whose aggregate outstanding units constitute not less than the percentage sought to be reduced. Any amendment
that would increase the percentage of units required to remove our general partner must be approved by the affirmative vote of
limited partners whose aggregate outstanding units constitute not less than 90% of outstanding common units and Series A preferred
units (on an as-converted basis at the then applicable conversion rate), voting as a single class. Any amendment that would increase
the percentage of units required to call a meeting of unitholders must be approved by the affirmative vote of limited partners
whose aggregate outstanding units constitute at least a majority of the outstanding common units and Series A preferred units (on
an as-converted basis at the then applicable conversion rate).
Merger, Consolidation,
Conversion, Sale or Other Disposition of Assets
A merger,
consolidation or conversion of our partnership requires the prior consent of our general partner. However, our general partner
will have no duty or obligation to consent to any merger, consolidation or conversion and may decline to do so free of any duty
or obligation whatsoever to us or the limited partners, including any duty to act in the best interest of us or the limited partners,
other than the implied contractual covenant of good faith and fair dealing.
In addition,
our Partnership Agreement generally prohibits our general partner, without the prior approval of the holders of at least a unit
majority, from causing us to, among other things, sell, exchange or otherwise dispose of all or substantially all of our assets
in a single transaction or a series of related transactions. Our general partner may, however, mortgage, pledge, hypothecate, or
grant a security interest in all or substantially all of our assets without that approval. Our general partner may also sell any
or all of our assets under a foreclosure or other realization upon those encumbrances without that approval. Finally, our general
partner may consummate any merger with another limited liability entity without the prior approval of our unitholders if we are
the surviving entity in the transaction, our general partner has received an opinion of counsel regarding limited liability and
tax matters, the transaction would not result in an amendment to our Partnership Agreement requiring unitholder approval, each
of our units will be an identical unit of our partnership following the transaction and the partnership interests to be issued
by us in such merger do not exceed 20% of our outstanding partnership interests immediately prior to the transaction.
If the
conditions specified in our Partnership Agreement are satisfied, our general partner may convert us or any of our subsidiaries
into a new limited liability entity or merge us or any of our subsidiaries into, or convey all of our assets to, a newly formed
entity if the sole purpose of that conversion, merger or conveyance is to effect a mere change in our legal form into another limited
liability entity, our general partner has received an opinion of counsel regarding limited liability and tax matters, and our general
partner determines that the governing instruments of the new entity provide the limited partners and our general partner with the
same rights and obligations as contained in our Partnership Agreement. The unitholders are not entitled to dissenters’ rights
of appraisal under our Partnership Agreement or applicable Delaware law in the event of a conversion, merger or consolidation,
a sale of substantially all of our assets or any other similar transaction or event.
Termination and Dissolution
We will
continue as a limited partnership until dissolved and terminated under our Partnership Agreement.
We will
dissolve upon:
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the withdrawal or removal of our general
partner or any other event that results in its ceasing to be our general partner other than by reason of a transfer of its general
partner interest in accordance with our Partnership Agreement or withdrawal or removal followed by approval and admission of a
successor;
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the election of our general partner to dissolve
us, if approved by the holders of units representing a unit majority;
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the entry of a decree of judicial dissolution
of our partnership; or
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there being no limited partners, unless we
are continued without dissolution in accordance with the Delaware Act.
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Upon a
dissolution under the first clause above, the holders of a unit majority may also elect, within specific time limitations, to continue
our business on the same terms and conditions described in our Partnership Agreement by appointing as a successor general partner
an entity approved by the holders of units representing a unit majority, subject to our receipt of an opinion of counsel to the
effect that:
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the action would not result in the loss of
limited liability of any limited partner; and
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neither our partnership nor any of our subsidiaries
would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes
upon the exercise of that right to continue.
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Liquidation and Distribution
of Proceeds
Upon our
dissolution, unless we are continued as a new limited partnership, the liquidator authorized to wind up our affairs will, acting
with all of the powers of our general partner that are necessary or appropriate to, liquidate our assets and apply the proceeds
of the liquidation as described in “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions
of Cash Upon Liquidation.” The liquidator may defer liquidation or distribution of our assets for a reasonable period of
time or distribute assets to partners in kind if it determines that a sale would be impractical or would cause undue loss to our
partners.
Withdrawal or Removal of
Our General Partner
Except
as described below, our general partner has agreed not to withdraw voluntarily as our general partner prior to September 30,
2023, without obtaining the approval of the holders of at least a unit majority, excluding units held by our general partner and
its affiliates, and furnishing an opinion of counsel regarding limited liability and tax matters. On or after September 30,
2023, our general partner may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days'
written notice, and that withdrawal will not constitute a violation of our Partnership Agreement. Notwithstanding the information
above, our general partner may withdraw without unitholder approval upon 90 days' written notice to the limited partners if
at least 50% of the outstanding units are held or controlled by one person and its affiliates other than our general partner and
its affiliates. In addition, our Partnership Agreement permits our general partner in some instances to sell or otherwise transfer
all of its general partner interest in us without the approval of the unitholders. Please read “—Transfer of General
Partner Interest” and “—Transfer of Incentive Distribution Rights.”
Upon voluntary
withdrawal of our general partner by giving notice to the other partners, the holders of a unit majority may select a successor
to that withdrawing general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability
and tax matters cannot be obtained, we will be dissolved, wound up and liquidated, unless within a specified period after that
withdrawal, the holders of a unit majority agree to continue our business by appointing a successor general partner. Please read
“—Termination and Dissolution.”
Our general
partner may not be removed unless that removal is approved by the vote of the holders of at least 66 2/3% of our outstanding common
and Series A preferred units (on an as-converted basis at the then applicable conversion rate), voting together as a single class,
including units held by our general partner and its affiliates, and we receive an opinion of counsel regarding limited liability
and tax matters. Any removal of our general partner is also subject to the approval of a successor general partner by the vote
of the holders of a majority of the outstanding common units and Series A preferred units (on an as-converted basis at the then
applicable conversion rate). The ownership of more than 33
1
/3% of the outstanding common units and Series A preferred
units (on an as-converted basis at the then applicable conversion rate) by our general partner and its affiliates would give them
the practical ability to prevent our general partner’s removal. As of the date of this prospectus, our general partner and
its affiliates own approximately 50.8% of our total outstanding common units and Series A preferred units (on an as-converted basis
at the then applicable conversion rate).
Our Partnership
Agreement also provides that if our general partner is removed as our general partner under circumstances where cause does not
exist and units held by our general partner and its affiliates are not voted in favor of that removal:
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any existing arrearages in payment of the
minimum quarterly distribution on the common units will be extinguished; and
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our general partner will have the right to
convert its general partner interest and its incentive distribution rights into common units or to receive cash in exchange for
those interests based on the fair market value of those interests as of the effective date of its removal.
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In the
event of removal of our general partner under circumstances where cause exists or withdrawal of our general partner where that
withdrawal violates our Partnership Agreement, a successor general partner will have the option to purchase our general partner
interest and incentive distribution rights of the departing general partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where our general partner withdraws or is removed by the limited partners, the departing
general partner will have the option to require the successor general partner to purchase our general partner interest of the departing
general partner and its incentive distribution rights for fair market value. In each case, this fair market value will be determined
by agreement between the departing general partner and the successor general partner. If no agreement is reached, an independent
investment banking firm or other independent expert selected by the departing general partner and the successor general partner
will determine the fair market value. Or, if the departing general partner and the successor general partner cannot agree upon
an expert, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value.
If the
option described above is not exercised by either the departing general partner or the successor general partner, the departing
general partner will become a limited partner and its general partner interest and its incentive distribution rights will automatically
convert into common units pursuant to a valuation of those interests as determined by an investment banking firm or other independent
expert selected in the manner described in the preceding paragraph.
In addition,
we will be required to reimburse the departing general partner for all amounts due the departing general partner, including, without
limitation, all employee-related liabilities, including severance liabilities, incurred for the termination of any employees employed
by the departing general partner or its affiliates for our benefit.
Transfer of General Partner
Interest
Except
for transfer by our general partner of all, but not less than all, of its general partner interest to (1) an affiliate of
our general partner (other than an individual), or (2) another entity as part of the merger or consolidation of our general
partner with or into such entity or the transfer by our general partner of all or substantially all of its assets to such entity,
our general partner may not transfer all or any part of its general partner interest to another person prior to September 30,
2023, without the approval of the holders of at least a unit majority, excluding units held by our general partner and its affiliates.
As a condition of this transfer, the transferee must assume, among other things, the rights and duties of our general partner,
agree to be bound by the provisions of our Partnership Agreement, and furnish an opinion of counsel regarding limited liability
and tax matters.
Our general
partner and its affiliates may at any time transfer units to one or more persons, without unitholder approval.
Transfer of Ownership Interests
in Our General Partner
At any
time, Phillips 66 and its affiliates may sell or transfer all or part of their membership interest in our general partner, to an
affiliate or third party without the approval of our unitholders.
Transfer of Incentive Distribution
Rights
At any
time, our general partner may sell or transfer its incentive distribution rights to an affiliate or third party without the approval
of the unitholders.
Change of Management Provisions
Our Partnership
Agreement contains specific provisions that are intended to discourage a person or group from attempting to remove Phillips 66
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% 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. Please read “—Withdrawal or Removal of Our General Partner.”
Limited Call Right
If at
any time our general partner and its affiliates own more than 80% of the then-issued and outstanding limited partner interests
of any class, our general partner will have the right, which it may assign in whole or in part to any of its affiliates or to us,
to acquire all, but not less than all, of the limited partner interests (but excluding the Series A preferred units) 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'
written notice.
The purchase
price in the event of this purchase is the greater of:
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the highest cash price paid by either our
general partner or any of its affiliates for any limited partner interests of the class purchased within the 90 days preceding
the date on which our general partner first mails notice of its election to purchase those limited partner interests; and
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the current market price calculated in accordance
with our Partnership Agreement as of the date three business days before the date the notice is mailed.
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As a result
of our general partner's right to purchase outstanding limited partner interests, a holder of limited partner interests may have
his limited partner interests purchased at a price that may be lower than market prices at various times prior to such purchase
or lower than a unitholder may anticipate the market price to be in the future. The tax consequences to a unitholder of the exercise
of this call right are the same as a sale by that unitholder of his common units in the market. Please read “Material U.S.
Federal Income Tax Consequences—Disposition of Common Units.”
Conversion and Redemption
of Series A Preferred Units
Each holder of Series A preferred units may
elect to convert all or any portion of the Series A preferred units owned by such holder into common units initially on a one-for-one
basis, subject to customary anti-dilution adjustments and an adjustment for any distributions that have accrued on such Series
A preferred units but not been paid when due (which we refer to as the “conversion rate”), at any time (but not more
often than once per quarter) after October 6, 2019 (or earlier upon our liquidation), provided that any conversion involves an
aggregate number of Series A preferred units with an underlying value of common units equal to or greater than $50 million (calculated
based on a per unit price of $54.27 (the “Series A Issue Price”)) or such lesser amount if such conversion relates
to all of a holder’s remaining Series A preferred units.
We may elect to convert all or any portion of
the Series A preferred units into common units at any time (but not more often than once per quarter) after October 6, 2020 if
(i) the common units are listed or admitted for trading on a national securities exchange, (ii) the average volume weighted average
price (“VWAP”) of the common units is greater than $73.2345 for the preceding 20 trading days, (iii) the average daily
trading volume of the common units exceeds 100,000 (as adjusted to reflect splits, combinations or similar events) for the preceding
20 trading days and (iv) we have an effective registration statement on file covering resales of the underlying common units to
be received by the holders upon conversion of the Series A preferred units, however, we will not be able to make any such election
unless the conversion involves an aggregate number of Series A preferred units with an underlying value of common units equal to
or greater than $50 million (calculated based on the Series A Issue Price) or such lesser amount if such conversion relates to
all of the then outstanding Series A preferred units. The Series A preferred units will be converted at the conversion rate if
the VWAP of the common units for the 20 trading days preceding the notice of conversion (the “Conversion VWAP”) is
equal or greater to $74.62125, and at a ratio of one common unit for each 0.975 Series A preferred unit if the Conversion VWAP
is less than $74.62125. We also may elect, rather than converting the Series A preferred units, to redeem the Series A preferred
units at a redemption price equal to the Conversion VWAP if the conditions described in clauses (i) through (iv) above have been
met.
Redemption of Ineligible
Holders
In order
to avoid any material adverse effect on the maximum applicable rates that can be charged to customers by our subsidiaries on assets
that are subject to rate regulation by FERC or analogous regulatory body, our general partner at any time can request a transferee
or a unitholder to certify or recertify:
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that the transferee or unitholder is an individual
or an entity subject to United States federal income taxation on the income generated by us; or
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that, if the transferee unitholder is an
entity not subject to United States federal income taxation on the income generated by us, as in the case, for example, of a mutual
fund taxed as a regulated investment company or a partnership, all the entity's owners are subject to United States federal income
taxation on the income generated by us.
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Furthermore,
in order to avoid a substantial risk of cancellation or forfeiture of any property, including any governmental permit, endorsement
or other authorization, in which we have an interest as the result of any federal, state or local law or regulation concerning
the nationality, citizenship or other related status of any unitholder, our general partner may at any time request unitholders
to certify as to, or provide other information with respect to, their nationality, citizenship or other related status.
The certifications
as to taxpayer status and nationality, citizenship or other related status can be changed in any manner our general partner determines
is necessary or appropriate to implement its original purpose.
If a unitholder
fails to furnish the certification or other requested information within 30 days or if our general partner determines, with
the advice of counsel, upon review of such certification or other information that a unitholder does not meet the status set forth
in the certification, we will have the right to redeem all of the units held by such unitholder at the market price as of the date
three days before the date the notice of redemption is mailed.
The purchase
price will be paid in cash or by delivery of a promissory note, as determined by our general partner. Any such promissory note
will bear interest at the rate of 5% annually and be payable in three equal annual installments of principal and accrued interest,
commencing one year after the redemption date. Further, the units will not be entitled to any allocations of income or loss, distributions
or voting rights while held by such unitholder.
Meetings; Voting
Except
as described below regarding a person or group owning 20% or more of any class of units then outstanding, record holders of units
on the record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for
which approvals may be solicited.
Our general
partner does not anticipate that any meeting of unitholders will be called in the foreseeable future. Any action that is required
or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or, 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% 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 our 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.
Subject
to the special voting rights of the holders of Series A preferred units described in this prospectus, 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 Securities.” However, if at any time any person or group,
other than (a) our general partner and its affiliates, (b) a direct transferee of our general partner and its affiliates, (c) a
transferee of such direct transferee who is notified by our general partner that it will not lose its voting rights, (d) any person
or group that acquired such beneficial ownership with the prior approval of the board of directors of our general partner, (e)
the purchasers of the Series A preferred units with respect to their ownership (beneficial or of record) of the Series A preferred
units or the common units into which the Series A preferred units are convertible or (f) any holder of Series A preferred units
in connection with any vote, consent or approval of the Series A preferred units as a separate class, acquires, in the aggregate,
beneficial ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all
of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of
a meeting of unitholders, calculating required votes, determining the presence of a quorum, or for other similar purposes. Common
units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of
the beneficial owner unless the arrangement between the beneficial owner and 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.
Status as Limited Partner
By transfer
of units in accordance with our Partnership Agreement, each transferee of units shall be admitted as a limited partner with respect
to the units transferred when such transfer and admission is reflected in our register.
Except as described under
“—Limited Liability,” the units will be fully paid, and unitholders will not be required to make additional contributions.
Indemnification
Under
our Partnership Agreement, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law,
from and against all losses, claims, damages or similar 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 director, officer,
managing member, manager, general partner, fiduciary or trustee of us or our subsidiaries, an affiliate of us or 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 director,
officer, managing member, manager, general partner, 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, excluding
any such person providing, on a fee-for-service basis, trustee, fiduciary or custodial services; and
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any person designated by our general partner
because such person's status, service or relationship expose such person to potential claims or suits relating to our or our subsidiaries'
business and affairs.
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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 fiscal and tax reporting purposes, our fiscal year is the calendar year.
We will
mail or make available to record holders of 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 registered public accounting firm. 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 information. Every unitholder will receive information to assist 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.
General Partner 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, other than
individuals, or their assignees if an exemption from the registration requirements is not otherwise available. We are obligated
to pay all expenses incidental to the registration, excluding underwriting discounts and commissions.
Exclusive Forum
Our Partnership Agreement provides that the
Court of Chancery of the State of Delaware shall be the exclusive forum for any claims, suits, actions or proceedings (1) arising
out of or relating in any way to our Partnership Agreement (including any claims, suits or actions to interpret, apply or enforce
the provisions of our Partnership Agreement or the duties, obligations or liabilities among our partners, or obligations or liabilities
of our partners to us, or the rights or powers of, or restrictions on, our partners or us), (2) brought in a derivative manner
on our behalf, (3) asserting a claim of breach of a duty owed by any of our, or our general partner's, directors, officers,
or other employees, or owed by our general partner, to us or our partners, (4) asserting a claim against us arising pursuant
to any provision of the Delaware Act or (5) asserting a claim against us governed by the internal affairs doctrine. Although
we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits
to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability
of similar choice of forum provisions in other companies' certificates of incorporation or similar governing documents have been
challenged in legal proceedings, and it is possible that, in connection with any action, a court could find the choice of forum
provisions contained in our Partnership Agreement to be inapplicable or unenforceable in such action.
MATERIAL U.S. FEDERAL
INCOME TAX CONSEQUENCES
This section is a summary
of the material U.S. federal income tax consequences that may be relevant to prospective common unitholders who are individual
citizens or residents of the United States and, unless otherwise noted in the following discussion, is the opinion of Latham &
Watkins LLP, counsel to our general partner and us, insofar as it relates to legal conclusions with respect to matters of
U.S. federal income tax law. This section is based upon current provisions of the Internal Revenue Code of 1986, as amended (the
“Internal Revenue Code”), existing and proposed Treasury regulations promulgated under the Internal Revenue Code (the
“Treasury Regulations”) and current administrative rulings and court decisions, all of which are subject to change.
Congress has passed legislation that, if signed into law by the President, would result in changes to certain of these authorities
(please read “—Recent Legislative Developments”). Adoption of this legislation or other 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 Phillips 66 Partners LP and
our operating subsidiaries.
The following discussion
does not comment on all federal income tax matters affecting us or our unitholders and does not describe the application of the
alternative minimum tax that may be applicable to certain unitholders. Moreover, the discussion focuses on unitholders who are
individual citizens or residents of the United States 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 foreign persons eligible for the benefits of an applicable income tax treaty with the
United States), individual retirement accounts (IRAs), real estate investment trusts (REITs) or mutual funds, dealers in securities
or currencies, traders in securities, U.S. persons whose “functional currency” is not the U.S. dollar, persons holding
their units as part of a “straddle,” “hedge,” “conversion transaction” or other risk reduction
transaction, and persons deemed to sell their units under the constructive sale provisions of the Internal Revenue Code. In addition,
the discussion only comments, to a limited extent, on state, local, and foreign tax consequences. Accordingly, we encourage each
prospective common 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 laws.
No ruling has been
requested from the Internal Revenue Service (the “IRS”) regarding our characterization as a partnership for tax purposes.
Instead, we will rely on opinions of Latham & Watkins LLP. Unlike a ruling, an opinion of counsel represents only
that counsel's 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 our common units, including the prices at which our common units trade. In addition, the costs of any contest with
the IRS, principally legal, accounting and related fees, will result in a reduction in cash available for distribution to our unitholders
and our general partner and thus will be borne 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.
All statements as to
matters of U.S. 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 Latham & Watkins LLP and are based on the accuracy of the
representations made by us and our general partner.
Notwithstanding the
above, and for the reasons described below, Latham & Watkins LLP has not rendered an opinion with respect to the
following specific federal income tax issues: (i) the treatment of a unitholder whose common units are loaned to a short seller
to cover a short sale of common units (please read “—Tax Consequences of Unit Ownership—Treatment of Short
Sales”); (ii) whether all aspects of our monthly method for allocating taxable income and losses is permitted by existing
Treasury Regulations (please read “—Disposition of Common Units—Allocations 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 Ownership—Section 754 Election” and “—Uniformity of Units”).
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 partner's adjusted basis
in his partnership interest. Section 7704 of the Internal Revenue Code provides that publicly traded partnerships will, as
a general rule, be taxed as corporations. However, an exception, referred to as the “Qualifying Income Exception,”
exists with respect to publicly traded partnerships of which 90% or more of the gross income for every taxable year consists of
“qualifying income.” Qualifying income includes income and gains derived from the transportation, processing, storage
and marketing of certain minerals and natural resources, including crude oil, natural gas and other products of a type that are
produced in a petroleum refinery or natural gas processing plant, the retail and wholesale marketing of propane, the transportation
of propane and natural gas liquids, certain related hedging activities, certain activities that are intrinsic to other qualifying
activities, and our allocable share of our subsidiaries’ income from these sources. 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 4% 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, Latham & Watkins LLP 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.
The IRS has made no
determination as to our status or the status of our operating subsidiaries for federal income tax purposes. Instead, we will rely
on the opinion of Latham & Watkins LLP on such matters. It is the opinion of Latham & Watkins LLP that,
based upon the Internal Revenue Code, its regulations, published revenue rulings and court decisions and the representations described
below that:
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we will be classified as a partnership for federal income tax purposes;
and
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each of our subsidiaries, other than Phillips 66 Partners Finance
Corporation, will be treated as a partnership or will be disregarded as an entity separate from us for federal income tax purposes.
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In rendering its opinion,
Latham & Watkins LLP has relied on factual representations made by us and our general partner. The representations
made by us and our general partner upon which Latham & Watkins LLP has relied include:
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neither we nor any of our subsidiaries, other than Phillips 66 Partners
Finance Corporation, have elected or will elect to be treated, or is otherwise treated, as a corporation for federal income tax
purposes; and
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for each taxable year, more than 90% of our gross income has been
and will be income of the type that Latham & Watkins LLP has opined or will opine is “qualifying income”
within the meaning of Section 7704(d) of the Internal Revenue Code.
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We believe that these
representations have been true in the past, are true as of the date hereof 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.
If we were treated
as an association taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception
or otherwise, our items of income, gain, loss and deduction would be reflected only on our tax return rather than being passed
through to our unitholders, and our net income would be taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as taxable dividend income, to the extent of our current and accumulated earnings and profits, or,
in the absence of earnings and profits, a nontaxable return of capital, to the extent of the unitholder's tax basis in his common
units, or taxable capital gain, after the unitholder's tax basis in his common units is reduced to zero. Accordingly, taxation
as a corporation would result in a material reduction in a unitholder's cash flow and after-tax return and thus would likely result
in a substantial reduction of the value of the units.
The discussion below
is based on Latham & Watkins LLP's opinion that we will be classified as a partnership for federal income tax purposes.
Limited
Partner Status
Unitholders of Phillips
66 Partners LP will be treated as partners of Phillips 66 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 Phillips 66 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 Ownership—Treatment
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 Phillips 66 Partners LP. The references to “unitholders” in the discussion that follows
are to persons who are treated as partners in Phillips 66 Partners LP for federal income tax purposes.
Tax Consequences
of Unit Ownership
Flow-Through
of Taxable Income
Subject to the discussion
below under “—Entity-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.
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 unitholder's 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 unitholder's
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
unitholder's “at-risk” amount to be less than zero at the end of any taxable year, he must recapture any losses deducted
in previous years. Please read “—Limitations on Deductibility of Losses.”
A decrease in a unitholder's
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 unitholder's share of our “unrealized receivables,” including depreciation,
recapture and/or substantially appreciated “inventory items,” each as defined in the Internal Revenue Code, and collectively,
“Section 751 Assets.” To that extent, the unitholder will be treated as having been distributed his proportionate
share of the Section 751 Assets and then having exchanged those assets with us in return for the non-pro rata portion of the
actual distribution made to him. This latter deemed exchange will generally result in the unitholder's realization of ordinary
income, which will equal the excess of (i) the non-pro rata portion of that distribution over (ii) the unitholder's tax
basis (often zero) for the share of Section 751 Assets deemed relinquished in the exchange.
Basis of
Common Units
A unitholder's 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 unitholder's 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 partner's “net value” as defined in the Treasury Regulations promulgated under Section 752
of the Internal Revenue Code, but will have a share, generally based on his share of profits, of our nonrecourse liabilities. Please
read “—Disposition of Common Units—Recognition of Gain or Loss.”
Limitations
on Deductibility of Losses
The deduction by a
unitholder of his share of our losses will be limited to the tax basis in his units and, in the case of an individual unitholder,
estate, trust, or corporate unitholder (if more than 50% of the value of the corporate unitholder's 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 unitholder's 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 unitholder's at-risk amount will increase or decrease as the tax basis of the unitholder's units increases or
decreases, other than tax basis increases or decreases attributable to increases or decreases in his 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
taxpayer's income from those passive activities. The passive loss limitations are applied separately with respect to each publicly
traded partnership. Consequently, any passive losses we generate will only be available to offset our passive income generated
in the future and will not be available to offset income from other passive activities or investments, including our investments
or a unitholder's investments in other publicly traded partnerships, or the unitholder's salary, active business or other income.
Passive losses that are not deductible because they exceed a unitholder's 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 unitholder's share
of our net income may be offset by any of our suspended passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other publicly traded partnerships.
Limitations
on Interest Deductions
The deductibility of
a non-corporate taxpayer's “investment interest expense” is generally limited to the amount of that taxpayer's “net
investment income.” 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 unitholder's investment interest expense will take into account interest on any margin account borrowing or other loan incurred
to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts treated
as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production
of investment income, but generally does not include gains attributable to the disposition of property held for investment or (if
applicable) qualified dividend income. The IRS has indicated that the net passive income earned by a publicly traded partnership
will be treated as investment income to its unitholders. In addition, the unitholder's 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.
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 common unitholders
in accordance with their percentage interests in us. At any time that incentive distributions are made to our general partner,
gross income will be allocated to the recipients to the extent of these distributions. If we have a net loss, that loss will be
allocated first to our general partner and the common unitholders in accordance with their percentage interests in us to the extent
of their positive capital accounts, as adjusted for certain items in accordance with applicable Treasury Regulations, and, second,
to our general partner.
Specified items of
our income, gain, loss and deduction will be allocated to account for any difference between the tax basis and fair market value
of any property contributed to us that exists at the time of such contribution, referred to in this discussion as the “Contributed
Property.” The effect of these allocations, referred to as Section 704(c) Allocations, to a unitholder purchasing common
units from us in an offering will be essentially the same as if the tax bases of our assets were equal to their fair market values
at the time of the offering. In the event we issue additional common units or engage in certain other transactions in the future,
“reverse Section 704(c) Allocations,” similar to the Section 704(c) Allocations described above, will be
made to the general partner and all of our common unitholders immediately prior to such issuance or other transactions to account
for the difference between the “book” basis for purposes of maintaining capital accounts and the fair market value
of all property held by us at the time of such issuance or future transaction. In addition, items of recapture income will be allocated
to the extent possible to the unitholder who was allocated the deduction giving rise to the treatment of that gain as recapture
income in order to minimize the recognition of ordinary income by some unitholders. Finally, although we do not expect that our
operations will result in the creation of negative capital accounts (subject to certain adjustments), if negative capital accounts
(subject to certain adjustments) nevertheless result, items of our income and gain will be allocated in an amount and manner sufficient
to eliminate such negative balance as quickly as possible.
An allocation of items
of our income, gain, loss or deduction, other than an allocation required by the Internal Revenue Code to eliminate the difference
between a partner's “book” capital account, credited with the fair market value of Contributed Property, and “tax”
capital account, credited with the tax basis of Contributed Property, referred to in this discussion as the “Book-Tax Disparity,”
will generally be given effect for federal income tax purposes in determining a partner's share of an item of income, gain, loss
or deduction only if the allocation has “substantial economic effect.” In any other case, a partner's share of an item
will be determined on the basis of his interest in us, which will be determined by taking into account all the facts and circumstances,
including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon liquidation.
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Latham & Watkins LLP
is of the opinion that, with the exception of the issues described in “—Section 754 Election” and “—Disposition
of Common Units—Allocations Between Transferors and Transferees,” allocations under our Partnership Agreement will
be given effect for federal income tax purposes in determining a partner's 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, Latham & Watkins LLP 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 also read “—Disposition
of Common Units—Recognition of Gain or Loss.”
Tax Rates
Currently, the highest
marginal U.S. federal income tax rate applicable to ordinary income of individuals is 39.6% and the highest marginal U.S. federal
income tax rate applicable to long-term capital gains (generally, capital gains on certain assets held for more than twelve months)
of individuals is 20%. Such rates are subject to change by new legislation at any time.
In addition, a 3.8%
Medicare tax (NIIT) is imposed on certain net investment income earned by individuals, estates and trusts. For these purposes,
net investment income generally includes a unitholder's 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 unitholder's net investment
income or (ii) the amount by which the unitholder's modified adjusted gross income exceeds $250,000 (if the unitholder is
married and filing jointly or a surviving spouse), $125,000 (if the unitholder is married and filing separately) or $200,000 (in
any other case). In the case of an estate or trust, the tax will be imposed on the lesser of (i) undistributed net investment
income, or (ii) the excess adjusted gross income over the dollar amount at which the highest income tax bracket applicable
to an estate or trust begins for such taxable year. The U.S. Department of the Treasury and the IRS have issued Treasury Regulations
that provide guidance regarding the NIIT. Prospective common unitholders are urged to consult with their tax advisors as to the
impact of the NIIT on an investment in our common units.
Section 754
Election
We have made the election
permitted by Section 754 of the Internal Revenue Code. That election is irrevocable without the consent of the IRS unless
there is a constructive termination of the partnership. Please read “—Disposition of Common Units—Constructive
Termination.” The election generally permits us to adjust a common unit purchaser's tax basis in our assets (“inside
basis”) under Section 743(b) of the Internal Revenue Code to reflect his purchase price. This election does not apply
with respect to a person who purchases common units directly from us. The Section 743(b) adjustment belongs to the purchaser
and not to other unitholders. For purposes of this discussion, the inside basis in our assets with respect to a unitholder will
be considered to have two components: (i) his share of our tax basis in our assets (“common basis”) and (ii) his
Section 743(b) adjustment to that basis.
We have adopted the
remedial allocation method as to all our properties. Where the remedial allocation method is adopted, the Treasury Regulations
under Section 743 of the Internal Revenue Code require a portion of the Section 743(b) adjustment that is attributable
to recovery property that is subject to depreciation under Section 168 of the Internal Revenue Code and whose book basis is
in excess of its tax basis to be depreciated over the remaining cost recovery period for the property's unamortized Book-Tax Disparity.
Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Internal Revenue Code, rather than cost recovery deductions under Section 168, is generally
required to be depreciated using either the straight-line method or the 150% declining balance method. Under our Partnership Agreement,
our general partner is authorized to take a position to preserve the uniformity of units even if that position is not consistent
with these and any other Treasury Regulations. Please read “—Uniformity of Units.”
We depreciate the portion
of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent
of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the property's unamortized Book-Tax Disparity, or treat that portion as non-amortizable to the
extent attributable to property that is not amortizable. This method is consistent with the methods employed by other publicly
traded partnerships but is arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected
to directly apply to a material portion of our assets. To the extent this Section 743(b) adjustment is attributable to appreciation
in value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative
history. If we determine that this position cannot reasonably be taken, we may take a depreciation or amortization position under
which all purchasers acquiring units in the same month would receive depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our
assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise
be allowable to some unitholders. Please read “—Uniformity of Units.” A unitholder's tax basis for his common
units is reduced by his share of our deductions (whether or not such deductions were claimed on an individual's income tax return)
so that any position we take that understates deductions will overstate such unitholder's basis in his common units, which may
cause the unitholder to understate gain or overstate loss on any sale of such units. Please read “—Disposition of Common
Units—Recognition of Gain or Loss.” Latham & Watkins LLP is unable to opine as to whether our method
for taking into account Section 743 adjustments is sustainable for property subject to depreciation under Section 167
of the Internal Revenue Code or if we use an aggregate approach as described above, as there is no direct or indirect controlling
authority addressing the validity of these positions. Moreover, the IRS may challenge our position with respect to depreciating
or amortizing the Section 743(b) adjustment we take to preserve the uniformity of the units. If such a challenge were sustained,
the gain from the sale of units might be increased without the benefit of additional deductions.
A Section 754
election is advantageous if the transferee's tax basis in his units is higher than the units' share of the aggregate tax basis
of our assets immediately prior to the transfer. Conversely, a Section 754 election is disadvantageous if the transferee's
tax basis in his units is lower than those units' share of the aggregate tax basis of our assets immediately prior to the transfer.
Thus, the fair market value of the units may be affected either favorably or unfavorably by the election. A basis adjustment is
required regardless of whether a Section 754 election is made in the case of a transfer of an interest in us if we have a
substantial built-in loss immediately after the transfer, or if we distribute property and have a substantial basis reduction.
Generally, a built-in loss or a basis reduction is substantial if it exceeds $250,000.
The calculations involved
in the Section 754 election are complex and will be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our assets must be made in accordance with the
Internal Revenue Code. The IRS could seek to reallocate some or all of any Section 743(b) adjustment allocated by us to our
tangible assets to goodwill instead. Goodwill, as an intangible asset, is generally nonamortizable or amortizable over a longer
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 Units—Allocations Between Transferors and Transferees.”
Tax Basis,
Depreciation and Amortization
The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition
of these assets. The federal income tax burden associated with the difference between the fair market value of our assets and their
tax basis immediately prior to an offering will be borne by our unitholders holding interests in us prior to any such offering.
Please read “—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction.”
To the extent allowable,
we may elect to use the depreciation and cost recovery methods, including bonus depreciation to the extent available, that will
result in the largest deductions being taken in the early years after assets subject to these allowances are placed in service.
Please read “—Uniformity of Units.” Property we subsequently acquire or construct may be depreciated using accelerated
methods permitted by the Internal Revenue Code.
If we dispose of depreciable
property by sale, foreclosure or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation
previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a unitholder who has taken cost recovery or depreciation deductions with respect to property we own will
likely be required to recapture some or all of those deductions as ordinary income upon a sale of his interest in us. Please read
“—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction” and “—Disposition
of Common Units—Recognition 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 U.S. federal income
tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market values,
and the initial tax bases, of our assets. Although we may from time to time consult with professional appraisers regarding valuation
matters, we will make many of the relative fair market value estimates ourselves. These estimates and determinations of basis are
subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or determinations
of basis are later found to be incorrect, the character and amount of items of income, gain, loss or deductions previously reported
by unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest
and penalties with respect to those adjustments.
Disposition
of Common Units
Recognition
of Gain or Loss
Gain or loss will be
recognized on a sale of units equal to the difference between the amount realized and the unitholder's tax basis for the units
sold. A unitholder's amount realized will be measured by the sum of the cash or the fair market value of other property received
by him plus his share of our nonrecourse liabilities. Because the amount realized includes a unitholder's share of our nonrecourse
liabilities, the gain recognized on the sale of units could result in a tax liability in excess of any cash received from the sale.
Prior distributions
from us that in the aggregate were in excess of cumulative net taxable income for a common unit and, therefore, decreased a unitholder's
tax basis in that common unit will, in effect, become taxable income if the common unit is sold at a price greater than the unitholder's
tax basis in that common unit, even if the price received is less than his original cost.
Except as noted below,
gain or loss recognized by a unitholder, other than a “dealer” in units, on the sale or exchange of a unit will generally
be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of units held for more than twelve months
will generally be taxed at the U.S. federal income tax rate applicable to long-term capital gains. However, a portion of this gain
or loss, which will likely be substantial, will be separately computed and taxed as ordinary income or loss under Section 751
of the Internal Revenue Code to the extent attributable to assets giving rise to “unrealized receivables,” including
potential recapture items such as depreciation recapture, or to “inventory gains” we own. Ordinary income attributable
to unrealized receivables and inventory items 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 Ownership—Tax 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 partner's tax basis in his entire
interest in the partnership as the value of the interest sold bears to the value of the partner's entire interest in the partnership.
Treasury Regulations under Section 1223 of the Internal Revenue Code allow a selling unitholder who can identify common units
transferred with an ascertainable holding period to elect to use the actual holding period of the common units transferred. Thus,
according to the ruling discussed above, a common unitholder will be unable to select high or low basis common units to sell as
would be the case with corporate stock, but, according to the Treasury Regulations, he may designate specific common units sold
for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of
common units transferred must consistently use that identification method for all subsequent sales or exchanges of common units.
A unitholder considering the purchase of additional units or a sale of common units purchased in separate transactions is urged
to consult his tax advisor as to the possible consequences of this ruling and application of the Treasury Regulations.
Specific provisions
of the Internal Revenue Code affect the taxation of some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an “appreciated” partnership interest, one in which gain would be recognized if
it were sold, assigned or terminated at its fair market value, if the taxpayer or related persons enter(s) into:
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an offsetting notional principal contract; or
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a futures or forward contract;
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in each case, with respect to the partnership
interest or substantially identical property.
Moreover, if a taxpayer
has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract with respect
to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then
acquires the partnership interest or substantially identical property. The Secretary of the Treasury is also authorized to issue
regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the preceding
transactions as having constructively sold the financial position.
Allocations
Between Transferors and Transferees
In general, our taxable
income and losses will be determined annually, will be prorated on a monthly basis in proportion to the number of days in each
month and will be subsequently apportioned among our 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 our unitholders on the Allocation Date in the month in which that gain or loss is recognized. As a result,
a unitholder transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.
The U.S. Department
of Treasury and the IRS have issued Treasury Regulations that permit publicly traded partnerships to use a monthly simplifying
convention that is similar to ours, but they do not specifically authorized all aspects of the proration method we have adopted.
Accordingly, Latham & Watkins LLP 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, 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.
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 United States and who effects the sale or exchange through a broker who
will satisfy such requirements.
Constructive
Termination
We will be considered
to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of
the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold
has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things,
result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders
could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a
deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable
year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months
of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would
not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership
for federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under
Section 754 of the Internal Revenue Code, and could be subject to penalties if we are unable to determine that a termination
occurred. The IRS administers a publicly traded partnership technical termination relief program whereby, if a publicly traded
partnership that technically terminated requests publicly traded 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. A lack of uniformity can result from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6).
Any non-uniformity could have a negative impact on the value of the units. Please read “—Tax Consequences of Unit Ownership—Section 754
Election.” We depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived
from the depreciation or amortization method and useful life applied to the property's unamortized Book-Tax Disparity, or treat
that portion as nonamortizable, to the extent attributable to property the common basis of which is not amortizable, consistent
with the regulations under Section 743 of the Internal Revenue Code, even though that position may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets. Please read
“—Tax Consequences of Unit Ownership—Section 754 Election.” To the extent that the Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized Book-Tax Disparity, we will apply the rules described
in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be taken, we may adopt
a depreciation and amortization position under which all purchasers acquiring units in the same month would receive depreciation
and amortization deductions, whether attributable to common basis or a Section 743(b) adjustment, based upon the same applicable
rate as if they had purchased a direct interest in our assets. If this position is adopted, it may result in lower annual depreciation
and amortization deductions than would otherwise be allowable to some unitholders and risk the loss of depreciation and amortization
deductions not taken in the year that these deductions are otherwise allowable. This position will not be adopted if we determine
that the loss of depreciation and amortization deductions will have a material adverse effect on the unitholders. If we choose
not to utilize this aggregate method, we may use any other reasonable depreciation and amortization method to preserve the uniformity
of the intrinsic tax characteristics of any units that would not have a material adverse effect on the unitholders. In either case,
and as stated above under “—Tax Consequences of Unit Ownership—Section 754 Election,” Latham &
Watkins LLP has not rendered an opinion with respect to these methods. Moreover, the IRS may challenge any method of depreciating
the Section 743(b) adjustment described in this paragraph. If this challenge were sustained, the uniformity of units might
be affected, and the gain from the sale of units might be increased without the benefit of additional deductions. Please read “—Disposition
of Common Units—Recognition of Gain or Loss.”
Tax-Exempt
Organizations and Other Investors
Ownership of units
by employee benefit plans, other tax-exempt organizations, non-resident aliens, foreign corporations and other foreign persons
raises issues unique to those investors and, as described below to a limited extent, may have substantially adverse tax consequences
to them. If you are a tax-exempt entity or a foreign 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 IRAs 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 United States because
of the ownership of units. As a consequence, they will be required to file federal tax returns to report their share of our income,
gain, loss or deduction and pay U.S. federal income tax at regular rates on their share of our net income or gain. Moreover, under
rules applicable to publicly traded partnerships, our quarterly distribution to foreign unitholders will be subject to withholding
at the highest applicable effective tax rate. Each foreign unitholder must obtain a taxpayer identification number from the IRS
and submit that number to our transfer agent on a Form W-8BEN, W-8BEN-E or applicable substitute form in order to obtain credit
for these withholding taxes. A change in applicable law may require us to change these procedures.
In addition, because
a foreign corporation that owns units will be treated as engaged in a U.S. trade or business, that corporation may be subject to
the U.S. branch profits tax at a rate of 30%, in addition to regular U.S. federal income tax, on its share of our earnings and
profits, as adjusted for changes in the foreign corporation's “U.S. net equity,” that is effectively connected with
the conduct of a U.S. trade or business. That tax may be reduced or eliminated by an income tax treaty between the United States
and the country in which the foreign corporate unitholder is a “qualified resident.” In addition, this type of unitholder
is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code.
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 United States by virtue of the U.S. activities of the partnership, and part or all
of that unitholder's gain would be effectively connected with that unitholder's indirect U.S. trade or business. Moreover, under
the Foreign Investment in Real Property Tax Act, a foreign common unitholder (other than certain “qualified foreign pension
funds” (or an entity all of the interests of which are held by such a qualified foreign pension fund), which generally are
entities or arrangements that are established and regulated by foreign law to provide retirement or other pension benefits to employees,
do not have a single participant or beneficiary that is entitled to more than 5% of the assets or income of the entity or arrangement
and are subject to certain preferential tax treatment under the laws of the applicable foreign country) 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 U.S. federal income tax on gain from the
sale or disposition of their units. Recent changes in law may affect certain foreign unitholders. Please read “—Administrative
Matters—Additional Withholding Requirements.”
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 unitholder's share of income, gain, loss and deduction. We cannot assure you that those positions will
yield a result that conforms to the requirements of the Internal Revenue Code, Treasury Regulations or administrative interpretations
of the IRS. Neither we nor Latham & Watkins LLP can assure prospective common 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 year's
tax liability, and possibly may result in an audit of his return. Any audit of a unitholder's return could result in adjustments
not related to our returns as well as those related to our returns.
Partnerships generally
are treated as separate entities for purposes of federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income, gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the partners. The Internal Revenue Code requires that one partner be designated
as the “Tax Matters Partner” for these purposes. Our Partnership Agreement names Phillips 66 Partners GP LLC
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 that unitholder elects, by
filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review, by which all the unitholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner
fails to seek judicial review, judicial review may be sought by any unitholder having at least a 1% interest in profits or by any
group of unitholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will
go forward, and each unitholder with an interest in the outcome may participate.
A unitholder must file a
statement with the IRS identifying the treatment of any item on his federal income tax return that is not consistent with the treatment
of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a unitholder to substantial
penalties.
Pursuant to the Bipartisan
Budget Act of 2015, for taxable years beginning after December 31, 2017, if the IRS makes audit adjustments to our income tax returns,
it may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly
from us. Similarly, for such taxable years, if the IRS makes audit adjustments to income tax returns filed by an entity in which
we are a member or partner, it may assess and collect any taxes (including penalties and interest) resulting from such audit adjustment
directly from such entity. Generally, we expect to elect to have our general partner and its unitholders take any such audit adjustment
into account in accordance with their interests in us during the taxable year under audit, but there can be no assurance that such
election will be effective in all circumstances. With respect to audit adjustments as to an entity in which we are a member or
partner, the Joint Committee on Taxation has stated that we would not be able to have our general partner and its unitholders take
such audit adjustment into account. If we are unable to have our general partner and its unitholders take such audit adjustment
into account in accordance with their interests in us during the taxable year under audit, our current unitholders may bear some
or all of the tax liability resulting from such audit adjustment, even if such unitholders did not own our common units during
the taxable year under audit. If, as a result of any such audit adjustment, we are required to make payments of taxes, penalties
and interest, our cash available for distribution to our common unitholders might be substantially reduced. These rules are not
applicable to us for taxable years beginning on or prior to December 31, 2017.
Additionally, pursuant
to the Bipartisan Budget Act of 2015, the Internal Revenue Code will no longer require that we designate a Tax Matters Partner.
Instead, for taxable years beginning after December 31, 2017, we will be required to designate a partner, or other person, with
a substantial presence in the United States as the partnership representative (“Partnership Representative”). The Partnership
Representative will have the sole authority to act on our behalf for purposes of, among other things, U.S. federal income tax audits
and judicial review of administrative adjustments by the IRS. If we do not make such a designation, the IRS can select any person
as the Partnership Representative. We currently anticipate that we will designate our general partner as the Partnership Representative.
Further, any actions taken by us or by the Partnership Representative on our behalf with respect to, among other things, U.S. federal
income tax audits and judicial review of administrative adjustments by the IRS, will be binding on us and all of the unitholders.
These rules are not applicable to us for taxable years beginning on or prior to December 31, 2017.
Additional
Withholding Requirements
Withholding taxes may
apply to certain types of payments made to “foreign financial institutions” (as specially defined in the Internal Revenue
Code) and certain other foreign 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 United States (“FDAP Income”),
or gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends from sources
within the United States (“Gross Proceeds”) paid to a foreign financial institution or to a “non-financial foreign
entity” (as specially defined in the Internal Revenue 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.
Department of 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 United States governing these requirements may be subject to different rules.
These rules generally
apply to payments of FDAP Income currently and generally will apply to payments of relevant Gross Proceeds made on or after January 1,
2019. Thus, to the extent we have FDAP Income or have 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 foreign entities, or persons that hold their common units through such
foreign 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 common
unitholders 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 of $250 per failure, up to a maximum of $3,000,000 per calendar
year, is imposed by the Internal Revenue Code for failure to report that information to us. The nominee is required to supply the
beneficial owner of the units with the information furnished to us.
Accuracy-Related
Penalties
Certain penalties may
be imposed on taxpayers as a result of an underpayment of tax that is attributable to one or more specified causes, including:
(i) negligence or disregard of rules or regulations, (ii) substantial understatements of income tax, (iii) substantial valuation
misstatements and (iv) the disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing
to meet the requirements of any similar rule of law. Except with respect to the disallowance of claimed tax benefits by reason
of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, however, no penalty
will be imposed for any portion of any such underpayment if it is shown that there was a reasonable cause for the underpayment
of that portion and that the taxpayer acted in good faith regarding the underpayment of that portion.
With respect to substantial
understatements of income tax, the amount of any understatement subject to penalty generally is reduced by that portion of the
understatement which is attributable to a position adopted on the return: (A) for which there is, or was, “substantial authority”;
or (B) as to which there is a reasonable basis and the relevant facts of that position are adequately disclosed on the return.
If any item of income, gain, loss or deduction included in the distributive shares of unitholders might result in that kind of
an “understatement” of income for which no “substantial authority” exists, we must adequately disclose
the relevant 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.
Recent
Legislative Developments
The present federal
income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative,
legislative or judicial interpretation at any time. For example, from time to time, members of Congress and the President propose
and consider substantive changes to the existing federal income tax laws that affect the tax treatment of publicly traded partnerships
and our common unitholders. Congress has recently passed a bill that would significantly alter current federal income tax laws,
and it is anticipated that Congress will present this bill to the President for signature imminently. If signed into law, this
bill is expected to impact income tax rates, certain deductions and other tax items relevant to our current and prospective common
unitholders. These changes and any other modifications 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 will likely 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
common unitholder should consider their potential impact on his investment in us. We currently own property or do business in many
states. Several of these states impose a personal income tax on individuals; certain of these states also impose an income tax
on corporations and other entities. 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 a particular unitholder's 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 Ownership—Entity-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 common 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. Latham & Watkins LLP has not rendered an opinion on the
state tax, local tax, alternative minimum tax or foreign tax consequences of an investment in us.
INVESTMENT IN PHILLIPS
66 PARTNERS LP BY EMPLOYEE BENEFIT PLANS
An investment in us
by an employee benefit plan is subject to additional considerations because the investments of these plans are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and the restrictions imposed by Section 4975 of the Internal
Revenue Code, and provisions under any federal, state, local, foreign or other laws or regulations that are similar to such provisions
of the Internal Revenue Code or ERISA (collectively, “Similar Laws”). For these purposes, the term “employee
benefit plan” includes, but is not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or individual requirement accounts or annuities (“IRAs”) established
or maintained by an employer or employee organization, and entities whose underlying assets are considered to include “plan
assets” of such plans, accounts and arrangements. Among other things, consideration should be given to:
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whether the investment is prudent under Section 404(a)(1)(B)
of ERISA;
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whether in making the investment, that plan will satisfy the diversification
requirements of Section 404(a)(l)(C) of ERISA; and
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whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential after-tax investment return. Please read “Material U.S.
Federal Income Tax Consequences—Tax-Exempt Organizations and Other Investors”; and
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whether making such an investment will comply with the delegation
of control and prohibited transaction provisions of ERISA, the Internal Revenue Code and any other applicable Similar Laws.
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The person with investment
discretion with respect to the assets of an employee benefit plan, often called a fiduciary, should determine whether an investment
in us is authorized by the appropriate governing instrument and is a proper investment for the plan.
Section 406 of
ERISA and Section 4975 of the Internal Revenue Code prohibit employee benefit plans, and IRAs that are not considered part
of an employee benefit plan, from engaging in specified transactions involving “plan assets” with parties that, with
respect to the plan, are “parties in interest” under ERISA or “disqualified persons” under the Internal
Revenue Code unless an exemption is available. A party in interest or disqualified person who engages in a non-exempt prohibited
transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Internal Revenue Code. In addition,
the fiduciary of the ERISA plan that engaged in such a non-exempt prohibited transaction may be subject to penalties and liabilities
under ERISA and the Internal Revenue Code.
In addition to considering
whether the purchase of common units is a prohibited transaction, a fiduciary should consider whether the plan will, by investing
in us, be deemed to own an undivided interest in our assets, with the result that our general partner would be a fiduciary of such
plan and our operations would be subject to the regulatory restrictions of ERISA, including its prohibited transaction rules, as
well as the prohibited transaction rules of the Internal Revenue Code, ERISA and any other applicable Similar Laws.
The Department of Labor
regulations provide guidance with respect to whether, in certain circumstances, the assets of an entity in which employee benefit
plans acquire equity interests would be deemed “plan assets”. Under these regulations, an entity's assets would not
be considered to be “plan assets” if, among other things:
(a) the
equity interests acquired by the employee benefit plan are publicly offered securities—i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other, are freely transferable and are registered under
certain provisions of the federal securities laws;
(b) the
entity is an “operating company,”—i.e., it is primarily engaged in the production or sale of a product or
service, other than the investment of capital, either directly or through a majority-owned subsidiary or subsidiaries; or
(c) there
is no significant investment by benefit plan investors, which is defined to mean that less than 25% of the value of each class
of equity interest is held by the employee benefit plans referred to above that are subject to ERISA and IRAs and other similar
vehicles that are subject to Section 4975 of the Internal Revenue Code.
Our assets should not
be considered “plan assets” under these regulations because it is expected that the investment will satisfy the requirements
in (a) and (b) above.
In light of the serious
penalties imposed on persons who engage in prohibited transactions or other violations, plan fiduciaries contemplating a purchase
of common units should consult with their own counsel regarding the consequences under ERISA, the Internal Revenue Code and other
Similar Laws.
PLAN OF DISTRIBUTION
Under this prospectus,
we intend to offer our common units to the public:
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through
one or more broker-dealers;
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directly to purchasers; or
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by a combination of any of these methods.
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We will fix a price
or prices of our common units at:
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market prices prevailing at the time of any sale under this registration
statement;
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prices based upon historical market prices; or
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We may change the
price of the common units offered from time to time.
We will pay or allow
underwriters’, distributors’ or sellers’ commissions that will not exceed those customary in the types of transactions
involved. Broker-dealers may act as agent or may purchase securities as principal and thereafter resell the securities from time
to time:
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in or through one or more transactions (which may involve crosses
and block transactions) or distributions;
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in the over-the-counter market; or
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in private transactions.
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Broker-dealers or
underwriters may receive compensation in the form of underwriting discounts or commissions and may receive commissions from purchasers
of the securities for whom they may act as agents. If any broker-dealer purchases the securities as principal, it may effect resales
of the securities from time to time to or through other broker-dealers, and other broker-dealers may receive compensation in the
form of concessions or commissions from the purchasers of securities for whom they may act as agents.
To the extent required,
the names of the specific managing underwriter or underwriters, if any, as well as other important information, will be set forth
in prospectus supplements. In that event, the discounts and commissions we will allow or pay to the underwriters, if any, and the
discounts and commissions the underwriters may allow or pay to dealers or agents, if any, will be set forth in, or may be calculated
from, the prospectus supplements. Any underwriters, brokers, dealers and agents who participate in any sale of the securities may
also engage in transactions with, or perform services for, us or our affiliates in the ordinary course of their businesses. We
may indemnify underwriters, brokers, dealers and agents against specific liabilities, including liabilities under the Securities
Act of 1933.
Offers to purchase
common units may be solicited directly by us and the sale thereof may be made by us directly to institutional investors or others,
who may be deemed to be underwriters within the meaning of the Securities Act with respect to any resale thereof. The terms of
any such sales will be described in the prospectus supplement relating thereto.
Because The Financial
Industry Regulatory Authority, Inc. (“FINRA”) views our common units as interests in a direct participation program,
any offering of common units under the registration statement of which this prospectus forms a part will be made in compliance
with Rule 2310 of the FINRA Rules.
To the extent required,
this prospectus may be amended or supplemented from time to time to describe a specific plan of distribution. The place and time
of delivery for the securities in respect of which this prospectus is delivered will be set forth in the accompanying prospectus
supplement.
In connection with
offerings under this shelf registration and in compliance with applicable law, underwriters, brokers or dealers may engage in transactions
that stabilize or maintain the market price of the common units at levels above those that might otherwise prevail in the open
market. Specifically, underwriters, brokers or dealers may over-allot in connection with offerings, creating a short position in
the securities for their own accounts. For the purpose of covering a syndicate short position or stabilizing the price of the securities,
the underwriters, brokers or dealers may place bids for the securities or effect purchases of the securities in the open market.
Finally, the underwriters may impose a penalty whereby selling concessions allowed to syndicate members or other brokers or dealers
for distribution of the securities in offerings may be reclaimed by the syndicate if the syndicate repurchases previously distributed
securities in transactions to cover short positions, in stabilization transactions or otherwise. These activities may stabilize,
maintain or otherwise affect the market price of the securities, which may be higher than the price that might otherwise prevail
in the open market, and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the
securities offered by this prospectus will be passed upon for us by Latham & Watkins LLP, Houston, Texas. Latham &
Watkins LLP will also render an opinion on the material income tax consequences regarding such securities. Legal counsel to
any underwriters may pass upon legal matters for such underwriters and will be named in the applicable prospectus supplement.
EXPERTS
The consolidated financial statements of
Phillips 66 Partners LP at December 31, 2016 and 2015, and for each of the three years in the period ended December 31, 2016,
and the effectiveness of Phillips 66 Partners LP’s internal control over financial reporting as of December 31, 2016,
appearing in Phillips 66 Partners LP’s Annual Report on Form 10-K for the year ended December 31, 2016, have been
audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their reports thereon,
included therein, and incorporated herein by reference, which as to the consolidated financial statements for the years ended
December 31, 2016 and December 31, 2015, are based in part on the reports of Deloitte & Touche LLP, independent
registered public accounting firm. The consolidated financial statements of DCP Sand Hills Pipeline, LLC (which Phillips 66
Partners LP accounts for using the equity method of accounting) as of December 31, 2016 and 2015, and for the year ended
December 31, 2016 and the period from March 2, 2015 through December 31, 2015, and the consolidated financial statements of
DCP Southern Hills Pipeline, LLC (which Phillips 66 Partners LP accounts for using the equity method of accounting) as of and
for the years ended December 31, 2016 and 2015, have been audited by Deloitte & Touche LLP, as stated in their reports,
which are incorporated herein by reference. The consolidated financial statements of Phillips 66 Partners LP, referred to
above, are incorporated herein by reference in reliance upon such reports given on the authority of such firms as experts in
accounting and auditing.
The consolidated financial statements of
Merey Sweeny, L.P. at December 31, 2016 and 2015, and for the years then ended, appearing in Phillips 66 Partners
LP’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on December 8, 2017, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon, included therein, and
incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting
and auditing.
The audited consolidated financial statements
of Dakota Access, LLC as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015, appearing in Phillips
66 Partners LP’s Current Report on Form 8-K/A filed on December 8, 2017, incorporated by reference in this prospectus and
elsewhere in the registration statement have been so incorporated by reference in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, upon the authority of said firm as experts in accounting and auditing.
The audited consolidated financial statements
of Energy Transfer Crude Oil Company, LLC as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015,
appearing in Phillips 66 Partners LP’s Current Report on Form 8-K/A filed on December 8, 2017, incorporated by reference
in this prospectus and elsewhere in the registration statement have been so incorporated by reference in reliance upon the report
of Grant Thornton LLP, independent certified public accountants, upon the authority of said firm as experts in accounting and auditing.
Phillips 66 Partners LP
Common Units Representing Limited Partner
Interests
Having an Aggregate Offering Price of
Up to $250,000,000
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Prospectus Supplement
February 26, 2018
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RBC Capital
Markets BofA Merrill Lynch Barclays BNP PARIBAS
BTIG Citigroup Credit Suisse
Deutsche Bank Securities Goldman
Sachs & Co. LLC HSBC J.P. Morgan Jefferies
Mizuho Securities
MUFG Scotia Howard Weil SMBC Nikko
SunTrust Robinson Humphrey
TD Securities Wells Fargo Securities The Williams Capital Group, L.P.
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